How did we get here?
First, where are we?
Matthew Yglesias: If the GOP tax plan is so good, why do they lie so much about it?: “Democratic programs may or may not be… good idea[s], [but] the bills they write that they say will expand the provision of social services in the United States really do expand the provision of social services…
…Not so… with the Republican plan…. Trump ran on promising a middle-class tax cut…. At the beginning of the month, Trump was on the same page, saying…. Treasury Secretary Steve Mnuchin made an unambiguous promise that there would be “no absolute tax cut for the upper class”…. Trump went so far as to phone up a group of Senate Democrats to tell them, “My accountant called me and said, ‘You’re going to get killed in this bill.’” This is all a bunch of lies…. Rather than own up to the reversal and defend it on the merits, Trump’s team is now engaging in bizarre deflections….
A telling thing about the cavalcade of lies Republicans are telling about taxes is the party can’t quite get its story straight as to what the policy agenda even is here. They are telling deficit hawks that the bill is fiscally responsible… revenue-neutral in the long term. They’re telling others that… PAYGO… will be suspended, and the bill won’t really lead to the automatic cuts in Medicare and other programs that, by law, will result from its passage. They’re telling some people the middle-class tax hikes written into the Senate bill will never be enacted… the opposite of what they’re telling deficit hawks. So then some Republicans are telling some deficit hawks that the follow-up to the tax bill will be a return to entitlement reform….
The good news—if you’re inclined to see it as good news—is that Trump is a huge liar, so you can always hope it’s someone other than you who’s going to get betrayed…
I guess we are allowed to use the “lie” word now, are we not?
As to how we got here, let me turn the microphone over to Fritz Hollings:
Senator Howard Baker, the majority leader, sat right down there at that first desk and he shrugged his shoulders and said: “This is a riverboat gamble…”
The thing about a “riverboat gamble”, is that if it goes wrong, you tell your counterparty that you need to get the money from your room, and then you jump overboard in the dark and swim to shore.
The time was 1981. Howard Baker was then characterizing the 1981 Reagan tax cut that he was shepherding through the Senate.
It worked—in a “riverboat gamble” sense. As a policy, it was a disaster: no acceleration of economic growth, a significant increase in wealth inequality and degradation of opportunity, and the first of the dollar cycles that devastated America’s manufacturing market share. But the Republican Party was able to swim to shore, collect campaign donations and win seats, and leave the Democrats to pilot the riverboat through the snags.
Ever since, that has been the strategy of the Republican Party: make riverboat gambles. Tell bigger and bigger whoppers about them until they get called to account by the media and by the electorate—and then, with the post-2010 gerrymander and rise of Fox News, by that not general election but primary electorate.
If America is going to remain great, they will have to be called to account. And the only bright future for America is one in which the Republican Party is now on the same slow-motion track to long-term electoral defeat that then-governor Pete Wilson set the California state Republican Party on back two decades ago.
But, in the meantime, here we are, in the cycle of bigger and bigger whoppers. This serves as a good example:
Scott Lemieux: “I Am Sick And Tired Of People Saying That Utah Does Not Share A Border With Belgium”: “At the Senate Finance Committee…
…Sherrod Brown said some indisputably true things about the Republican plan to increase taxes on many non-affluent people to massively cut taxes for the extremely affluent:
I think it would be nice just tonight to just acknowledge that this tax cut is really not for the middle class; it’s for the rich. And that whole thing about higher wages, well, it’s a good selling point, but we know companies don’t just give higher wages—they don’t just give away higher wages just because they have more money. Corporations are sitting on a lot of money. They are sitting on a lot of profits now—I don’t see wages going up…
In response, Orrin Hatch said something indisputably irrelevant:
I come from the poor people, and I have been here working my whole stinking career for people who don’t have a chance, and I really resent anybody who says I’m just doing this for the rich—give me a break. Listen I have honored you by allowing you to spout off here, and what you’ve said is not right…. I come from the lower middle class originally. We didn’t have anything, so don’t spew that stuff on me. I get a little tired of crap…
It’s worth watching the video at the link; the pitch of furious indignation Hatch works himself into because someone pointed out that a tax cut for the rich is a tax cut for the rich is striking. And note that he does not say anything substantive about the bill, because he can’t—he talks about his background. I believe this is what we call a tell. No matter how much spittle Hatch emits, it doesn’t change the fact that he’s trying to ram a massive tax cut for the rich paid for on the backs of the poor through Congress…
Are there any economists out there saying that this is, policywise, a good idea? If there are economists of note and reputation who are taking the plunge, the natural place to find them is among the former Republican CEA chairs. So let’s take a look:
- On the side of reality, we have Alan Greenspan and Greg Mankiw:
- Alan Greenspan: “Economically, it’s a mistake to deal with sharp reductions in taxes now. We are premature on fiscal expansion, whether it’s tax cuts or expenditure increases. We’ve got to get the debt stabilized before we can even think in those terms…” (Nov 10)
Greg Mankiw: “The business tax plan being promoted by President Trump, and its close cousin released by House leadership this week, start with a good idea but then descend into an unworkable mess. Fortunately, the flaws can be fixed, if policymakers are willing to be bold…. O.K., O.K., I know that I have now come a long way from the Trump plan. And I know that, given the dysfunction in Washington, what I am proposing is a political nonstarter right now…” (Nov 3)
On the side of silence, we have Ben Bernanke, Harvey Rosen, and Michael Boskin…
On Team Riverboat Gambler, we have Eddie Lazear, Glenn Hubbard, and Martin Feldstein:
- Eddie Lazear: “Will it boost the economy enough to cover most of the revenue cost? And will it help the middle class? The answer to both questions is yes, although some key changes can make achieving these goals likelier…” (Oct 16)
Glenn Hubbard: “Economists’ technical fouls of each other on the tax basketball court make good copy. But a hole-in-one of the wage increase the CEA report describes is what should grab the attention of congressional tax writers…” (Nov 6)
Martin Feldstein: “I have long been a deficit hawk…. An extra 1.5 trillion dollars of debt…. But I believe the advantages of corporate tax reform outweigh the adverse effects of the relatively small debt increase… raise the capital stock by 5 trillion dollars within a decade, causing annual national income to rise by 500 billion dollars…” (Nov 5)
There are, I believe, three important errors in Feldstein.
First, he says “causing annual national income to rise…” But that is wrong. The right phrase, in his analytical framework, is “causing annual domestic product to rise…” The difference is that a lot of the increase in domestic product he counts on from increased investment is not an increase in the income of Americans, is not an increase in national income. My first reaction was that half of it is an increase in the incomes of foreigners. Paul Krugman’s second reaction was that two thirds of it is an increase in the incomes of foreigners. Long experience has taught me that, whenever I disagree with Paul, he is probably right.
If Paul is wrong, the effect of this first error is to lower the assessment of the boost to Americans’ annual incomes from 500 billion to 170 billion dollars.
The second error is that Feldstein assumes that the tax cut on already built and installed capital is 100% a cut that flows out of the Treasury and into Americans’ pockets. It doesn’t. Steve Rosenthal estimates that 70 billion dollars of it flows into foreigners’ pockets each year. The effect of this second error is to further lower the assessment of the boost from 170 down to 100 billion dollars a year.
The third error is that Feldstein’s calculation assumes that the bill is deficit neutral, and thus that the 200 billion dollars a year in extra corporate retained earnings it produces is free to be devoted to increased corporate investment without countervailing factors. But, later on, he notes that the proposal involves “an extra 1.5 trillion dollars of debt” over the next decade. That is a subtraction from the funds available for investment. Remove that 10% return on the investment displaced from national income, and so we are down not to 170 billion dollars but to -50 billion dollars as the annual change in national income.
And, of course, not all of extra retained earnings will go to boosting investment. If we trust the CEO Council event that led to White House advisor Gary Cohn “ask[ing] sheepishly, ‘Why aren’t the other hands up?’”, A bunch will go to stock buybacks. A bunch will go to cash hoards and acquisitions. Some will not flow into retained earnings at all but go to dividends. Those wealth flows will boost elite consumption, rather than investment.
We are definitely in minus territory for economic growth here. And we are definitely in minus territory even without noting that Feldstein’s framework is already pretty far on the optimistic side as far as the economic benefits of low capital taxation are concerned. As Matthew Yglesias noted, you might get such a boost from:
a tax plan that was specifically designed to reduce taxation of new investments…. But most corporate profits are… the result of activities undertaken in the past…. A broad cut… is a windfall for what in tax policy jargon is called “old capital,” as well as for monopoly and quasi-monopoly rents and various other things that have nothing to do with incentivizing new investment…
And if we do note that a corporate tax cut is badly targeted—and a passive passthrough even worse targeted—as an investment incentive, we are in very negative territory as far as likely effects on economic growth are concerned.
And Feldstein’s arguments are the only game in town for supporters of the Trumpublican plans. Lazear, Hubbard, the Tax Foundation where Greg Leiserson has been correcting their modeling are all basically Feldstein with or without various bells and whistles.
Two of eight calling it a “mistake” and an “unworkable mess” is great. Three being quiet is OK—but, Harvey and Mike, ex-CEA chairs do not have the privilege of being silent on important policy questions and, Ben, although perhaps it would be better if ex-Fed chairs were to restrict their comments to monetary and financial policy, there is no such rule in operation.
But three offering support, even qualified support, is disappointing. I realize it is asking a lot to ask people who have spent their lives playing for Team Republican to cross the aisle—especially since they (rightly) believe that their principal societal value as is moderating technocratic voices within the Republican Party’s internal discussions, and they fear (rightly) that they put that at risk by failing to support the Republican Party’s legislative priorities. Marty gets a pass for having been very brave in stressing the dangers of the riverboat gambles in the early 1980s.
But may I please ask Glenn and Eddie to come over to the side of technocracy here?