Trump’s budget is simply ludicrous

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Details of President Trump’s first budget have now been released.  Much can and will be said about the dire social consequences about what is in it and the ludicrously optimistic economic assumptions it embodies.  My observation is that there appears to be a logical error of the kind that would justify failing a student in an introductory economics course.

Apparently, the budget forecasts that US growth will rise to 3.0 percent because of the Administration’s policies—largely its tax cuts and perhaps also its regulatory policies.  Fair enough if you believe in tooth-fairies and ludicrous supply-side economics.

Then the Administration asserts that it will propose revenue neutral tax cuts with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count.  You can’t use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue.  At least you cannot do so in a world of logic.

The Trump team prides itself on its business background.  This error is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenues while failing to account for the fact that the investments would actually cost some money to make. The revenue generated by the investments might exceed their cost (though the same is almost never true of tax cuts), but that doesn’t change the fact that the investment has a cost that must be included in the accounting.

This is a mistake no serious business person would make. It appears to be the most egregious accounting error in a Presidential budget in the nearly 40 years I have been tracking them.

Who knew what when?   I have no doubt that there are civil servants in OMB, Treasury and CEA who do know better than this mistake.  Were they cowed, ignored or shut out?   How could the Secretary of Treasury, Director of OMB and Director of the NEC allow such an elementary error? I hope the press will ferret all this out.

The President’s personal failings are now not just center stage but whole stage.  They should not blind us to the manifest failures of his economic team.  Whether it is Secretary Mnuchin’s absurd claims about tax cuts not favoring the rich, Secretary Ross’s claim that the small squib of a deal negotiated last week with China was the greatest trade result with China in history, NEC Director Cohn’s ludicrous estimate of the costs of Dodd Frank, or today’s budget, the Trump administration has not yet made a significant economic pronouncement that meets a minimal standard of competence and honesty.

Five suggestions for avoiding another banking collapse

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Several weeks ago I gave a talk based on my Brookings paper with Natasha Sarin at the Atlanta Fed’s annual research conference. Here are the video and slides.  I continue to be puzzled by gap between what is widely believed and my reading of market evidence.

I began by highlighting three facts that seem to me to be in substantial tension with the widespread view that banks are far safer now than they used to be because they are far better capitalized. Mark Carney’s statement that “The capital requirements of our largest banks are now ten times higher than before the crisis. . . . This substantial capital and huge liquidity give banks the flexibility they need to continue to lend…even during challenging times” is typical.

First, there is distressingly little evidence in favor of the proposition that banks that are measured as better capitalized by their regulators are less likely to fail than other banks.  Andrew Haldane suggests the absence of a relationship looking across banks before the 2008 crisis.  Òscar Jordà  and coauthors suggest the absence of such a relationship historically, using data for many countries.  Jeremy Bulow and Paul Klemperer note that for banks whose crisis failure resulted in FDIC losses, the FDIC typically had to inject an amount in excess of 15 percent of their assets, suggesting that they in fact had substantial negative capital positions.

Second, financial logic embodied in the celebrated Modigliani Miller theorem and suggested by common sense holds that substantial reductions in leverage, if achieved, should be associated with reduced volatility, reduced sensitivity to shocks and lower risk premiums.  Our paper examines a comprehensive suite of volatility measures including actual volatility, volatility implied by option pricing, beta, credit default spreads, preferred stock yields and earnings price ratios.  While each indicator has associated ambiguities, it is striking that none suggest a major reduction in leverage for the largest US financial institutions, large global institutions or midsize domestic institutions.

Third, the ratio of the market value of bank’s common equity to its risk weighted assets provides a market based measure of its leverage.  Of course, the market value of equity overstates true capital because of limited liability: if assets rise in value there is no limit to how much shareholders can ultimately receive; but there is a zero lower bound on what shareholders receive. Still, as Haldane and others have documented, this market measure has historically proven useful in predicting bank distress. The data suggest that on a market value of equity basis, major financial institutions are no less levered than they were over the period before the crisis—even excluding the couple of years before the crisis when there was plausibly a bubble element in market pricing.

I am more confident that these observations need to be reckoned with in thinking about financial stability than I am in any particular set of explanations much less policy conclusions.  Here though are some observations suggested by our findings.

First, it is essential to take a dynamic view of capital.  The health of a financial institution depends critically on the profits it can expect to generate in the future.  I suspect that the decline in the ratio of the market value of bank equity to assets reflects declines in expected future profits, and that this declining franchise value, other things equal, causes banks to be more levered.

The stress tests introduced by the regulatory community represent a welcome recognition of the need to take a dynamic view of capital.  However I am inclined to agree with Jeremy Bulow who noted in commenting on the our paper that recent stress tests estimate that if GDP drops 6.25 percent, unemployment doubles, the stock market halves, and real estate falls by 25 to 30 percent, then capital losses would be insufficient to trigger “prompt corrective action.” Bulow wonders—and we do as well—if this is not more of a comment on the inadequacies of the stress test procedures, than on the soundness of the banks.

Second, a crucial challenge for financial regulation going forward is assuring prompt responses to deteriorating conditions that do not set off vicious cycles.  Markets were sending clear signals of major problems in the financial sector well in advance of the events of the fall of 2008 but the regulatory community did not even limit bank dividend payouts, even after the experience at Bear Stearns, which had been deemed very well capitalized even as it was failing.  Current experiences in Europe where some institutions have a price-to-book ratio of barely 0.35 and have not yet been forced to raise capital are not encouraging about lessons learned.

Third, regulators need to be attentive to franchise value.  It goes without saying that banks should not be permitted to take excessive risks or treat customers unfairly in order to raise their franchise value.  Nor would it be wise public policy to undermine competition in banking in order to raise franchise values.  On the other hand, it is not just an issue of cost, but financial stability as well when regulators impose needless burdens on banks.  This point was brought home to me not long ago when I heard about the legal contortions one big bank felt it had to go through when I recommended a student for a job.  Would hiring the student be doing me an impermissible favor?  Would not hiring the student be unfair?  The debates surrounding my well-intentioned suggestion consumed hours of time on behalf of the bank’s compliance team. And I am sure such abundance of caution is commonplace at most large financial institutions.  On a random Tuesday, there are hundreds of federal government employees going to work at each of our major banks, some of which have more than 10,000 people engaged in compliance activity.

Regulatory costs are an especially large issue for smaller banks since there are almost certainly economies of scale in compliance functions.  There is also the crucial point that incomplete regulation which discriminates against banks in favor shadow banks may by undermine financial stability in two ways.  First, shadow banks may become loci of instability.  Second, weakening the franchise value of regulated institutions may make their insolvency more likely.

Fourth, bankers may be more right in their concerns about increased costs of capital and its effect on lending than economists usually suggest.  Economists like Anat Admati normally rely on Modigliani-Miller considerations to argue that enhanced regulation does not raise capital costs, because it makes equity safer.  If as our results suggest equity is not safer, there is every reason to suppose that bank capital costs have increased as a consequence of regulation, and that this may to some extent have reduced credit flows.

Fifth, it is high time we move beyond a sterile debate between more and less regulation.  No one who is reasonable can doubt that inadequate regulation contributed to what happened in 2008 or suppose that market discipline is sufficient to contain excessive risk-taking in the financial industry. At the same time, not all regulatory expansions are desirable and in some contexts tougher regulation can be counterproductive for financial stability if it reduces profitability without offsetting benefit, if interferes with bank diversification, or if it causes regulators to become overly identified within regulated institutions.  Neither the approach that holds that all increases in measured capital and other regulation are attractive, nor the one that holds that capital and other regulations should be completely scaled back is likely to prevent or contain the next financial crisis.

Financing of international collective action for epidemic and pandemic preparedness

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The Lancet Global Health

May 18, 2017

The global pandemic response has typically followed cycles of panic followed by neglect. We are now, once again, in a phase of neglect, leaving the world highly vulnerable to massive loss of life and economic shocks from natural or human-made epidemics and pandemics. Quantifying the size of the losses caused by large-scale outbreaks is challenging because the epidemiological and economic research in this field is still at an early stage. Research on the 1918 influenza H1N1 pandemic and recent epidemics and pandemics has shown a range of estimated losses (See full report here).

 A limitation in assessing the economic costs of outbreaks is that they only capture the impact on income. Fan and colleagues recently addressed this limitation by estimating the “inclusive” cost of pandemics: the sum of the cost in lost income and a dollar valuation of the cost of early death. They found that for Ebola and severe acute respiratory syndrome (SARS), the true (“inclusive”) costs are two to three times the income loss. For extremely serious pandemics such as that of influenza in 1918, the inclusive costs are over five times income loss. The inclusive costs of the next severe influenza pandemic could be US$570 billion each year or 0·7% of global income (range 0·4–1·0%)—an economic threat similar to that of global warming, which is expected to cost 0·2–2·0% of global income annually. Given the magnitude of the threat, we call for scaled-up financing of international collective action for epidemic and pandemic preparedness.

Two planks of preparedness must be strengthened. The first is public health capacity—including human and animal disease surveillance—as a first line of defence. Animal surveillance is important since most emerging infectious diseases with outbreak potential originate in animals. Rigorous external assessment of national capabilities is critical; WHO developed the Joint External Evaluation (JEE) tool specifically for this purpose. Financing for this first plank will largely be through domestic resources, but supplementary donor financing to low-income, high-risk countries is also needed.

The second plank is financing global efforts to accelerate research and development (R&D) of vaccines, drugs, and diagnostics for outbreak control, and to strengthen the global and regional outbreak preparedness and response system. These two international collective action activities are underfunded.

Medical countermeasures against many emerging infectious diseases are currently missing. We need greater investment in development of vaccines, therapeutics, and diagnostics to prevent potential outbreaks from becoming humanitarian crises. The new Coalition for Epidemic Preparedness Innovations (CEPI), which aims to mobilise $1 billion over 5 years, is developing vaccines against known emerging infectious diseases as well as platforms for rapid development of vaccines against outbreaks of unknown origin. The WHO R&D Blueprint for Action to Prevent Epidemics is a new mechanism for coordinating and prioritising the development of drugs and diagnostics for emerging infectious diseases. Consolidating and enhancing donor support for these new initiatives would be an efficient way to channel resources aimed at improving global outbreak preparedness and response.

Crucial components of the global and regional system for outbreak control include surge capacity (eg, the ability to urgently deploy human resources); providing technical guidance to countries in the event of an outbreak; and establishing a coordinated, interlinked global, regional, and national surveillance system. These activities are the remit of several essential WHO financing envelopes that all face major funding shortfalls. The Contingency Fund for Emergencies finances surge outbreak response for up to 3 months. The fund has a capitalisation target of $100 million of flexible voluntary contributions, which needs to be replenished with about $25–50 million annually, depending on the extent of the outbreak in any given year. However, as of April 30, 2017, only $37·65 million had been contributed, with an additional $4 million in pledges. The WHO Health Emergencies and Health Systems Preparedness Programmes face an annual shortfall of $225 million in funding their epidemic and pandemic prevention and control activities.

Previous health emergencies have shown that it can take time to organise global collective action and provide financing to the national and local level. In such situations, a global mechanism should offer a rapid injection of liquidity to affected countries. The World Bank’s Pandemic Emergency Financing Facility (PEF) is a proposed global insurance mechanism for pandemic emergencies. It aims to provide surge funding for response efforts to help respond to rare, high-burden disease outbreaks, preventing them from becoming more deadly and costly pandemics. The PEF currently proposes a coverage of $500 million for the insurance window; increasing the current coverage will require additional donor commitments. In addition, the PEF has a $50–100 million replenishable cash window.

As the world’s health ministers meet this month for the World Health Assembly, we propose five key ways to help prevent mortality and economic shocks from disease outbreaks. First, to accelerate development of new technologies to control outbreaks, donors should expand their financing for CEPI and support the WHO R&D Blueprint for Action to Prevent Epidemics. Second, funding gaps in the WHO Contingency Fund for Emergencies and the WHO Health Emergencies Programme should be urgently filled and the PEF should be fully financed. Third, all nations should support their own and other countries’ national preparedness efforts, including committing to the JEE process. Fourth, we believe it would be valuable to create and maintain a regional and country-level pandemic risk and preparedness index. This index could potentially be used as a way to review preparedness in International Monetary Fund article IV consultations (regular country reports by staff to its Board). Finally, we call for a new global effort to develop long-term national, regional, and global investment plans to create a world secure from the threat of devastation from outbreaks.

Gavin Yamey, Marco Schäferhoff, Ole Kristian Aars, Barry Bloom, Dennis Carroll, Mukesh Chawla, Victor Dzau, Ricardo Echalar, Indermit Singh Gill, Tore Godal, Sanjeev Gupta, Dean Jamison, Patrick Kelley, Frederik Kristensen, Ceci Mundaca-Shah, Ben Oppenheim, Julie Pavlin, Rodrigo Salvado, Peter Sands, Rocio Schmunis, Agnes Soucat, Lawrence H Summers, Anas El Turabi, Ron Waldman, Ed Whiting

Trump’s tax plan is more trickle down than pump priming

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Published by Sabri Ben-Achour, Marketplace

May 11, 2017

In an interview with The Economist, President Trump said it’s OK that his tax plan would increase the deficit, because it wouldn’t do so for very long. He said it would “prime the pump” of the economy. And then he said he came up with that phrase.

For the record, Donald Trump did not invent the phrase “priming the pump” in an economic context, or really any context.

“Pump priming goes all the way back to the 1930s,” said Peter Sokolowski, editor-at-large at Merriam-Webster. “We do have evidence of, for example, FDR using it during the Great Depression, talking about his own policies.”

In the olden days, like hundreds of years ago, you’d have to put some water into a pump to get it started. In economics, pump priming is a standard Keynesian concept.

“A burst of government spending or a burst of tax cutting can start there being more spending, which leads to more income, and the economy starts revving up,” said Larry Summers, who teaches economics at Harvard.

But this metaphor is usually used when the economy is in the dumps, Summers said, not in a situation like we have now with 4.5 percent unemployment and strong corporate profits.

“It’s pretty unusual to talk about priming a pump when the pump has been actively pumping water for a long time,” Summers said.

The other thing is that priming the pump, well, it’s more of a phrase that Democrats would use.

“It is an odd phrase for a Republican president to use,” said Chris Edwards, an economist with the Cato institute. Democrats would use it to describe stimulus plans — increasing spending or income tax cuts.

“Trump’s tax plan is generally a supply-side tax reform plan,” Edwards said.

That means it focuses on cutting business taxes and deregulation. That usually has a different and contested metaphor: trickle down.

Larry Summers: More Susceptible To Downturn Than People Think

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May 9, 2017

Bloomberg Markets AM with Pimm Fox and Lisa Abramowicz.

GUEST: Former Treasury Secretary Larry Summers, President Emeritus and Charles W. Eliot University Professor at Harvard University, discusses bank regulation, US Treasury policies, and outlook for a recession. (Source: Bloomberg)

Less is more when it comes to Federal Reserve policy

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May 7, 2017

Friday’s US employment report was generally strong, with job growth of 211,000, declining unemployment and a drop in the number of workers involuntarily confined to part-time work.

The data, along with indications that growth in the second quarter is likely to come in above 3 per cent, suggest the economy is reasonably robust. But these economic data present difficult issues of interpretation and policy choice for the US Federal Reserve. Is the economy or the stock market enjoying a “sugar high” or is the current path sustainable? What weight should the Fed give strong employment figures relative to gross domestic product growth that remains modest by historical standards and relative to low rates of inflation and expected inflation? How should the Fed treat the tension between the great uncertainty that so many economic actors experience and near-record low levels of market volatility and expected volatility?

Given how little the administration has actually changed policy, recent economic performance was pre-determined before Donald Trump took office. Stock markets have boomed in recent months but it is less obvious that there is a sugar high element in their performance than it seemed around the turn of the year. Fundamentals unrelated to the new administration have strengthened, particularly as strong earnings reports for the first quarter have come in, growth abroad has strengthened and bond yields have declined. At the same time, the “Trump signature” in the market has attenuated: for example, high-tax stocks which outperformed after the election have given back their outperformance.

The greatest puzzle regarding the stock market is not its level but its lack of volatility. We have for months been in a period where volatility has been low by historic standards, despite what seems high policy uncertainty. Perhaps this reflects technical factors in the market. It may also be that uncertainty is a kind of self-denying prophecy as it causes investors to scale back their leverage, which in turn limits volatility. It is probably important to recognise also that much of market volatility reflects factors other than economic policy.

It is now very difficult to argue that there is a large amount of slack in US labour markets. Another year of employment performance like that we have seen during the past few months, would take the labour market into nearly uncharted territory. It has been surprising, in the face of the labour market tightening, that there has not been more evidence of accelerating wage inflation. A reasonable conjecture is that this reflects workers cowed by the possibility of being replaced by technology or foreigners. Indeed, given the tightness of the labour market, workers appear relatively reluctant to quit jobs.

What about slow GDP growth? There is little reason to think growth has moved out of the 2 per cent range in which it has been stuck for the last half a dozen years. If, as seems arithmetically almost inevitable, employment growth slows, GDP growth will as a matter of logic slow, unless productivity growth accelerates. There is little in the data to suggest this is likely in the near term.

So the next couple of years are likely to see slower GDP growth and possibly a tendency to rising inflation. What does this mean for monetary policy? The assumption manifest in the statements of the Fed and most commentary is that policy should be tightened over time through rising interest rates and a reversal of quantitative easing. Perhaps, but tightening involves real dangers and needs to be carried out with great care. The Fed has committed itself to a symmetric 2 per cent inflation target and inflation has been below 2 per cent for eight years. If a booming economy in the ninth year of recovery with this prelude is not the time for inflation above 2 per cent, when would such a time arise?

Moreover, economists should now have great humility regarding the inflation process. The Phillips curve relation on which they have relied has largely broken down over the past several decades and so relying on it to take pre-emptive action with respect to inflation seems problematic. It may be that the economy will surprise in its ability to run hot without accelerating inflation.

There is also the observation that price inflation remains very much under control and that some wage growth in excess of price growth would be desirable given the erosion of labour’s position in the economy over the last period.

The Fed will have little room to respond if it overdoes things and the economy goes into recession. Sometimes the hardest and most important decisions in government involve doing less rather than more. This is one of those times for the Fed. Caution should be its watchword.

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

This time, Trump’s treasury secretary is undermining himself

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Last week I suggested that I felt sorry for Treasury Secretary Steven Mnuchin. He found himself forced by circumstance and his president to say and do things that undermined his and Treasury’s credibility.

I wish there was an external force that could be blamed for the secretary’s comments on Monday, but they look from the outside like unforced errors.

At Michael Milken’s annual conference for investment professionals, he crowed to the bankers present that “you should all thank me for your bank stocks doing better.” I cannot conceive of any of the 11 other secretaries I have known making such a statement. Leave aside the question of whether whatever credit is to be claimed should be claimed on behalf of the president. Since when is the stock price of banks the objective or the standard of success for economic policy? And when, as will inevitably occur, bank stock prices decline, will the secretary accept the blame?

It was quite a day.

The secretary also doubled down on his surprising statements of last week by predicting that within years the economy will be regularly growing at above 3 percent. This is not the view of mainstream forecasters, and in light of the very slow growth in the adult population, and reduced immigration along with low unemployment, it would require a productivity growth miracle. He cited no evidence in favor of his views.

The secretary claimed that President Trump’s tax cuts will be the largest in history. Relative to any relevant denominator, like total tax collections or GDP, President Ronald Reagan’s were far larger.

Usually treasury secretaries try to stay out of the president’s personal politics. Yet Mnuchin has made the claim that the president has given more financial disclosure than anybody else. This is ludicrous. Hundreds of officials from presidents on down have made their tax returns available to members of Congress as part of the confirmation process. And for 40 years all presidents have released their tax returns. President Trump has been not the most but the least transparent president in the last 50 years.

There will likely come a time when the secretary of the treasury will need to invoke his credibility to support confidence in the economy, to stabilize markets, or to mitigate an international crisis. Let’s hope that when the moment comes Mnuchin will retain some credibility. This will require an end to days like yesterday.

The future of banking

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I had a keynote conversation last week with my friend Markus Brunnermeier on fintech and the future of finance at a conference he held at Princeton. Markus got me to think about a number of different aspects of fintech that I hadn’t fully considered before. Some of the main points I tried to make were:

  • Fintech is ultimately about taking away frictions. I gave as examples of frictions that are kind of shocking in the 21st century the huge premiums people pay for title insurance every time they refinance a mortgage, the inability of major banks to enable even major private bank customers to automatically pay down their credit line whenever they have cash inflows, and the $40 billion-plus in credit and debit card interchange each year.
  • I guessed that 10 years from now, the odds that there would be a fintech company with the kind of $250 billion market cap that some big American banks have was about 25 percent. I did not expect that in the foreseeable future fintech would have the kind of existential impact on banks that Netflix has had on Blockbuster. I do think in some areas fintech companies are likely to have the kind of impact that Skype has had on major telephone companies — forcing drastic reductions in pricing and profit margins on some key products.
  • I surprised Markus a bit by being skeptical of the idea that one of the big technology players like Apple, Google, Facebook and Amazon would become big players in financial services. I noted the traditional American aversion to combinations of banking and commerce and also noted that I thought privacy rules would preclude their using their massive data troves to drive lending activity.
  • I was quite serene about the impact of fintech on financial stability. In general it seems to me that prevailing understandings of financial crises put too much emphasis on financial innovation and too little on age-old rapid oscillation between greed and fear, on real estate lending and real estate bubbles, on excessive leverage especially related to implicit government guarantees, and on illiquidity phenomena.
  • Fintech, by providing for faster settlements, more transparency and diversification, is likely to have as many stabilizing as destabilizing effects.
    If the large banks of today are not as large five or 10 years from now, I think it is more likely to be because of bad lending, heavy regulation or market pressures to break up because the whole is valued less than the sum of the parts than it will be because of disruption from fintech. I say this because much of what fintech does depends on the banking system and because I doubt that over this horizon banks can be completely disrupted.
  • I argued that financial regulation should be directed at functions and at institutions not at particular financial instruments noting that most instruments could be synthesized in multiple ways and suggesting that all might have similar impacts.

The video of our full conversation can be watched here.

My overall conclusion was that fintech is likely to make a substantial contribution by removing frictions. Policymakers should be slow to accede to demands from incumbents for heavy regulation of new fintech entrants. At the same time, they should assure that when fintech companies succeed, it is on the basis of genuine efficiencies and not because of regulatory avoidance.

Trump is undermining his own Treasury Secretary

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President Trump’s tax proposals were rolled out yesterday by Treasury Secretary Mnuchin and NEC Director Cohn. For reasons of long run budget health, fairness, and economic impact I think they are extraordinarily ill-advised. I am certain that the substantive concerns I have will be extensively addressed in the debates to come.

As I read about the proposals and thought back over the tax discussions of the last year, I found myself feeling sympathetic to Secretary Mnuchin. Some of the most difficult moments for any cabinet officer comes when the President fails to respect his Department’s desire to do serious policy work, when political circumstance forces the repudiation of his major past statements, and when he has to out of loyalty support absurd propositions. All three of these things happened to Secretary Mnuchin this week.

By all accounts the Treasury was on a path working with other agencies to come forth by June with a set of tax reform proposals. Treasury officials were shocked when the President, speaking in the Treasury building, announced last Friday that the Administration would unveil its tax plan today. There was no time for specification of a proposal, let alone consultation on its merits, estimates of its revenue impact, or evaluations of its economic impact. Instead the Treasury Secretary was asked to lend his prestige and that of his Department to a one page document that would have been judged skimpy on detail if it were a campaign proposal. I can only imagine how demoralized the Treasury tax staff-a group that rightly prides itself on its professionalism and analytic seriousness – must be.

Mnuchin has stated on multiple occasions that the Administration’s tax proposals would not favor the rich. Whatever its other virtues, distributional neutrality is not a feature of the plan announced yesterday. Indeed, between massive corporate rate cutting, big tax cuts for the highest income individual taxpayers, elimination of the estate tax, and other incentives it is a certainty that the vast majority of the benefits of the plan will go to a very small fraction of tax payers.

Secretary Mnuchin also stated last week, in what appeared to be a scripted interview, that tax cuts would be so good for growth that they would come very close to paying for themselves. This of course is the famous Laffer curve idea. In the context of an economy with 4.5 percent unemployment, it is absurd. Ronald Reagan asserted that tax cuts could pay for themselves during his campaign but his Treasury Department was far too serious to ever make such a statement. His Administration recognized that large tax cuts would raise deficits unless offset by spending cuts. So did the George W. Bush Administration. So have House and Senate Republicans. So has every reputable economist who has addressed the subject in the last several decades.

The Treasury Secretary’s credibility is an important national asset that could be needed at any moment. I am very sorry to see it squandered on behalf of a set of tax reform proposals that are at best a bargaining position.

X-Treasury Secretary Larry Summers just completely trashed the Trump tax plan

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Published by Jeff Cox, CNBC

April 27, 2017

President Donald Trump‘s plan to roll back taxes in the hope that doing so will generate robust economic growth with little impact on debt and deficits is “absurd,” former Treasury Secretary and White House economic advisor Larry Summers said.

In fact, Summers added in an interview with CNBC, that had he been asked to present such a plan with the notion that it would pay for itself, he would have refused.

“If I had been asked by the White House to assert a proposition as demonstrably false as the claim that this plan would produce revenue, I would have resigned rather than put the credibility of the department behind a proposition that no one with real experience would believe was true,” he said.

Summers served as head of the Treasury during the Bill Clinton administration and as senior economic advisor to President Barack Obama.

The cornerstone of Trumps’ economic agenda is that, as well as simplification of the tax code, it will unlock growth, which was strong under Clinton but plodding under Obama.

In a proposal rolled out Wednesday by Treasury Secretary Steven Mnuchin and Gary Cohn, Trump’s chief economic advisor, the number of individual tax brackets would be cut to three and the levels for wage earners across the board would be reduced.

In addition, the plan would slash business taxes and give companies a much lower tax rate for profits earned overseas and brought back to the U.S.

Summers said he was surprised at the apparent lack of thought in a proposal that was presented as a single-page document.

“Most presidential campaigns during the primaries, when they put out a tax plan, they put out more than one page. They put out some analysis, some models, some careful articulation of the proposal and estimate its effects,” he said.

“There’s none of that coming from the administration, and yet there’s this confident statement that it will pay for itself,” Summers added. “I don’t know how they could possibly know without having done economic work.”

Comparing the Trump tax-cut plan to those launched by predecessors including Ronald Reagan and George W. Bush, Summers said there are arguments on both sides about their net effects.

However, he said, there is “no — no serious read of the evidence to suggest that they came close to paying for themselves by stimulating economic growth.”

Summers said sending out the Treasury secretary to make that claim undermines the office.

“I just don’t understand what could cause an administration to put its secretary of the Treasury in a position to assert something … that is generally regarded by economists as absurd,” he added.

Still, White House budget chief Mick Mulvaney said Thursday that the Trump administration intended for its initial tax plan to be vague and that assessing its long-term impact is difficult right now.

Wealth Management Systems for Individual Investors

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Princeton University – April 26 and April 27

Men Without Work

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April 16, 2017

Panelists Nicholas Eberstadt, Henry Wendt Chair in Political Economy at the American Enterprise Institute and author of Men Without Work: America’s Invisible Crisis, Jason Furman, Senior Fellow at the Peterson Institute for International Economics and former Chair of the Council of Economic Advisers (2013-2017), joined moderator Lawrence H. Summers, Charles W. Eliot University Professor of Harvard University and Co-Director of the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, for a panel discussion to reflect on employment crisis amongst “prime-age” men twenty-five to fifty-four. The panelists defined the exact problem as they saw it and discussed their differing opinions on its causes and possible remedies.  (Source: Harvard IOP at the Kennedy School)

 

Former Treasury Secretary Lawrence Summers says taxing robots makes no sense

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Published by David Brancaccio, Marketplace

April 19, 2017

My some estimates, nearly half of the work in America could be done by machines and software using current technology. Look out five, ten, twenty years and the impact of technology could be even more radical. All this week on the Marketplace Morning Report, we’re looking at ways to take advantage of automation in the workforce — rather than letting it take advantage of us. For instance, what if the government put a tax on robots? It’s an idea that philanthropist and Microsoft founder Bill Gates has proposed.

“Right now, if a human worker does $50,000 worth of work in a factory, that income is taxed,” Gates told Quartz in February. “If a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level.”

Lawmakers in the EU voted down a similar idea earlier this year. And for now, it doesn’t look like there’s much support in the U.S. either. Former Treasury Secretary Lawrence Summers told us he thinks the idea is illogical.

“At the practical level, why robots?” he said. “Word processing programs displace secretaries; dishwashers, the automated kind, displace dishwashers, the human kind; electricity means many fewer people in jobs carrying things from one place to another. Why would one single out among possible technologies, robots?”

Additionally, Summers said, the notion doesn’t make sense from a philosophical standpoint.

“There’s a deeper question, which is, should it be the objective of policy to encourage more rapid technological improvement or should it be the objective of policy to retard technological improvement?” he said. “It’s always seemed to me that enlarging the pie as much as possible and then figuring out a set of policies that are directed at making sure the pie is allocated in a fair way is a much better strategy than seeking, for some other reason, to slow the growth. I think the best course is not to be an ostrich and pretend we can ignore disruption. Too many people do that.”

He pointed to the comments from current Treasury Secretary Steven Mnuchin, who said the Trump administration wasn’t concerned about robots.

“I was shocked and appalled when the treasury secretary said that artificial intelligence destroying jobs wasn’t on the radar screen of the administration because it was 50 to 100 years off,” Summers said. “I thought that was an extraordinary and clueless statement, but having said that, I don’t think simply trying to resist or stop technology is a viable strategy. I don’t think it would be a viable strategy if it was adoptable on a global basis, but it’s even less viable for a single country in international competition.”

Larry Summers Says He Is Disappointed With 2% U.S. Growth

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April 12, 2017

Former U.S. Treasury Secretary Larry Summers discusses U.S. economic growth and proposals from the Trump administration. He speaks with Bloomberg’s David Westin on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)

The US must work on its economic relationship with China

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April 9, 2017

Donald Trump and Chinese President Xi Jinping have now completed their first summit. Observers on both sides seem to be relieved. If no diplomatic breakthroughs on major issues were achieved, it is also the case that there were no outward displays of truculence from either side. Neither high hopes nor great fears have been realised.

This leaves the question of where economic relations between the United States and China are going and where the US should want to take them. As important as the resolution of any specific issue is the definition of the challenges, which will be the focus of economic diplomacy henceforth. Having recently returned from China, where I had a chance to participate in a major economic forum and meet a number of senior officials, I have become convinced that the issues that preoccupy many Americans are either invalid or of secondary importance and the most important economic challenge posed by China is receiving far less attention than it deserves.

Discussions by the US of alleged currency manipulation by China are in the economic realm what discussions of changing the “One China” policy are in the geopolitical realm – unconstructive at best and possibly dangerous. While there is a case for the proposition that China manipulated its currency in an unreasonable way during the decade after 2005, by no stretch of any imagination is China today manipulating the renminbi downward for competitive advantage. In terms of the volumes of reserves expended and the extent of capital controls imposed, few countries in recent years have done as much to try to prop up their currency as has China.

More broadly, America’s economic future is shaped much more by policy choices made in Washington than in Beijing. To the extent that China trade has caused disruption in the US, it is the result of China’s remarkable growth and increase in capacity to produce, not unfair trade policies.

So a commercial focus on China’s trade deficit with the US is largely misguided. Yes, China subsidises various exports to the rest of the world in a number of ways. But if the US succeeds in stopping the subsidies or blocking the subsidised products, the results will be to shift production to Vietnam and other low-wage countries rather than to create good jobs in the US. Likewise, a reduction in Chinese trade barriers to products produced by American companies will indeed help these companies, but only a small part of the extra production will take place in the US.

American firms have valid complaints about requirements that they share intellectual property with Chinese partners when they invest in China, but if they were resolved the result would likely be more outsourcing of production to China, not less.

If currency issues are invalid and commercial diplomacy is unlikely to have much positive effect on the US economy, what should be the focus of US economic policy with respect to China?

It is difficult to overestimate the extent to which China is seeking to project soft power around the world by economic means. Mr Xi’s speech in Davos in January quoting Abraham Lincoln and laying out a Chinese vision for the global economic system at a time when the US is turning inward was the rhetorical edge of a concerted strategy.

Of course there is Mr Xi’s “One Belt, One Road” initiative, which envisions infrastructure investment and foreign aid to connect China and Europe. In a little noticed development, the Asian Infrastructure Investment Bank, a Chinese-sponsored competitor to the World Bank, has announced that it will invest all over the world. Already Chinese investment in Latin America and Africa significantly exceeds that by the US, World Bank and the relevant regional development banks. And China will soon be the leading exporter of clean energy technologies.

This investment will over time secure access to raw materials, allow Chinese companies to gain economies of scale, and help China to win friends. The US has chosen not to join the AIIB and to act as the dragging anchor on the financial scale of the Bretton Woods institutions, and to undermine rather than lead global co-operation on climate change and to sharply cut back foreign aid. In doing so, it is accelerating a perhaps invevitable loss of its pre-eminence in the global competition for prestige and influence.

The objectives of global economic co-operation and the respective roles of the US and China would be subject of a truly strategic economic dialogue. It is very important that such a dialogue start soon, but this will require the US to focus less on specific near-term business interests and more on what historians will remember a century from now.

Larry Summers on the economy, and Trump’s plans for tax reform

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March 30, 2017

A conversation about the economy and Trump’s plans for tax reform with Larry Summers, president emeritus of Harvard University and former treasury secretary under President Clinton. (Source: Charlie Rose)

Optimism over Trump a ‘sugar high’ with no signs of 3-4% economic growth, Larry Summers warns

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March 30, 2017

Published by Matthew J. Belvedere, CNBC

The highest consumer confidence reading in more than 16 years and the postelection stock market rally may not translate into more robust economic growth, former Clinton Treasury Secretary Larry Summers told CNBC on Thursday.

“If you use the standard of what the administration has held out the hope for, 3 to 4 percent growth, there is nothing in any data suggesting we’re moving towards that 3 to 4 percent growth standard,” Summers said on “Squawk Box.”

Summers, also a former economic advisor during Barack Obama‘s presidency, reiterated concerns that optimism for faster economic growth due to President Donald Trump‘s promised agenda of tax cuts and deregulation might be a “sugar high.”

 “We may be seeing a kind of sugar high, and sugar highs tend to be followed by much less happy periods,” warned Summers, president emeritus of Harvard University.

“If you continue to have the degree of division, confusion, rancor and uncertainty in Washington that we’ve seen, we may not see those sentiment changes last as long as many people thought they would a couple months ago,” Summers said.

The Republican Party’s “stunning” lack of unity on repealing and replacing Obamacare undermines Trump’s entire agenda, he argued.

“I would be cautious about any big revision to the upside in forecasts” for economic growth, Summers said, also partly due to the Federal Reserve‘s desire to prevent the economy from overheating. The Fed already put one interest rate hike on the board for 2017 earlier this month. Two or three more rate increases this year are being debated in the markets.

See video here

Larry Summers: GOP’s ‘stunning’ lack of unity on health care undermines rest of Trump’s agenda

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March 30, 2017

Published by Matthew J. Belvedere, CNBC

The GOP’s “stunning” lack of unity on repealing and replacing Obamacare undermines President Donald Trump’s entire agenda, former Clinton Treasury Secretary Larry Summers said Thursday.

The failure calls into question whether Trump and GOP leaders in Congress can deliver on the pro-economic growth promises that have supported the stock market and buoyed business and consumer sentiment, Summers argued on CNBC’s “Squawk Box.”

Summers, a former economic advisor to President Barack Obama, also said he’s concerned that a fight over funding Planned Parenthood could lead to a government shutdown. House Speaker Paul Ryansuggested earlier this week the House would not try to defund Planned Parenthood while working to approve spending to keep the government open beyond April 28.

Couple fiscal uncertainty with questions about Russia’s interference in the 2016 election, and there are potential pitfalls on multiple fronts, said Summers, president emeritus of Harvard University.

“There’s a huge set of leadership issues around the president’s ability to lead in the way presidents do that comes before, and is separate from, whatever add-on you get from Russia investigations,” Summers said.

On Thursday, Russian President Vladimir Putin denied accusations that Moscow meddled in U.S. elections. During a panel moderated by CNBC, Putin said, “All those things are fictional, illusory and provocations, lies.”

See video here

The robots are coming, whether Trump’s Treasury Secretary admits it or not

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As I learned (sometimes painfully) during my time at the Treasury Department, words spoken by Treasury secretaries can over time have enormous consequences, and therefore should be carefully considered. In this regard, I am very surprised by two comments made by Secretary Steven Mnuchin in his first public interview last week.

In reference to a question about artificial intelligence displacing American workers, Mnuchin responded that “I think that is so far in the future — in terms of artificial intelligence taking over American jobs — I think we’re, like, so far away from that [50 to 100 years], that it is not even on my radar screen.” He also remarked that he did not understand tech company valuations in a way that implied that he regarded them as excessive. I suppose there is a certain internal logic. If you think AI is not going to have any meaningful economic effects for a half a century, then I guess you should think that tech companies are overvalued. But neither statement is defensible.

Mnuchin’s comment about the lack of impact of technology on jobs is to economics approximately what global climate change denial is to atmospheric science or what creationism is to biology. Yes, you can debate whether technological change is in net good. I certainly believe it is. And you can debate what the job creation effects will be relative to the job destruction effects. I think this is much less clear, given the downward trends in adult employment, especially for men over the past generation.

But I do not understand how anyone could reach the conclusion that all the action with technology is half a century away. Artificial intelligence is behind autonomous vehicles that will affect millions of jobs driving and dealing with cars within the next 15 years, even on conservative projections. Artificial intelligence is transforming everything from retailing to banking to the provision of medical care. Almost every economist who has studied the question believes that technology has had a greater impact on the wage structure and on employment than international trade and certainly a far greater impact than whatever increment to trade is the result of much debated trade agreements.

As for the secretary’s questioning of tech company valuations, no one can predict markets, so he may turn out to be right. But with Apple trading at below the market average price earnings ratio, and Google trading with a price earnings ratio in the 20s at a time of very low volatility and near-zero long-term real interest rates, I do not understand the basis for Mnuchin drawing a conclusion about the inappropriate valuation of technology stocks.

In a highly uncertain world with a major tax reform debate upcoming, the credibility of the Treasury secretary is an important national asset. I hope Mnuchin will soon find an opportunity to clarify his thinking on technology and to back off from judging appropriate sector valuations in the stock market.