Larry Summers’ blog

Revisiting Harvard and the American Dream

11/10/2017

Like many others, we have closely followed and admired the important work of a former Harvard colleague, Raj Chetty. With access to millions of anonymous tax records, Raj and his team at the Equality of Opportunity Project have powerfully confirmed what many have long feared about declining upward mobility in America. continue

What I do support in a new tax plan

10/26/2017

I have been very sharply critical of what I regard as unprofessional exaggeration by advocates of the Trump tax proposal. Reasonably enough, people have asked what I am for.

I strongly support tax reform in general and especially corporate tax reform on the model of the highly successful bipartisan 1986 tax reform, which achieved very large rate reductions, spurred economic growth and improved the efficiency of the economy while being revenue and distribution neutral.

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The Business Roundtable’s outlandish tax cut claims

10/24/2017

I think of myself as pro-business.  I frequently counselled the Obama Administration that “business confidence is the cheapest form of stimulus” and during my times in government have found meetings with business leaders very helpful in understanding economic policy challenges.  So when the Business Roundtable (BRT) does an analysis I pay close attention.

Last Thursday I read on the Politico website a JPMorgan ad linking to the BRT site where there was a statement that “a competitive 20 percent corporate tax rate could increase wages sufficient to support 2 million new jobs”.  The claim surprised me because 2 million new jobs, on top of current projected job growth, would likely drive the unemployment rate below 3 percent—a level not seen in a half century and would be inconsistent with the claims of BRT Chairman Jamie Dimon that businesses can’t now fill all their job vacancies.  continue

One last time on who benefits from corporate tax cuts

10/22/2017

recently asserted that Kevin Hassett deserved a failing grade for his “analysis” projecting that the Trump administration proposal to reduce the corporate tax rate from 35 to 20 percent would raise the wages of an average American family between $4,000 to $9,000. I chose harsh language because Hassett had, for what seemed like political reasons, impugned the integrity of people like Len Burman and Gene Steuerle who have devoted their lives to honest rigorous evaluation of tax measures by calling their work “scientifically indefensible” and “fiction.” Since there have been a variety of comments on the economics of corporate tax reduction, some further discussion seems warranted.

The analysis from Hassett, chief of the White House Council of Economic Advisers (CEA), relies heavily on correlations between corporate tax rates and wages in other countries to argue that a cut in the corporate tax rate would boost returns to labor very substantially. Perhaps unintentionally, the CEA ignores our own historical experience in their analysis. As Frank Lysy noted, the corporate tax cuts of the late 1980s did not result in increased real wages. Actually, real wages fell. The same is true in the United Kingdom, as highlighted by Kimberly Clausing and Edward Kleinbard. These examples feel far more relevant to the corporate tax issue analysis than comparisons to small economies and tax havens like Ireland and Switzerland upon which the CEA relies.

There has been a lot of back and forth, but notably no one has defended the $4,000 claim as a “very conservatively estimated lower bound,” let alone endorsed the plausibility of the $9,000 claim. In fact, the Wall Street Journal op-ed page published two very optimistic versions of what the wage increase could be, which were below CEA’s lower bound.

Casey Mulligan and Greg Mankiw also do not defend CEA’s numbers, but do make use of simple academic abstract models that do not capture the complexities of a policy situation to argue that wage increases could be larger than the tax cut. The inadequacy of their analyses illustrate why well-resourced, team-based institutions with a strong culture of attention to detail like the Congressional Budget Office, the GAO, the Joint Tax Committee Staff or the Tax Policy Center are so important.

Mankiw’s blog is a fine bit of economic pedagogy. It asks students to gauge the impact of a corporate rate reduction on wages in a so called “Ramsey” model or equivalently in a small fully open economy, with perfect capital mobility. Even with these assumptions, he does not get answers in the range of the CEA’s estimates.

As a device for motivating students to learn how to manipulate oversimplified academic models, Mankiw’s blog is terrific as one would expect from an outstanding economist and one of the leading textbook authors of his generation. As a guide to the effects of the Trump administration’s tax cut, I do not think it is very helpful for three important reasons.

First, a cut in the corporate tax rate from 35 to 20 percent in the presence of expensing of substantial or total investment has very little impact on the incentive to invest. Imagine the case of full expensing. If a company is permitted to deduct all of its investment costs and then is taxed on all of its investment profits, the tax rate has no impact at all on the investment incentive. If investments are financed in part with deductible interest, as would be true even under the Trump plan (where expensing would be total), a reduction in the corporate tax rate could easily reduce the incentive to invest.  Mankiw assumes implicitly that capital lasts forever and companies take no depreciation and engage in no debt finance.  This is not the world we live in.

Second, neither the Ramsey model nor the small open economy model is a reasonable approximation for the world we live in. In the Ramsey model, savings are infinitely elastic, so the real interest rate always returns to some fixed level. In fact, real interest rates vary vastly through space and time, and generations of economic research show that the savings rate rather than being infinitely sensitive to the interest rate is almost entirely insensitive to the interest rate.

The United States is not a small open economy. If it were, the effect of an effective investment incentive would be a major increase in the trade deficit as capital inflows forced an excess of imports over exports. I imagine that President Trump at least feels that a greatly augmented trade deficit is not good for American workers.

Third, a big cut in the corporate rate does not happen in isolation as a break for new investment.  Mankiw’s model does not recognize the possibility of monopoly profits or returns to intellectual capital or other ways in which a corporate tax cut benefits shareholders without encouraging investment. It means either increases in other taxes or enlarged deficits, both of which have adverse effects on households. It also means that capital moves out of the non-corporate sector into the corporate sector, tending to hurt workers in the non-corporate sector.

Mulligan accuses me of rejecting the results of my 1981 paper on Q Theory which he claims to like and teach. I’m flattered that he appreciates my paper, but am fairly confident he draws the wrong conclusions from it.

One central aspect of this paper was the recognition that the corporate tax rate is, contrary to Mulligan and Mankiw’s assumption, not a sufficient statistic for assessing the impact of the corporate tax system.  As I explained above, the paper emphasizes that to examine the impact of a corporate tax change, it is necessary to build in assumptions about depreciation allowances, debt finance and so forth, even if these are being held constant. If Mulligan did this, he would get a very different answer.

The main point of my paper, which Mulligan entirely ignores, was that because of slow adjustment costs, the impact of tax changes was felt primarily on asset prices for a long time. This meant that as my paper showed, the primary impact of a corporate tax cut would be to raise after-tax profits and the stock market. This in turn, as I noted, primarily benefits wealthy individuals. Note that because a corporate rate cut benefits investments already made, this conclusion does not depend on assumptions about depreciation allowances and the like which are important for new investment.

Mulligan also fails to recognize that a corporate rate cut benefits capital and hurts labor outside the corporate sector because it draws capital out of the noncorporate sector, raising its marginal productivity and reducing that of labor. It is true that if the corporate sector is small, this effect is small in terms of return, but by assumption it is large in total because it applies to a large quantity of capital and labor.

It is worth noting that Larry Kotlikoff and Jack Mintz’s response to criticisms of the Trump tax plan suffers from the same deficiencies as Mulligan’s. The authors include no corporate tax detail, no recognition of the impact of the tax proposal on asset prices, and no treatment of the budget consequences of tax cuts.

The newest boldest bit of claim inflation regarding the tax bill comes from the Business Roundtable: “a competitive 20 percent corporate tax rate could increase wages sufficient to support two million new jobs.” This would, coupled with job growth projected even in the absence of a corporate rate cut, take the unemployment rate well below 3 percent! I would be very interested to see the underlying analysis.  I would be surprised if it is convincing.

By far the highest quality assessment of corporate tax issues has been provided by Jane Gravelle, writing under the auspices of the Congressional Research Service.  It looks at all the literature. It recognizes that the issues are complex and cannot be captured by a single model or regression equation. It does not start with a point of view. Unfortunately it provides little support for claims that corporate rate cuts will raise revenue, help the middle class or spur rapid wage growth.

During my years in government, I served with 7 CEA chairs — Martin Feldstein, Laura Tyson, Joe Stiglitz, Janet L. Yellen, Martin Baily, Christy Romer and Austan Goolsbee. I observed all of them fighting with political figures in their Administrations as they insisted that CEA analysis had to be of a kind that would be respected and validated by outside economists. They refused to cheerlead for Administration policies at the expense of their professional credibility. I cannot imagine any of them releasing an estimate as far from the professional mainstream as $4000 to $9000 wage increase from a corporate rate cut claim. Chairman Hassett should for the sake of his own credibility, that of the Administration he serves and the institution he leads, back off.

 

Hassett’s flawed analysis of Trump tax plan

10/17/2017

Kevin Hassett accuses me of an ad-hominem attack against his economic analysis of the Trump Administration’s tax plan.  I am proudly guilty of asserting that it is some combination of dishonest, incompetent and absurd.  TV does not provide space to spell out the reasons why, so I am happy to provide them here.

I believe strongly in civility in public policy debates, and prior to the Trump administration do not believe I have ever used words like dishonest in disagreeing with the policy analyses of other economists.  Part of my rationale for speaking so strongly here is that Kevin called into question the integrity of the Tax Policy Center, a group staffed by highly respected former civil servants, by calling their work “scientifically indefensible” and “fiction”. continue

Corporations would surely benefit from a Trump tax cut — but probably at their workers’ expense

10/13/2017
October 13, 2017
I did an interview with Sara Eisen and Scott Wapner on CNBC on Thursday afternoon. During the interview Scott challenged my criticisms of the Trump administration’s tax cut and asserted that such a cut would be sound policy for the economy by noting that Jamie Dimon is in favor of it. Scott noted that the JP Morgan chairman and chief executive recently said, “I would hire more workers if Trump’s tax reform passes,” and Scott used that quote as evidence that the Trump administration is justified in claiming a corporate tax cut would benefit workers.

Trump could help Puerto Rico with the stroke of a pen. Why hasn’t he?

09/28/2017

My modestly-informed guess is that Hurricane Maria and Puerto Rico will appear in history textbooks right next to Katrina and New Orleans. Puerto Rico’s unique territorial status and institutional constraints make the federal government’s response very difficult. And as I shall suggest in a subsequent post, the hurricane has greatly exacerbated Puerto Rico’s profound debt burden and development challenges. Yet one has to wonder why we are fanning the flames.

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Opportunity for Republican Senators to be 21st century Profiles in Courage

09/21/2017

There is an opportunity for 1 or 2 Republican Senators to be 21st century Profiles in Courage.  A Senator who stands up to his or her party and casts the decisive vote against the Cassidy Graham health legislation will be seen by history as a hero.

Cassidy Graham is the cruelest and most misguided piece of consequential legislation proposed so far in the 21st century.  It is far worse than the “repeal and replace” bills that Congress has so far voted down.  Cassidy Graham is much more dangerous than previous bills both because it goes further in eliminating critical parts of the ACA and because it savages the pre-ACA Medicaid safety net.

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Why the US government can’t be downsized

09/12/2017

Speaking at an event organized by Robert Greenstein, the President of the Center for Budget and Policy Priorities, I argued last week that unless our values have changed profoundly in an antigovernment direction, the balance of pressures from economic change will lead to an expansion of the federal budget relative to GDP. This was also the conclusion of a paper released by Paul Van de Water of the Center. Excellent summaries were provided by Al Hunt and David Leonhardt.

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Stan Fischer’s departure from the Fed: End of an era

09/07/2017

Stan Fischer announced yesterday that he is leaving his position as Vice Chair of the Fed.  The Fed and the international monetary system will be weaker for his departure from official responsibility.  It is the end of an era.

Stan’s has been a singular career.  As an MIT professor he coauthored, with his close friend Rudi Dornbusch, the macro textbook that defined the basics of the field for a generation.  With Olivier Blanchard, he wrote the treatise that defined the state of the art for graduate students.  His lectures were models of lucid exposition and balanced judgement.  My view of monetary economics was shaped by my experience auditing his class in the Fall of 1978. Legions of central banking greats, starting with Ben Bernanke and Mario Draghi, were not just his students but his disciples. continue

Cohn had a bad day with facts

09/05/2017

Given recent controversies, I was interested to read NEC chair Gary Cohn’s answer to a “why are you staying?” question put by Stuart Varney of Fox Business Network last week.  To his credit Cohn did not back away from his reservations about the President’s response to Charlottesville. He said “Look, tax cuts are really important to me. I think it’s a once-in-a-lifetime opportunity. We haven’t done tax cuts in 31 years. So, to be a part of an Administration that gets something done that hasn’t been done for 31 years is enormously challenging, enormously interesting to me.”

The problem with this statement is how utterly wrong it is.  Taxes were not cut 31 years ago.  A central point of the 1986 Tax Reform Act was that it was revenue neutral.  And since that time, taxes were cut in 1997, 2001, 2003, 2009 and 2015. continue

Issues under discussion at Jackson Hole

08/25/2017

I will not be attending Jackson Hole this year but I will be thinking about some of the issues under discussion.  As I have written recently, I think the period going forward will be more challenging for central banks than the preceding few years.  I will sleep best at night if Janet Yellen is reappointed.

Even though the Fed has raised rates more than I would have preferred and done far more signaling of future rate hikes than has seemed reasonable to me or for that matter to markets, it could have been much worse.  I do not see a case for a further rate increase on current facts and remain very concerned that macroeconomic policy has inadequately internalized all the aspects of large declines in the neutral real rate and secular stagnation risks. continue

Trump’s CEOs resigned. His staff should do the same.

08/17/2017

President Trump, recognizing the inevitable, has disbanded his Business Advisory Councils in order to preempt the tidal wave of resignations that was in the offing.  Given my long standing views about CEOs lending legitimacy to the Trump administration, I was delighted that a group of CEOs forced this step.

It is a stunning development with more to come.  Who could have imagined that the CEO world would be actively stepping away from a Republican President whose economic program is centered on business tax cuts and regulatory relief?  Or that an incoming President could take his popularity down to 34 percent within 7 months.  Considering polling data, legislative relations and connections or lack thereof to elites, I think it is safe to say that President Trump is more bereft of support than any President since Nixon in the months before his resignation. continue

Why don’t all CEOs quit Trump’s advisory councils?

08/15/2017

I have since Inauguration Day been troubled by abdication of moral responsibility on the part of business who have lent their reputations to President Trump.  So congratulations to Merck CEO Ken Frazier on his resignation from Trump’s American Manufacturing Council over the President’s manifestly inadequate response to Charlottesville. Interestingly, the President lashed out by tweet at Frazier, who is African American, for resigning.  He did not lash out at Disney CEO Robert Iger or Tesla CEO Elon Musk, who are white, when they resigned from his Strategic and Policy Forum because of the President’s decision to pull out of the Paris climate accord.

Andrew Ross Sorkin gets it absolutely right when he asks why there have not been more resignations from Trump’s various Advisory Councils. As I’ve discussed before, the President has again and again traduced American values of international cooperation, of integrity in government, and of human decency.  No advisor committed to the bipartisan American traditions of government can possibly believe he or she is being effective at this point. And all should feel ashamed for complicity in Trump’s words and deeds.   I sometimes wonder how they face their children. continue

Western civilization and Presidential hypocrisy

07/12/2017

President Trump’s Poland speech articulating his foreign policy principles has generated much comment and would have generated more but for all the Russia scandal news.  It’s an important window into the President’s gestalt as he views the world.  As I wrote recently, I don’t care for the “West against the Rest” as a paradigm US foreign policy because it risks becoming a self-fulfilling prophecy, a point Martin Wolf makes powerfully in his column today.

Certainly, there is an argument for the President’s invocation of Western Civilization.  Unlike many of my friends and colleagues in American universities, I sympathize with the concern that contemporary educational norms pass too lightly over the accomplishments of America and the West in favor of a fashionable multiculturalism.  Indeed I have joked after reading multiple issues of its flagship journal that the American Studies Association should be renamed the anti-American Studies Association since it sees America largely through its sins towards minority groups.

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Our President is the greatest threat to our security

07/08/2017

In the run-up to the ongoing G20 meeting in Hamburg, I was interviewed by the G20 Research Group about its significance. I argued that the only really important issue was whether the United States would at last be induced to signal a commitment to the idea of a global community or would it double down on atavism.

As I write Saturday morning (US time), things seem to be running below my already low expectations. On the philosophical and policy questions regarding United States’ willingness to continue supporting a rules based international system, there is no progress to observe.

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5 reasons why the Fed may be making a mistake

06/14/2017

While I do not believe the Fed made a serious mistake Wednesday in raising rates, I believe that the “preemption of inflation based on the Phillips curve” paradigm within which it is operating is highly problematic.  Much better would be a “shoot only when you see the whites of the eyes of inflation” paradigm of the kind I have advocated for the past several years.

Such a paradigm would be more credible, more likely to result in the Fed’s satisfying its dual mandate, reduce risks of recession, and increase the economy’s resilience when recession comes. continue

The problem with privatization

06/12/2017

We tend in modern economies to take progress for granted and debate only its pace.  This is not true with respect to air travel times. A look at airline time tables reveals that today the 8:26 a.m. flight from Boston to Washington National took 103 minutes. The 8:15 a.m. flight in 1982 took 82 minutes. The difference is similar, if not greater, on other routes. For example, flights from Boston to Charlotte typically took 125 minutes in the early 1980s compared to 160+ today.

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What history tells us about Trump’s budget fantasy

05/30/2017

At the risk of beating a dead horse, here are some thoughts on the Trump administration’s 3 percent growth forecast. Zero interest rates seemed inconceivable 15 years ago, and yet they happened. Almost no one forecast the productivity boom that took place in the United States between 1995 and 2005 or the magnitude of the 2008 financial crisis. So any statement that a given forecast is inconceivable is unwarranted.

It is, though, reasonable to use history to try to gauge the likelihood of possible outcomes. I do not see how any examination of U.S. history could possibly support the Trump forecast as a reasonable expectation.

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Trump’s “China deal” is only a good deal for China

05/24/2017

The events of the last week have crowded out reflection on economic policy.  But things have been happening. Commerce Secretary Wilbur Ross described the trade deal reached with China earlier this month as “pretty much a herculean accomplishment….This is more than has been done in the history of U.S.-China relations on trade.”

Past a certain point, exaggeration and hype become dishonesty and deception. In economic policy, as in almost everything else, the Trump Administration is way past that point.

The trade deal is a “nothing burger” that a serious Administration committed to helping American workers would likely not have accepted, and surely would not have hyped.

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