Central Bankers Have Difficult Road to Walk, Says Summers

Jan.10 — Former U.S. Treasury Secretary Lawrence H. Summers and Roger Ferguson, TIAA president and chief executive officer, discuss the emergence of secular stagnation and the challenges that central bankers will face in a new decade. They speak with David Westin on “Bloomberg Wall Street Week.”

How Corporations Destroyed American Democracy – Chris Hedges.

How Corporations Destroyed American Democracy – Chris Hedges.
Filmed at Socialism 2010 in Chicago by Paul Hubbard

Secular Stagnation and the Future of Global Macroeconomic Policy

Lawrence H. Summers discusses “Secular Stagnation and the Future of Global Macroeconomic Policy” at the Peterson Institute for International Economics on April 15, 2019. Summers, the Charles W. Eliot University Professor and president emeritus at Harvard University, argues that events of the last five years confirm that secular stagnation is real and spreading, and that fiscal not monetary policy will play the major role in stabilization policy going forward. As a result, Summers contends that the industrialized world has passed peak central bank independence, and that secular stagnation is ironically a product of the information technology revolution—supply side progress has created demand side problems.
For more information, visit: https://piie.com/events/secular-stagn…

Summers warns Fed not to be too confident it has tools to combat recession

Summers warns Fed not to be too confident it has tools to combat recession

In tweet storm, former Treasury Secretary crashes Jackson Hole party

Former U.S. Treasury Secretary Larry Summers isn’t on the agenda to speak at this year’s Federal Reserve economic symposium in Jackson Hole, Wyoming. But he didn’t let that stop him.

In a series of tweets, Summers said the Fed should not be confident it has the tools to combat the next recession and called for a “revolution in Fed” thinking.

Summers was once President Barack Obama’s top pick to lead the Federal Reserve, but his nomination was blocked by progressive Senate Democrats like Sen. Elizabeth Warren of Massachusetts. Obama then tapped Janet Yellen for the top Fed spot. Since then, Summers has become a leading outside commentator on monetary policy.

Summers was also a director of the National Economic Council under President Obama and chief economist at the World Bank.

In his tweets, Summers said the economies of Europe and Japan are now stuck in black holes — negative interest rates are expected for a generation and the U.S. economy is only one recession away from joining them.

In a world where the U.S. 10-year Treasury yield TMUBMUSD10Y, +0.91%   is 1.50%, Fed officials confidence in their toolkit is “misplaced,” he said.

Summers said the Fed’s traditional recession-fighting tool of lowering short-term interest rates may be counterproductive in this new global economy of low interest rates and economic stagnation.

Comparing the Fed’s current challenge to the central bank’s famous battle with inflation in the late 1970s, Summers called for revolution in monetary policy thinking.

But he said he wasn’t so hopeful.

A broader tax base that closes loopholes would raise more money than plans by Ocasio-Cortez and Warren

Tax reform debates have been transformed in recent weeks by a shift in emphasis from revenue raising and progressivity to an emphasis on going after the rich for the sake of equality and justice. Bold proposals from Representative Alexandria Ocasio-Cortez of New York, for a 70 percent marginal tax rate on top earners, and from Senator Elizabeth Warren of Massachusetts — a 2020 Democratic presidential candidate — for a wealth tax on those worth more than $50 million have attracted widespread attention.

Warren’s proposal aspires to raise roughly 1 percent of GDP ($2.75 trillion in the next decade). Ocasio-Cortez’s proposal is estimated to generate around one-third of 1 percent ($720 billion in the next decade). By way of comparison, the Trump tax cuts will cost the federal government about $2 trillion over the next decade. We agree with Ocasio-Cortez and Warren that increases in tax revenue of at least this magnitude are necessary. We also agree that the way forward is by generating more revenue from the most affluent Americans. Indeed, it may well be necessary and appropriate to raise more than Warren’s targeted 1 percent of GDP from those at the top.

Be very skeptical about how much revenue Elizabeth Warren’s wealth tax could generate

Their response is disingenuous. They focus most of their fire on what they label as our revenue estimate: that the proposed wealth tax would raise $25 billion annually, rather than the $187 billion they estimate. In reality, we are explicit that $25 billion is a rough back-of-the-envelope number and state that “We would be surprised if the $25-billion-a-year figure we suggest was not a significant underestimate of the revenue potential of a 2 percent wealth tax.” The purpose of our piece was not to provide an alternative revenue estimate for the wealth tax but to call into question the naively high estimate provided by Saez and Zucman.

.. As we explain at some length in our piece, naive estimation of the kind offered by Saez and Zucman tends to be way optimistic relative to scorekeeping by government experts. This point is well illustrated by the difference between academic and government estimates of taxing carried interest as ordinary income or of the value-added tax. Nothing in Saez and Zucman’s response suggests they are immune from this problem.

They attempt a broad allowance for tax avoidance, assuming the rich would successfully shelter at most 15 percent of their wealth from taxation. They base this guess on four academic studies that consider the international experience of wealth taxation, which find that a 1 percent wealth tax reduces reported wealth by 0.5 and 35 percent, which they simply average to 15 percent. But this strikes us as too low.

First, Saez and Zucman’s interpretation of the international experience differs from ours. They rely on estimates suggesting that a 1 percent wealth tax in Denmark and Sweden results in evasion of less than 1 percent (which makes their 15 percent estimate look huge). But in both countries, wealth taxation proved so easy to avoid and so difficult to administer that these taxes were repealed. In fact, of the 12 nations in the Organization for Economic Cooperation and Development that had wealth taxes in 1990, only three still have them today.

Second, the estate tax is informative on the potential magnitude of wealth tax evasion. Let’s consider Saez and Zucman’s estimated tax base for people with wealth greater than $50 million: about $9.3 trillion in 2019. If we were to apply the current 40 percent estate tax to this figure — assuming 2 percent of those families will experience a death this year (a conservative estimate) — we would expect that tax to generate about $75 billion this year. And if we apply the effective estate tax to that figure (accounting for charitable contributions and spousal bequests), it would raise $25 billion this year. In reality, the estate tax will raise about $10 billion from estates of more than $50 million this year. In other words, it seems plausible that tax avoidance is closer to 60 percent.

It is worth noting that estimating the tax base for those worth more than $50 million in itself is a difficult task — let alone estimating the revenue that taxing these households can raise. Different approaches to measuring top wealth can paint very different pictures. And the numbers reported in the Forbes 400, which Saez and Zucman rely on repeatedly in their rejoinder, are thought of by many as dubious.

This isn’t to say that our method should be viewed as definitive, but it does suggest the Saez and Zucman estimation is likely too high. As an illustration of the crudity of their analysis: They neglect to contend with behavioral responses that would inevitably follow a 2 percent tax on a small group of wealth holders. For example, there would be a significant incentive to accelerate charitable giving, which would decrease the wealth tax base. It seems important to account for the fact that the wealthy (and their tax planners) will inevitably be motivated to limit tax liability.

Saez and Zucman are at pains to suggest that their proposal is for a ramped-up Internal Revenue Service that is much more serious about collections than the current estate tax. We share their view that more could be done to collect estate tax revenue (and tax revenue more generally).

And we certainly do not start from “the premise that the rich cannot be taxed,” as Saez and Zucman allege. Instead, we share their objective that it is imperative to raise more tax revenue from those at the very top, and we propose a variety of progressive reforms to this end.

However, government budget scorekeepers properly score proposals in the form in which they would likely be enacted, not on the basis of the aspirations of their academic authors. So, we stand by our position — which will possibly be tested someday — that official scorekeepers would be very unlikely to validate the Saez-Zucman estimate of Warren’s proposed wealth tax, and that the gap would likely be substantial.