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| Source: Macro-man blog |
1) But for negative rates, inflation would have been even lower
2) We're living in a Fisher effect world. Lower rates lower inflation. (Which is arguably a good, if unintended, thing)
Negative rates and inflation
Have negative interest rates boosted inflation? Here is a nice graph (source macro-man blog, HT FT alphaville)
Not really. Explanations? Choose the chicken or the egg:
1) But for negative rates, inflation would have been even lower
2) We're living in a Fisher effect world. Lower rates lower inflation. (Which is arguably a good, if unintended, thing)
1) But for negative rates, inflation would have been even lower
2) We're living in a Fisher effect world. Lower rates lower inflation. (Which is arguably a good, if unintended, thing)
Immigration, trade, and child care
Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?
I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care. As the WSJ points out in a recent editorial,
Needless to say, that is not the candidates' preferred approach, who were vying with each other to offer federal subsidies. Mr. Trump is, needless to say, simultaneously vowing to deport large number of child-care workers. Mrs Clinton is not making any noises about removing legal restrictions or taxes on low-skill part time employment. (The WJS offers that "Mr. Trump deserves credit for noting" the above comments on regulation, but did not offer a link. If anyone knows where this is, put it in a comment, as I had not heard about it.)
A lot of economics comes down to: Supply competition is the best answer to just about every economic problem.
This is a small example of a spreading disease in American economic policy. The recipe: 1) introduce strong supply and competition restrictions, usually to politically favored groups. Soon, however, those groups start charging higher prices. So 2) give subsidies so people can pay the higher prices induced by 1). It's perfect: now both sides depend on politicians. See, most egregiously, health care and housing.
The trouble is, you can only make one thing (child care, now) cheaper by making everything else more expensive. A tax credit for child care means higher taxes on everything else. We're running out of everything elses fast!
This is a good moment for supply and demand, and a good illustration of how this basic economic tool gives insights that are not obvious.
(If you can't see the supply and demand graph, try here.) Demand slopes down. The less child care costs, the more of it people buy. Supply curve slopes up. If child care workers can charge more, more people take those jobs or set up child care businesses.
The red graph shows what happens if we allow lots of immigration, and also deregulate supply. The supply curve shifts to the right -- more child care offered at the same price. Moreover, if we allow immigration, the supply curve becomes flatter -- a smaller increase in price produces a larger increase in the amount of child care.
There is a very important distinction between domestic and international supply. In the end, the US workforce is limited. The more people who go in to child care, the fewer do something else. The upward slope of the child-care supply curve represents an inward shift of the supply curves of everything else, meaning higher prices and lower quantities. Immigration gives us a free upward slope.
This graph analyzes a federal subsidy for child care. If people get a $100 subsidy, they are willing to pay $100 more for the same amount of child care, so the demand curve goes up by $100, as shown. I drew the supply curves with more extreme slopes, to make a deeper point.
The "restricted" supply curve is nearly vertical. This is what happens in an industry with strong supply restrictions, like, say, epi-pens. The subsidy means people are willing to pay $100 more. With no more supply forthcoming, the result is simply that people pay $100 more and get the same quantity.
Subsidizing something with restricted supply does not benefit consumers. It just raises the price and benefits the producers.
The consumers, unaware of what's going on, become dependent on the subsidy of course. See health care and education.
With lots of supply competition, and a flat supply curve, the subsidy instead raises the quantity of child care delivered, which is presumably what both Mrs. Clinton and Mr. Trump desire from the policy. A subsidy only increases quantities if there is lots of supply competition and easy entry.
The journal gets this
On the human side of our immigration restrictions, I recommend a beautiful New Yorker article by Rachel Aviv on the life of a woman who immigrated illegally from the Phillippines to care for the children of... well, people like the Trumps and Clintons. The US will not kick out illegal immigrants because deep down we know that without them the cost of child care will skyrocket. But the cost to a low-wage worker of illegal status -- never being able to see family again -- is worth remembering.
The New Yorker article makes clear also how much immigration to the US is driven by desperate conditions elsewhere. If you don't want immigration to the US, the best possible solution is to aggressively buy what other countries have to sell, so people can make a living there. Needless to say, neither Mr. Trump nor Mrs. Clinton seem at all aware of this obvious connection.
(Vaguely competent foreign policy is the second best possible solution. Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war.)
Most child care is not Mrs. Trump, handing off children to a loving nanny in Manhattan as she speeds off to her job as.. whatever it is she does. Tellingly, the Trump plan takes the form of a tax credit and a new addition to the bewildering number of tax sheltered savings vehicles. What, doesn't everyone have a tax lawyer? A lot of child care is done off the books, for people who also work off the books. This is also a good moment to reflect on the wisdom of the new ban-cash movement plus e-verify so that every single transaction in the US is taxed and appropriately monitored for compliance with labor laws, licensing, OSHA, and so on...
I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care. As the WSJ points out in a recent editorial,
... regulation drives up the cost of care. States set minimums on square feet per child; licensing requirements; ratios for staff-to-children; group sizes. Zoning laws prevent care centers in convenient places such as residential neighborhoods. Regulation also limits options like informal care at grandma’s house or families who share nannies.On the latter, zoning, for example, forbids commercial activity in residential-zoned areas, like the ones where people live. And WSJ left out the full weight of American labor law and taxation. Anyone who has tried to legally hire a nanny has a good sense of that. (See also Ivanka Trump's oped describing the plan.)
Needless to say, that is not the candidates' preferred approach, who were vying with each other to offer federal subsidies. Mr. Trump is, needless to say, simultaneously vowing to deport large number of child-care workers. Mrs Clinton is not making any noises about removing legal restrictions or taxes on low-skill part time employment. (The WJS offers that "Mr. Trump deserves credit for noting" the above comments on regulation, but did not offer a link. If anyone knows where this is, put it in a comment, as I had not heard about it.)
A lot of economics comes down to: Supply competition is the best answer to just about every economic problem.
This is a small example of a spreading disease in American economic policy. The recipe: 1) introduce strong supply and competition restrictions, usually to politically favored groups. Soon, however, those groups start charging higher prices. So 2) give subsidies so people can pay the higher prices induced by 1). It's perfect: now both sides depend on politicians. See, most egregiously, health care and housing.
The trouble is, you can only make one thing (child care, now) cheaper by making everything else more expensive. A tax credit for child care means higher taxes on everything else. We're running out of everything elses fast!
This is a good moment for supply and demand, and a good illustration of how this basic economic tool gives insights that are not obvious.
The red graph shows what happens if we allow lots of immigration, and also deregulate supply. The supply curve shifts to the right -- more child care offered at the same price. Moreover, if we allow immigration, the supply curve becomes flatter -- a smaller increase in price produces a larger increase in the amount of child care.
There is a very important distinction between domestic and international supply. In the end, the US workforce is limited. The more people who go in to child care, the fewer do something else. The upward slope of the child-care supply curve represents an inward shift of the supply curves of everything else, meaning higher prices and lower quantities. Immigration gives us a free upward slope.
This graph analyzes a federal subsidy for child care. If people get a $100 subsidy, they are willing to pay $100 more for the same amount of child care, so the demand curve goes up by $100, as shown. I drew the supply curves with more extreme slopes, to make a deeper point.
The "restricted" supply curve is nearly vertical. This is what happens in an industry with strong supply restrictions, like, say, epi-pens. The subsidy means people are willing to pay $100 more. With no more supply forthcoming, the result is simply that people pay $100 more and get the same quantity.
Subsidizing something with restricted supply does not benefit consumers. It just raises the price and benefits the producers.
The consumers, unaware of what's going on, become dependent on the subsidy of course. See health care and education.
With lots of supply competition, and a flat supply curve, the subsidy instead raises the quantity of child care delivered, which is presumably what both Mrs. Clinton and Mr. Trump desire from the policy. A subsidy only increases quantities if there is lots of supply competition and easy entry.
The journal gets this
Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.The graph offers a little more precision. Subsidies only raise college expenses because of restricted supply. The Administration's war on for profit colleges unambiguously pushes the supply curve to the left.
On the human side of our immigration restrictions, I recommend a beautiful New Yorker article by Rachel Aviv on the life of a woman who immigrated illegally from the Phillippines to care for the children of... well, people like the Trumps and Clintons. The US will not kick out illegal immigrants because deep down we know that without them the cost of child care will skyrocket. But the cost to a low-wage worker of illegal status -- never being able to see family again -- is worth remembering.
The New Yorker article makes clear also how much immigration to the US is driven by desperate conditions elsewhere. If you don't want immigration to the US, the best possible solution is to aggressively buy what other countries have to sell, so people can make a living there. Needless to say, neither Mr. Trump nor Mrs. Clinton seem at all aware of this obvious connection.
(Vaguely competent foreign policy is the second best possible solution. Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war.)
Most child care is not Mrs. Trump, handing off children to a loving nanny in Manhattan as she speeds off to her job as.. whatever it is she does. Tellingly, the Trump plan takes the form of a tax credit and a new addition to the bewildering number of tax sheltered savings vehicles. What, doesn't everyone have a tax lawyer? A lot of child care is done off the books, for people who also work off the books. This is also a good moment to reflect on the wisdom of the new ban-cash movement plus e-verify so that every single transaction in the US is taxed and appropriately monitored for compliance with labor laws, licensing, OSHA, and so on...
Testimony 2
On the way back from Washington, I passed the time reformatting my little essay for the Budget committee to html for blog readers. See below. (Short oral remarks here in the last blog post, and pdf version of this post here.)
I learned a few things while in DC.
The Paul Ryan "A better way" plan is serious, detailed, and you will be hearing a lot about it. I read most of it in preparation for my trip, and it's impressive. Expect reviews here soon. I learned that Republicans seem to be uniting behind it and ready to make a major push to publicize it. It is, by design, a document that Senatorial and Congressional candidates will use to define a positive agenda for their campaigns, as well as describing a comprehensive legislative and policy agenda.
"Infrastructure" is bigger in the conversation than I thought. But since there is no case that potholes caused the halving of America's trend growth rate, do not be surprised if infrastructure fails to double the trend growth rate. It's also a bit sad that the most common growth idea in Washington is, acording to my commenters, about 2,500 years old -- employment on public works.
Washington conversation remains in thrall to the latest numbers. There was lots of buzz at my hearing about a recent census report that median family income was up 5%. Chicagoans used to get excited about the 40 degree February thaw.
The quality can be very very good. Congressman Price, the chair of my session, covered just about every topic in my testimony, and possibly better. Congressional staff are really good, and they are paying attention to the latest. If you write policy-related economics, take heart, they really are listening.
The questions at my hearing pushed me to clarify just how will debt problems affect the average American. What I had not said in the prepared remarks needs to be said. If we don't get an explosion of growth, the US will not be able to make good on its promises to social security, health care, government pensions, credit guarantees, taxpayers, and bondholders. Something's got to give. And the growing size of entitlements means they must give. Even a default on the debt, raising taxes to the long-run Laffer limit, will not pay for current pension and health promises. Those will be cut. The question is how. If we wait to a fiscal crisis, they will be cut unexpectedly and by large amounts, leaving people who counted on them in dire straits. Greece is a good example. If we make sensible sustainable promises now, they will be cut less, and people will have decades to adjust.
Ok, on to html testimony:
Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.
I am John H. Cochrane. I am a Senior Fellow of the Hoover Institution at Stanford University1. I speak to you today on my own behalf on not that of any institution with which I am affiliated.
Sclerotic growth is our country's most fundamental economic problem.2 From 1950 to 2000, our economy grew at 3.6% per year.3 Since 2000, it has grown at barely half that rate, 1.8% per year. Even starting at the bottom of the recession in 2009, usually a period of super-fast catch-up growth, it has grown at just over 2% per year. Growth per person fell from 2.3% to 0.9%, and since the recession has been 1.3%.
The CBO long-term budget analysis4 looks out 30 years, and forecasts roughly 2% growth. On current trends that is likely an over-estimate, as it presumes we will have no recessions, or that future recessions will have not have the permanent effects we have seen of the last several recessions. If we grow at 2%, the economy will expand by 82% in 30 years, almost doubling.5 But if we can just get back to the 3.6% postwar normal growth rate, the economy will expand by 194%, almost tripling instead. We will add the entire current US economic output to the total. In per-person terms, a 1.3% trend gives the average American 48% more income in 30 years. Reverting to the postwar 2.3% average means 99% more income, twice as much. And economic policy was not perfect in the last half of the 20th century. We should be able to do even better.
Restoring sustained, long-term economic growth is the key to just about every economic and budgetary problem we face.
Nowhere else are we talking about doubling or not the average American's income.6
Nowhere else are we talking about doubling or not Federal revenues. Long-term Federal revenues depend almost entirely on economic growth. In 1990, the Federal Government raised $1.6 trillion inflation-adjusted dollars. In 2016, this has doubled to $3.1 trillion. Wow! Did the government double tax rates? No. The overall federal tax rate stayed almost the same -- 18.0% of GDP in 1990, 18.8% of GDP today. Income doubled.
Whether deficits and debt balloon, whether we our government can pay for Social Security and health care, defend the country, and fund other goals such as protecting the environment, depend most crucially on economic growth.
Why has growth halved? Some will tell you that the economy is working as well as it can, but we've just run out of new ideas.7 A quick tour of the Silicon Valley makes one suspicious of that claim.
Others will bring you novel and untested economic theories: we suffer an ill-defined "secular stagnation" that requires massive borrowing and spending, even wasted spending. The "multiplier" translating government spending to output is not one and a half, and a temporary expedient which can briefly raise the level of income in a depression, but six or more, enough to finance itself by the larger tax revenues which larger output induces --a proposition long derided of the "supply side" --and it can now kick off long-term growth.8 Like 18th century doctors to whom disease was an imbalance of humors, modern macroeconomic doctors have one diagnosis and remedy for all the complex ills that can befall a modern economy: "demand!"
I'm here to tell you the most plausible answer is simple, clear, sensible, and much more difficult. Our legal and regulatory system is slowly strangling the golden goose of growth. There is no single Big Fix. Each market, industry, law, and agency is screwed up in its own particular way, and needs patient reform.
America is middle aged, out of shape and overweight. One voice says: well, get used to it, buy bigger pants. Another voice says: 10 day miracle detox cleanse! I'm here to tell you that the only reliable answer is good old-fashioned diet and exercise.
Or, a better metaphor perhaps: our economy, legal and regulatory system has become like a hoarder's house. No, there isn't a miracle organizer system. We have to patiently clean out every room.
Economic regulation, law and policy all slow growth by their nature. Growth comes from new ideas, new products, new processes, new ways of doing things, and most of these embodied in new companies. And these upend old companies, and displace their workers, both of whom come to Washington pleading that you save them and their jobs. It is a painful process. It is natural that the administration, regulatory agencies, and you, listen and try to protect them. But every time we protect an old company, an old industry, or an old job, from innovation and competition, we slow down growth.
How do we solve this problem and get back to growth? Our national political and economic debate has gotten stale, each side repeating the same base-pleasing talking points, but making no progress persuading the other. Making one or the other points again, or louder, will get us nowhere. I will try, instead, to find policies that think outside of these tired boxes, and that can appeal to all sides of the political spectrum.
Rather than "more government" or "less government," let's focus on fixing government. We need above all a grand simplification of our economic, legal, and political life, so that government does what it does competently and efficiently.
Regulation: fix the process.
"There's too much regulation, we're stifling business. No, there's too little regulation, businesses are hurting people." Or so goes the tired argument. Regulation is strangling business investment, and especially the formation of new businesses. But the main problem with regulation is how it's done, not how much. If we fix regulation, the quantity will take care of itself. We can agree on smarter regulation, better regulation, not just "more" or "less" regulation.9
Regulation is too discretionary --you can't read the rules and know what to do, you have to ask for permission granted on regulators' whim. No wonder that the revolving door revolves faster and faster, oiled by more and more money.
Regulatory decisions take forever. Just deciding on the Keystone Pipeline or California's high speed train --I pick examples from left and right on purpose --takes longer than it did to build the transcontinental railroad in the 1860s. By hand.
Regulation has lost rule-of-law protections. You often can't see the evidence, challenge witnesses, or appeal. The agency is cop, prosecutor, judge, jury and executioner all rolled in to one. [And, a Congressman pointed out during the discussion, recipient of collected fines.]
Most dangerous of all, regulation and associated legal action are becoming more politicized. Each week brings a new scandal. Last week10, we learned how the Government shut down ITT tech, but not the well-connected Laureate International. The IRS still targets conservative groups11. The week before, we learned how the company that makes Epi-pens, headed by the daughter of a Senator, got the FDA to block its competitors, Congress to mandate its products, and jacked up the price of an item that costs a few bucks to $600. This is a bi-partisan danger. For example, presidential candidate Donald Trump has already threatened to use the power of the government against people who donate to opponents' campaigns.12
America works because you can lose an election, support an unpopular cause, speak out against a policy you disagree with, and this will not bring down the attentions of the IRS, the EPA, the NLRB, the SEC, the CFPB, the DOJ, the FDA, the FTC, the Department of Education, and so forth, who can swiftly put you out of business even if eventually you are proven innocent, or just slow-roll your requests for permissions until you run out of money.
This freedom does not exist in much of the world. The Administrative state is an excellent tool for cementing power. But when people can't afford to lose an election, countries come unglued. Do not let this happen in the US.
Congress can take back its control of the regulatory process. Write no more thousand-page bills with vague authorizations. Fight back hard when agencies exceed their authorization. Insist on objective and retrospective cost benefit analysis. Put in rule-of law protections, including discovery of how agencies make decisions. Insist on strict timelines --if an agency takes more than a year to rule on a request, it's granted. [I later learned this is called a "shot clock" in Washington, a nice metaphor.]
Health care and finance are the two biggest new regulatory headaches. The ACA and Dodd-Frank aren't working, and are important drags on employment and economic growth. Simple workable alternatives exist. Implement them.
The real health care problem is not how we pay for health care, but the many restrictions on its supply and competition.13 If hospitals were as competitive as airlines, they would work darn hard to heal us at much lower --and disclosed! --prices. If the FDA did not strangle new medicines and devices, even generics, prices would fall.
Competition is always the best disinfectant, guarantor of good service and low prices. Yet almost all uncompetitive markets in the US are uncompetitive because some law or regulation keeps competitors out.
Rather than guarantee bank debts, and unleash an army of regulators to make sure banks don't risk too much, we should instead insist that banks get their money in ways that do not risk crises, primarily issuing equity and long-term debt. Then banks can fail just like other companies, and begin to compete just like other companies.14
"The planet is dying, control carbon!" "Your crony energy boondoggles and regulations are killing the economy!" Well, that argument is not getting us anywhere, is it? The answer is straightforward: A simple carbon tax in exchange for elimination of all the growth-killing, intrusive, cronyist, and ineffective micromanagement. We can continue to argue about the rate of that tax, but it will both reduce more carbon, and increase more growth, than the current ineffective policies --and stagnant debate.
None of these recommendations are ideological or partisan. These are just simple, clean-out-the-junk, workable ways to get our regulatory system to actually work, for its goal of protecting consumers and the environment, at minimal economic and political damage.
Social programs: Fix the incentives.
"Cut spending, or the debt will balloon!" "Raise spending or people will die in the streets!" That's getting nowhere too. And it ignores central problems.
In many social programs, if you earn an extra dollar, you lose a dollar or more of benefits. Many programs have cliffs, especially in health care and disability, where earning one extra dollar triggers an enormous loss. Even when one program cuts benefits modestly with income, the interaction of many programs makes work impossible.15 No wonder that people become trapped. We need to fix these disincentives. Doing so will help people better. If we fix the incentives, though it may look like we spend more, in the end we will spend less --and encourage economic growth as well as opportunity.
Spend more to spend less. "Spending is out of control! We need to spend less or there will be a debt crisis!" "Oh there you go being heartless again. We need to invest more in programs that help Americans in need." I feel like I'm at a dinner party hosted by a couple in a bad marriage. This isn't getting us anywhere.
It is important to limit Federal spending. However, we tend to just limit the appearance of spending by moving the same activities off the books. Off-the-books spending does the same economic damage. Or more.
For example, we allow an income tax deduction for mortgage interest, in order to subsidize homeownership. From an economic point of view, this is exactly the same thing as collecting higher taxes, and then sending checks to homeowners. It looks like we're taxing and spending less than we really are. But from an economic growth point of view, it's the same thing.
Actually, it's worse, because it adds unfairness and inefficiency. Suppose a colleague proposes a bill to you: The U.S. Treasury will send checks to homeowners, but high income people get much bigger checks, as will people who borrow a lot, and people who refinance often and take cash out. People with low incomes, who save up to buy houses, or don't refinance, get a lot less. You would say, "You're out of your mind!" But that's exactly what the mortgage interest deduction achieves!
If we were to eliminate the mortgage deduction, and put housing subsidies on budget, where taxpayers can see where their money is going, the resulting homeowner subsidy would surely be a lot smaller, much more progressive, helping lower income people, better targeted at getting people in houses, and less damaging of savings and economic growth. Both Republicans and Democrats should rejoice. Except the headline amount of taxing and spending will increase. Well, spend more to spend less.
We allow a tax deduction for charitable deductions. This is exactly the same thing as taxing more, but then sending checks to non-profits as matching contributions --but much larger checks for contributions from rich people than from poorer people. Then, many "non-profits" spend a lot of money on private jet travel, executive salaries, and political activities. Actual on-budget federal spending, convoluted and inefficient as it is, at least has a modicum of oversight and transparency. If we removed the deduction, but subsidized worthy charities, with transparency and oversight, we'd do a lot more good, and probably overall tax less and spend less. Except the headline amount of taxing and spending might increase. Well, spend more to spend less.
Mandates are the same thing as taxing and spending. Many European countries tax a lot, and then provide services, like health insurance. We mandate that employers provide health insurance. It looks like we're taxing and spending less, but we're not. A health insurance mandate has exactly the same economic effects as a $15,000 head tax on each employee, financing a $15,000 health insurance voucher.
Economics pays no heed to budget tricks. Spending too much rhetorical effort on lowering taxes and spending induces our government to such tricks, with the same growth-destroying effects. If you want economic growth, treat every mandate as taxing and spending.
Taxes: break up the argument.
The outlines of tax reform have been plain for a long time: lower marginal rates, broaden the base by getting rid of the massive welter of special deals. But it can't get done. Why not?
When we try to fix taxes,16 we argue about four things at once: 1) What is the right structure for a tax code? 2) What is the right level of taxes, and therefore, of spending? 3) What activities should the government subsidize -- home mortgages, charitable contributions, electric cars, and so on? 4) How much should the government redistribute income?
Tax reforms fail because we argue about all these together. For example, the Bowles-Simpson commission got to an improvement on the structure of taxes, but then the reform effort fell apart when the Administration wanted more revenue and congressional Republicans less.
I am back at my dysfunctional dinner party. Sometimes, in politics as in marriage, it is wise to bundle issues together, each side accepting a minor loss to ensure what they see as a major gain. You clean up your socks, I'll clean up my makeup. Sometimes, however, we bundle too many issues together, and the result is paralysis, as each side vetoes a package of improvements over a small issue. Then, it's better to work on the issues separately.
So, let's fix taxes by separating these four issues, in four commissions possibly, or better in four completely separate sections of law.
1) Structure. Agree on the right structure of the tax code, with its only goal to raise revenue at minimal economic distortion, but leave the rates blank.
2) Rates. Determine the rates, without touching the structure of the tax code. A good tax code should last decades. Rates may change every year, and likely will be renegotiated every four. But those who want higher or lower rates know they can agree on the structure of the tax code.
3) Separate the subsidy code from the tax code. Mortgage interest subsidies? Electric car subsidies? Sure, we'll talk about them, but separately. Then, we don't have to muck up raising revenue for the government with subsidies, and the budgetary and economic impact of subsidies can be evaluated on their own merits
4) Separate the redistribution code from the tax code. Then we don't muck up raising revenue for the government with income transfers.
The main point is that by separating these four elements of law, each with fundamentally different purposes, we are much more likely to make coherent progress on each. You need not oppose beneficial aspects of an economically efficient tax simplification, say, if you wish to have a greater level of redistribution --well, at least any more than you might oppose any random bill in order to force your way on that issue.
Some thoughts on how each of these might work:
Structure. The economic damage of taxation is entirely about "marginal'' rates --if you earn an extra dollar, how much do you get to enjoy it, after all taxes, federal, state, local, sales, estate, and so forth. Economics has really little to say about how much taxes people pay. The economists' ideal is a tax system in which people pay as much as the Government needs --but each extra dollar earned is tax-free. Politics, of course, focuses pretty much on the opposite, how much people pay and ignoring the economically-distorting margins.
Thus, if you ask 100 economists, "now, forget politics for a moment --that's our job --and tell me what the right tax code is, with the only objective being to raise revenue without distorting the economy,'' the pretty universal answer will be a consumption tax --with no corporate tax, income tax, tax on savings or rates of return, estates, or anything else, and essentially no deductions. (They will then say "but..." and go on to demand subsidies and income redistribution, at which time you have to assure them too that we'll discuss these separately.)
A massive simplification of the tax code is, in my opinion, as or more important than the rates --and it's something we're more likely to agree on. America's tax code is an obscenely complex cronyist nightmare.
For example, that's why I favor, and you should seriously consider, eliminating the corporate tax. Corporations never pay any taxes. All money they send to the government comes from higher prices, lower wages, or lower returns to shareholders --and mostly the former two. If you tax people who receive corporate profits, rather than collecting taxes from higher prices and lower wages, you will have a more progressive tax system.
But more importantly, if you eliminate the corporate tax, you will eliminate the constant stream of lobbyists in your offices each day asking for special favors.
Far too many businesses are structured around taxes, and far too many smart minds are spending their time devising corporate tax avoidance schemes and lobbying strategies. A much simpler tax code even with sharply higher rates --but very clear rates, that we all know about and can plan on --may well have less economic distortion than a massively complex code, with high statutory rates, but a welter of complex schemes and deductions that result in lower taxes.
Subsidy code. Tax expenditures --things like deductions for mortgage interest, employer provided health care, charitable contributions, and the $10,000 credit my wealthy Palo Alto neighbor got from the taxpayers for buying a Tesla -- are estimated at $1.4 trillion,17 compare with $3.5 trillion Federal Receipts and $4 trillion Federal Expenditures.18 Our Federal Government is really a third larger than it looks.
While the subsidy code could consist of a separate discussion of tax expenditures, it would be far better for the rules of the subsidy code to be: all subsidies must be on budget, where we can all see what's going on.
Redistribution. Even a consumption tax can be as progressive as one wants. One can use the regular income tax code with full deduction of savings and omitting capital income, thus taxing high consumption at higher rates and low consumption at lower rates.
Again, however, it might well be more efficient to integrate income redistribution with social programs. Put it on budget, and send checks to people. Yes, that makes spending look larger, but sending a check is the same thing as giving a tax break. And spending can be more carefully monitored.
Infrastructure
Infrastructure is all the rage19. America needs infrastructure. Good infrastructure, purchased at minimum cost, that passes objective cost-benefit criteria, built promptly, can help the economy in the long run. Soft infrastructure --a better justice system, for example --matters as much as hard infrastructure --more asphalt.
However, there is no case that the halving of America's growth rate in the last 20 years is centrally due to potholes and rusting bridges. Poor infrastructure is not the cause of sclerosis, so already one should be wary of infrastructure investment as the central plan to cure that sclerosis.
The claim that infrastructure spending will lift the economy out of its doldrums lies on the "multiplier" effect, that any spending, even wasted, is good for the economy. That is a dubious proposition, especially when the task is to raise the economy by tens of trillions, over decades.
Modern infrastructure is built by machines, and not many people; even less people who do not have the specialized skills. A Freeway in California will do little to help employment of a high school dropout in New York, or a middle-aged mortgage broker in New Jersey. Neither knows how to operate a grader.
The problem with infrastructure is not lack of money. President Obama inaugurated a nearly trillion dollar stimulus plan 8 years ago. His Administration found out there are few shovel-ready projects in America today. They're all tied up waiting for historic review, environmental review, and legal challenges.
The problem with infrastructure is a broken process. Put a time limit on historic, environmental, and other reviews. Require serious, objective, and retrospective cost-benefit analysis. Repeal Davis-Bacon and other contracting requirements that send costs soaring. If the point is infrastructure it should be infrastructure, not passing money around. You ought to be able to agree on more money in return for assurance that the money is wisely spent.
Debt and deficits
This hearing is also about budgets and debts, which I have left to the end. Yes, our deficits are increasing. Yes, every year the Congressional Budget Office declares our long-term promises unsustainable.
I have not emphasized this problem, though in my opinion it is centrally important, and I think I was invited here to say so.
Recognize that computer simulations with hockey-stick debt, designed to frighten into submission a supporter of what he or she feels is necessary government spending, are as ineffective as computer simulations with hockey-stick temperatures, designed to frighten into submission a supporter of current economic growth and skeptic of draconian energy regulation. Yelling about each, louder, is not going to be productive.
And there are many voices who tell you debt is not a problem. Interest rates are at record lows. Why not borrow more, and worry about paying it back later? So, let me offer a few out of the box observations, and suggestions that you might agree on.
It is useful to clarify why debt is a problem. The case that large debts will slowly and inexorably push up interest rates, and crowd out investment, is hard to make in this era of ultra-low rates. Debt does place a burden of repayment on our children and grandchildren, but if we have reasonable economic growth they will be wealthier than we are.
The biggest danger that debt poses is a crisis.
Debt crises, like all crises that really threaten an economy and society, do not come with decades of warning. Do not expect slowly rising interest rates to canary the coalmine. Even Greece could borrow at remarkably low rates. Until, one day, it couldn't, with catastrophic results.
The fear for the US is similar. We will have long years of low rates. Until, someday, it is discovered that some books are cooked, and somebody owes a lot of money that they can't pay back, and people start to question debts everywhere.
For example, suppose Chinese debts blow up, and southern Europe as well. Both Europe and China will start selling Treasury debt quickly. Suppose at the same time that student loans, state and local pensions, and state governments are blowing up, along with some large U.S. companies, and banks under deposit insurance. A recession looms, which the US will want to fight with fiscal stimulus. The last crisis occasioned about $5 trillion of extra borrowing. The next one could double that.
So, the U.S. needs to quickly borrow additional trillions of dollars, while its major customers --foreign central banks --are selling. In addition, the U.S. borrows relatively short term. Each year, the U.S. borrows about $7 trillion to pay off $7 trillion of maturing debt, and then more to cover the deficit.
Imagine all this happens 10 years from now, with social security and medicare unresolved and increasing deficits. The CBO is still issuing its annual warnings that our debt is unsustainable. Now, bond investors are willing to lend to the US government so long as they think someone else will lend tomorrow to pay off their loans today. When they suspect that isn't true, they pull back and interest rates spike.
But our large debts leave our fiscal position sensitive to interest rate rises. At 100% debt to GDP ratio, if interest rates rise to just 5%, that means the deficit rises by 5 percentage points of GDP, or approximately $1 Trillion extra dollars per year. If bond investors were worried about sustainability already, an extra trillion a year of deficits makes it worse. So they demand even higher interest rates. Debt that is easily financed at 1% rates is not sustainable at 5% rates and a catastrophe at 10% rates --if you have a large debt outstanding.
This is a big part of what happened to Greece and nearly happened to Italy. At low interest rates, they are solvent. At high interest rates, they are not.
Debt crises are like an earthquakes. It's always quiet. People laugh at you for worrying. Buying insurance seems like a waste of money. Until it isn't.
So, the way to think about the dangers of debt is not like a predictable problem that comes to us slowly. View the issue as managing a small risk of a catastrophic problem, like a war or pandemic.
The easy answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Fix the indexing, improve the incentives for older people to keep working. Convert medicare to a premium support policy.
The harder problems are those less recognized. Underfunded pensions, widespread credit guarantees, and explicit or implicit too big to fail guarantees add tinder to the fire. Dry powder and good credit are invaluable.
Above all, undertake a pro-growth economic policy. We grew out of larger debts after World War II; we can do that again.
You can also buy some insurance. Every American household that takes out a mortgage faces the choice: fixed rate, or variable rate? The fixed rate is a little higher. But it can't go up, no matter what happens. The variable rate starts out lower. But if interest rates rise, you might not be able to make the payments, and you might lose the house. That is what happens to countries in a debt crisis.
For the US, this decision is made by the Treasury Department and the Federal Reserve. The Treasury has been gently lengthening the maturity of its borrowings. The Federal Reserve has been neatly undoing that effort.
Both Treasury and Fed need direction from Congress. The Treasury does not regard managing risks to the budget posed by interest rate rises as a central part of its job, and the Fed does not even consider this fact. Congress needs to decide who is in charge of the maturity structure of US debt, and guide the Treasury. I hope that guidance leans towards the fixed rate plan. By issuing long-term debt --I argue in fact for perpetuities, that simply pay a $1 coupon forever with no fixed roll over date -- and engaging in simple swap transactions that every bank uses to manage interest rate risk, the U.S. can isolate itself from a debt crisis very effectively.20 But at least ask that fixed or floating interest rate question and make a decision.
As I have warned against focusing too much attention on on-budget spending, so let me warn against too much attention on deficits rather than spending. If you focus on debt and deficits, the natural inclination is to raise tax rates. Europe's experience in the last few years argues against "austerity" in the form of sharply higher tax rates, as always adding to the disincentive to hire, invest, or start innovative businesses.
Concluding comments
I have sketched some novel and radical-sounding approaches to restoring robust economic growth. Economic growth, together with commonsense fiscal discipline are keys to solving our budget problems.
This is not pie in the sky. These are simple straightforward steps, none controversial as a matter of economics. And there really is no alternative. Ask of other approaches: Does this at all plausibly diagnose why America's growth rate has fallen in half? Does the cure at all plausibly address the diagnosis? Is the cure based on a reasonable causal channel that you can actually explain to a constituent? Does the cure have a ghost of a chance of having a large enough effect to really make a difference?
You may object that fundamental reform is not "politically feasible." Well, what's "politically feasible" can change fast in this country. This is an exciting time politically. The people are mad as hell, and they're not taking it any more. They are ready for fundamental changes.
Furthermore, it is time for Congress to take the lead. These are properly Congressional matters, and no matter who wins the Presidential election you are unlikely to see leadership in this direction.
Winston Churchill once said that Americans can be trusted to do the right thing after we've tried everything else. [NB: apparently this is an urban legend. Oh well, it's a good quip if not a quote] Well, we've tried everything else. It's time to prove him right.
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1. You can find a full CV, a list of all affiliations, and a catalog of written work at http://faculty.chicagobooth.edu/john.cochrane/index.htm. ↩
2.This testimony summarizes several recent essays. On growth and for an overview, see "Economic Growth." 2016. In John Norton Moore, ed., The Presidential Debates Carolina Academic Press p. 65-90. http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_growth.pdf; "Ending America's Slow-Growth Tailspin." Wall Street Journal, May 3 2016. http://www.wsj.com/articles/ending-americas-slow-growth-tailspin-1462230818, and "Ideas for Renewing American Prosperity" Wall Street Journal July 4 2014. http://online.wsj.com/articles/ideas-for-renewing-american-prosperity-1404777194. ↩
3. https://fred.stlouisfed.org/series/GDPCA, Continuously compounded annual rates of growth. Per capita https://fred.stlouisfed.org/series/A939RX0Q048SBEA ↩
4. https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51580-LTBO-2.pdf ↩
5. 100*exp(30 x 0.02) = 182. 100*exp(30*0.035) = 286. ↩
6. As an example of agreement on the fundamental importance of growth among economists of all political leanings, see Larry Summers, "The Progressive Case for Championing Pro-Growth Policies," 2016. http://larrysummers.com/2016/08/08/the-progressive-case-for-championing-pro-growth-policies/ ↩
7. For an excellent recent exposition of this view, see Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton University Press 2016. http://press.princeton.edu/titles/10544.html ↩
8. An influential example of these views, including self-financing stimulus: J. Bradford DeLong and Lawrence H. Summers, "Fiscal Policy in a Depressed Economy" Brookings Papers on Economic Activity. Spring 2012. https://www.brookings.edu/bpea-articles/fiscal-policy-in-a-depressed-economy/. Interestingly, DeLong and Summers condition their view on interest rates stuck at zero, a cautionary limitation that current stimulus advocates seem to have forgotten. ↩
9. See "Rule of Law in the Regulatory State." 2015. http://faculty.chicagobooth.edu/john.cochrane/research/papers/ rule_of_law_and_regulation essay.pdf ↩
10. http://www.wsj.com/articles/the-clinton-for-profit-college-standard-1473204250 ↩
11. http://www.washingtontimes.com/news/2016/sep/7/irs-refuses-to-abandon-targeting-criteria-used-aga/ ↩
12. http://www.usatoday.com/story/news/politics/onpolitics/2016/02/22/trump-ricketts-family-better-careful/80761060/ ↩
13. See "After the ACA: Freeing the market for health care." 2015. In Anup Malani and Michael H. Schill, Eds. The Future of Healthcare Reform in the United States, p. 161-201, Chicago: University of Chicago Press. http://faculty.chicagobooth.edu/john.cochrane/research/papers/after_aca_published.pdf ↩
14. See "Toward a run-free financial system." 2014. In Across the Great Divide: New Perspectives on the Financial Crisis, Martin Neil Baily and John B. Taylor, Editors, Stanford: Hoover Institution Press, p. 197-249. http://faculty.chicagobooth.edu/john.cochrane/research/papers/across-the-great-divide-ch10.pdf, and "A Blueprint for Effective Financial Reform." 2016. In George P. Shultz, ed, Blueprint for America Hoover Institution Press, p. 71 - 84. http://faculty.chicagobooth.edu/john.cochrane/research/papers/george_shultz_blueprint_for_america_ch7.pdf ↩
15. See Casey Mulligan The Redistributon Recession, Oxford University Press 2012. ↩
16. See "Here's what genuine tax reform looks like." Wall Street Journal, December 23 2015. http://www.wsj.com/articles/heres-what-genuine-tax-reform-looks-like-1450828827 ↩
17. https://www.whitehouse.gov/omb/budget/Analytical_Perspectives Table 14; http://www.taxpolicycenter.org/briefing-book/what-tax-expenditure-budget ↩
18. https://fred.stlouisfed.org/series/W019RCQ027SBEA ↩
19. See "The Clinton Plan's Growth Deficit." Wall Street Journal, August 12 2016. http://www.wsj.com/articles/the-clinton-plans-growth-deficit-1470957720. Also, for an excellent and well documented review of these issues, see Edward L. Glaeser, 2016, "If you Build it..." City Journal, Summer 2016, http://www.city-journal.org/html/if-you-build-it-14606.html ↩
20. For more details see: A New Structure For U. S. Federal Debt." 2015. In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. https://www.brookings.edu/book/the-13-trillion-question/ and http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_US_Federal_Debt.pdf. For a clear analysis of the problem, that recommends the opposite action --shortening the maturity structure to take advantage of low rates --see Robin Greenwood, Samuel G. Hanson, Joshua S. Rudolph, and Lawrence H. Summers, "The Optimal Maturity of Government Debt" and "Debt Management Conflicts between the U.S. Treasury and the Federal Reserve," also in David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt.↩
I learned a few things while in DC.
The Paul Ryan "A better way" plan is serious, detailed, and you will be hearing a lot about it. I read most of it in preparation for my trip, and it's impressive. Expect reviews here soon. I learned that Republicans seem to be uniting behind it and ready to make a major push to publicize it. It is, by design, a document that Senatorial and Congressional candidates will use to define a positive agenda for their campaigns, as well as describing a comprehensive legislative and policy agenda.
"Infrastructure" is bigger in the conversation than I thought. But since there is no case that potholes caused the halving of America's trend growth rate, do not be surprised if infrastructure fails to double the trend growth rate. It's also a bit sad that the most common growth idea in Washington is, acording to my commenters, about 2,500 years old -- employment on public works.
Washington conversation remains in thrall to the latest numbers. There was lots of buzz at my hearing about a recent census report that median family income was up 5%. Chicagoans used to get excited about the 40 degree February thaw.
The quality can be very very good. Congressman Price, the chair of my session, covered just about every topic in my testimony, and possibly better. Congressional staff are really good, and they are paying attention to the latest. If you write policy-related economics, take heart, they really are listening.
The questions at my hearing pushed me to clarify just how will debt problems affect the average American. What I had not said in the prepared remarks needs to be said. If we don't get an explosion of growth, the US will not be able to make good on its promises to social security, health care, government pensions, credit guarantees, taxpayers, and bondholders. Something's got to give. And the growing size of entitlements means they must give. Even a default on the debt, raising taxes to the long-run Laffer limit, will not pay for current pension and health promises. Those will be cut. The question is how. If we wait to a fiscal crisis, they will be cut unexpectedly and by large amounts, leaving people who counted on them in dire straits. Greece is a good example. If we make sensible sustainable promises now, they will be cut less, and people will have decades to adjust.
Ok, on to html testimony:
Growing Risks to the Budget and the Economy.
Testimony of John H. Cochrane before the House Committee on Budget.
September 14 2016
Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.
I am John H. Cochrane. I am a Senior Fellow of the Hoover Institution at Stanford University1. I speak to you today on my own behalf on not that of any institution with which I am affiliated.
Sclerotic growth is our country's most fundamental economic problem.2 From 1950 to 2000, our economy grew at 3.6% per year.3 Since 2000, it has grown at barely half that rate, 1.8% per year. Even starting at the bottom of the recession in 2009, usually a period of super-fast catch-up growth, it has grown at just over 2% per year. Growth per person fell from 2.3% to 0.9%, and since the recession has been 1.3%.
The CBO long-term budget analysis4 looks out 30 years, and forecasts roughly 2% growth. On current trends that is likely an over-estimate, as it presumes we will have no recessions, or that future recessions will have not have the permanent effects we have seen of the last several recessions. If we grow at 2%, the economy will expand by 82% in 30 years, almost doubling.5 But if we can just get back to the 3.6% postwar normal growth rate, the economy will expand by 194%, almost tripling instead. We will add the entire current US economic output to the total. In per-person terms, a 1.3% trend gives the average American 48% more income in 30 years. Reverting to the postwar 2.3% average means 99% more income, twice as much. And economic policy was not perfect in the last half of the 20th century. We should be able to do even better.
Restoring sustained, long-term economic growth is the key to just about every economic and budgetary problem we face.
Nowhere else are we talking about doubling or not the average American's income.6
Nowhere else are we talking about doubling or not Federal revenues. Long-term Federal revenues depend almost entirely on economic growth. In 1990, the Federal Government raised $1.6 trillion inflation-adjusted dollars. In 2016, this has doubled to $3.1 trillion. Wow! Did the government double tax rates? No. The overall federal tax rate stayed almost the same -- 18.0% of GDP in 1990, 18.8% of GDP today. Income doubled.
Whether deficits and debt balloon, whether we our government can pay for Social Security and health care, defend the country, and fund other goals such as protecting the environment, depend most crucially on economic growth.
Why has growth halved? Some will tell you that the economy is working as well as it can, but we've just run out of new ideas.7 A quick tour of the Silicon Valley makes one suspicious of that claim.
Others will bring you novel and untested economic theories: we suffer an ill-defined "secular stagnation" that requires massive borrowing and spending, even wasted spending. The "multiplier" translating government spending to output is not one and a half, and a temporary expedient which can briefly raise the level of income in a depression, but six or more, enough to finance itself by the larger tax revenues which larger output induces --a proposition long derided of the "supply side" --and it can now kick off long-term growth.8 Like 18th century doctors to whom disease was an imbalance of humors, modern macroeconomic doctors have one diagnosis and remedy for all the complex ills that can befall a modern economy: "demand!"
I'm here to tell you the most plausible answer is simple, clear, sensible, and much more difficult. Our legal and regulatory system is slowly strangling the golden goose of growth. There is no single Big Fix. Each market, industry, law, and agency is screwed up in its own particular way, and needs patient reform.
America is middle aged, out of shape and overweight. One voice says: well, get used to it, buy bigger pants. Another voice says: 10 day miracle detox cleanse! I'm here to tell you that the only reliable answer is good old-fashioned diet and exercise.
Or, a better metaphor perhaps: our economy, legal and regulatory system has become like a hoarder's house. No, there isn't a miracle organizer system. We have to patiently clean out every room.
Economic regulation, law and policy all slow growth by their nature. Growth comes from new ideas, new products, new processes, new ways of doing things, and most of these embodied in new companies. And these upend old companies, and displace their workers, both of whom come to Washington pleading that you save them and their jobs. It is a painful process. It is natural that the administration, regulatory agencies, and you, listen and try to protect them. But every time we protect an old company, an old industry, or an old job, from innovation and competition, we slow down growth.
How do we solve this problem and get back to growth? Our national political and economic debate has gotten stale, each side repeating the same base-pleasing talking points, but making no progress persuading the other. Making one or the other points again, or louder, will get us nowhere. I will try, instead, to find policies that think outside of these tired boxes, and that can appeal to all sides of the political spectrum.
Rather than "more government" or "less government," let's focus on fixing government. We need above all a grand simplification of our economic, legal, and political life, so that government does what it does competently and efficiently.
Regulation: fix the process.
"There's too much regulation, we're stifling business. No, there's too little regulation, businesses are hurting people." Or so goes the tired argument. Regulation is strangling business investment, and especially the formation of new businesses. But the main problem with regulation is how it's done, not how much. If we fix regulation, the quantity will take care of itself. We can agree on smarter regulation, better regulation, not just "more" or "less" regulation.9
Regulation is too discretionary --you can't read the rules and know what to do, you have to ask for permission granted on regulators' whim. No wonder that the revolving door revolves faster and faster, oiled by more and more money.
Regulatory decisions take forever. Just deciding on the Keystone Pipeline or California's high speed train --I pick examples from left and right on purpose --takes longer than it did to build the transcontinental railroad in the 1860s. By hand.
Regulation has lost rule-of-law protections. You often can't see the evidence, challenge witnesses, or appeal. The agency is cop, prosecutor, judge, jury and executioner all rolled in to one. [And, a Congressman pointed out during the discussion, recipient of collected fines.]
Most dangerous of all, regulation and associated legal action are becoming more politicized. Each week brings a new scandal. Last week10, we learned how the Government shut down ITT tech, but not the well-connected Laureate International. The IRS still targets conservative groups11. The week before, we learned how the company that makes Epi-pens, headed by the daughter of a Senator, got the FDA to block its competitors, Congress to mandate its products, and jacked up the price of an item that costs a few bucks to $600. This is a bi-partisan danger. For example, presidential candidate Donald Trump has already threatened to use the power of the government against people who donate to opponents' campaigns.12
America works because you can lose an election, support an unpopular cause, speak out against a policy you disagree with, and this will not bring down the attentions of the IRS, the EPA, the NLRB, the SEC, the CFPB, the DOJ, the FDA, the FTC, the Department of Education, and so forth, who can swiftly put you out of business even if eventually you are proven innocent, or just slow-roll your requests for permissions until you run out of money.
This freedom does not exist in much of the world. The Administrative state is an excellent tool for cementing power. But when people can't afford to lose an election, countries come unglued. Do not let this happen in the US.
Congress can take back its control of the regulatory process. Write no more thousand-page bills with vague authorizations. Fight back hard when agencies exceed their authorization. Insist on objective and retrospective cost benefit analysis. Put in rule-of law protections, including discovery of how agencies make decisions. Insist on strict timelines --if an agency takes more than a year to rule on a request, it's granted. [I later learned this is called a "shot clock" in Washington, a nice metaphor.]
Health care and finance are the two biggest new regulatory headaches. The ACA and Dodd-Frank aren't working, and are important drags on employment and economic growth. Simple workable alternatives exist. Implement them.
The real health care problem is not how we pay for health care, but the many restrictions on its supply and competition.13 If hospitals were as competitive as airlines, they would work darn hard to heal us at much lower --and disclosed! --prices. If the FDA did not strangle new medicines and devices, even generics, prices would fall.
Competition is always the best disinfectant, guarantor of good service and low prices. Yet almost all uncompetitive markets in the US are uncompetitive because some law or regulation keeps competitors out.
Rather than guarantee bank debts, and unleash an army of regulators to make sure banks don't risk too much, we should instead insist that banks get their money in ways that do not risk crises, primarily issuing equity and long-term debt. Then banks can fail just like other companies, and begin to compete just like other companies.14
"The planet is dying, control carbon!" "Your crony energy boondoggles and regulations are killing the economy!" Well, that argument is not getting us anywhere, is it? The answer is straightforward: A simple carbon tax in exchange for elimination of all the growth-killing, intrusive, cronyist, and ineffective micromanagement. We can continue to argue about the rate of that tax, but it will both reduce more carbon, and increase more growth, than the current ineffective policies --and stagnant debate.
None of these recommendations are ideological or partisan. These are just simple, clean-out-the-junk, workable ways to get our regulatory system to actually work, for its goal of protecting consumers and the environment, at minimal economic and political damage.
Social programs: Fix the incentives.
"Cut spending, or the debt will balloon!" "Raise spending or people will die in the streets!" That's getting nowhere too. And it ignores central problems.
In many social programs, if you earn an extra dollar, you lose a dollar or more of benefits. Many programs have cliffs, especially in health care and disability, where earning one extra dollar triggers an enormous loss. Even when one program cuts benefits modestly with income, the interaction of many programs makes work impossible.15 No wonder that people become trapped. We need to fix these disincentives. Doing so will help people better. If we fix the incentives, though it may look like we spend more, in the end we will spend less --and encourage economic growth as well as opportunity.
Spend more to spend less. "Spending is out of control! We need to spend less or there will be a debt crisis!" "Oh there you go being heartless again. We need to invest more in programs that help Americans in need." I feel like I'm at a dinner party hosted by a couple in a bad marriage. This isn't getting us anywhere.
It is important to limit Federal spending. However, we tend to just limit the appearance of spending by moving the same activities off the books. Off-the-books spending does the same economic damage. Or more.
For example, we allow an income tax deduction for mortgage interest, in order to subsidize homeownership. From an economic point of view, this is exactly the same thing as collecting higher taxes, and then sending checks to homeowners. It looks like we're taxing and spending less than we really are. But from an economic growth point of view, it's the same thing.
Actually, it's worse, because it adds unfairness and inefficiency. Suppose a colleague proposes a bill to you: The U.S. Treasury will send checks to homeowners, but high income people get much bigger checks, as will people who borrow a lot, and people who refinance often and take cash out. People with low incomes, who save up to buy houses, or don't refinance, get a lot less. You would say, "You're out of your mind!" But that's exactly what the mortgage interest deduction achieves!
If we were to eliminate the mortgage deduction, and put housing subsidies on budget, where taxpayers can see where their money is going, the resulting homeowner subsidy would surely be a lot smaller, much more progressive, helping lower income people, better targeted at getting people in houses, and less damaging of savings and economic growth. Both Republicans and Democrats should rejoice. Except the headline amount of taxing and spending will increase. Well, spend more to spend less.
We allow a tax deduction for charitable deductions. This is exactly the same thing as taxing more, but then sending checks to non-profits as matching contributions --but much larger checks for contributions from rich people than from poorer people. Then, many "non-profits" spend a lot of money on private jet travel, executive salaries, and political activities. Actual on-budget federal spending, convoluted and inefficient as it is, at least has a modicum of oversight and transparency. If we removed the deduction, but subsidized worthy charities, with transparency and oversight, we'd do a lot more good, and probably overall tax less and spend less. Except the headline amount of taxing and spending might increase. Well, spend more to spend less.
Mandates are the same thing as taxing and spending. Many European countries tax a lot, and then provide services, like health insurance. We mandate that employers provide health insurance. It looks like we're taxing and spending less, but we're not. A health insurance mandate has exactly the same economic effects as a $15,000 head tax on each employee, financing a $15,000 health insurance voucher.
Economics pays no heed to budget tricks. Spending too much rhetorical effort on lowering taxes and spending induces our government to such tricks, with the same growth-destroying effects. If you want economic growth, treat every mandate as taxing and spending.
Taxes: break up the argument.
The outlines of tax reform have been plain for a long time: lower marginal rates, broaden the base by getting rid of the massive welter of special deals. But it can't get done. Why not?
When we try to fix taxes,16 we argue about four things at once: 1) What is the right structure for a tax code? 2) What is the right level of taxes, and therefore, of spending? 3) What activities should the government subsidize -- home mortgages, charitable contributions, electric cars, and so on? 4) How much should the government redistribute income?
Tax reforms fail because we argue about all these together. For example, the Bowles-Simpson commission got to an improvement on the structure of taxes, but then the reform effort fell apart when the Administration wanted more revenue and congressional Republicans less.
I am back at my dysfunctional dinner party. Sometimes, in politics as in marriage, it is wise to bundle issues together, each side accepting a minor loss to ensure what they see as a major gain. You clean up your socks, I'll clean up my makeup. Sometimes, however, we bundle too many issues together, and the result is paralysis, as each side vetoes a package of improvements over a small issue. Then, it's better to work on the issues separately.
So, let's fix taxes by separating these four issues, in four commissions possibly, or better in four completely separate sections of law.
1) Structure. Agree on the right structure of the tax code, with its only goal to raise revenue at minimal economic distortion, but leave the rates blank.
2) Rates. Determine the rates, without touching the structure of the tax code. A good tax code should last decades. Rates may change every year, and likely will be renegotiated every four. But those who want higher or lower rates know they can agree on the structure of the tax code.
3) Separate the subsidy code from the tax code. Mortgage interest subsidies? Electric car subsidies? Sure, we'll talk about them, but separately. Then, we don't have to muck up raising revenue for the government with subsidies, and the budgetary and economic impact of subsidies can be evaluated on their own merits
4) Separate the redistribution code from the tax code. Then we don't muck up raising revenue for the government with income transfers.
The main point is that by separating these four elements of law, each with fundamentally different purposes, we are much more likely to make coherent progress on each. You need not oppose beneficial aspects of an economically efficient tax simplification, say, if you wish to have a greater level of redistribution --well, at least any more than you might oppose any random bill in order to force your way on that issue.
Some thoughts on how each of these might work:
Structure. The economic damage of taxation is entirely about "marginal'' rates --if you earn an extra dollar, how much do you get to enjoy it, after all taxes, federal, state, local, sales, estate, and so forth. Economics has really little to say about how much taxes people pay. The economists' ideal is a tax system in which people pay as much as the Government needs --but each extra dollar earned is tax-free. Politics, of course, focuses pretty much on the opposite, how much people pay and ignoring the economically-distorting margins.
Thus, if you ask 100 economists, "now, forget politics for a moment --that's our job --and tell me what the right tax code is, with the only objective being to raise revenue without distorting the economy,'' the pretty universal answer will be a consumption tax --with no corporate tax, income tax, tax on savings or rates of return, estates, or anything else, and essentially no deductions. (They will then say "but..." and go on to demand subsidies and income redistribution, at which time you have to assure them too that we'll discuss these separately.)
A massive simplification of the tax code is, in my opinion, as or more important than the rates --and it's something we're more likely to agree on. America's tax code is an obscenely complex cronyist nightmare.
For example, that's why I favor, and you should seriously consider, eliminating the corporate tax. Corporations never pay any taxes. All money they send to the government comes from higher prices, lower wages, or lower returns to shareholders --and mostly the former two. If you tax people who receive corporate profits, rather than collecting taxes from higher prices and lower wages, you will have a more progressive tax system.
But more importantly, if you eliminate the corporate tax, you will eliminate the constant stream of lobbyists in your offices each day asking for special favors.
Far too many businesses are structured around taxes, and far too many smart minds are spending their time devising corporate tax avoidance schemes and lobbying strategies. A much simpler tax code even with sharply higher rates --but very clear rates, that we all know about and can plan on --may well have less economic distortion than a massively complex code, with high statutory rates, but a welter of complex schemes and deductions that result in lower taxes.
Subsidy code. Tax expenditures --things like deductions for mortgage interest, employer provided health care, charitable contributions, and the $10,000 credit my wealthy Palo Alto neighbor got from the taxpayers for buying a Tesla -- are estimated at $1.4 trillion,17 compare with $3.5 trillion Federal Receipts and $4 trillion Federal Expenditures.18 Our Federal Government is really a third larger than it looks.
While the subsidy code could consist of a separate discussion of tax expenditures, it would be far better for the rules of the subsidy code to be: all subsidies must be on budget, where we can all see what's going on.
Redistribution. Even a consumption tax can be as progressive as one wants. One can use the regular income tax code with full deduction of savings and omitting capital income, thus taxing high consumption at higher rates and low consumption at lower rates.
Again, however, it might well be more efficient to integrate income redistribution with social programs. Put it on budget, and send checks to people. Yes, that makes spending look larger, but sending a check is the same thing as giving a tax break. And spending can be more carefully monitored.
Infrastructure
Infrastructure is all the rage19. America needs infrastructure. Good infrastructure, purchased at minimum cost, that passes objective cost-benefit criteria, built promptly, can help the economy in the long run. Soft infrastructure --a better justice system, for example --matters as much as hard infrastructure --more asphalt.
However, there is no case that the halving of America's growth rate in the last 20 years is centrally due to potholes and rusting bridges. Poor infrastructure is not the cause of sclerosis, so already one should be wary of infrastructure investment as the central plan to cure that sclerosis.
The claim that infrastructure spending will lift the economy out of its doldrums lies on the "multiplier" effect, that any spending, even wasted, is good for the economy. That is a dubious proposition, especially when the task is to raise the economy by tens of trillions, over decades.
Modern infrastructure is built by machines, and not many people; even less people who do not have the specialized skills. A Freeway in California will do little to help employment of a high school dropout in New York, or a middle-aged mortgage broker in New Jersey. Neither knows how to operate a grader.
The problem with infrastructure is not lack of money. President Obama inaugurated a nearly trillion dollar stimulus plan 8 years ago. His Administration found out there are few shovel-ready projects in America today. They're all tied up waiting for historic review, environmental review, and legal challenges.
The problem with infrastructure is a broken process. Put a time limit on historic, environmental, and other reviews. Require serious, objective, and retrospective cost-benefit analysis. Repeal Davis-Bacon and other contracting requirements that send costs soaring. If the point is infrastructure it should be infrastructure, not passing money around. You ought to be able to agree on more money in return for assurance that the money is wisely spent.
Debt and deficits
This hearing is also about budgets and debts, which I have left to the end. Yes, our deficits are increasing. Yes, every year the Congressional Budget Office declares our long-term promises unsustainable.
I have not emphasized this problem, though in my opinion it is centrally important, and I think I was invited here to say so.
Recognize that computer simulations with hockey-stick debt, designed to frighten into submission a supporter of what he or she feels is necessary government spending, are as ineffective as computer simulations with hockey-stick temperatures, designed to frighten into submission a supporter of current economic growth and skeptic of draconian energy regulation. Yelling about each, louder, is not going to be productive.
And there are many voices who tell you debt is not a problem. Interest rates are at record lows. Why not borrow more, and worry about paying it back later? So, let me offer a few out of the box observations, and suggestions that you might agree on.
It is useful to clarify why debt is a problem. The case that large debts will slowly and inexorably push up interest rates, and crowd out investment, is hard to make in this era of ultra-low rates. Debt does place a burden of repayment on our children and grandchildren, but if we have reasonable economic growth they will be wealthier than we are.
The biggest danger that debt poses is a crisis.
Debt crises, like all crises that really threaten an economy and society, do not come with decades of warning. Do not expect slowly rising interest rates to canary the coalmine. Even Greece could borrow at remarkably low rates. Until, one day, it couldn't, with catastrophic results.
The fear for the US is similar. We will have long years of low rates. Until, someday, it is discovered that some books are cooked, and somebody owes a lot of money that they can't pay back, and people start to question debts everywhere.
For example, suppose Chinese debts blow up, and southern Europe as well. Both Europe and China will start selling Treasury debt quickly. Suppose at the same time that student loans, state and local pensions, and state governments are blowing up, along with some large U.S. companies, and banks under deposit insurance. A recession looms, which the US will want to fight with fiscal stimulus. The last crisis occasioned about $5 trillion of extra borrowing. The next one could double that.
So, the U.S. needs to quickly borrow additional trillions of dollars, while its major customers --foreign central banks --are selling. In addition, the U.S. borrows relatively short term. Each year, the U.S. borrows about $7 trillion to pay off $7 trillion of maturing debt, and then more to cover the deficit.
Imagine all this happens 10 years from now, with social security and medicare unresolved and increasing deficits. The CBO is still issuing its annual warnings that our debt is unsustainable. Now, bond investors are willing to lend to the US government so long as they think someone else will lend tomorrow to pay off their loans today. When they suspect that isn't true, they pull back and interest rates spike.
But our large debts leave our fiscal position sensitive to interest rate rises. At 100% debt to GDP ratio, if interest rates rise to just 5%, that means the deficit rises by 5 percentage points of GDP, or approximately $1 Trillion extra dollars per year. If bond investors were worried about sustainability already, an extra trillion a year of deficits makes it worse. So they demand even higher interest rates. Debt that is easily financed at 1% rates is not sustainable at 5% rates and a catastrophe at 10% rates --if you have a large debt outstanding.
This is a big part of what happened to Greece and nearly happened to Italy. At low interest rates, they are solvent. At high interest rates, they are not.
Debt crises are like an earthquakes. It's always quiet. People laugh at you for worrying. Buying insurance seems like a waste of money. Until it isn't.
So, the way to think about the dangers of debt is not like a predictable problem that comes to us slowly. View the issue as managing a small risk of a catastrophic problem, like a war or pandemic.
The easy answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Fix the indexing, improve the incentives for older people to keep working. Convert medicare to a premium support policy.
The harder problems are those less recognized. Underfunded pensions, widespread credit guarantees, and explicit or implicit too big to fail guarantees add tinder to the fire. Dry powder and good credit are invaluable.
Above all, undertake a pro-growth economic policy. We grew out of larger debts after World War II; we can do that again.
You can also buy some insurance. Every American household that takes out a mortgage faces the choice: fixed rate, or variable rate? The fixed rate is a little higher. But it can't go up, no matter what happens. The variable rate starts out lower. But if interest rates rise, you might not be able to make the payments, and you might lose the house. That is what happens to countries in a debt crisis.
For the US, this decision is made by the Treasury Department and the Federal Reserve. The Treasury has been gently lengthening the maturity of its borrowings. The Federal Reserve has been neatly undoing that effort.
Both Treasury and Fed need direction from Congress. The Treasury does not regard managing risks to the budget posed by interest rate rises as a central part of its job, and the Fed does not even consider this fact. Congress needs to decide who is in charge of the maturity structure of US debt, and guide the Treasury. I hope that guidance leans towards the fixed rate plan. By issuing long-term debt --I argue in fact for perpetuities, that simply pay a $1 coupon forever with no fixed roll over date -- and engaging in simple swap transactions that every bank uses to manage interest rate risk, the U.S. can isolate itself from a debt crisis very effectively.20 But at least ask that fixed or floating interest rate question and make a decision.
As I have warned against focusing too much attention on on-budget spending, so let me warn against too much attention on deficits rather than spending. If you focus on debt and deficits, the natural inclination is to raise tax rates. Europe's experience in the last few years argues against "austerity" in the form of sharply higher tax rates, as always adding to the disincentive to hire, invest, or start innovative businesses.
Concluding comments
I have sketched some novel and radical-sounding approaches to restoring robust economic growth. Economic growth, together with commonsense fiscal discipline are keys to solving our budget problems.
This is not pie in the sky. These are simple straightforward steps, none controversial as a matter of economics. And there really is no alternative. Ask of other approaches: Does this at all plausibly diagnose why America's growth rate has fallen in half? Does the cure at all plausibly address the diagnosis? Is the cure based on a reasonable causal channel that you can actually explain to a constituent? Does the cure have a ghost of a chance of having a large enough effect to really make a difference?
You may object that fundamental reform is not "politically feasible." Well, what's "politically feasible" can change fast in this country. This is an exciting time politically. The people are mad as hell, and they're not taking it any more. They are ready for fundamental changes.
Furthermore, it is time for Congress to take the lead. These are properly Congressional matters, and no matter who wins the Presidential election you are unlikely to see leadership in this direction.
Winston Churchill once said that Americans can be trusted to do the right thing after we've tried everything else. [NB: apparently this is an urban legend. Oh well, it's a good quip if not a quote] Well, we've tried everything else. It's time to prove him right.
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1. You can find a full CV, a list of all affiliations, and a catalog of written work at http://faculty.chicagobooth.edu/john.cochrane/index.htm. ↩
2.This testimony summarizes several recent essays. On growth and for an overview, see "Economic Growth." 2016. In John Norton Moore, ed., The Presidential Debates Carolina Academic Press p. 65-90. http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_growth.pdf; "Ending America's Slow-Growth Tailspin." Wall Street Journal, May 3 2016. http://www.wsj.com/articles/ending-americas-slow-growth-tailspin-1462230818, and "Ideas for Renewing American Prosperity" Wall Street Journal July 4 2014. http://online.wsj.com/articles/ideas-for-renewing-american-prosperity-1404777194. ↩
3. https://fred.stlouisfed.org/series/GDPCA, Continuously compounded annual rates of growth. Per capita https://fred.stlouisfed.org/series/A939RX0Q048SBEA ↩
4. https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51580-LTBO-2.pdf ↩
5. 100*exp(30 x 0.02) = 182. 100*exp(30*0.035) = 286. ↩
6. As an example of agreement on the fundamental importance of growth among economists of all political leanings, see Larry Summers, "The Progressive Case for Championing Pro-Growth Policies," 2016. http://larrysummers.com/2016/08/08/the-progressive-case-for-championing-pro-growth-policies/ ↩
7. For an excellent recent exposition of this view, see Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton University Press 2016. http://press.princeton.edu/titles/10544.html ↩
8. An influential example of these views, including self-financing stimulus: J. Bradford DeLong and Lawrence H. Summers, "Fiscal Policy in a Depressed Economy" Brookings Papers on Economic Activity. Spring 2012. https://www.brookings.edu/bpea-articles/fiscal-policy-in-a-depressed-economy/. Interestingly, DeLong and Summers condition their view on interest rates stuck at zero, a cautionary limitation that current stimulus advocates seem to have forgotten. ↩
9. See "Rule of Law in the Regulatory State." 2015. http://faculty.chicagobooth.edu/john.cochrane/research/papers/ rule_of_law_and_regulation essay.pdf ↩
10. http://www.wsj.com/articles/the-clinton-for-profit-college-standard-1473204250 ↩
11. http://www.washingtontimes.com/news/2016/sep/7/irs-refuses-to-abandon-targeting-criteria-used-aga/ ↩
12. http://www.usatoday.com/story/news/politics/onpolitics/2016/02/22/trump-ricketts-family-better-careful/80761060/ ↩
13. See "After the ACA: Freeing the market for health care." 2015. In Anup Malani and Michael H. Schill, Eds. The Future of Healthcare Reform in the United States, p. 161-201, Chicago: University of Chicago Press. http://faculty.chicagobooth.edu/john.cochrane/research/papers/after_aca_published.pdf ↩
14. See "Toward a run-free financial system." 2014. In Across the Great Divide: New Perspectives on the Financial Crisis, Martin Neil Baily and John B. Taylor, Editors, Stanford: Hoover Institution Press, p. 197-249. http://faculty.chicagobooth.edu/john.cochrane/research/papers/across-the-great-divide-ch10.pdf, and "A Blueprint for Effective Financial Reform." 2016. In George P. Shultz, ed, Blueprint for America Hoover Institution Press, p. 71 - 84. http://faculty.chicagobooth.edu/john.cochrane/research/papers/george_shultz_blueprint_for_america_ch7.pdf ↩
15. See Casey Mulligan The Redistributon Recession, Oxford University Press 2012. ↩
16. See "Here's what genuine tax reform looks like." Wall Street Journal, December 23 2015. http://www.wsj.com/articles/heres-what-genuine-tax-reform-looks-like-1450828827 ↩
17. https://www.whitehouse.gov/omb/budget/Analytical_Perspectives Table 14; http://www.taxpolicycenter.org/briefing-book/what-tax-expenditure-budget ↩
18. https://fred.stlouisfed.org/series/W019RCQ027SBEA ↩
19. See "The Clinton Plan's Growth Deficit." Wall Street Journal, August 12 2016. http://www.wsj.com/articles/the-clinton-plans-growth-deficit-1470957720. Also, for an excellent and well documented review of these issues, see Edward L. Glaeser, 2016, "If you Build it..." City Journal, Summer 2016, http://www.city-journal.org/html/if-you-build-it-14606.html ↩
20. For more details see: A New Structure For U. S. Federal Debt." 2015. In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. https://www.brookings.edu/book/the-13-trillion-question/ and http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_US_Federal_Debt.pdf. For a clear analysis of the problem, that recommends the opposite action --shortening the maturity structure to take advantage of low rates --see Robin Greenwood, Samuel G. Hanson, Joshua S. Rudolph, and Lawrence H. Summers, "The Optimal Maturity of Government Debt" and "Debt Management Conflicts between the U.S. Treasury and the Federal Reserve," also in David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt.↩
Testimony
I was invited to testify at a hearing of the House budget committee on Sept 14. It's nothing novel or revolutionary, but a chance to put my thoughts together on how to get growth going again, and policy approaches that get past the usual partisan squabbling. Here are my oral remarks. (pdf version here.) The written testimony, with lots of explanation and footnotes, is here. (pdf) (Getting footnotes in html is a pain.)
Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.
Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average, we would, in the next 30 years, triple rather than double the size of the economy—and tax revenues, which would do wonders for our debt problem.
Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.
How do we fix it? Our national political and economic debate just makes the same points again, louder, and going nowhere. Instead, let us look together for novel and effective policies that can appeal to all sides.
Regulation:
Let’s get past “too much” or “too little” regulation, and fix regulation instead.
Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop, prosecutor, judge, jury and executioner all rolled in to one. Most dangerous of all, regulation is becoming more politicized.
Congress can fix this.
Social programs
Let’s get past spending “more” or “less” on social programs, and fix them instead.
Often, if you earn an extra dollar, you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives, we will help people better, encourage growth and opportunity--and in the end we will spend less.
Spend more to spend less.
Spending is a serious problem. But moving spending off the books does not help.
For example, we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes, and sending checks to homeowners – but larger checks for high income people, people who borrow a lot, and people who refinance often.
Suppose we eliminate the mortgage deduction, and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller, help lower-income people a lot more, and be better targeted at getting people in houses.
The budget would look bigger. But we would really spend less -- and grow more.
Taxes
Tax reform fails because arguments over the level of taxes, subsidies, or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.
First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code, preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.
A massive simplification of the tax code is, I think, more important than the rates – and easier for us to agree on.
Debt and deficits
Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.
First, let’s face the big problem: a debt crisis, when the U.S. suddenly needs to borrow a lot and roll over debts, and markets refuse. This, not a slow predictable rise in interest rates and crowding out, strikes me as the biggest problem. Crises are always sudden and unexpected, like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until, one day, it couldn’t.
The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions, widespread credit and bailout guarantees.
Buy some insurance. Like every homeowner shopping for a mortgage, the US chooses between a floating rate, lower initially, and a fixed rate, higher initially, but forever insulating the budget from interest rate risks, which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.
Above all, undertake this simple, pro-growth economic policy, and grow out of debt.
Concluding comments
You may object that fundamental reform is not “politically feasible.” Well, what’s “politically feasible” changes fast these days.
Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing.
Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.
Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average, we would, in the next 30 years, triple rather than double the size of the economy—and tax revenues, which would do wonders for our debt problem.
Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.
How do we fix it? Our national political and economic debate just makes the same points again, louder, and going nowhere. Instead, let us look together for novel and effective policies that can appeal to all sides.
Regulation:
Let’s get past “too much” or “too little” regulation, and fix regulation instead.
Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop, prosecutor, judge, jury and executioner all rolled in to one. Most dangerous of all, regulation is becoming more politicized.
Congress can fix this.
Social programs
Let’s get past spending “more” or “less” on social programs, and fix them instead.
Often, if you earn an extra dollar, you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives, we will help people better, encourage growth and opportunity--and in the end we will spend less.
Spend more to spend less.
Spending is a serious problem. But moving spending off the books does not help.
For example, we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes, and sending checks to homeowners – but larger checks for high income people, people who borrow a lot, and people who refinance often.
Suppose we eliminate the mortgage deduction, and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller, help lower-income people a lot more, and be better targeted at getting people in houses.
The budget would look bigger. But we would really spend less -- and grow more.
Taxes
Tax reform fails because arguments over the level of taxes, subsidies, or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.
First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code, preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.
A massive simplification of the tax code is, I think, more important than the rates – and easier for us to agree on.
Debt and deficits
Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.
First, let’s face the big problem: a debt crisis, when the U.S. suddenly needs to borrow a lot and roll over debts, and markets refuse. This, not a slow predictable rise in interest rates and crowding out, strikes me as the biggest problem. Crises are always sudden and unexpected, like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until, one day, it couldn’t.
The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions, widespread credit and bailout guarantees.
Buy some insurance. Like every homeowner shopping for a mortgage, the US chooses between a floating rate, lower initially, and a fixed rate, higher initially, but forever insulating the budget from interest rate risks, which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.
Above all, undertake this simple, pro-growth economic policy, and grow out of debt.
Concluding comments
You may object that fundamental reform is not “politically feasible.” Well, what’s “politically feasible” changes fast these days.
Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing.
Glaeser and Summers on Infrastructure
Ed Glaeser has a superb essay on infrastructure at City Journal, titled "If you Build It.." I have a few excerpts, but do go and enjoy the whole thing. Larry Summers also has a new blog post on infrastructure, with some fascinating bits if you read carefully. I wrote about some of these issues in the WSJ and recent post, but not with Ed's clarity and erudition, nor Larry's imprimatur.
Glaeser starts with a clear summary paragraph:
On the stimulus aspect of infrastructure, I have long been suspicious. The Keynesian argument for stimulus works for wasted spending just as well as infrastructure. That you have to wrap it in something nice to get it past the rubes who will not believe that wasted spending is a good thing suggests faith in the idea is not as strong as it should be. Anyway, Ed takes this on with precision
Larry also takes on the private sector issue,
Glaeser starts with a clear summary paragraph:
While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollarsEd documents well my own doubts that infrastructure spending will do much for the economy as a whole, especially in the short run. Buy the infrastructure for the infrastructure, at lowest possible cost -- not for the "jobs" or on the idea this is the key to returning to growth. Annoying as they may be, there is no case that US GDP growth has been cut in half because there are too many potholes. The Hillary Clinton plan included a praiseworthy -- and novel, considering her party's years of opposition to freeway building -- proposal to cut commuting times. But
What about the economic value of the shorter commuting times that new infrastructure can bring? ... it’s hard to see how substantially reducing time lost to traffic congestion will turbocharge the economy. Imagine that America gets its act together and cuts traffic time sufficiently to save $80 billion—a pretty miraculous improvement. That would still represent less than one-half of 1 percent of America’s $18 trillion GDP....Transportation infrastructure isn’t a solution for America’s lackluster growth ratesThe idea of public works to boost the economy goes back, I think, to the Romans, but I'm glad to read just how fresh an idea it is in America:
The idea of using infrastructure building as a weapon against unemployment first entered American politics after the economic panic of 1893. Before that recession hit, in 1891, businessman and Ohio politician Jacob Coxey drafted his “Good Roads Bill.” Coxey wanted the government to spend at least $20 million per month building roads across America, paying workers “at least 80 percent above the going hourly rate.” This building campaign, he argued, would be financed by the printing press—Coxey was a pro-inflation Greenback Party member—and would hike government spending by 75 percent.Fiscal expansion financed by helicopter drops remains the cutting edge of Keynesian policy macroeconomics. Keynes once said that "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." It sees instead that practical policy Keynesian economists who believe themselves a vanguard of intellectual influence are usually the slaves of some defunct politician! It's a more general problem when economics comes to the service of policies decided for other reasons.
On the stimulus aspect of infrastructure, I have long been suspicious. The Keynesian argument for stimulus works for wasted spending just as well as infrastructure. That you have to wrap it in something nice to get it past the rubes who will not believe that wasted spending is a good thing suggests faith in the idea is not as strong as it should be. Anyway, Ed takes this on with precision
... one should be wary of drawing infrastructure-related lessons from the 1930s for the twenty-first century. .. While a sensible anti-unemployment policy targets resources at areas that have high unemployment rates, many of those areas are today in long-term decline, and the last thing they need is new roads and bridges...
...The relatively simple technology of infrastructure construction of the 1930s meant that the unskilled unemployed could easily be put to work building roads. Among the iconic images of the Great Depression are scores of men wielding shovels and picks. That isn’t how roads and bridges are built anymore, though. Big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed. The most at-risk Americans, if they’re working at all, usually toil in fast-food restaurants, where the average worker makes $22,000 a year. They’re typically not trained to labor on complex civil-construction projects. Subsidizing Big Mac consumption would be a more effective way to provide jobs for the temporarily unemployed than subsidizing airport renovation.My emphasis because it's such a great quote. It also holds for the permanently unemployed, low-skilled or not construction union members.
The building process was also much quicker in the past, meaning that projects proposed during the Depression could be started and even finished during the Depression, making them more likely to fight temporary joblessness. Robert Moses built the Triborough Bridge complex, the construction of which got under way on Black Friday in October 1929, in just four years. Such speed is hard to imagine today. Boston’s Big Dig, to take one famous example, took 25 years from initial planning to its final completion in 2007.It took 6 years to build the transcontinental railroad in the 1860s. By hand.
Why have transportation projects become so much slower? Yes, they’re usually more technologically complicated, but much of the time, politics is also to blame. ... To erect the Triborough, Moses could just demolish the buildings that he needed to get out of the way—neighborhood complaints be damned. Such tactics are no longer politically acceptable, so the Big Dig and other large-scale undertakings needed painstakingly to avoid inconveniencing anybody, dramatically raising costs and delays. New Deal projects also didn’t face environmental-impact reviews, which can add years to a project timeline. Detroit’s Gordie Howe International Bridge’s review process took “four years of consultations, public hearings, traffic analyses, and environmental studies,” to take a recent example. The project should be finished around 2020—15 years after that review process began.Ed closes with an important point. Just why are roads and bridges, today, financed by Federal tax money? Groceries are funded by the money of people who buy them. In the past, roads and bridges were public goods -- it was not practical to charge users. Now, electronics make real-time, congestion-contingent tolling practical on city streets.
Many tasks of government have nothing in common with private enterprise. Neither our military nor our courts should be in the business of extracting revenues from, respectively, foreign powers or litigants. Aid to the poor and to the elderly is meant to be money-losing. But infrastructure is different and has much more in common with ordinary businesses. After all, infrastructure provides valuable services, the use of which by one individual typically crowds out the use by someone else. E-ZPass technology has made it simple to charge for transportation. Why not, then, establish a business model for transportation infrastructure?Back from Free-Market Nirvana, Larry Summers' latest blog post has a predictably strong argument for infrastructure investment along the lines of the Hilary Clinton plan, multiplied by about a factor of 10. But he has some wise and important words of caution as well:
How can we be sure investment is carried out efficiently? There is legitimate scepticism about this, and there is no silver bullet for this problem. ... progressive advocates of more investment should compromise with conservative sceptics and, in the context of increased spending, accept regulatory streamlining, as well as requirements that projects undergo cost-benefit analysis. Minimising cost should be the objective of infrastructure procurement.This is a very important statement. Me, in the WSJ,
In return for more spending, Mrs. Clinton could have offered serious structural reforms: repeal of Davis-Bacon, time limits on environmental reviews, serious cost-benefit analysis, and so forth. Such a package would have been irresistibleIt's nice to agree. But minimizing cost is a breathaking proposition in American politics. A good acid test for infrastructure fans: Suppose a Chinese company offers to build your high speed train at half the cost. Do you say yes? If no, you're not really serious about infrastructure. Larry just said yes.
Larry also takes on the private sector issue,
What about the private sector? ...Policy frameworks that streamline regulatory decision-making and reduce uncertainty could spur investment in these sectors. There is a case for experimenting with mobilising private capital for use on infrastructure that has been a public-sector preserve, such as airports and roads. But, the reality that government borrowing costs are much lower than the returns demanded by private-sector infrastructure investors should lead to caution. It would be unfortunate if, in an effort to avoid deficits, large subsidies were given to private financial operators. Only when private-sector performance in building and operating infrastructure is likely to be better than what the public sector can do is there a compelling argument for privatisation.Anytime someone uses a passive locution so convoluted as "experimenting with mobilising private capital," I suggest you react as you would to "Ladies and Gentlemen, a band of pickpockets has been discovered working the room." Precisely for the reasons laid out in Larry's last sentence: "Public-Private partnerships" usually mean public protection, private profits, and a piñata for politicians.
Rosenberg in New York Times
Naomi Rosenberg's Op-Ed in the Sunday New York Times is the best piece of writing I have had the painful pleasure to read in a long time. The title is How to Tell a Mother her Child Is Dead. Warning: this is not an easy piece to read.
Read it. Read the whole thing. Read it again. There is no excerpt I can offer.
Why is it so good? She does not clear her throat. She does not introduce the subject -- the title did that. She dives right in: "First you get your coat." She uses short, declarative, active sentences. The absence of contractions is powerful.
She does not beat us over the head with the obvious, or fill it with policy-blather. She reminds us of the daily tragedy in many cities, like my hometown of Chicago, that we must no longer ignore.
She reminds us of the deep humanity of doctors who pick up the pieces. The emergency room doctor who took care my mother could have been Dr. Rosenberg, and I will forever be thankful for her consideration. "You use the mother’s name and you use her child’s name." Yes. Too often in our many doctor visits raising four children, someone addressed us as "Mom" and "Dad." We're not dumb. We know that means you can't bother to look down at the sheet in front of you to read and pretend to know who we are.
She reminds us to treat people in awful circumstances with the same humanity and respect as she treats her patients, not as numbers, abstractions, easy categories or talking points for longstanding policy arguments.
Had she said any of that, it would have been much weaker. She didn't need to say it. In all likelihood, neither do I.
Let us remember Dr. Rosenberg and her colleagues this labor day, as they will be at that painful work while we barbecue.
Read it. Read the whole thing. Read it again. There is no excerpt I can offer.
Why is it so good? She does not clear her throat. She does not introduce the subject -- the title did that. She dives right in: "First you get your coat." She uses short, declarative, active sentences. The absence of contractions is powerful.
She does not beat us over the head with the obvious, or fill it with policy-blather. She reminds us of the daily tragedy in many cities, like my hometown of Chicago, that we must no longer ignore.
She reminds us of the deep humanity of doctors who pick up the pieces. The emergency room doctor who took care my mother could have been Dr. Rosenberg, and I will forever be thankful for her consideration. "You use the mother’s name and you use her child’s name." Yes. Too often in our many doctor visits raising four children, someone addressed us as "Mom" and "Dad." We're not dumb. We know that means you can't bother to look down at the sheet in front of you to read and pretend to know who we are.
She reminds us to treat people in awful circumstances with the same humanity and respect as she treats her patients, not as numbers, abstractions, easy categories or talking points for longstanding policy arguments.
Had she said any of that, it would have been much weaker. She didn't need to say it. In all likelihood, neither do I.
Let us remember Dr. Rosenberg and her colleagues this labor day, as they will be at that painful work while we barbecue.
Settlement skulduggery
Andy Koenig had a WSJ oped on a subject getting far too little attention. When the government goes after big companies such as banks, and obtains huge out of court settlements, just where does the money go?
This story rings a few bells.
1) Regulation. What's wrong with regulation and economic law is not really "too much" or "too little" -- the standard old argument --but how it works -- the steady politicization of economic law and regulation, the decline in rule-of-law protections, the increasing use of the Administrative state to force political compliance.
Why didn't the banks fight? Why didn't they object to where their money was going? Why do they (except B of A) not even disclose their "charitable" contributions under the settlement? The government, now with the Fed along for the ride, can really make their lives difficult, of course! Hefty speaking fees to likely political officials, a strong revolving door to Washington, and keeping the payments secret are cheap investments to keep this sort of thing at bay.
2) Nonprofits. The public image of nonprofits are Red Cross, or Stanford. As you can see, many "nonprofits" have become a way to funnel money to politics. I'd like to get rid of "nonprofits," or to the corporate tax and estate tax which creates nonprofits. I think the good ones will survive. The substitution effect should outweigh the income effect.
3) Spending. Another tired argument is too much vs. too little spending. But look how our government manages to direct A to give to B, all the while keeping the tax and spending off the books.
What to do? Koenig suggests
There isn't a magic bullet. The dissolution of rule of law has to be met by, well, laws with rules in them.
...In conjunction with the Justice Department, the RMBS Working Group ["a coalition of federal and state regulators and prosecutors"] has reached multibillion-dollar settlements with essentially every major bank in America.The money does not go to any individual who demonstrably lost money as a result of the banks' actions. Instead,
...in April ... the Justice Department announced a $5.1 billion settlement with Goldman Sachs. In February Morgan Stanley agreed to a $3.2 billion settlement. Previous targets were Citigroup ($7 billion), J.P. Morgan Chase ($13 billion), and Bank of America,... $16.65 billion...
... a substantial portion is allocated to private, nonprofit organizations drawn from a federally approved list. Some groups on the list—Catholic Charities, for instance—are relatively nonpolitical. Others—La Raza, the National Urban League, the National Community Reinvestment Coalition and more—are anything but.
...Many of these groups engage in voter registration, community organizing and lobbying on liberal policy priorities at every level of government. They also provide grants to other liberal groups not eligible for payouts under the settlements...
...Most of the deals give double credit or more against the settlement amount for every dollar in “donations.” Bank of America’s donation list—the only bank to disclose exactly where it sends its money—shows how this benefits liberal groups. The bank has so far given at least $1.15 million to the National Urban League, which counts as if it were $2.6 million against the bank’s settlement. Similarly, $1.5 million to La Raza takes $3.5 million off the total amount of “consumer relief” owed by the bank...I wrote about this quite a while ago, when I was astonished to find the Federal Reserve going along with the DOJ and attorneys general, using its "safety and soundness" regulatory power to force banks to give money to activist groups.
As part of their “consumer relief” penalties, Bank of America and J.P. Morgan Chase must also pay a minimum $75 million to Community Development Financial Institutions—taxpayer-funded groups propped up by the Obama administration as an alternative to payday lenders. “Housing Counseling Agencies” also get at least $30 million. This essentially circumvents Congress’s recent decision to cut $43 million in federal funds routed to these groups through the Department of Housing and Urban Development.
The politicians who negotiate the settlements as part of the RMBS Working Group have also directed money to their supporters and states. Illinois’s Democratic attorney general Lisa Madigan announced she had secured $22.5 million from February’s Morgan Stanley deal for her state’s debt-ridden pension funds—a blatant payout to public unions. The deals with J.P. Morgan Chase, Bank of America and Citigroup yielded a further $344 million for both “consumer relief” and direct payments to pension funds.
New York hit the jackpot too. Attorney General Eric Schneiderman, also a Democrat and chairman of the RMBS Working Group, arranged for Morgan Stanley to fork over $400 million to New York nonprofits and $150 million to the state.
This story rings a few bells.
1) Regulation. What's wrong with regulation and economic law is not really "too much" or "too little" -- the standard old argument --but how it works -- the steady politicization of economic law and regulation, the decline in rule-of-law protections, the increasing use of the Administrative state to force political compliance.
Why didn't the banks fight? Why didn't they object to where their money was going? Why do they (except B of A) not even disclose their "charitable" contributions under the settlement? The government, now with the Fed along for the ride, can really make their lives difficult, of course! Hefty speaking fees to likely political officials, a strong revolving door to Washington, and keeping the payments secret are cheap investments to keep this sort of thing at bay.
2) Nonprofits. The public image of nonprofits are Red Cross, or Stanford. As you can see, many "nonprofits" have become a way to funnel money to politics. I'd like to get rid of "nonprofits," or to the corporate tax and estate tax which creates nonprofits. I think the good ones will survive. The substitution effect should outweigh the income effect.
3) Spending. Another tired argument is too much vs. too little spending. But look how our government manages to direct A to give to B, all the while keeping the tax and spending off the books.
What to do? Koenig suggests
... Rep. Bob Goodlatte (R., Va.) introduced a bill in April that would prevent government officials from enforcing settlements that funnel money to third parties, and it needs to gain wider traction with his colleagues. The political shakedowns disguised as public service must end.This does seem like a practice that Congress could end, this way or others. Any money paid in a legal settlement must go to people actually hurt by the illegal action, or to the US Treasury.
There isn't a magic bullet. The dissolution of rule of law has to be met by, well, laws with rules in them.
Asset Pricing Mooc, Resurrected
The videos, readings, slides/whiteboards and notes are all now here on my webpage. If you just want the lecture videos, they are all on Youtube, Part 1 here and Part 2 here.
These materials are also hosted in a somewhat prettier manner on the University of Chicago's Canvas platform. You may or may not have access to that. It may become open to the public at some point.
I'm working on the quizzes, problems, and exams, and also on finding a new host so you can have problems graded and get a certificate. For now, however, I hope these materials are useful as self-study, and as assignments for in-person classes. I found that sending students to watch the videos and then having a more discussion oriented class worked well.
What happened? Coursera moved to a new platform. The new platform is not backward-compatible, did not support several features I used from the old platform, and some of the new platform features don't work as advertised either. Neither the excellent team at U of C, nor Coursera's staff, could move the class to the new platform. And Coursera would not keep the old platform open. So, months of work are consigned to the dustbin of software "upgrades," at least for now.
Obviously, if you are thinking of doing an online course, I do not recommend that you work with Coursera. And make sure to write strong language about keeping your course working in the contract.
Micro vs. Macro
The cause of sclerotic growth is the major economic policy question of our time. The three big explanations are 1) We ran out of ideas (Gordon); 2) Deficient "demand," remediable by more fiscal stimulus (Summers, say) 3); Death by a thousand cuts of cronyist regulation and legal economic interference.
On the latter, we mostly have stories and some estimates for individual markets, not easy-to-use government-provided statistics. But there are lots of stories.
Here is one day's Wall Street Journal reading while waiting for a plane last Saturday:
1) Holman Jenkins,
3) You don't need a dentist to fill a cavity Whether (cheaper, less licensed) dental therapists will be allowed to provide basic services especially in poor areas where there are no dentists.
4) How Obama’s FDA Keeps Generic Drugs Off the Market
As these stories make clear, the problem is not benevolent but ham-handed interventionism. The problem, much tougher, is best described as "cronyism." A veneer of public purpose stifles markets, to drive profits to connected parties in return for political support.
Can we really screw up every single market but make it all up with "demand?" The "ideas" and "stimulus" approaches presume everything else in the economy is working just fine. Is investment really slow only because there are, fundamentally, just no good ideas to invest in any more?
The deeper economic issue is whether "macro" and "growth" outcomes really can be separated from "micro" distortions in each market.
On the latter, we mostly have stories and some estimates for individual markets, not easy-to-use government-provided statistics. But there are lots of stories.
Here is one day's Wall Street Journal reading while waiting for a plane last Saturday:
1) Holman Jenkins,
... unbridled rent seeking. That’s the term economists use for exercising government power to create private gains for political purposes.Channelling Jefferson,
Mr. Obama’s bank policy dramatically consolidated the banking industry, which the government routinely sues for billions of dollars, with the proceeds partly distributed to Democratic activist groups.
His consumer-finance agency manufactured fake evidence of racism against wholesale auto lenders in order to facilitate a billion-dollar shakedown.
His airline policy, urged by labor unions, led to a major-carrier oligopoly, with rising fares and profits.
His FDA is seeking to extinguish small e-cigarette makers for the benefit of Big Tobacco and Big Pharma (whose smoking-cessation franchise is threatened by cheap and relatively safe electronic cigarettes).
His National Labor Relations Board, by undermining the power of independent franchisees, is working to cartelize the fast-food industry for the benefit of organized labor.Summing up,
We could go on. Mr. Obama’s own Council of Economic Advisers complains about the increasing cartelization of the U.S. economy—as if this were not a natural output of regulation. In a much-noted Harvard Business Review piece this spring, James Bessen, an economist, lawyer and software entrepreneur, cites increased “political rent seeking” to explain the puzzle of rising corporate profits in the absence of job creation and economic growth.
The truth is, government playing neutral arbiter over the private economy doesn’t produce rents. A stable and predictable regulatory system produces only mingy or non-existent rents.2) Uber class action buffet
Federal judge Edward Chen on Thursday rejected a $100 million settlement in a class action alleging that Uber misclassified drivers as independent contractors. That’s a big pot of cash, but the judge says the ride-hailing company can be raided for billions more....Judge Chen complained, however, that the settlement required class members to drop all employment-related claims (e.g., minimum wage, rest and meal breaks and workers’ compensation) ...he settlement would have pre-empted at least 15 lawsuits for employment-related claims as well as cases “before various administrative bodies such as the NLRB.”...the settlement would have scotched lawsuits brought under California’s Private Attorneys General Act—known among businesses as the “bounty hunter law”—that lets private attorneys litigate labor, safety and health code violations on behalf of the state. California pays the lawyers’ fees and keeps 75% of the bounty. The state’s Labor & Workforce Development Agency carped that the statutory penalties against Uber could exceed $1 billion.Uber brings flexible employment to thousands, and dramatically better and cheaper rides to consumers and businesses. Whatever you think of contractors vs. employees, nothing in this improves productivity and economic growth, or encourages the needed massive investment towards self-driving ubers.
3) You don't need a dentist to fill a cavity Whether (cheaper, less licensed) dental therapists will be allowed to provide basic services especially in poor areas where there are no dentists.
4) How Obama’s FDA Keeps Generic Drugs Off the Market
One of the biggest factors fueling the angst over drug prices in the U.S. is that some older medicines that should be sold cheaply as generics are still priced very high, often owing to a dwindling number of generic competitors ..in recent years the Food and Drug Administration has imposed on generic firms many of the same costly requirements that the agency applies to branded-drug makers.
In 2003...we estimated that it cost less than $1 million for a firm to file a generic-drug application. ...Today, filing a generic application requires an average of about $5 million and can cost as much as $15 million....
For generics filed in 2009, the median review time exceeds three years. Yet generics launched in 2015 took about four years for the FDA to approve, since less than 2% of applications were approved on their first submission.
A new FDA draft regulation...would force the generics to clutter their drug labels with defensive advisories to avoid “failure to warn” lawsuits. Legal fees stemming from the regulation would add over $5 billion to annual health-care costs, rising to $8.6 billion by 2024, ...And this is just one morning's reading of one paper's opinion section while sipping coffee at the airport. Even the New York Times is waking up to the apres-Obama regulatory deluge.
As these stories make clear, the problem is not benevolent but ham-handed interventionism. The problem, much tougher, is best described as "cronyism." A veneer of public purpose stifles markets, to drive profits to connected parties in return for political support.
Can we really screw up every single market but make it all up with "demand?" The "ideas" and "stimulus" approaches presume everything else in the economy is working just fine. Is investment really slow only because there are, fundamentally, just no good ideas to invest in any more?
The deeper economic issue is whether "macro" and "growth" outcomes really can be separated from "micro" distortions in each market.
The new voodoo
Scott Sumner sums up contemporary stimulus proposals well
...Old hydraulic Keynesianism from the 1960s was already a pretty implausible model. But what's happened since 2009 involves not just one, but at least five new types of voodoo:
1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD.
2. The claim that extended unemployment benefits---paying people not to work---will lead to more employment, by boosting AD.
3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible.
4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity.
5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ?
In all five cases there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against. There were 5 attempts to push wages higher in the 1930s, and all 5 failed to spur recovery. Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians. The austerity of 2013 failed to slow growth, contrary to the predictions of Keynesians. Britain had perhaps the biggest budget deficits of any major economy during the Great Recession, job growth has been robust, and yet productivity is now actually lower than in the 4th quarter of 2007.
Interview, talk, and slides
I did an interview with Cloud Yip at Econreporter, Part I and Part II, on various things macro, money, and fiscal theory of the price level. It's part of an interesting series on macroeconomics. Being a transcript of an interview, it's not as clean as a written essay, but not as incoherent as I usually am when talking.
On the same topics, I will be giving a talk at the European Financial Association, on Friday, titled "Michelson-Morley, Occam and Fisher: The radical implications of stable inflation at the zero bound," slides here. (Yes, it's an evolution of earlier talks, and hopefully it will be a paper in the fall.)
And, also on the same topic, you might find useful a set of slides for a 1.5 hour MBA class covering all of monetary economics from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That too should get written down at some point.
The talk incorporates something I just figured out last week, namely how Sims' "stepping on a rake" model produces a temporary decline in inflation after an interest rate rise. Details here. The key is simple fiscal theory of the price level, long-term debt, and a Treasury that stubbornly keeps real surpluses in place even when the Fed devalues long-term debt via inflation.
Here is really simple example.
Contrast a perpetuity with one period debt, and a frictionless model. Frictionless means constant real rates and inflation moves one for one with interest rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The fiscal theory equation, real value of government debt = present value of surpluses, says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond price, B is the number of bonds outstanding, and s are real primary surpluses. For one period debt Q=1 always. (If you don't see equations above or picture below, come back to the original here.)
Now, suppose the Fed raises interest rates, unexpectedly, from \(i\) to \(i^\ast\), and (really important) there is no change to fiscal policy \(s\). Inflation \(P_{t+1}/P_t\) must jump immediately up following the Fisher relation. But the price level \(P_t\)might jump too.
With one period debt, that can't happen -- B is predetermined, the right side doesn't change, so \(P_t\) can't change. We just ramp up to more inflation.
But with long-term debt, any change in the bond price Q must be reflected in a jump in the price level P. In the example, the price of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
so if we were expecting P under the original interest rate i, we now have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the interest rate rises permanently from 5% to 6%, a 20% rise, the price level jumps down 20%. The sticky price version smooths this out and gives us a temporary disinflation, but then a long run Fisher rise in inflation.
Do we believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt, so all the Fed can do is rearrange the price level over time.
But it tells us this is the important question -- the dynamics of inflation following an interest rate rise depend crucially on how we think fiscal policy adjusts. That's a vastly different focus than most of monetary economics. That we're looking under the wrong couch is big news by itself.
Even if the short-run sign is negative, that is not necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model, and this one, is Fisherian in the long run -- higher interest rates eventually mean higher inflation. Like Friedman's example of adjusting the temperature in the shower, rather than fiddle with the knobs it might be better to just set it where you want it and wait.
On the same topics, I will be giving a talk at the European Financial Association, on Friday, titled "Michelson-Morley, Occam and Fisher: The radical implications of stable inflation at the zero bound," slides here. (Yes, it's an evolution of earlier talks, and hopefully it will be a paper in the fall.)
And, also on the same topic, you might find useful a set of slides for a 1.5 hour MBA class covering all of monetary economics from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That too should get written down at some point.
The talk incorporates something I just figured out last week, namely how Sims' "stepping on a rake" model produces a temporary decline in inflation after an interest rate rise. Details here. The key is simple fiscal theory of the price level, long-term debt, and a Treasury that stubbornly keeps real surpluses in place even when the Fed devalues long-term debt via inflation.
Here is really simple example.
Contrast a perpetuity with one period debt, and a frictionless model. Frictionless means constant real rates and inflation moves one for one with interest rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The fiscal theory equation, real value of government debt = present value of surpluses, says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond price, B is the number of bonds outstanding, and s are real primary surpluses. For one period debt Q=1 always. (If you don't see equations above or picture below, come back to the original here.)
Now, suppose the Fed raises interest rates, unexpectedly, from \(i\) to \(i^\ast\), and (really important) there is no change to fiscal policy \(s\). Inflation \(P_{t+1}/P_t\) must jump immediately up following the Fisher relation. But the price level \(P_t\)might jump too.
With one period debt, that can't happen -- B is predetermined, the right side doesn't change, so \(P_t\) can't change. We just ramp up to more inflation.
But with long-term debt, any change in the bond price Q must be reflected in a jump in the price level P. In the example, the price of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
so if we were expecting P under the original interest rate i, we now have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the interest rate rises permanently from 5% to 6%, a 20% rise, the price level jumps down 20%. The sticky price version smooths this out and gives us a temporary disinflation, but then a long run Fisher rise in inflation.
Do we believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt, so all the Fed can do is rearrange the price level over time.
But it tells us this is the important question -- the dynamics of inflation following an interest rate rise depend crucially on how we think fiscal policy adjusts. That's a vastly different focus than most of monetary economics. That we're looking under the wrong couch is big news by itself.
Even if the short-run sign is negative, that is not necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model, and this one, is Fisherian in the long run -- higher interest rates eventually mean higher inflation. Like Friedman's example of adjusting the temperature in the shower, rather than fiddle with the knobs it might be better to just set it where you want it and wait.
Clinton Plan
The WSJ asked me to review the Hillary Clinton economic plan, motivated by her August 11 speech introducing it. The Op-Ed is here.
I read a good deal of the "plan" on hillaryclinton.com. What I discovered is that there is so much plan that there really isn't any plan at all.
For example, follow me down to the Fact sheet at the bottom of the website to figure out just what the "infrastructure" plan is about. Some snippets:
I read a good deal of the "plan" on hillaryclinton.com. What I discovered is that there is so much plan that there really isn't any plan at all.
For example, follow me down to the Fact sheet at the bottom of the website to figure out just what the "infrastructure" plan is about. Some snippets:
Clinton will make smart, targeted, and coordinated investments to increase capacity, improve road quality, and reduce congestion
Clinton will prioritize and increase investments in public transit to connect Americans to jobs, spur economic growth, and improve quality of life in our communities. And she will encourage local governments to work with low-income communities to ensure that these investments are creating transit options that connect the unemployed and underemployed to the jobs they need. She will also support bicycle and pedestrian infrastructure
Clinton will make smart, coordinated investments that upgrade our aging rail tunnels and bridges, expand congested highway corridors, eliminate dangerous at-grade railway crossings, and build deeper port channels to accommodate the newest and largest cargo ships. Clinton will also focus on vital “intermodal” transfer points between trucks, rail, and ships—including the “last-mile connectors” between different modes, like the local roads that connect highways to ports. She is committed to initiating upgrades of at least the 25 most costly freight bottlenecks by the end of her first term. (bold italics in the original)
The Federal Aviation Administration is currently pursuing a “NextGen” upgrade program... But these efforts have fallen chronically behind schedule and well short of expectations. Clinton will get this crucial program back on track and ensure that it is managed effectively and with accountability.
Clinton will also invest in building world-class American airports...with reliable and efficient connections to mass transit. ...
committing that by 2020, 100 percent of households in America will have access to affordable broadband that delivers world-class speeds sufficient to meet families’ needs.
A wide-ranging system of advanced energy fueling stations for the 21st century fleet. A network of roadway sensors capable of alerting drivers to a dangerous icy patch a mile ahead.
Clinton will invest in creating a world-leading passenger rail system to meet rapidly growing demand and build a more mobile America.
...Clinton’s plan will modernize our pipeline system, increase rail safety, and enhance grid security. It will also build new infrastructure to power our economic future and capture America’s clean energy potential. ...
We need a bold agenda to revitalize our aging water infrastructure and make it more sustainable and energy efficient. Clinton will work to harness both public and private resources to support these efforts.
Modernizing our dams and levees ...our efforts to maintain these critical structures are haphazard and under-resourced ...We need to substantially increase funding to inspect these structures, bring them into good repair, and remove them where appropriate. ...
Clinton will support efforts to increase dams’ capacity to deliver affordable and reliable electricity while reducing carbon pollution.And it goes on like this.
The positive view of all this is that someone running the vast American bureacracy should have a detailed plan for what they want that bureuacracy to do. Well, there is plenty of detail here, and it's a good bet that Donald Trump has never thought about traffic jams at intermodal transfer facilities.
So how can I say there is no "plan?"
The other job of an Administration is to set priorities, which means something has to come second. This is what Clinton will propose in her first 100 days, and what she will accomplish in 5 years, with $50 billion a year? You must be kidding. Turning Amtrak alone into a "world-leading passenger rail system" would swallow her $275 billion
There are no numbers here anywhere. The $275 billion is clearly just a made up number that sounds sortof big but not so big as to attract tax-and-spend criticism. Because that is the last number in the whole document. In my rough calculation, she blew $275 billion by the first paragraph. As a consequence, analysts who calculate how many "jobs" the "Clinton plan" will create are just making it up too.
There is no timeline or process The President of the US is not a King or dictator who waves her hands and upgrades at intermodal transfer facilities just happen. The president appoints cabinet secretaries, who oversee a bureaucracy, which must, by law conducts proper cost benefit analysis, follow the Administrative Procedures Act, submit plans for EPA review, and so on.
The job of an Administration is also to understand and figure out how to surmount the institutional barriers that have stopped all of these fine and very old ideas from happening before. If Governor Brown and President Obama have not been able to lay a foot of high-speed track in 8 years, how is she going to do so much better?
As I mentioned in the oped, it fails to ask, why are these things problems in the first place? Apparently, traffic jams where trucks unload trains happen when the President is not, herself, there to run things. It's an implicitly damning condemnation of her predecessor -- he was either not studious enough to do his homework to this detail, or insufficiently "committed to initiating upgrades""at costly freight bottlenecks"
In my world, things go wrong when markets go wrong, or the structures of government fail. In this world, things happen only on the will and attention of the President, including traffic jams. The people in charge now are either idiots, Republicans blocking progress, or just insufficiently guided by the great leader on top. One need do not analysis of why things are going wrong, just "fight" to fix them.
This "plan" implies a stinging rebuke of her predecessor, when you think about it. If all it takes is the force of Hllary's will to accomplish all this in 5 years for $275 billion, just why did he fail in 8 years with about $10 trillion? Maybe, just maybe, President Obama was trying darn hard, using the same methods, and came up short for a reason?
There is, literally, no plan. I looked hard through the website, and this "fact sheet" is the bottom level for infrastructure. Yet it keeps referring to what "the plan" will do, with no citations or links. That's all over the website. Thousands of pages talk about the plan, but no pages are, grammatically the plan itself.
Lost in details And this is just one fact sheet, 6 levels deep in the website. You get here from (click on bold)
1) Hllaryclinton.com
2) About / Act / Issues / Shop / More / Español / Donate
3) All Issues / Economy and jobs / Education / Environment / Health / Justice and equality / National security
4) A fair tax system / Jobs and Wages / Paid family and medical leave .../ Fixing America's infrastructure / ... (17 boxes in all)
5) As president, Hillary will:
- Repair and expand our roads and bridges....
- Lower transportation costs and unlock economic opportunity by expanding public transit options. ...
- Connect all Americans to the internet....
- Invest in building world-class American airports and modernize our national airspace system. ..
- Build energy infrastructure for the 21st century. ..
And finally this Fact sheet. Transport is actually one of the best thought out of all the tabs.
The point, if each such fact sheet promises that Mrs. Clinton is "committed" to details as fine as solving intermodal freight bottlenecks (the bold italics really got to me), across all 17 tabs of economic policy x 7 tabs of policy areas, she and her administration will get nothing done.
In sum, I think the picture I painted is unavoidable. Clinton and her team are well meaning, but this document (the website) displays an unbelievable naivete about how American government works. Every possible "policy solution" to every perceived problem in America got thrown in, with no thought of where the problems came from, no acknowledgement that good people have been trying hard for years, and that American government has an important set of checks and balances and a policy process. No, she will wave her hand and all will be well.
Perhaps she and her team are wiser, and this is just a campaign document designed to please media analysts and voters. But if that is the case, it displays an unbelievable disdain for the intelligence of the media and voters she wishes to attract.
Red Tape
The thousands of pages of the website do address how Mrs. Clinton will succeed where President Obama failed: She will "break through washington gridlock" and get rid of "red tape." Period.
This had me guffawing. Really? That's all it takes? Too bad President Obama never had that idea! (He did, and had an office devoted to the project. With little success.)
Her speech made some progress on just how she will break through "gridlock":
What we need is serious, steady leadership that can find common ground and build on it based on hard but respectful bargaining.
Leadership that rises above personal attacks and name calling, not revels in it....
ogether, we'll make full use of the White House's power to convene. We'll get everyone at the table – not just Republicans and Democrats, but business and labor leaders...academics and experts... and, most importantly, all of you. I want working people to have a real say in your government again.
That means we have to get unaccountable money out of our politics, overturn Citizens United, and expand voting rights, not restrict them.
Starting even before the election, we will bring together leaders from across our economy and our communities for meetings on jobs, American competitiveness, and working families.
If Mrs. Clinton wants to listen, and reach out to Republicans, she doesn't need to "convene" everyone at the table. And least of all, she doesn't need more policy-wonks stuffing her campaign website with every little idea that public policy schools and liberal think tanks dream up. Paul Ryan's "a better way" plan is right there on the internet. She should get a good glass of wine, sit down with that plan, pick 5 things she can live with, and go with them or see how to meet them half way.
This should be taken as constructive and nonpartisan criticism. Do not mistakenly imply anything about Mr. Trump in here. Mrs. Clinton is daily more likely to be our next president. I hope dearly that she could make some progress in coming to compromise on some of the simple and obvious steps that our country needs to take, steps pretty much every bipartisan commission agrees on -- tax and immigration reform, yes, infrastructure, reform of much regulatory process, and so on. She doesn't have to agree on policy, but an approach much more like the famous Shultz memo to Reagan -- written in November! -- is much more likely to succeed.
Sadly, though, this seems like a road to four more years of gridlock.
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