Sad CEA Letter

And just as I was getting all weepy about how great and a-political, obejective, non-partisan and all that the CEA is, along comes an open letter from past CEA chairs Alan Krueger, Austan Goolsbee, Chirstina Romer, and Laura D'Andrea Tyson to Senator Sanders, to restore my cynicism.

The heart of the letter is worthy, and commendable: to call out the fact that Senator Sander's campaign is making promises that don't add up, beyond even the usual stretches of campaign rhetoric from both sides.

But read

 When Republicans have proposed large tax cuts for the wealthy..

Hmm. I wonder if Republicans would characterize their proposals that way? How many speeches have you heard saying "we want  large tax cuts for the wealthy!" No, they say they want tax reform to reduce distorting marginal rates and rampant cronyism.

Really, dear colleagues and friends, how would you respond if Republican CEA chairs were to write a similar letter addressing the shortcomings of Trump's plan that started,

When Democrats have proposed incentive-killing growth-killing marginal tax rate increases with lots of exemptions for their donors... 

and goes on to trumpet their sober-minded analysis of the plans, would you be inspired to plaud their "reputation" for objective evidence-based analysis?

So this is just a poke in the eye, a repetition of partisan Democratic campaign rhetoric, stirring up the base by bulverizing the other party.

Why is Washington so polarized? Because even once-respectable academic economists, transported to Washington, cannot stop themselves from this sort of schoolyard taunting, tribalistic attacks, and repetition of their bosses' propaganda.


Moreover,

For many years, we have worked to make the Democratic Party the party of evidence-based economic policy.

Largely as a result of efforts like these, the Democratic party has rightfully earned a reputation for responsibly estimating the effects of economic policies.

our reputation as the party of responsible arithmetic.

Oh. I thought you were simply doing what all good economists, do, all good CEA chairs do, and you were working to make evidence-based policy a routine feature of all government policy under all administrations. I thought you were working for the benefit of the country, not just the Democratic party.

Worst of all, it's counterproductive. Once you start repeating propaganda -- "tax cuts for the wealthy" -- once you start schoolyard taunts -- the CEA chairs who serve under Republicans are apparently not even capable of arithmetic --  the other side, feeling exactly the intended sling of insult, turns off. You do not gain a reputation for evidence-based policy, you gain a reputation for pandering to political opportunity, and all your "evidence" is immediately suspect of the same partisan bias.

So I don't know in whose eyes the "Democratic party has rightfully earned a reputation for responsibly estimating the effects of economic policies." Among Democrats? Sure. But they often don't care a lot about evidence, as in, say GMO foods or nuclear power. Among Republicans? That's where it might count. I don't go to fancy Republican cocktail parties in DC, but I sort of doubt the chatter goes "well, those Democrats, they have a lot of looney ideas, but you have to hand it to them, they always stick with the science and the evidence."  Evidence is only evidence if it is objective.

So if there ever was such a reputation, you four just threw it away with "large tax cuts for the wealthy" and the insinuation that Republicans can't even add. Instead, you reinforced what I sense your party's reputation actually is among Republicans. And then you're surprised when they don't play nice.

CEA History

The Council of Economic Advisers has released a history of the CEA on its' 70th anniversary, as  Chapter 7 of the  Economic Report of the President. This piece is very interesting for economists interested in policy.

It's a nice reminder on how much economic policy ideas have changed. In the late 1940s, when the CEA was set up, fiscal policy was everything. Solow's growth model had not been invented, let alone Romer's. Monetary policy was a twinkle in Milton Friedman's eye. Adam Smith had more or less been forgotten. Economic policy was widely thought to consist of just setting the right level of fiscal stimulus, let multipliers work their magic, to achieve "full employment" and economic growth. The piece tracks well the rediscovery of microeconomics and regulation, as well as the shifts in macroeconomic thinking.

It reminds us how much the stage has changed. In the early years there were really no economists working elsewhere in government, and there were no think tanks. Now every agency has a chief economist and a staff, and the CEA isn't (!) the only game in town for producing policy-oriented research. Its role has changed as a consequence.

The CEA has long had many roles,  adviser, calculator of numbers, cheerleader for the Administration's policies, spinner for the Sunday talk shows, and interagency warrior.

One of its most important and least appreciated roles is just to stop silly stuff.

Joe Stiglitz:

 the money saved from just one of the many bad projects the CEA had helped stop ... would have been enough to provide us with a permanent endowment

Ben Bernanke, even better:

Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.

Some examples

...the Heller Council argued against a proposal during the Kennedy Administration to use nuclear explosives to widen the Panama Canal. In the Nixon Administration, CEA played a leading role in the analysis that led to the conclusion that the government should not subsidize the development of a supersonic transport or SST plane, dubbed the “sure-to-be-subsidized transport” (Schultze 1996). Under President Ronald Reagan, CEA participated in a Gold Commission, which investigated the feasibility of returning to the gold standard, and ultimately advised against doing so. 

In my brief time at CEA while very young I got to see this role up close.  There would be an interagency meeting on something like tariffs and quotas for goose down. Every other agency would show up at a meeting all for it -- defense wants to make sure there are American suppliers of American goose down from patriotic American Geese, so our boys fighting the Russkies in Canada someday will stay warm. The American Goose Down production board is screaming about unfair dumping from China. The Goose Feather Plucker's union is all for it, along with the merchant marine -- under the Jones Act, American geese must travel on American made and staffed ships. State is all for it too, so long as we can carve an exception for special down from Berlin. The Congressional liaison says the Congressman from the one county in the country that makes goose down is screaming about it and will cause all sorts of trouble if we don't do it. And so on and so forth. It was the CEAs lonely role to stick up for the poor consumer who might want a cheap warm jacket. (Note: I'm mostly making all this up as a composite of a large number of different cases.)

There has always been a tension, how much the CEA is there to provide disinterested advice, and how much it is there to cheerlead the Administration's policies, though many of those are at least limited by political considerations, if not downright driven entirely by politics.  Just how much time should the chair spend on Sunday talk shows spinning the latest numbers to show how great the Administration's policies are?

As many commentators and former CEA chairs have observed, there can be a tension between CEA’s duty to advance the President’s agenda and its responsibility to provide expert economic advice. 

Important: You can't be pure and also effective:

CEA chairs and members need to be able to operate effectively within a political environment without it affecting the integrity of their economic advice. 

The Chapter offers good advice, coming from long experience:

Former CEA chairs, members, and staff offer several specific pieces of advice as to how to successfully strike this balance: they advise that CEA should not publicly advocate for policies that are not supported by economic analysis, and that CEA should stick to giving economic advice, not political advice. CEA’s comparative advantage is economics, 

A former chair told me a great story of offering a president political advice, only to be told "you stick to the economics, and let me do the politics."

A big lesson is not to become an administrative agency:

Others advise that the Council should not get too involved in policy coordination. ... One episode that illustrates this lesson occurred during the Johnson Administration, when CEA was responsible for the day-to-day administration of wage-price guideposts to combat inflation.

Stuart Eizenstat, President Carter’s domestic policy adviser, argues that “[t]he CEA cannot provide both detached, Olympian economic advice and become enmeshed in the daily, inter-agency compromises and political log-rolling” (1992).

In 1993, President Clinton created a National Economic Council inside the White House. It seemed to me a sort of parallel CEA. Governments often don't cancel an agency, they just create a new parallel one, and let the old one rot. The report handles this question carefully, but seems to suggest that the arrangement is working, with the NEC allowing the CEA to do less political work and better economic work:

Since 1993, the National Economic Council has been responsible for coordinating economic policymaking. These arrangements have largely served to augment CEA’s effectiveness by permitting it to focus on providing economic advice and analysis and giving the Council greater exposure to the President

The CEA is, rather unabashedly, the representative of the economics profession in the government. The chapter covers it well.

The final function of CEA is to engage with the economics community, by staying abreast of the latest academic research and by sharing new insights with policymakers, and in turn, by communicating the administration’s actions and plans to the economics community. This function helps to support the administration’s efforts to develop economic policies and to articulate and advance the President’s agenda. While the academic character of CEA may not have been originally intended by Congress when it created CEA, this engagement has arguably made the Council a more effective and durable institution.

I'm a little leery of this paragraph. I think the distance from research to policy might productively be a little greater -- let's make sure the latest research is solid first. And the vision that the CEA is there to sell a political agenda to economists is a bit frightening.

But inaugurated by the CEA, there has been a much more active participation by academic economists in policy making. I think policy is better for it -- or at least not as catastrophically bad as it might be otherwise -- and so is academia.  Academics are also taking over from bankers and politicians at the Fed, with positive impact in my view.  Marty Feldstein's box speaks to this issue nicely.

A nice summary:

Many of CEA’s contributions are due to its unique institutional structure: that it is a small organization with no regulatory authority of its own, few direct operational responsibilities, and populated by academic economists. Yet its contributions are also dependent on the ability of its staff to balance operating effectively in a necessarily political environment without being overly influenced by politics, and to be effective in advocating for their positions while providing objective economic advice. All in all, given the divergent objectives reflected in the Employment Act of 1946, CEA’s turbulent early years, and its unusual institutional structure, CEA has proven to be a durable and effective advocate for the public interest.

A small personal note: I got the lucky chance to be a junior staff economist -- basically an RA -- while I was in graduate school. It was a great experience. I worked on a new project every two weeks, largely under Bill Poole. Unlike my academic training, we quickly went from idea, to data, to report or memo and on to the next. Bill taught me a lot. I saw quite a bit of how policy is made. I learned that most of the people in Washington are really smart, hard working, informed, and public spirited. It cured a lot of cynicism.  And it got me to work on much better ideas for my research, to break out of the literature-driven world 3d year graduate students live in, and to make sure my research ideas matter to the larger world.

If you get the chance, go.

An don't worry about politics. At the staff level, it's pretty a-political. In fact, working for an administration whose general philosophy you disagree with would be good for you. (See Martin Feldstein's little essay on this point. Quite a few of the Reagan-era staff were democrats.)

Update: "On February 11, the Hutchins Center on Fiscal and Monetary Policy at Brookings marked this anniversary by examining the ways the CEA and other economists succeed and fail when they set out to advise elected politicians and tap the expertise of some of the “exceptionally qualified” economists who have chaired the Council over the past four decades."

Video and other links here.  And here is their photo from the event, with many past CEA chairs and economists.

Source: Brookings institution. 

Brooks v. Krugman

I usually try to steer away from Presidential politics, and especially from commentators' habit of analyzing character. But last week's New York Times had two particularly interesting columns that invite breaking the rule: "I Miss Barack Obama" by David Brooks and "How America Was Lost" by Paul Krugman.

As we contemplate a Clinton, Sanders, Trump, or Cruz presidency, we may well continue the pattern that each president's main accomplishment is to burnish nostalgia for his (so far) predecessor. Brooks is feeling that.

And he's right. Say what you will about policy, the Obama Administration has, as Brooks points out,  been staffed by people of basic personal integrity and remarkably scandal-free. (In the conventional sense of "scandal." I'm sure some commenters will contend that the bailouts, Lois Lerner, the EPA, and Dodd-Frank and Obamacare are "scandals," but that's not what we're talking about here.) On economic issues, his main advisers have been thoughtful, credentialed, mainstream Democrats. Obama's speeches on many topics have, as David says, been full of "basic humanity," even if one disagrees with his solutions.


Brooks finishes,

No, Obama has not been temperamentally perfect. Too often he’s been disdainful, aloof, resentful and insular. 

Brooks leaves out many faults, including a tendency to hector and demonize opponents and a desire for quick spin successes.  Demonizing opponents is simply ineffective in getting them to see things your way, and has made polarization much worse. Too much short term spin control causes long term damage -- think of the Syrian line in the sand, or the Benghazi cover story.

But recognize what David is doing: Bending over backwards to be nice. Trying to build a  bridge. Finding common ground. Listening. Appreciating an opponent's good intentions and motivations, which lets us move on to craft solutions. Overlooking faults. We'll need a lot of that, and it requires letting festering wounds heal. Because

...there is a tone of ugliness creeping across the world, as democracies retreat, as tribalism mounts, as suspiciousness and authoritarianism take center stage.

Krugman's column is an interesting contrast. It offers a great display of just how our politics got so bad.  It starts well:

How did we get into this mess?

At one level the answer is the ever-widening partisan divide. Polarization has measurably increased in every aspect of American politics, from congressional voting to public opinion, with an especially dramatic rise in “negative partisanship” — distrust of and disdain for the other side.

That would be a terrible thing, wouldn't it. It would be terrible if, for example, people said "distrustful and disdainful" things like

only one of our two major political parties has gone off the deep end.

Polarization and triablism mount when one passes on conspiracy theories and plain untruths. Such as

Democrats don’t routinely deny the legitimacy of presidents from the other party; Republicans did it to both Bill Clinton and Mr. Obama.

"Democrats" have never gone unhinged about who "stole an election," repeating endlessly that President Bush was not legitimate?  It's such a whopper, I don't understand how Krugman thinks his readers (and editors) wouldn't notice it.  Especially given how much coverage Bush v. Gore is getting in the wake of Justice Scalia's death. I can only hope it's a delicious tongue-in-cheek self-parody.

And only a lunatic fringe of Republicans seriously challenged President Obama's legitimacy. Attempting to tar a whole, varied group with a lunatic fringe is a classic demonization tactic.

Or the column's premise:

Republicans have more or less unanimously declared that President Obama has no right even to nominate a replacement for Mr. Scalia

That is also simply factually incorrect. "Republicans" -- not notice tarring  half the population with the subject of the sentence, rather than the potentially correct "some Republican senators" -- are more or less unanimously enamored of one thing, the Constitution. Every statement of every Republican Senator I have read recognizes that the President has every right to nominate a replacement. And they have the right to vote on it. Or not. And all of this is so clearly pre-negotiation posturing it's silly to take seriously anyway.

Krugman's column strikes me therefore as a great example of the polarization process. Right now, the obvious thing for both sides to do is to reach out to find a consensus peacemaker nominee, someone who will preserve the most important parts of what each side wants. Perhaps they could agree to someone who will keep the social advances like gay marriage, abortion rights, and immigration rights, but have a sharper eye to economic freedom and limited government. Such a nominee would be a great capstone for President Obama's term, rather than a bitter fight with a blocked senate. And all sides might be a bit afraid of President Trump/Cruz or Sanders/Clinton making the next nomination at the beginning of a term.

But no, Krugman prefers to assume the fight will be lost and to fulminate in ex-ante demonization:

 The G.O.P.’s new Supreme Court blockade is, fundamentally, in a direct line of descent from the days when Republicans used to call Mr. Clinton “your president.” 

And the Bork nomination, and the Clarence Thomas hearings... well, those never happened.

So Krugman's is a great column in the end. Read it closely and it shows very effectively just what is wrong with our political system: Demonization -- there is good and there is evil, and everything that's wrong comes from the evil side; Mendacity (a good Krugman word) -- passing on known falsehoods; Tribalization -- everything bad comes from "Republicans," a uniform army of orcs.

Brooks ends

Obama radiates an ethos of integrity, humanity, good manners and elegance that I’m beginning to miss, and that I suspect we will all miss a bit, regardless of who replaces him.

Well, at least who replaces him of the current front-runners. Let us hope the electorate wakes up soon to value these characteristics, together with basic competence, in their candidates and in their opinion writers.

The Libertarian Case for Bernie Sanders

The Libertarian Case for Bernie Sanders, from Will Wilkinson at the Niskanen Center. Yes, Denmark scores much above the US on ease of doing business indices. An interesting case. A welfare state is not necessarily a politicized regulatory state, with strong two-way political-industry capture. The latter may be more dangerous economically.  Those who wish to eat golden eggs have an incentive to let the Goose grow fat.

Update: Megan McArdle brilliantly demolishes the case.  "It's fun, but not convincing." My view as well.

Policy Rules Legislation

Allan Meltzer and John Taylor organized a Statement on Policy Rules Legislation signed by quite a few famous economists. John's blog explains in some detail.

Stating a rule or "strategy" about what things the Fed will react to also will help the Fed to pre-commit to things it will not react to. If the Fed says they react to inflation and unemployment, that means you should not expect it to react to stock prices, oil prices, exchange rates, and so forth.

Ms. Yellen's testimony and monetary policy report happen Feb 10 and 11. It will be interesting to hear the discussion of these issues. I hope that discussion includes not just legislation, but whether the Fed should follow something like this strategy communication on its own, in order to limit pressures for the Fed to do unwise things.

Gordon on growth 2

PBS covers Bob Gordon's The Rise and Fall of American Growth.



[Embedded video. These aren't picked up when other sources pick up the blog, so come back to the original if you don't see the video.]

PBS and Paul Solman did a great job, especially relative to the usual standards of economics coverage in the media.  OK, not perfect -- they livened it up by tying it to partisan politics a bit more than they should have, though far less than usual.

I don't (yet, maybe) agree with Bob. I still hope that the mastery of information and biology can produce results like the mastery of electromagnetism and fossil fuels did earlier. I still suspect that slow growth is resulting from government-induced sclerosis rather than an absence of good ideas in a smoothly functioning economy.  But Bob has us talking about The Crucial Issue: long term growth, and its source in productivity. The 1870-1970 miracle was not about whether the federal funds rate was 0.25% higher or lower. And the issue is not about opinions, like the ones I just offered, but facts and research, which Bob offers.

The issue of future long-term growth is tied with the issue of measurement, something else that Bob has championed over the years. GDP is well designed to measure steel per worker. Information, health and lifespan increases are much more poorly measured. This is already a problem in long-term comparisons. In the video, Bob points to light as the greatest invention. The price of light has fallen by a factor of thousands since the age of candles, to the point where light consumption is a trivial part of GDP. It's a worse problem as all the great stuff becomes free. I suspect that we'll have to try to measure consumer surplus not just the market value of goods and services.

And congratulations to Bob. The economics profession tends to focus on the young rising stars, but he offers inspiration that economists can produce magnum opuses of deep impact at any point in a career.

Disclosure: I haven't read the book yet, but it is on top of the pile. More when I finish. Ed Glaeser has an excellent review.

Update: Tyler Cowen's review, in Foreign Affairs

Tax Oped -- full version

Source: Wall Street Journal

An Oped at the Wall Street Journal, "Here's what genuine tax reform looks like." I posted the teaser a month ago, now I can post the whole thing.

Left and right agree that the U.S. tax code is a mess. The men and women running for president in 2016 are offering reform plans, and proposals to fix the code regularly surface in Congress. But these plans are, and should be, political documents, designed to attract votes. To prevent today’s ugly bargains from becoming tomorrow’s conventional wisdom, we should more frequently discuss the ideal tax structure.

The first goal of taxation is to raise needed government revenue with minimum economic damage. That means lower marginal rates—the additional tax people pay for each extra dollar earned—and a broader base of income subject to tax. It also means a massively simpler tax code.


In my view, simplification is more important than rates. A simple code would allow people and businesses to spend more time and resources on productive activities and less on attorneys and accountants, or on lobbyists seeking special deals and subsidies. And a simple code is much more clearly fair. Americans now suspect that people with clever lawyers are avoiding much taxation, which is corrosive to compliance and driving populist outrage across the political spectrum.

What would a minimally damaging, simple, fair tax code look like? First, the corporate tax should be eliminated. Every dollar of taxes that a corporation seems to pay comes from higher prices to its customers, lower wages to its workers, or lower dividends to its shareholders. Of these groups, wealthy individual shareholders are the least likely to suffer. If taxes eat into profits, investors pay lower prices for less valuable shares, and so earn the same return as before. To the extent that taxes do reduce returns, they also financially hurt nonprofits and your and my pension funds.

With no corporate tax, arguments disappear over investment expensing versus depreciation, repatriation of profits, too much tax-deductible debt, R&D deductions, and the vast array of energy deductions and credits.

Second, the government should tax consumption, not wages, income or wealth. When the government taxes savings, investment income, wealth or inheritance, it reduces the incentive to save, invest and build companies rather than enjoy consumption immediately. Taxes on capital gains discourage people from moving or reallocating capital toward their most productive uses.

Recognizing the distortion, the federal government provides a complex web of shelters, including IRAs, Roth IRAs, 527(b), 401(k), health-savings accounts, life-insurance exemptions, and the panoply of trusts that wealthy individuals use to shelter their wealth and escape the estate tax. If investment isn’t taxed, these costly complexities can disappear.

All the various deductions, credits and exclusions should be eliminated—even the holy trinity of tax breaks for mortgage interest, charitable donations and employer-provided health insurance. The extra revenue, over a trillion dollars annually, could finance a large reduction in marginal rates. This step would also simplify the code and make it fairer.

Imagine that Congress proposed to send an annual check to each homeowner. People with high incomes, who buy expensive houses, borrow lots of money or refinance often, would get bigger checks than people with low incomes, who buy smaller houses, save up more for down payments or pay down their mortgages. There would be rioting in the streets. Yet that is exactly what the mortgage-interest deduction accomplishes.

Similarly, suppose Congress proposed to match private charitable donations. But rich people would get a 40% match, middle class people only 10%, and poor people nothing. This is exactly what the charitable deduction accomplishes.

Zeroing out deductions, credits, and corporate and investment taxes matters—for permanence, for predictability and for simplicity. If the corporate rate is drastically reduced, or if deductions are capped, it seems that the economic distortions go away. But the thousands of pages of tax code are still in place, the army of lawyers and accountants and lobbyists is still in place, and the next administration will itch to raise the caps, and the rate.

Why is tax reform paralyzed? Because political debate mixes the goal of efficiently raising revenue with so many other objectives. Some want more progressivity or more revenue. Others defend subsidies and transfers for specific activities, groups or businesses. They hold reform hostage.

Wise politicians often bundle dissimilar goals to attract a majority. But when bundling leads to paralysis, progress comes by separating the issues. Thus, we should agree to first reform the structure of the tax code, leaving the rates blank. We will then separately debate rates, and the consequent overall revenue and progressivity.

Consumption-based taxes can be progressive. A simplified income tax, excluding investment income and allowing a full deduction for savings, could tax high-income earners’ consumption at a higher rate. Low-income people can receive transfers and credits. I think smaller government and less progressivity are wiser. But we can agree on an efficient, simple and fair tax, and debate revenues and progressivity separately.

We should also agree to separate the tax code from the subsidy code. We agree to debate subsidies for mortgage-interest payments, electric cars and the like—transparent and on-budget—but separately from tax reform.

Negotiating such an agreement will be hard. But the ability to achieve grand bargains is the most important characteristic of great political leaders.

Mr. Cochrane is a senior fellow at Stanford University’s Hoover Institution.