Last December, Republicans relied on the support of conservative economists who predicted that the party’s corporate tax cuts would boost productivity and investment in the United States substantially. The forecasts were wrong, and the silence of those who made them suggests that they knew it all along.BERKELEY – It has now been one year since US President Donald Trump and his fellow Republicans rammed their massive corporate tax cut through Congress. At the time, critics of the “Tax Cuts and Jobs Act” described it as a cynical handout for wealthy shareholders. But a substantial number of economists came out in support of it.For example, one prominent group, most of whom served in previous Republican administrations, predicted in The Wall Street Journal that the tax cuts would boost long-run GDP by 3-4%, with an “associated increase” of about 0.4% “in the annual rate of GDP growth” over the next decade. And in an open letter to Congress, a coterie of over 100 economists asserted that “the macroeconomic feedback generated by the [tax cuts]” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time.
Likewise, in a commentary for Project Syndicate, Robert J. Barro of Harvard University argued that the tax cuts would increase long-run real (inflation-adjusted) per capita GDP by an improbable 7%. And Michael J. Boskin of the Hoover Institution endorsed his analysis in a follow-up commentary.
Finally, Kevin Hassett, Chairman of the White House Council of Economic Advisers, and Greg Mankiw of Harvard University claimed that the productivity gains stemming from the tax package would primarily boost wages, rather than profits, because foreign savers would pour investment into the US.
.. To be sure, these were primarily long-run predictions. But proponents of the bill nonetheless claimed that we would see enough additional investment to boost growth by 0.4% per year. That implies an annual GDP increase of roughly $800 billion, which would require annual investment to rise from 17.5% to about 21.5% of GDP. We cannot know how much the US economy would grow in the absence of the tax cuts. But, as the chart below shows, investment has not jumped to that level, nor does it show signs of doing so anytime soon.
.. Back when all the aforementioned economists were issuing their sanguine predictions about the tax package’s likely effects, neutral scorekeepers such as the Tax Policy Center were painting a more realistic picture. And unlike most proponents of the cuts, the Tax Policy Center’s raison d’être is not to please donors or support a particular political party, but rather to make the best forecasts that it can.
The deep disagreement last year over the tax bill’s potential effects anguished Binyamin Applebaum of The New York Times. “What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement?” Applebaum asked on Twitter at the time. “How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?”
.. We can now answer that last question. Scholarship is about the pursuit of truth. When scholars find that they have gotten something wrong, they ask themselves why, in order to improve their methodology and possibly get it less wrong in the future. The economists who predicted that tax cuts would spur a rapid increase in investment and sustained growth have now been proven wrong. If they were serious academics committed to their discipline, they would take this as a sign that they have something to learn. Sadly, they have not. They have remained silent, which suggests that they are not surprised to see investment fall far short of what they promised.
But why should they be surprised? After all, it would be specious to assume, as their models do, that investment can rapidly rise (or fall) as foreign investors flood into (or flee) the US. Individuals and firms do not suddenly ratchet up their savings just because the after-tax profit rate has increased. While a higher profit rate does make saving more profitable, it also increases the income from one’s past savings, thus reducing the need to save. Generally speaking, the two balance out.
While a higher profit rate does make saving more profitable, it also increases the income from one’s past savings, thus reducing the need to save. Generally speaking, the two balance out.
All of those who published op-eds and released studies supporting the corporate tax cuts last year knew (or should have known) this to begin with. That is why they have not bothered to investigate their flawed forecasts to determine what they may have missed. It is as if they knew all along that their predictions were wrong.1
For reporters still wondering which economists to listen to, the answer should now be clear. If there is one message to take from the past year, it is: “Fool me once, shame on you; fool me twice, shame on me.”
The studies we cite all find that reductions in corporate taxation have important positive effects on economic growth.
Ultimately, we are confident that the estimates in our piece are closer to the mark and are at the same time broadly consistent with other estimates from empirical studies of effects of corporate tax changes on growth... We state explicitly in the letter that the figure calculated on the basis of the OECD study is a long-run estimate (the OECD study estimates effects on GDP per capita, not GDP per se)... By this method, the proposed changes would raise long-run GDP per capita by approximately 1.8 percent... Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz, John B. Taylor
Mr. Muzinich, a 39-year-old newcomer to Washington, has emerged as a central player in the Trump administration’s tax overhaul effort. The former investment banker and hedge fund manager is the Treasury point man on taxes, accompanying Mr. Mnuchin into “Big Six” meetings with top Republican lawmakers drafting the tax plan and laying out the administration’s positions on which taxes and deductions to cut or preserve.
.. He fits the mold of Mr. Trump’s top economic advisers, Mr. Mnuchin and Gary D. Cohn, the director of the National Economic Council, both of whom made a career on Wall Street. While not a Goldman Sachs alumnus, as they are, he brings an extensive background from the world of finance, having been a banker at Morgan Stanley and the president of Muzinich & Co., an international investment firm founded by his father.
.. His Wall Street brashness sometimes shines through when he gets into deal-making mode.
.. Mr. Muzinich, who holds an M.B.A. from Harvard and a law degree from Yale
.. In a 2007 Op-Ed article in The New York Times, Mr. Muzinich and a co-author, Eric Werker, called on Congress to offer tax credits to companies that build factories in developing countries and to offset the lost revenue with reductions in foreign aid.
.. “I think that he is pragmatic,” said Glenn Hubbard, the dean of Columbia Business School, where Mr. Muzinich taught before joining the Treasury Department. “He’s looking for good policy solutions, not policy positions.”
.. Some economists have scoffed at Mr. Mnuchin’s promises that tax cuts would more than pay for themselves because of the robust economic growth he says they will create. The department came under fire for removing from its web site an economic study that contradicted the secretary’s analysis of the benefits of corporate tax cuts.
Ms. Yellen has a possibility of being renominated, according to this consensus, but it is only 22 percent; experts think that Kevin Warsh, a former Fed governor with deep Republican ties, has a slightly better chance at 23 percent.
.. The case for renominating Ms. Yellen is straightforward.
She has presided over four years of steady economic expansion and rising financial markets. She moved cautiously toward raising interest rates even though the economy seemed to be approaching full employment. By contrast, some more conservative contenders for the job have indicated they want to raise rates more quickly, which could endanger the economy as President Trump approaches midterm elections in 2018 and a potential re-election battle in 2020.
.. Moreover, as President Trump dabbles in making deals with Democrats, reappointing Ms. Yellen could serve as an expression of good faith to Democratic senators. As administration officials focus on tax legislation and other priorities on Capitol Hill, it might be helpful to them to nominate someone who might sail through confirmation, rather than demand a bruising, time-consuming battle.
.. The case against Ms. Yellen is similarly straightforward: She is a liberal economist in a government dominated by conservatives. She is a cerebral academic serving during the presidency of a bombastic businessman. And she is a staunch defender of the work the Fed and other bank regulators have done to try to limit risk in the financial system — including in a high-profile speech last month — amid an administration focused on deregulation.
Kevin Warsh: well connected, but with baggage
He has a law degree, but no advanced degree in economics.
.. Mr. Warsh has been a skeptic of the Fed’s efforts to boost the economy through quantitative easing and has advocated raising interest rates more quickly. He also has a regulatory philosophy more in line with the administration’s.
.. Mr. Warsh’s father-in-law is Ronald Lauder, of the Estée Lauder cosmetics fortune, a major Republican donor with longstanding ties to Mr. Trump.
.. If Mr. Warsh is nominated, expect significant blowback during the confirmation process from Democrats, who are likely to accuse the 47-year-old Mr. Warsh of being underqualified, of being responsible for the 2008 bank bailouts and inclined to regulate banks too lightly now, and of being too overtly political for the traditionally nonpartisan Fed chairmanship... Democrats would be eager to criticize the administration for naming a recent top executive at Goldman Sachs to be the nation’s most powerful financial regulator. Some populist Republicans might join them... Foremost among them are several of the names we would probably be hearing about if a conventional Republican president were in the White House.. John B. Taylor is a respected economist at Stanford who worked in the George W. Bush administration and has been an influential voice among congressional Republicans who want to see the Fed bound by stricter rules governing its actions.
Glenn Hubbard was a top economic adviser to Mr. Bush who is dean of Columbia Business School.
Larry Lindsey was another top adviser to Mr. Bush and a former Fed governor with an economics doctorate from Harvard.
.. Their doctorates and affiliations with top universities may actually be downsides in an administration that has shown disdain for academic expertise... other names has emerged in various reports, including the F.D.I.C. vice chairman Thomas Hoenig and John Allison