Don Kohn to Fed Vice Chair
Paul Krugman on Talk-Show Joe Lieberman

Eddie Lazear Gets Bad Reviews on his NTA Speech

Eddie Lazear gets bad reviews on his National Tax Association speech:

The Washington Post:

Down Is Still Up: The White House continues to tax reality: Sunday, May 21, 2006; B06: WHEN BEN S. Bernanke left the White House Council of Economic Advisers to become Fed chairman, his place was filled by Edward P. Lazear, an accomplished economist from Stanford University. For all his credentials, Mr. Lazear is not doing well.

In a speech Thursday, Mr. Lazear contended that "low taxes are consistent with rising federal revenues, which helps bring the deficit down." This deliberately implies that low taxes cause a rise in federal revenue, even though they don't. Last year one of Mr. Lazear's predecessors as chairman of President Bush's Council of Economic Advisers, N. Gregory Mankiw of Harvard University, examined whether tax cuts pay for themselves: In other words, do they boost work incentives enough to generate sufficient extra growth that government revenue ends up higher than it would have been without tax cuts? Mr. Mankiw concluded that this "dynamic" effect is way too small to justify Mr. Lazear's message. Tax cuts cause falls in federal revenue, and implying the opposite is irresponsible.

Mr. Lazear also stated that "higher productivity translates directly into higher wages -- even over the relatively short run." But one of his own charts showed how wages of production workers have lagged behind productivity gains for nearly all of the past 50 years and how this gap has grown wider in the past five years. In a recent paper titled "Where did the Productivity Growth Go?" Robert J. Gordon of Northwestern University reports that between 1966 and 2001, everyone in the bottom 90 percent of the income distribution saw wages grow more slowly than productivity and that fully half the gains from extra productivity went to the richest tenth. Mr. Lazear did not address this issue.

In a Wall Street Journal op-ed recently, Mr. Lazear stated that the Bush tax cuts have narrowed gaps in take-home earnings. This is wrong, as a previous editorial noted; but in Thursday's speech Mr. Lazear returned to the subject of progressivity from the opposite angle. "To further investment in human capital, it is necessary that the progressivity of the tax system not become too pronounced," he said; in other words, inequality usefully boosts the incentive to get an education. To illustrate the dangers of equality, Mr. Lazear cited Eastern Europe circa 1990, when "highly skilled individuals chose to drive taxis for tourists."

It is true that equal wages dampen work incentives, but the invocation of communist Czechoslovakia or Poland is far-fetched. In the late 1980s, the Gini coefficient, a standard measure of inequality, averaged around 24 points in the Soviet bloc; the contemporary United States, with a Gini score of about 40, is far less equal. Does Mr. Lazear honestly believe the United States is anywhere close to a situation in which engineers or doctors forsake their professions to act as tour guides? Or is he scraping around for an argument -- any argument -- to play down justified concerns about rising inequality?

Dan Shaviro:

Start Making Sense: Fun in the nation's capital: I was in Washington for the spring meeting of the National Tax Association this past Thursday, and the lunch talk was given by Ed Lazear, the labor economist and recent Tax Reform Panel member who is now on Bush's Council of Economic Advisors. Though I realize the job puts pressure on one's public utterances, I was dismayed by the level of sales pitch that I was hearing, all this stuff about how the Administration's tax policy has wonderfully boosted economic growth, increased national saving, etc., etc. E.g., attributing the recent economic growth rate to the tax cuts, rather than to the recessionary trough that the growth came from, and not acknowledging the fairly obvious point that there were also high growth rates after the 1993 tax increases. Claiming that the dividend tax cuts will create vast increases in national saving and economic growth, as predicted by economic theory, blah blah blah.

With no ill will towards Lazear, I must say I found it a bit stomach-turning, even more so than the cardboard cheesecake with raspberry sauce that was sitting in front of me. So I waved my hand like a first grader so I would get to ask the first question, and was I suppose a bit blunt. I noted that economic theory can't predict the consequences of a tax cut in isolation; it needs to be a balanced-budget exercise that includes the offset. I noted that the Administration has vastly increased the fiscal gap, with huge likely negative effects on national saving even if there is no catastrophe. I noted the immense transfers to older generations, from unsustainable tax cuts that will have to be reversed later on plus the Medicare prescription drug benefit, likely to reduce national saving due to the income effect (seniors save less than younger people for lifecycle reasons). Maybe I had one or two more points before I subsided and let Lazear have at it.

I wouldn 't say he answered me, though I can't say I blame him. At some point he started saying something about how, with just a little economic growth, all the deficits will totally disappear. This was a bit thick. So I started to cut in: "There isn't a single reputable expert in the country who believes - "

"I've got the floor now!" was his answer, so I subsided again. He did acknowledge sharing some of my concerns.

No hard feelings, but a job in the Council of Economic Advisors really isn't very good for one's reputation these days.

Is there anybody whose reputation has been enhanced by their term in the Bush administration? I can think of Zalmay Khalilzad. That's all.