Must-Read: Jason Furman and Larry Summers: Robert Barro’s Tax-Reform Advocacy: A Response

Must-Read: Ahem! If Robert Barro seriously and carefully thought the long-run boost to national income from the tax “reform” bill was 7% rather than the 3% of the Nine Republican Economists Being Unprofessional, he should have said so then.

It is not good to say now: “our critics are right and we should have divided by 25 rather than 10 to get an 0.12% per year growth boost rather than an ‘as much as 0.3%’ growth boost, so let me multiply the 3% by 25 to get 7%”. That is neither “serious” nor “careful”. It is, instead, delivering a piece that nails the 0.3% per year growth boost that the Republican political spinmasters have settled on as the talking point.

Larry and Jason, please do not ascribe “seriousness” and “carefulness” to work unless it is both serous and careful. I do not believe either the work of the Nine Republican Economists Being Unprofessional or to the work of Robert Barro alone here qualifies: Jason Furman and Larry Summers: Robert Barro’s Tax-Reform Advocacy: A Response: “Now Barro has provided Project Syndicate with an analysis that uses his own estimates to conclude that the long-run level of output would increase by 7%…

…Assuming the economy converges to its long-run steady state at 5% per year,… an additional 0.3-percentage-point increase in the annual growth rate…. (Under his convergence assumptions, the 3% increase in output in his previous group letter would translate into a 0.1-percentage-point increase in the annual growth rate over the next decade. As we argued in our response to that letter, this is also consistent with the annual growth rates implied by the papers Barro and his co-signers cited.)… Barro… makes errors in modeling the actual tax provisions and in choosing parameters…. We believe that Barro’s method, correctly applied, would yield an increase in the level of long-run GDP of about 1%. This works out to a 0.05-percentage-point increase in the annual growth rate…. That this conclusion is similar to the JCT estimate should not be a surprise, because the JCT already incorporates most of the economic relationships that Barro is modeling, but correctly models the actual tax provisions and appropriate economic parameters….

Instead of being used to justify this tax bill, Barro’s insights could have helped to shape a much better tax bill. Such a bill would include permanent instead of temporary expensing, apply expensing to structures as well as equipment, and reduce the statutory tax rate by a smaller margin…

Tuning one’s analysis to hit a pre-specified political spinmaster mark—that is never a good game to play…

December 15, 2017


Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch