Sunday, March 24, 2019

Can Trump Turn The Fed Into A Bastion Of Trumpnomics-- Enough To Make The Coming Recession Into A Depression?


When Trump nominated crackpot Stephen Moore for a spot on the Fed, I was shocked. That's even a crazy move for Trump. What was I missing? I asked the smartest economist I know, Stephanie Kelton. All she would say is that "It’s not an inspired choice, to say the least. Paul McCulley would have been an inspired choice." Conservative economist Greg Mankiw was considerably more forthcoming on his thoughts about the nomination.

Mankiw isn't famous because he teaches economics at Harvard, though he does. He's famous because he worked for both Bush-- for whom he served as chairman of the Council of Economic Advisors-- and for Mitt Romney. In 2011, while he was advising Romney and teaching at Harvard, dozens of students walked out of his lecture and went to a Occupy Wall Street demonstration, handing him an open letter on the way out:
Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific-- and limited-- view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.

A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models. As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics. There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.

Care in presenting an unbiased perspective on economics is particularly important for an introductory course of 700 students that nominally provides a sound foundation for further study in economics. Many Harvard students do not have the ability to opt out of Economics 10. This class is required for Economics and Environmental Science and Public Policy concentrators, while Social Studies concentrators must take an introductory economics course-- and the only other eligible class, Professor Steven Margolin’s class Critical Perspectives on Economics, is only offered every other year (and not this year). Many other students simply desire an analytic understanding of economics as part of a quality liberal arts education. Furthermore, Economics 10 makes it difficult for subsequent economics courses to teach effectively as it offers only one heavily skewed perspective rather than a solid grounding on which other courses can expand. Students should not be expected to avoid this class-- or the whole discipline of economics-- as a method of expressing discontent.

Harvard graduates play major roles in the financial institutions and in shaping public policy around the world. If Harvard fails to equip its students with a broad and critical understanding of economics, their actions are likely to harm the global financial system. The last five years of economic turmoil have been proof enough of this.

We are walking out today to join a Boston-wide march protesting the corporatization of higher education as part of the global Occupy movement. Since the biased nature of Economics 10 contributes to and symbolizes the increasing economic inequality in America, we are walking out of your class today both to protest your inadequate discussion of basic economic theory and to lend our support to a movement that is changing American discourse on economic injustice. Professor Mankiw, we ask that you take our concerns and our walk-out seriously.
His fame increased when he announced on CNBC that he wouldn't vote for Trump in 2016. On his blog he explained in more detail why he wouldn't vote for the Republican candidate for president:
I have Republican friends who think that things couldn't be worse than doubling down on Obama policies under Hillary Clinton. And, like them, I am no fan of the left's agenda of large government and high taxes. But they are wrong: Things could be worse. And I fear they would be under Mr. Trump.

Mr. Trump has not laid out a coherent economic worldview, but one recurrent theme is hostility to a free and open system of international trade. From my perspective as an economics policy wonk, that by itself is disqualifying.

And then there are issues of temperament. I am not a psychologist, so I cannot figure out what Mr. Trump's personal demons are. But he does not show the admirable disposition that I saw in previous presidents and presidential candidates I have had the honor to work for.
I don't get the feeling he intends to vote for Trump in 2020 either. On Friday he wrote that the only good thing he credited Trump with, in his opinion, "making good appointments to the Fed.... Jay Powell, Rich Clarida, and Randy Quarles. Then today the president nominates Stephen Moore to be a Fed governor. Steve is a perfectly amiable guy, but he does not have the intellectual gravitas for this important job. If you doubt it, read his latest book Trumponomics (or my review of it). It is time for Senators to do their job. Mr. Moore should not be confirmed."

Moore wrote the universally panned book with Arthur Laffer and Mankiw's review for Foreign Affairs was titled Snake-Oil Economics-- The Bad Math Behind Trump’s Policies. Moore and Laffer, he wrote, presented their findings in the voice of "rah-rah partisans... who do not build their analysis on the foundation of professional consensus or serious studies from peer-reviewed journals. They deny that people who disagree with them may have some logical points and that there may be weaknesses in their own arguments. In their view, the world is simple, and the opposition is just wrong, wrong, wrong. Rah-rah partisans do not aim to persuade the undecided. They aim to rally the faithful." He feels that their "over-the-top enthusiasm" for Señor Trumpanzee's "sketchy economic agenda is not likely to convince anyone not already sporting a 'Make America Great Again' hat." 
Moore and Laffer served as economic advisers to Trump during his campaign and after he was elected president (along with Larry Kudlow, the current director of the National Economic Council, who wrote the book’s foreword). From this experience, Moore and Laffer apparently learned the importance of flattering the boss. In the first chapter alone, they tell us that Trump is a “gifted orator” who is always “dressed immaculately.” He is “shrewd,” “open-minded,” “no-nonsense,” and “bigger than life.” He is a “commonsense conservative” who welcomes “honest and fair-minded policy debates.” He is the “Mick Jagger of politics” with a contagious “enthusiasm and can-doism.”

The authors’ approach to policy is similarly bereft of nuance. In Chapter 3, they sum it up by proudly recounting what Moore told Trump about U.S. President Barack Obama during the campaign: “Donald, just look at all the things that Obama has done on the economy over the past eight years, and then do just the opposite.”

It is hard to imagine more simplistic, misguided advice. To be sure, Moore and Laffer can reasonably hold policy positions and political values to the right of those of Obama. (As someone who chaired the White House Council of Economic Advisers during the George W. Bush administration, so do I.) But the Obama administration was filled with prominent economic advisers who were well within the bounds of mainstream economics: Jason Furman, Austan Goolsbee, Alan Krueger, Christina Romer, and Lawrence Summers, to name but a few. It is not tenable to suggest that with all this talent, the administration made only wrong decisions, and that they were wrong simply because those who made them were Democrats.

The tribalism of Moore and Laffer’s approach stems primarily from their devotion to a single issue: the level of taxation. Obama pursued higher taxes, especially on higher-income households. His goal was to fund a federal government that was larger and more active than many Republicans would prefer and to use the tax system to “spread the wealth around,” as he famously told Joe Wurzelbacher, known as Joe the Plumber, a man he encountered at a campaign stop in Ohio in 2008. By contrast, Moore and Laffer want lower taxes, especially on businesses, which in their view would promote faster economic growth.

The debate over taxes reflects a classic, ongoing disagreement between the left and the right. In 1975, Arthur Okun, a Brookings economist and former adviser to President Lyndon Johnson, wrote a short book called Equality and Efficiency: The Big Tradeoff. Okun argued that by using taxes and transfers of wealth to equalize economic outcomes, the government distorts incentives-- or that, to put it metaphorically, the harder the government tries to ensure that the economic pie is cut into slices of a similar size, the smaller the pie becomes. Based on this argument, the main priority of the Democratic Party is to equalize the slices, whereas the main priority of the Republican Party is to grow the pie.

Yet Moore and Laffer aren’t willing to admit that making policy requires confronting such difficult tradeoffs. Laffer is famous for his eponymous curve, which shows that tax rates can reach levels high enough that cutting them would yield enough growth to actually increase tax revenue. In that scenario, the tradeoff between equality and efficiency vanishes. The government can cut taxes, increase growth, and use the greater tax revenue to help the less fortunate. Everyone is better off.

The Laffer curve is undeniable as a matter of economic theory. There is certainly some level of taxation at which cutting tax rates would be win-win. But few economists believe that tax rates in the United States have reached such heights in recent years; to the contrary, they are likely below the revenue-maximizing level. In practice, the big tradeoff between equality and efficiency just won’t go away.

Trumponomics is full of exhortations about the importance of economic growth. Why, Moore and Laffer ask, should Americans settle for the two percent growth that many economists have been projecting? Wouldn’t every problem be easier to solve with a more rapidly expanding economy? The book quotes Trump as claiming, when announcing his tax plan in December 2017, that it would not increase the budget deficit because it would raise growth rates to “three, or four, five, or even six percent.”

The authors offer no credible evidence that the tax changes passed will lead to such high growth. Most studies yield far more modest projections. The Congressional Budget Office estimates that the Trump tax cuts will increase growth rates by 0.2 percentage points per year over the first five years. A study by Robert Barro (a conservative economist at Harvard) and Furman (a liberal economist at Harvard) published in 2018 estimates that the tax bill will increase annual growth by 0.13 percentage points over a decade. And that is if the changes are made permanent. Barro and Furman estimate that as the legislation is written, with many of the provisions set to expire in 2025, it will increase annual growth by a mere 0.04 percentage points over ten years.

It is conceivable that standard economic models underestimate the impact of tax cuts on growth. A research paper by the economists Christina Romer and David Romer published in 2010 examined historical tax changes and found that they had larger effects on economic activity than standard models suggest. (It is worth noting that these two authors’ political leanings are left of center, so their findings are not the result of ideological taint.) One might reasonably argue that Trump’s tax cuts will increase growth over the next decade by as much as half a percentage point per year. But that is a long way from the one- to four-percentage-point boost that the president and his associates have bragged of, and that Moore and Laffer quote without explanation, caveat, or apology.

...Perhaps the most disappointing aspect of Trumponomics is the long list of crucial issues on which the authors are largely silent. They offer no cogent plans to deal with global climate change, the long-term fiscal imbalance from growing entitlement spending, or the increase in economic inequality that has occurred over the past half century. Many reasonable Republicans would support a tax on carbon emissions, for example. Such a policy would slow climate change by incentivizing the movement toward cleaner energy, as well as provide revenue that could be used to close the fiscal gap or to help those struggling at the bottom of the economic ladder.

Rather than suggesting coherent policies, Moore and Laffer seem to hope that a much more rapidly growing economy will provide the resources to address all these problems, and they seem to believe that this growth will follow ineluctably from the lower taxes and deregulation that lie at the heart of Trump’s agenda. It would be wonderful if that were possible. Maybe rah-rah partisans really believe it is. But more likely, it is just wishful thinking. Trump appears eager to avoid most of the economic problems facing the nation. By banking on so much growth from cutting taxes, Moore and Laffer are, in effect, giving him a pass and kicking the can down the road to a future leader more interested in confronting hard policy choices.
Are there enough Republicans in the Senate with enough good sense and courage to deny Moore his confirmation? I doubt it. In fact, it's probably more likely that Kyrsten Sinema and Joe Manchin vote to confirm that it is that more than one or two Republicans vote not to, even though some Republicans have been grumbling about Moore's column advocating that Trump fire Fed Chair Jay Powell (a Trump appointee who, like so many, Trump quickly soured on).

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At 1:28 PM, Anonymous Anonymous said...

The letter from the students to their econ 10 professor was fantastic. However, the following must certainly have been written with tongue firmly in cheek:
"...lend our support to a movement (Occupy) that is changing American discourse on economic injustice."

Occupy didn't do shit. smothered in its cradle.

That observed, the Fed has already helped create a near depression and has done next to nothing to prevent any recession over the past 50 years. Or have we all forgotten that greenspan shilled for both creative mortgaging AND all the 'innovative' investment products (derivative bonds) created from same?

What the Fed have done is to make it easier to ensure that the wealthy .1% get 80% of all created money over that same span of time. This nomination is perfectly consistent with that legacy.

At 2:49 PM, Anonymous Anonymous said...

A depression is the goal, for that gives Trump an excuse to declare a national emergency, suspend what remains of US law, and rule as a dictator. He would also prevent any election which might remove him from office.

At 3:33 PM, Anonymous Anonymous said...

DWT's clear pass to President Obama (on every and any matter) have made obsession with President Trump have highlighted DWT's deeply partisan nature.

At 5:01 PM, Anonymous Anonymous said...

Such a Republican complaint, 3:33! Daily Kos not listening to you anymore?

At 6:54 AM, Anonymous Anonymous said...

trumponomics is really reaganomics. nothing has changed under either party since Reagan first deeply cut taxes for the rich and started mushrooming the debt.

The Fed has been part and parcel to that for the duration. trump isn't doing anything that obamanation or Clinton didn't also do.

And 3:33 is absolutely correct. clearly.

At 12:22 PM, Anonymous Anonymous said...

So are we to take up 3:33's apparent desire to fall into formation and march in lock step? After all, as the saying goes, democraps fall in love and republicants fall in.
Onward, progressive soldiers! Uniformity in all things! Be the identical widgets that corporatism desires no matter your position on the Overton Scale!

At 9:18 PM, Anonymous Anonymous said...

hyperbolic 12:22?

All 3:33 said is that DWT is partisan... this piece tries to blame the coming recession/depression on trump when trump is merely extending the policies of obamanation, bush, Clinton and Reagan. DWT neglects to mention that trumponomics builds in a straight line from the legacies of his D and R predecessors.

The upcoming r/d is inevitable and would have been inevitable under a president trump or a president $hillbillary or maybe even a president Bernie, given that the congress is who does this shit. The prez only signs it and brags about it... or apologizes for it after the fact.

At 10:11 PM, Anonymous Anonymous said...

There have been too many complaints recently about how there are more than one set of comments espousing a single position to take any such inferences lightly, 9:18. This isn't Daily Kos, where the party line dictates all thought. I don't want to see DWT follow that same trajectory. If the democraps can't handle the heat, they had best stay out of the kitchen before the Republicants charbroil them.


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