We are even more convinced that thousands will die prematurely if the ACA is repealed

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On Monday, The Washington Post published an article by Casey Mulligan and Tomas Philipson attacking Lawrence Summers’s statement that “thousands” of individuals would die if the Republican tax bill became law. Summers reached his estimate after carefully reviewing the literature and consulting with health economists Jonathan Gruber and Mulligan and Philipson’s University of Chicago colleague Dean Kate Baicker, who has published a number of influential studies on the effect of health insurance on health. Read more

Sugar high is right diagnosis, tax cuts are the wrong prescription

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The approaching end of President Trump’s first year in office, another strong employment report and a still-strong stock market make it appropriate to revisit my year-old judgment that the economy is enjoying a “sugar high.” Unfortunately, the best available evidence suggests that signs of current market and economic strength are largely unrelated to government policy, that the drivers of this year’s economic strength are likely transient and that the structural foundation of the U.S. economy is weakening. Sugar high remains the right diagnosis, and tax cuts are very much the wrong prescription.

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Susan Collins is wrong to say that the tax cuts will pay for themselves, despite the economists she cites

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Senator Susan Collins speaking on “Meet the Press” defended her vote on the Senate GOP tax bill based on the claims of the signatories to the nine economists’ letter that we have criticized over the last week. The Maine Republican explained: “If you take the CBO’s formula and apply it, just four-tenths of one percent increase in the GDP generates revenues of a trillion dollars. … So I think if we can stimulate the economy, create more jobs, that does generate more revenue.”

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Thousands would die as a consequence of the GOP tax bill

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I suggested on Friday when it became clear that the tax bill would pass that “thousands would die.” In light of my sharp criticisms of other economists claims regarding the tax bill, some have asked whether my statement is well grounded.  I believe so, but this should be open to debate.

In reaching my judgement I relied primarily on work by Kate Baicker, a former colleague now serving as Dean of the University of Chicago’s Harris School of Public Policy.  Baicker served at the CEA during a Republican administration, so I judged that any political bias would operate against the conclusions I drew. Read more

Dear Colleagues: You responded, but we have more questions about your tax-cut analysis

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Dear colleagues:

We appreciate that in response to our questions you clarified a number of points in your letter to Treasury Secretary Steven Mnuchin and, in particular, that you are backing off the statement in your original letter that “the gain in the long-run level of GDP would be just over 3%, or 0.3% per year for a decade.” As you state in your response to us, “We did not offer claims about the speed of adjustment to a long-run result.”

The only three studies you explicitly called out in your original letter do, however, provide specific estimates of the speed of adjustment that would imply that a 3 percent increase in long-run output would increase the annual growth rate by a 0.1 to 0.2 percentage point a year for the next decade — rates of growth that would not come close to paying for the cost of the proposed tax cut.

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Dear colleagues, please explain your letter to Steven Mnuchin

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Dear Colleagues:

You recently wrote an open letter to Treasury Secretary Steven  Mnuchin quantifying the economic impact of tax reform. We are interested in and surprised by your analysis.  We share your commitment to the idea that well-designed tax reform can make the economy stronger and that careful economic analysis is essential. And we know that you all share our belief that such careful analysis is well served by discussion and debate of these issues that is at least as frank and vigorous as what we are all accustomed to in the average economics seminar. To that end, we think it would be useful to lay out some of the questions we have about your analysis:

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Trump’s version of capitalism looks a lot like revenge — and it endangers our democracy

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In response to the Carrier caper after the election last year, I decried the Trump administration’s preference for what I called ad hoc deal capitalism. I noted that the practice was characteristic of developing countries and earlier times in the United States and that it was much less conducive to prosperity and freedom than capitalism based on the predictable rule of law.
Until last month, there had been fewer cases of deal capitalism than I had feared. But in the last month, policy has taken an ugly turn toward the selective and ad hoc use of government power — not to reward political friends but to punish political adversaries. Government rewards encourage cronyism and rent-seeking and waste public resources. Targeting adversaries may chill dissent and threaten democracy.

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Revisiting Harvard and the American Dream

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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. Read more

Three (almost) inexplicable parts of the Republican tax plan

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With the release of the Republican tax proposal, the most important tax debate in a generation is in full swing. Most reasonable experts agree that tax reform has the potential to spur investment and raise wages while also simplifying the system and increasing its fairness and legitimacy. The right question for debate is not the desirability of tax reform or even of business tax reform directed at spurring investment. It is the likely economic effect of particular proposals.

Unfortunately, the proposal on offer by House Republicans may well retard growth, reward the wealthy, add complexity to the code and cheat the future, even as it raises burdens on the middle class and the poor. There are three aspects of the proposal that I find almost inexplicable, except as an expression of the power of entrenched interests.

First, what is the rationale for passing tax cuts that increase the deficit by $1.5 trillion in this decade and potentially more in the future, instead of pursuing the kind revenue-neutral reform adopted in 1986? There is no present need for fiscal stimulus. The national debt is already on an explosive path, even without taking into account large spending needs that are almost certain to arise in areas ranging from national security to infrastructure to the addressing those left behind by globalization and technology.

Borrowing to pay for tax cuts is a way to defer pain, not avoid it. Ultimately, the power of compound interest makes necessary tax increases or spending cuts that are even larger than those tax reductions. But in the meantime, debt-financed tax cuts would raise the trade deficit and reduce investment, thereby cheating the future.

Second, what is the case for cutting the corporate tax rate to 20 percent? For at least five years under the GOP proposal, businesses would be able to write off investments in new equipment entirely in the year that those investments are made. So the government would be sharing to an equal extent in the costs of and returns from investment, eliminating any tax-induced disincentive to invest. The effective tax rate on new investment would be reduced to zero, or less, even before considering the corporate rate reduction. A corporate rate reduction serves only to reward monopoly profits, other rents or past investments. Given the trends of the past few years, are shareholders really the most worthy recipients of such a windfall?

Proponents of the House approach defend it by pointing to international considerations. Unfortunately, the “territorial” approach being pushed by the House, which would renounce the objective of taxing the global income of U.S. companies, could easily encourage offshore production. Wouldn’t it be much better for the United States to lead an initiative to prevent a race to the bottom in global corporate taxation than for it to try to win a race to the bottom?

Third, why include new complexities that help the richest taxpayers while taking steps that hurt middle-income families? Why should passive owners of businesses that are already avoiding the corporate tax get a big rate reduction to 25 percent when those who actually operate and work in such businesses pay at a higher rate? What is the rationale for eliminating the estate tax when it is only paid for by .2 percent of households?

At a bare minimum, if such provisions are to be adopted, one would assume they would be paid for, to the maximum extent possible, through steps such as eliminating the carried-interest loophole or loopholes that enable real estate tax shelters. Not so. The proposal instead goes after measures such as the adoption tax credit, deductions for major medical expenses and the deductibility of student-loan interest. These seem like far more important benefits to preserve than carried interest.

Congress should instead return to the 1986 approach of revenue-neutral tax reform, while being careful not to adversely affect the progressivity of the tax system. This would enable what is most needed now — strengthening incentives for investment in the United States relative to other countries and raising the legitimacy of the tax code.

It is possible (though I doubt it) that the questions I have raised here have good answers. And there may be reasons why 1986 is an inapplicable model for today.

What is certain, though, is that we have a once-in-a-generation debate underway. Even those who disagree on policy should be able to agree on the importance of not making decisions until all relevant analytical work can be completed.

Lawrence H. Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.

Dana Farber’s Joint Visiting Committee Symposium

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The most important thing that a philanthropist can do is set off a chain that leads to an extraordinary discovery.

There is no risk, none, that we will over invest, over care or overdue it with respect to solving these problems. What does that mean? It means that all of us have to worry not about the mistakes we make but about the things we do not do, the opportunities that we miss.  All of us have to be prepared to take risks and bet on young genius.

This century will be a century about victory against disease, success in limiting pain and suffering, large scale extension of life and substantial augmentation of human capability.  And it is probably going to be the best thing to happen to mankind.

In 15th century Florence was not the biggest or richest city in the world but most important city in the world because of what human minds in Florence were doing.  What they were doing artistically, culturally and scientifically with respect to what was most important to human thought at that time.  I would say that Boston has exactly that potential right now because if you draw a circle with a six mile radius from where right where we are now, you have more life science talent within that circle by a factor of 2, than in any comparable 6 mile circle on this planet and its most important thing that’s happening for humanity.

I said something in my inaugural address as President of Harvard: We will take risks, we will fail many times because the greatest failure would be if we never had any failures because that would mean we had not taken the risks that the challenges of the moment demand.  All of your who are involved in supporting research, allocating research dollars need to make sure that you are taking risks, that  you are gambling on the things that could change the world.

My story of late stage cancer makes the point that cancer doesn’t need to define you and won’t define your life.  And with work you are doing here, it won’t define or end the life of the large majority of people who experience it. That, based on my own experience, is a hugely important thing.

What I do support in a new tax plan

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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

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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.  Read more

One last time on who benefits from corporate tax cuts

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I 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

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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”. Read more

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

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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.

America’s tax plan is not worth its name

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The international community should give officials a very uncomfortable week

October 8, 2018

The US administration’s tax plan is not a plan. It is a mélange of ideas put forth without precision or arithmetic. It is not clear enough to permit the kind of careful quantitative analysis of budget costs, economic impacts and distributional implications that precedes legislation in a serious country. It is clear enough to demonstrate that the claims of Steven Mnuchin, Treasury secretary, Gary Cohn, director of the National Economic Council, and Kevin Hassett, chair of the Council of Economic Advisers, are some combination of ignorant, disingenuous and dishonest.

I have strong disagreements on tax policy with Republican economists like Greg Mankiw, Glenn Hubbard and Martin Feldstein and with Treasury alumni like Nick Brady, John Snow and Hank Paulson. Nothing I have ever heard or read from them seems absurd or dishonest in the way that almost everything coming out of this administration has that character.

We know enough to know that a tax reform plan along the lines of the administration’s sketch will not substantially increase growth, will blow out the budget deficit and will make America an even more unequal place.

The administration pushes the idea that cutting the corporate tax rate will spur investment. It is certainly possible that with a lower rate, accountants will locate more corporate income in the US but a big spur to investment seems very unlikely. With long-term interest rates well below 2 per cent, the stock market sky high and business able to write off investments immediately, capital costs have never been lower.

True, there is much cash parked outside the US. But almost all the companies with large cash holdings outside the US also have cash hoards in the US that they choose not to invest. The first order impact of a “territorial system” that renounces a US tax claim to corporations’ overseas income will be to encourage the relocation of productive activity from America to tax-haven jurisdictions, and so to slow US growth.

It should not be forgotten that the most rapid growth in gross domestic product that the US has seen took place in the 1950s, 1960s and 1970s when top tax rates were nearly twice as high as now. Those rates were surely too high and punitive rates would be a huge mistake in the current context. Yet it is absurd to suggest that reductions from current levels will call forth some renaissance of hard work.

What about the budget deficit? In order for tax cuts to pay for themselves, as Mr Mnuchin sometimes asserts, they would have to massively spur growth. Since it is unlikely they will have any important effect on growth, they will bloat the budget deficit at a time when we should be preparing for the next downturn, for rising entitlement costs, and potentially for the need for increased national security spending.

It is worse than this. Many in the administration’s orbit have expressed the belief that the Federal Reserve’s quantitative easing programme has inflated asset prices. If so, increasing the supply of bonds should have a significant depressing impact on asset prices and the economy. Any possible supply-side benefits of the tax programme have to be weighed against the damping impact of future deficits on economic growth.

Finally, there is the question of fairness. Those secure in their beliefs do not, as Mr Mnuchin did, seek to de-publish studies by apolitical civil servants. There is very little doubt among serious economists that the immediate impact of corporate tax cuts would be to help corporations and that the vast majority of corporate shareholding is concentrated among those at the top of the income and wealth distribution.

Anyone in doubt about fairness should note that the administration chooses to exclude the estate tax from discussion when it considers fairness and is unwilling, as all previous Treasuries have been, to present a revenue and distributional analysis of its plan.

This week the world’s finance ministers and central bank governors will gather in Washington for the annual International Monetary Fund-World Bank meetings. These meetings used to be a time when the US urged other countries to respect the laws of economics and arithmetic in formulating economic policies. This time the lecturing should go in the opposite direction. The international community should make sure that US officials have a very uncomfortable week. Just possibly, that will be enough to get the administration economic team to consult their consciences as well as their Twitter accounts.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

 

Newt Gingrich & Larry Summers on Why Roy Moore, Donald Trump Won

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“Newt has the right elements of the answer- people are really angry, they’re disillusioned, they’re uncomfortable, they’re scared, they’re looking for something very different,” said Summers.

“He had a gut visceral connection that the Democrats lacked.”

“We had statisticians doing computer models around voter targeting, he had gut instincts around Twitter, rallies and Facebook- those three things, gut instincts, Trump’s analysis that people are very angry and disillusioned and his tremendous energy.”

“That’s why I think what happened in Alabama is a big deal.”

Read on Chicago Now.

Listen on Soundcloud.

Conversations with Tyler Cowen: Macroeconomics, Mentorship and Avoiding Complacency

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Listen to Conversation with Tyler Cowen: Macroeconomics, Mentorship and Avoiding Complacency where we discuss a wide range of ideas including: innovation in higher education, Herman Melville, the Fed, Mexico, Russia, China, philanthropy and my table tennis adventure in the summer Jewish Olympics.

Macro Musings podcast

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My interview with David Beckwirth of Macro Musings podcast where we discuss macro policy making, QE, nominal GDP targeting and more. Listen to the podcast here.

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

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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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