How Large Is the Shadow Cast by Recessions?

Macroeconomics: How Large Is the Shadow Cast by Recessions?

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DeLong Says Tax Bill Has 70% Chance of Passing | Bloomberg Daybreak Asia 2017-12-01

The Trump Ryan McConnell Tax Cut My Angry Face

Professor DeLong Says Tax Bill Has 70% Chance of Passing: From 2017-12-01: Not a transcript but much more what I wish I had said—that is, heavily edited and revised to increase clarity, decrease stupidity, and file a little bit of the ragged stream-of-consciousness rough edges off.

Nevertheless, holds up very nicely, no? (BTW, this is my angry face):

There are still many potential stumbling blocks in the way of the high-end tax cut bill currenty inching its way through the senate. The current issue is the so-called “trigger”—the provision of the bill that would eliminate the tax cuts if the federal deficit turned out to come in high. Apparently the trigger has failed the so-called “Byrd Bath” as the Parliamentarian removes pieces of the bill that do not qualify for the special un-filibusterable Reconciliation process. The “trigger” has been removed from the bill. The bill’s proponents are frantically trying to figure things on the floor—frantically trying to come up with a substitute that would be acceptable both to the small number of members of the Republican congress who are more deficit hawkish and also to the larger number of members in the Republican caucus who are more supply-side optimistic—or, I would say, “crazy”.

I think the bill still has a 70% chance of passing. Certainly the stock market here in the United States appears to be fixing its odds at about a 70% chance of passing.

I, however, would like to step back and take a broader view. What is even crazier than Republican legislators believing this particular high-end tax cut will effectively pay for itself is the fact that we have arrived at this point at all. There are some 12 Democratic senators would gladly sign on to a corporate tax cut that broadened the base and lowered the rates. They would gladly sign on—provided they could be convinced that this was not just another shift in the income distribution from the non-rich toward the rich and that it would significantly strengthen the economy. And that test could be passed: I and many other economists not indentured to various Republican political masters see lots of opportunity to broaden the base, lower the rates, and strengthen the economy via real tax reform.

Yet, rather than take that path, McConnell and Ryan are moving forward with this Republican only thing that truly is down to the wire.

And as they get down to the wire, the potential benefits to the economy as a whole are evaporating. All that is left is a shift in the income distribution away from the non-rich to the rich. And even that is badly drafted: it is starting to look like incentives are going to be further disrupted and distorted so that there may not be growth benefits but rather growth harm to the economy as a whole.

The expensing provision—the provision by which companies get to deduct their investment expenditures from their tax base—expires. And it expires after five years. That means that McConnell and Ryan and Trump are trying to give corporations a big incentive to crowd a whole bunch of their investment spending in the five-year near future while that window is open. Then, after the window closes, they have an incentive to cut back on investment spending. That could well produce a small boom and then a small bust in the economy: stronger investment from 2018-2022, and then weaker investment starting in 2023. That go-stop is unproductive, and a good way to weaken the economy.

Republicans say that when the time comes around for expensing to expire, they will simply renew it. But that would require they maintain control of all three potential blockers—House, Senate, and Presidency. And if we have learned any lessons from ObamaCare and the Bush II tax cuts for the rich, it is that bills passed through Reconciliation along party-line votes are very unstable as policies.

Yet there are at least 12 Democrats in the senate in line to support corporate tax reform that would genuinely broaden the base, lower the rates, and provide a significant plus to the economy as a whole. Yes, such a deal would have gotten less money to the superrich who are now the key financial support base of the American economy—perhaps half as much money. But that money would be much more stable. And the chances of Republicans being able to run in 2020 on the basis of good economic stewardship would be noticeably higher.

As it is—the Joint Committee on Taxation’s report is now out, and we are talking about real GDP growth over the next decade of only 0.08%. And that is for how much is produced in the United States. For how much flows in income to Americans, it is at best a zer, more likely a small negative as a bunch of the tax cut goes to foreign investors from day 1.

I am flummoxed.

At is not as though this issue appeared by surprise. It is not as though they had to put a critical proposal today in a month without any staff preparation on options, alternatives, benefits, and costs. They had years to prepare. Yet these idiots really do seem to have done their homework in the bus on the way to the school….

A recession? Probably not. There is a significant minus to GDP growth coming in five years from the expiration of expensing. There is the risk that each time you load on the national debt a little more you increase potential financial instability. That does add a little bit to recessionary dangers. But interest rates are still extremely low . Slower growth rather than any serious risk of a session follow from this.

A Question I Asked a Much Shorter Version of…

A Question I Asked a Much Shorter Version of at the Berkeley “How Did Tax Reform Happen?” Symposium: I have a question for Alan Auerbach: a question hinted at in his slide that contrasted the analyses of the tax cuts from economists from those from “economists“. It was also hinted at in David Kamin’s slide the one that contrasted:

  1. the analyses of policy shops with models—including the highly unreliable Tax Foundation (yes, crowding out is a thing; no, the long run does not come in ten years)
  2. that found very small growth effects with the unmotivated and unjustified claims of the Trump administration.

There are two problems:

  1. David’s slide omitted a number of estimates of the effect that were even higher
  2. Alan’s slide omitted the fact that the most absurd estimates I saw came not from “economists” but from economists—Ph.D. economists with tenured appointments at places like Princeton, Harvard, Columbia and Stanford.

We had:

  1. The claim by Stanford’s John Taylor, Mike Boskin, John Cogan, and George Schultz; Columbia’s Glenn Hubbard, Princeton’s Harvey Rosen; Harvard’s Robert Barro; plus Larry Lindsey and Douglas Holtz-Eakin that the tax cuts would boost GDP by 3% in the long run and that it was possible the long run might come in as few as 10 years.

  2. The claim by 100-odd economists led by James C. Miller III, Douglas Holtz-Eakin, Charles W. Calomiris, and Jagdish Bhagwati (who backtracked, saying he thought it was standard practice to sign letters that contained claims with which one did not agree) claiming not just such rapid growth but that the tax cuts would pay for themselves: “Sophisticated economic models show the macroeconomic feedback generated by the TCJA will… [be] more than enough to compensate for the static revenue loss…”

  3. Three of the nine—Douglas Holtz-Eakin, Larry Lindsay, and Glenn Hubbard of Columbia—whom Sen Susan Collins (R-ME) believes assured her that the tax cut was likely to pay for itself. (They claim that they did not say that, and are not responsible for Susan Collins’s misapprehension; NEWSFLASH: when you talk to a senator, you are responsible for what the senator hears, not for the loopholes you preserve so you can sleep better at night.)

  4. One of the nine, Robert Barro of Harvard, doubling down and saying that the long-run boost to GDP is not 3% but 7%—and Michael Boskin of Stanford then endorsing his analysis.

(Robert Barro has since cut his estimate of the effects of the law-as-written from 7% to 0.4%. See Barro and Furman (2018). Michael Boskin has not, to my knowledge, backed off of the 7% number.)

The net effect of all of these “analyses” by not “economists” but by economists of note and reputation was to put the Trump administration estimates in the middle of the distribution, rather than way far out on the fringe. And this mattered for the debate in the public sphere. It led, among other things, to this outraged cry from Binyamin Applebaum:

I am not sure there is a defensible case for the discipline of macroeconomics if they can’t at least agree on the ground rules for evaluating tax policy. What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement? How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?…

I agree with Alan Auerbach that it would be wonderful if we had strong nonpartisan analytical institutions. But I want to ask Alan: What marching orders do you give us to get there? How can we get there when we see such egregious behavior not just from “economists” who serve political masters and do not know how to do analyses that get the incidence right, but from economists who know well how to do analyses that get the incidence right?

Symposium: How Did Tax Reform Happen?

Monday March 12, 2:00–3:30pm, 648 Evans Hall

In late December, less than two months after its initial introduction in Congress, the Tax Cuts and Jobs Act became law. Full of complex and controversial provisions, this major change in the U.S. tax system occurred more than three decades after the last significant change, the Tax Reform Act of 1986, and followed a very different process in a starkly different political environment.

This coming Monday, the Robert D. Burch Center on Tax Policy and Public Finance will sponsor a special panel on how institutions shaped, or failed to shape, the new law of the land.

The panel will discuss:

  • Basics of the new tax law
  • What the Joint Committee on Taxation and Congressional Budget Office [staff] actually do
  • How the Executive and Legislative branches interact
  • The role of budget rules and the minority party
  • How 2017 differed from 1986 and with what consequences

Our panel comprises three academics with direct experience in the tax policy process:

  • Edward Kleinbard, Robert C. Packard Trustee Chair in Law, USC Gould School of Law; former Chief of Staff, U.S. Joint Committee on Taxation
  • David Kamin, Professor of Law, NYU School of Law; former Special Assistant to the President for Economic Policy
  • Alan Auerbach, Robert D. Burch Professor of Economics and Law, UC Berkeley; former Deputy Chief of Staff, U.S. Joint Committee on Taxation; current member, Panel of Economic Advisers, Congressional Budget Office
  • Moderator: Danny Yagan, Assistant Professor of Economics, UC Berkeley

Keynes’s General Theory Contains Oddly Few Mentions of “Fiscal Policy”

File WhiteandKeynes jpg Wikipedia

Something that has puzzled me for quite a while: Keynes’s General Theory contains remarkably few references to fiscal policy in any form:

  • “Government spending”: no matches…

  • “Government purchases”: no matches…

  • “Fiscal policy”: 6 matches:

    • Four in one paragraph about how fiscal policy is the fifth in an enumerated list of factors affecting the marginal propensity to consume…
    • One about how an estate tax changes the marginal propensity to consume…
    • One about how fiscal policy in ordinary times is “not likely to be important”…
  • “Public works”: 10 matches:
    • Three in a paragraph about how the multiplier amplifies the employment effect from public works…
    • Two in a paragraph warning that multiplier calculations are overoptimistic because of import, interest rate, and confidence crowding-out…
    • Four on how public works have a much bigger effect when unemployment is high and “public works even of doubtful utility may pay for themselves…”
    • One a criticism of Pigou’s logic…

And yet it also contains this one paragraph:

In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative…

Chasing back this “banking policy” that is the alternative to the “somewhat comprehensive socialization of investment”, there are three cites to “banking policy”: this paragraph is one, and the others are:

  • “to every banking policy there corresponds a different long-period level of employment…”
  • and the “it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists. The disappointment of expectation, characteristic of the slump, may lead to so much loss and waste that the average level of useful investment might be higher if a deterrent is applied…. [But] the austere view, which would employ a high rate of interest to check at once any tendency in the level of employment to rise appreciably above the average of; say, the previous decade, is, however, more usually supported by arguments which have no foundation at all apart from confusion of mind…”

The question of why “it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself… a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment…” is left hanging. And how “a somewhat comprehensive socialisation of investment” is to be implemented are left hanging as well.

So will somebody please explain to me why “fiscal policy” plays such a small part in the General Theory and yet such a large part in mindshare perceptions of “Keynesianism”?

Six Tax “Reform”-Related Appeals to Various People to Do Their Jobs for Their Country’s Sake—and Even, in the Long Run, Their Selves’ Sake

Tax Foundation Score of the Tax “Reform” Conference Report


Alan Cole: @AlanMCole on Twitter: “Don’t think this one’s gonna pay for itself, guys:”

John Buhl: @jbuhl35 on Twitter: “Because of the nonstop work of @ScottElliotG @NKaeding and others, we have a dynamic score of the conference committee version of the #TaxReformBill Full report to come later today.”

Alan Cole: @AlanMCole on Twitter: “1.7% change in long-run GDP is a pretty bad score from @taxfoundation all things considered, given how large the tax cut is. One problem is they got rid of the shortened asset life for structures in conference…”

The rules of thumb I find myself applying to Tax Foundation numbers these days are:

  1. Their “small open economy with perfect capital mobility” assumptions together bias and triple the long run boost to the level of GDP relative to the baseline. The US is a large economy: global interest rates are not unaffected by it. International capital mobility is not perfect: home bias is a huge thing.

  2. Their “1/e time to the long run is 10 years” assumption biases and doubles their estimate of the initial growth rate boost..

  3. Their failure to distinguish between Gross Domestic Product and national income causes an additional substantial bias that depends sensitively on the details.

  4. Their failure to take account of how the tax “reform” is going to be financed—what will be the effects on economic growth of the services and public investments cut, or of the additional taxes elsewhere in the economy that will be levied—causes an additional substantial bias that depends sensitively on the details.

So if you are talking about the impact on the growth rate of national income, divide the Tax Foundation by more than six and you have what is probably a sensible estimate.

Thus take the Tax Foundation’s 0.17%/year. Cut it down. To less than 0.03% per year. Not 0.3%. Less than 0.03%.

The claim was the 0.4% per year on the growth rate would get you 1 trillion dollars in revenue over 10 years. That was always stretching it: it was 0.5% per year. But we do not have that. Even if we were a small open economy in a world with perfect capital mobility–which we are most definitely not–the Tax Foundation grants you only 350 billion dollars over 10 years. And applying my rule of thumb haircuts makes me expect 60 billion.

Notes on Gerald Friedman

Rethinking macro economics Fiscal policy

J. Bradford Delong: Notes on Gerald Friedman: Since 2010 fiscal policy austerity has been a disaster for both Europe and the United States. But how much better could things be? How much good could be done by a restoration of a sensible fiscal policy?

I take a sensible fiscal policy to be one that, in the words of Abba Lerner, recognizes the first principle of functional finance…

to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce… concentrat[ing] on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation…

I think a sensible fiscal policy entailing larger deficits and much more aggressive federal spending on investment—and remember that improving public health and the human capital of twelve year olds are just as good “investments” as big pieces of useful infrastructure, and much better than border walls—would do a lot of good. Gerald Friedman thinks that it would do about four times as much good in the long run as I do. Let me try to figure out why….

At first, [Larry Summers’s and my] decision to set [our hysteresis parameter] η = 0.1 as the central case was merely a calculation followed by a belief and then extended by a guess. But the argument was strengthened by… American economic history. It is very difficult see large and permanent depression of the rate of potential output growth following any of the major and at times lengthy recessions of the pre-Great Depression period. And whatever damage had been done to long-run productive potential from the Great Depression and its decade-long output gap appears to have been offset by the boost to productive potential from the extremely high-pressure economy of World War II…. [And] previous post-WWII downturn episodes had been followed by V-shaped recoveries—after 1957, 1960, 1975, 1982, and 1992—seems to leave little space for any hysteresis coefficient η much larger than calculations, beliefs, and guesses had led to….

To me, back in the winter of 2016, projections finding large benefits that made sense only under an assumption of η = 0.4 thus seemed four times as large as was in fact likely to be the case. The world seemed to be telling us that η = 0.1 instead. It seemed—and it seems—to me that overpromising the benefits of even the best policies is not a good business to get in. Somebody like Irving Kristol could unashamedly take the Public Interest he edited and use it as a vehicle to publish things he really did not believe could possibly be true:

My own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems [arose because] the task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority—so political effectiveness was the priority, not the accounting deficiencies of government…

But this is not a good game to play. We seek to do better…


The Page Which All Discussion of the Trumpublican Tax… “Reform”? “Cut”? “Giveway”? Should Start from…

Information from the very sharp Eric Toder: The House Ways and Means Tax Bill Would Raise the National Debt to 123 percent of GDP by 2037: “The Tax Policy Center estimates that the House Ways and Means Committee’s version of the Tax Cut and Jobs Act (TCJA)…

…over the first decade… increases the deficit by $1.7 trillion…. Between 2028 and 2037, the TCJA would reduce net receipts by $1.6 trillion and add $920 billion in additional interest costs. Over the entire 20-year period, the combination of reduced revenues and higher interest payments would raise the federal debt held by the public by $4.2 trillion…

This is based on:

the baseline economic and budget estimates in the Congressional Budget Office’s (CBO) March, 2017 long-term and June, 2017 updated 10-year budget projections…

But, of course, if the Trumpublican plan is passed, the best forecast of how the economy would evolve would not be the baseline CBO spring 2017 projections, but would be different. How different, and in which direction?

The best way to explain what professional economists think is to follow turn-of-the-twentieth-century British economist Alfred Marshall and divided the analysis up into four “runs”, each of which corresponds to a different forecast horizon, and in each of which the dominant economic factors at work are different. Call these the “short run”, “medium run”, “long run”, and “very long run”. And be aware that this separation is a heuristic device to aid in understanding. In the real world, all of the factors are operating all at once over time, so that even in the “short run” it is the case that “long run” factors will have a (small) influence. Moreover, the “runs” do not always come in sequence: sometimes the “long run” is right now.

With that caveat, the “runs” are:

  1. The “short run”, usually of zero to four years. In the short run, the economy is not or is not necessarily at “full employment”. Production can be below or above the current value of its sustainable productive potential, and changes in policy can either kick spending down (in which case production falls, unemployment rises, and inflation slows), or kick spending up (in which case production rises, unemployment falls, and inflation speeds up). Over the short run these effects of policy changes on the level of production, employment, and inflation are the dominant impacts.

  2. The “medium run”, usually of one to fifteen years, in which price levels and standard policy reactions have had time to adjust and so match production to the economy’s sustainable potential and match inflation to its generally-expected value, but in which there has not yet been time for stocks of productive resources to substantially adjust to policies. Over this medium run, the dominant effects of policy changes are on the division of production and spending between consumption, investment, government purchases, and net exports, plus the concomitant effect of those shifts in the distribution of production on the medium-run rate of economic growth.

  3. The “long run”, typically of ten to thirty years, in which stocks of productive resources have adjusted to changed incentives. Price levels and standard policy reactions have adjusted and matched production to potential and inflation to expectations. Adjustment has taken place so that government budget and international balance conditions are no longer out of whack with unsustainable deficits or surpluses. Shifts in the distribution of production have raised or lowered relative resource stocks so that they are no longer changing relative to the economy. s a result, in the long run the value of the economy’s productive potential has jumped up or down relative to its previous baseline growth path.

  4. The “very long run”, in which demographic and technological change factors that determine not jumps up or down in the level of sustainable productive capacity but rather the evolution of the economy over generations.

What are the likely effects of the Trumpublican plan, if implemented, in these four “runs”?

First, there is no short run argument that the bigger government deficits produced by Trumpublican plan will boost the economy. In order for a plan that increases deficits to boost the economy, three things would have to all be true:

  1. The larger deficits must either generate more purchases of goods and services directly—by the government buying more stuff—or get more purchasing power into the hands of people who have a high propensity to spend extra cash because they feel short of cash. The Trumpublican plan gets many into the hands of the rich, who do not feel short of cash.

  2. Production in the economy must be low relative to sustainable potential, so that extra spending actually does put workers without jobs to work in factories currency standing idle. Right now it looks as though the economy is close to if not at its sustainable potential—but there is an ongoing debate about that.

  3. The Federal Reserve must believe that production in the economy is low relative to sustainable potential. It must, then, be willing to cry “Havoc!”, and let slip the dogs of a higher-pressure economy. Right now the Federal Reserve is certain that the economy is very near to if not at “full employment”, and will respond quickly and thoroughly by raising interest rates in order to keep spending on the path it currently envisions.

All of (1), (2), and (3) would have to be true together for there to be a correct argument that the Trumpublican plan would boost economic growth in the short run. (1) and (3) are certainly false. (2) is probably false.

We can, in this case, neglect the short run analysis. It is not there in this case.

Nevertheless, if it were there—if (1), (2), and (3) were true or were to become true—a tax cut would boost production. This short-run argument is completely standard. I see it, for example, on page 319 of my copy of N. Gregory Mankiw: Macroeconomics (9th edition)

Mankiw Short Run Tax Cut

Second, the medium run argument is that the Trumpublican tax ct for the rich will not boost but rather be a drag on the economy. It raises the budget deficit by about 0.7% of GDP. That means that private savings that would have gone to finance private investment spending are diverted to the government instead. That deficit increase shifts about 0.5%-points of production out of investment spending, decreases net exports by about 0.2%-points of production, and raises consumption—elite, upper-class consumption, for the rich are the ones to whom the money is flowing—by 0.7%-points of production.

This medium-run argument is completely standard. I see it, for example, on page 74 of my copy of N. Gregory Mankiw: Macroeconomics (9th edition)

Mankiw A Tax Cut

The 0.5%-point fall in investment in America will slow economic growth by about 0.05%-point per year: we would lose 10 billion dollars a year of economic growth each year over the next ten years. That would leave real production in a decade some 100 billion dollars a year less—about 1000 dollars a year less per family—than in the baseline forecast. In an economy current currently producing 20 trillion dollars worth of goods and services a year, that would not not an economy-shattering deal. But 1000 dollars a year less in income per family—0.5% lower real production in a decade—would hurt: it would be a poke in the eye with a sharp stick.

Third, the long run argument is that the Trumpublican plan could boost the economy by inducing more investment. It cuts taxes on profits from passive investments, making investing in them more, well, profitable. Thus money should flow in, and some of that money will be used to build buildings and install machines to make workers more productive. This could happen: the right assessment of this argument is “it depends”. For one thing, in the long run the plan is simply one part of the change in the economy and in incentives that the Trumpublican plan will set in motion. The government budget must add up properly in the long run, and so in any long run analysis the tax cuts for the rich must be balanced either now or in the future by spending cuts or tax increases for the non-rich, and those would have their own effects on incentives and thus on productivity. For another thing, who would the increased profits flow to, and who would benefit from increased productivity?

It is possible to roughly and approximately sketch out this long run argument in another standard framework, set out by Paul Krugman in Leprechaun Economics, With Numbers. Assume that we start with an economy with (as the U.S. economy has) 150 million workers, producing 20 trillion dollars of national income each year with the assistance of 80 trillion dollars of capital. Assume further that the pre-corporate-tax rate of return on capital is some 10.0% per year. With a corporate tax rate of 35%, that would give us an after-tax rate of return on capital of 6.5% per year.

Now cut the corporate tax rate to 20%. That would give us an after-tax rate of return on capital of 8% per year if investment and thus the capital stock were to not rise in response to this increase in profitability. But in the long run investment and the capital stock would rise. By how much? Three considerations appear dominant:

  1. Domestic savings are simply not responsive to rates of return. Lots of economists have looked at the question, hoping to find that increases in profitability call forth increases in domestic savings and thus in investment. They haven’t found much.

  2. The U.S. is a huge chunk of the world economy. Figure that changes in after-tax rates of return in the United States drag the required rate of return in the rest of the world up or down in its wake by about 1/3 as much.

  3. International capital does chase higher rates of return. But investors in other countries have a limited desire to commit their wealth far away: there is “home bias”. Figure that half of the gap between changes in rest-of-the-world and U.S. returns is closed by international flows of investment.

Take these three considerations into account, and figure that in the long run the after-tax rate of return would fall by about 1/3 of the initial gap between the 6.5% rate before the tax cut and the 8.0% rate after the tax cut. So foreign investment would flow into the United States and push up the capital stock and productivity until the after-tax rate of return were 7.5%—which means that in the long run the pre-tax rate of return on capital would fall to 9.3% from 10%, a proportional decline of 1/14.

As a rule of thumb, to reduce the rate of return on capital by 1/14 requires an increase in the capital stock of 1/14. But only about half total valued capital is machines and buildings: the rest is market power and market position, intellectual property, and other economic quasi-rents. With 40 trillion dollars of machines and buildings, a 1/14 increase is about 3 trillion additional dollars worth of investment and capital.

That extra 3 trillion of capital would boost total annual production by about 300 billion dollars. Of that 300 billion dollars, 225 billion would flow to the foreigners who provided the investment, leaving a 75 billion dollar boost to Americans’ national income—an 0.35% boost. I would be inclined to then double that number: there are valuable benefits to having more investment and more capital, as workers successfully bargain for a share of economic rents created and as more investment strengthens and makes more productive our communities of engineering practice. If I were working for the CEA or the Treasury, I would be comfortable claiming an 0.7% boost in the long run to national income from this tax cut as long as the other changes in policy that made the government’s accounts add up were something (like, say, a carbon tax) that did not impose their own drag on economic growth and well-being (as, say, spending cuts would.

But the medium run effects would still be there in the long run. We would thus have a -0.5% from the medium run; an +0.7% from the long run; and whatever costs would be imposed on the economy by government-budget-adding-up. That looks like a wash to me.

And, fourth, the very long run effects? Those are highly speculative: nobody is confident that they have the right approach to modeling those. I tend to be on the side of those who believe that making the American distribution of income more unequal is harmful to entrepreneurship, enterprise, and growth. A richer superrich are a more politically powerful superrich. Economic growth comes from creative destruction. And in creative destruction it is the current superrich who are creatively destroyed—and thus they use their power and influence to try to block beneficial change. But such arguments are not ones you can take home.

That is the economic analysis of the Trumpublican plan, in basic and approximate form. Everybody serious and professional who is doing an analysis winds up with these pieces:

  1. A short run near-zero negligible effect.
  2. A medium run drag on the economy from higher deficits the cumulates to around 0.5% of national income.
  3. A possible—but far from certain and maybe not even likely—boost to national income (if there is no drag from the other, currently unspecified policy shifts that arrive with the Trumpublican plan in the long run) of about the same magnitude.
  4. Very long run effects that we do not have a handle on.

If anyone tries to sell you estimates of the impact that differ very much—by orders of magnitude—from those I have just given above, there is something wrong with their model and their analysis. Politely, it is “non-standard”. Impolitely…

Plus, of course: it would be a tax cut for the rich—and by the fact that things add up, a tax increase on and a reduction in useful government services flowing to the nonrich. How big would these effects be? We have estimates from the Center on Budget and Policy Priorities:


Chye-Ching Huang, Guillermo Herrera, and Brendan Duke: The Bill’s Impact in 2027: “By 2027… the JCT tables show…

…The highest-income groups would still get the largest tax cuts as a share of after-tax income. Millionaires, for example, would see a 0.6 percent ($16,810) increase… the bill’s permanent corporate tax cuts would primarily flow to wealthy investors and highly paid CEOs and other executives.

Every income group below $75,000 would face tax increases, on average. For example, households between $40,000 and $50,000 would see a 0.6 percent ($310) decline in their after-tax incomes. Many millions more families would face a tax increase in 2027 than in 2025 due to the expiration of such provisions as the increases in the Child Tax Credit and standard deduction. Further, the effect of the chained CPI would grow over time as it would fall further and further behind the tax code’s current measure of inflation…

And the CBPP has a very good track record on these matters.

Supply-Side Amnesia

Project Syndicate: Supply-Side Amnesia: While in the White House, Feldstein waged a persuasive but lonely bureaucratic campaign against the Reagan administration’s 1981 income-tax cuts, arguing that they had been too big, and would prove economically painful if not corrected…. If Feldstein’s warning had been heeded in 1982-84, America would be stronger and happier today. I was thus dismayed at his recent expression of optimism that under today’s Republican-led Congress, “a tax reform serving to increase capital formation and growth will be enacted,” while arguing that “any resulting increase in the budget deficit will be only temporary”… Read MOAR at Project Syndicate

Hoisted from the Archives from 2007: How Supply-Side Economics Trickled Down…

Hoisted from the Archives: How Supply-Side Economics Trickled Down… Bruce Bartlett’s piece on supply-side economics:

How Supply-Side Economics Trickled Down – New York Times: AS one who was present at the creation of “supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy…

sparked an interesting and useful debate at Mark Thoma’s Economist’s View (which I previously noted).

After thinking about it, I want to weigh in again–on the side of Bruce Bartlett as opposed to Paul Krugman. It’s not that Paul says anything wrong about what he and his MIT colleagues thought at the end of the 1970s, but IMHO he underestimates the intellectual gulf between Cambridge and Washington.

There are two issues here–stabilization policy and growth policy.

(1) On stabilization policy: Bartlett says that the Keynesians around 1980 believed that full employment should be produced via fiscal policy–spending increases and tax cuts, preferably spending increases, to boost aggregate demand–and that inflation should be controlled via incomes policy–jawboning unions to restrain wages and businesses to keep a lid on prices, tax penalties for price increases, excess-profits and other taxes to provide incentives to keep wages and prices close to previous nominal anchors, and the threat and perhaps the reality of wage and price controls. Monetary policy, Bartlett says they said, was next to useless in controlling aggregate demand. And the principal effect of fiscal policy was not its impact on the supply side–on incentives to work and invest–but its demand-side impact on the volume of spending.

Krugman protests that what he and his Keynesian colleagues at MIT taught around 1980 was very different from Bartlett’s parody of modern Keynesianism. MIT’s Robert Solow had argued for JFK in the early 1960s that a good fiscal policy needed to pay at least as much attention to the supply side as the demand side. And certainly those teaching macroeconomics at MIT at the end of the 1970s–Stan Fischer, Rudi Dorbusch, and company–placed enormous stress on the power of monetary policy to affect aggregate demand, shape expectations, and control inflation. All this is true. And yet, and yet…

Matthew Shapiro of the University of Michigan perhaps puts it best. He went to Yale as an undergraduate in the late 1970s and to MIT as a graduate student in the early 1980s. He says (roughly, this is my memory and not verbatim):

At Yale in the 1970s, I was taught that the Chicago School was bad and wrong because they believed that monetary policy had powerful effects on production and unemployment. Then I get to MIT in the early 1980s and was taught that the Chicago School was bad adn wrong because they believed that monetary policy did not have powerful effects on production and unemployment.

The second Chicago School was made up of the rational expectations revolutionaries of the late 1970s. The first Chicago School was that of Milton Friedman’s monetarists who thought that controlling inflation was simple: don’t use open market operations to expand the money supply. They were opposed by Old Keynesians who thought that monetary restraint was ineffective, by those who thought that monetary restraint was too effective (i.e., would cause too much unemployment), and by those (like Arthur Burns) who thought monetary restraint was impossible (i.e., that the Congress would never allow the Federal Reserve to stop inflation by generating a recession the size of 1982).

My take on this story is found in J. Bradford DeLong (1997), “America’s Peacetime Inflation”; and J. Bradford DeLong (2000), “The Triumph? of Monetarism”.

The first Chicago School by and large won the day, and Paul Krugman takes their substantial victory as natural and inevitable, and it did indeed seem that way from MIT in 1980, but not from the trenches of the Joint Economic Committee where Bruce Bartlett wallowed in the political trench-warfare mud in the late 1970s. So it seems to me that Bruce is more right than Paul.

(2) I’m less sure that Bruce Bartlett was on the side of the angels on growth policy.

I was taught that one sought to have cyclical deficits in recessions, but a budget in balance or surplus on average over the business cycle, so that the mix of policy tended toward a tight fiscal-easy money configuration that would produce high investment and rapid wage, output, and productivity growth, and one paid attention to high marginal tax rates and the deadweight losses they caused. Nothing that Bruce would disagree with there. And certainly I am on Bruce’s side against those who focused exclusively on how high marginal tax rates were a good thing because they improved the distribution of income, and those who focused exclusively on fiscal policy as a manager of aggregate demand.

But in practice… it seemed to me that Bruce’s political masters like Jack Kemp were excesssively eager to throw the “budget in balance or surplus on average over the business cycle,” and that the eager embrace of deficits and their crowding-out of investment did more harm than the focus on reducing marginal tax rates did good. We can argue about that, however.

A good deal of the problem is that there were so many factions.

On the left side, there was the Solow tight fiscal-easy money tradition; the Musgrave progressive-redistributive-tax-system tradition; the vulgar Keynesians who never met a deficit or a price control they didn’t like; the New Keynesian faction to which Krugman belongs, and others.

On the right side, there were Bruce Bartlett and company; the neoconservatives who wanted rhetoric but didn’t care about getting economic policy right; those who were loyal to Reagan whatever Reagan would decide but had no clue about policy; David Stockman who hoped that cutting taxes now would produce a wave of revulsion against deficits that would enable him to cut spending later; the Buchanan-Niskanen “we are betrayed” faction that protested against the embrace of deficit spending by the Republicans; and the “starve the beast” faction. “What the supply-siders thought” depends very much on who is included in the charmed circle, and when. And the same applies to “What the Keynesians thought.”