A Question for William Gale: The Fiscal Outlook
Afternoon Must-Read: Bob Litan: Two Relatively Painless Ways to Boost Growth

Department of "WTF?!?!": Douglas Holtz-Eakin Edition: (Not) The Honest Broker for the Week of November 28, 2014

Cthulhu Google Search The other contributions to Brink Lindsey's Cato Institute Online Economic Growth Forum have all been things I can engage--things that make me think, that are individual economists' honest and good-faith attempts to say where the fruit is to be picked in terms of boosting America's economic growth.

Then comes Douglas Holtz-Eakin.

And, I must say, it seems to me that it really is time for some sort of disciplinary boundary-patrol police action/intervention here...

Holtz-Eakin's piece seems to me to be, in the context of the other--remarkably good--pieces that Brink Lindsey has commissioned, a very strange intrusion from some alternative non-technocratic discursive universe--a veritable Colour out of Space:

That same nameless intrusion which Ammi had come to recognise and dread... the shaft of phosphorescence from the well was getting brighter and brighter, bringing to the minds of the huddled men a sense of doom and abnormality which far outraced any image their conscious minds could form...


Douglas Holtz-Eakin: Structural Reforms to Reduce Debt and Restore Growth: "America’s future is in jeopardy...

...Since World War II, the average rate of growth in real (inflation-adjusted) income (Gross Domestic Product, or GDP) per capita was 2.1 percent. At about that pace of growth, the average income would double in 35 years. Put differently, in the course of less than one person’s working life, the standard of living would double. One car could become two. One child’s chance to go to college could open up to the whole family. Two spouses at work could turn into only one, with more time with the family for the other. The opportunity is enormous.

Unfortunately, since 2007, the rate has slowed to a meager 0.7 percent...

Wait a minute! Is Holtz-Eakin saying that in 2007 we saw a discontinuous slowdown in America's long-run trend rate of GDP per capita growth from 2.1%/year to 0.7%/year? It sure sounds like it:

This is a recipe for diminished opportunity. At that pace, it takes 99 years for incomes to double. More than two working lives will be needed to achieve the same increase in the standard of living that once was experienced in a lifetime...

But then he backtracks: the decline in trend growth in GDP per capita he fears is only half as large as the 1.4%-point/year reduction Holtz-Eakin led with.

But why lead with the wrong number?

Given the economic turbulence of the post-2007 era, one might expect the bad news to be transitory. So it is even more troubling that the non-partisan Congressional Budget Office (CBO) projects that long run growth per capita will recover to only 1.3 percent over the next 10 years. The poor growth outlook is a direct threat to Americans’ future The poor growth outlook is also a threat to the nation’s fiscal strength. The CBO forecasts that federal deficits will total another $7.6 trillion in the next decade and the federal debt will continue to climb from $13 trillion to $21 trillion...

And here it is time to throw the red penalty flag. Holtz-Eakin knows as well as I know that the right variable with which to scale the national debt is GDP. But the projection over the next decade is that the debt as a share of a year's GDP will only grow from 74% to 79%--that's not scary enough for his purposes. Perhaps he can forget that the debt capacity of America grows over time and just give the decade-ahead forecast for growth in the real debt, from $13 trillion to $17 trillion? Nope--that's not scary enough either. He has to report the growth in the nominal debt from $13 trillion to $21 trillion in order to get a number that is scary enough for his purposes.

And in doing so, I believe, he does his right-wing political masters no good service.

A year ago I came across Nick Eberstadt--who, like Douglas Holtz-Eakin knows better--doing something similar in his unfortunately-titled A Nation of Takers:

The breathtaking growth of entitlement payments over the past half-century.... In 1960, U.S. government transfers to individuals from all programs totaled $24 billion. By 2010, the outlay for entitlements was almost 100 times more. Over that interim, the nominal growth in entitlement payments to Americans by their government was rising by an explosive average of 9.5% per annum for fifty straight years...

And as I wrote at the time:

That 9.5%/year number is not the right headline number.... Real spending growth was some 5.5%/year.... We would expect real spending to match our increasing resources. So the headline number should be 2.4%/year.... One-seventh of our current transfers are the result of the downturn, as Barack Obama and company follow the advice Joseph gave to Pharoah.... 36% of federal transfer payments are health programs.... If your worry is about our becoming a nation of moochers--as Eberstadt's does... put those to the side: very few quit their jobs saying "I don't need to work, because government programs will pay my doctor and hospital bills". Very few abandon their pregnant girlfriends because their unborn children-to-be are eligible for federally-funded nutrition supplements. The right number... is a growth rate of 1.2%/year.... I can untangle the issues. I can correct the 9.5%/year number down to the 1.2%/year number that should have been presented. I can do this in five minutes. But Mitt Romney--and his peers, and their staffs--cannot.

And I thus argued that there Nick Eberstadt's--and here Douglas Holtz-Eakin's--leading with a HUGE! FRIGHTENING!! SCARY!!! VERY-LARGE NUMBER!!!! is a very bad mistake on two levels. First, it tells those of us who can untangle the issues and do know the numbers that they are not writing as technocrats who want to engage in a substantive policy dialogue, but, rather, engaged in the exercise of trying to fire up some political base or please some political masters. Second, it misinforms their political masters in a bad way.

As I began my review of Eberstadt for Democracy last year:

If there was a moment when Mitt Romney lost the presidential election, it was the moment in mid-May when he stood up in front of the $50,000 a plate audience at Sun Capital honcho Marc Leder's place in Boca Raton and said:

[The] 47%… dependent upon government... believe that government has a responsibility to care for them... believe that they're entitled... people who pay no income tax... my job is not to worry about those people. I'll never convince them that they should take personal responsibility and care for for their lives…

This is what Mark Schmitt calls "the theory of the moocher class". And Romney is all-in with it. In July he boasted:

the NAACP... weren't happy.... That's OK.... If they want more stuff from government tell them to go vote for the other guy--more free stuff...

And after the election he ranted about Obama's "gifts" to African-Americans, Hispanics, young people--especially young women--etc.:

The President’s campaign focused on giving targeted groups a big gift... [that] add up to trillions of dollars..."

Those of us who know the numbers, or who simply live in America and look around, know that the 47% who do not pay federal income taxes are by and large not "moochers". By and large they do not lack work ethic. By and large they do take personal responsibility for their lives. And by and large they are not the Democratic base--more than half of the 47% who pay no income taxes are the elderly white and southern white low-income voters who voted for Romney by substantial margins.

So how does a Mitt Romney, along with his peers and all their staffs, become convinced that 47% of Americans are the moochers, the takers, dependent on "free gifts" from the government, lacking work ethic, lacking personal responsibility, the Democratic Party base?

And I wrote:

Late nineteenth-century British politician Robert Gascoyne, 3rd Marquess of Salisbury, withered one of his critics in the House of Lords with the observation that:

A great deal of misapprehension arises from the popular use of maps on a small scale.... [P]ut a thumb on India and a finger on Russia... [and] at once think that the political situation is alarming and that India must be looked to..." But, he went on, if the noble Lord would look at a more detailed map or try to travel from Moscow to Delhi....

Mitt Romney has been working 90 hours a week for the past six years. He has been running for the office of President of the United States. He has spent roughly 1/3 of his time raising money and assembling his social-political network. He has spent roughly 1/3 of his time managing his campaign operation and refereeing fights among members of his staff. He has spent 1/3 of his time--30 hours a week--trying to learn and keep up with the substance of major national policy issues. The shape and functioning of America's social insurance programs is one of perhaps 15 major issue areas. So Mitt Romney has spent about two hours a week on it.

During those two hours a week, Romney (and his peers, and their staffs) have seen numbers and charts like those headlining Eberstadt's Nation of Takers thrown at them over and over again--increases from $24 to $2300 billion a year in entitlement spending, 100-fold growth, 9.5%/year, doubling every eight years. But then Romney (and his peers, and their staffs) go on to the other 15 issue areas, and to growing the social-political network, to fundraising, and so forth. What sticks is that growth in federal government transfer programs has been enormous....

Romney (and his peers, and their staffs) do not have the time to dig deeply into the numbers himself, and did not have the inclination to get straight shooters like Peter Diamond or Henry Aaron or William Gale to give him his briefings. After looking at all those rapidly-rising lines and rapidly-growing spending programs, falsely concluding that we have become a nation of moochers is the only logical deduction Romney (and his peers, and their staffs) could make.

I still think that holds very true. Give your political masters the fake numbers in an attempt to energize (or bamboozle?) them, and don't be surprised if, as John Maynard Keynes wrote in the ultimate kiss-off memoir about his ex-boss David Lloyd George:

To his horror, Mr. Lloyd George, desiring at the last moment all the moderation... discovered that he could not in five days persuade the President [Woodrow] of error in what it had taken five months to prove to him to be just and right. After all, it was harder to de-bamboozle this old Presbyterian than it had been to bamboozle him...

So the first commandment to any technocrat: work hard to always present the right numbers, not the wrong numbers.

But presenting the wrong numbers is not the end. Douglas Holtz-Eakin fires up the national security wurlitzer as well:

Finally, because it exacerbates the debt problem, the poor economic growth outlook is a threat to our security. According to Admiral Mike Mullen, former chairman of the Joint Chiefs of Staff:

I’ve said many times that I believe the single, biggest threat to our national security is our debt, so I also believe we have every responsibility to help eliminate that threat...

Reality check time: Right now there is no debt problem. Right now the real cost of financing America's national debt is -0.14% of GDP. We may well have a debt problem in the future if recent favorable trends in health-care costs are reversed. But right now the Congressional Budget Office says that our 25-year fiscal gap is a mere 1.2% of GDP. We may well generate a future debt problem, especially if Republican caucuses are again as powerful, as feckless, as short-sighted, and as unconcerned with the long-run national well-being as they were in 1981 and 2001. We have many real problems. The national debt is not--right now--one of them.

Holt-Eakin continues:

Fortunately, this is also an opportunity. Americans need not be condemned to this dismal economic outlook. To take advantage of this opportunity will require leadership, a new approach to policy, and better policies themselves. Leadership is a key. At its core, long-run economic growth is driven by the willingness to sacrifice in the present--no Twizzlers, no Twinkies, no T-shirts, no tanks, no television--in order to devote those dollars to higher skills, bigger production facilities, development of new technologies, advanced machinery and other investments in the ability to produce more and better. Put simply, to sustain growth any nation has to make sacrifices in the present. Most politicians recoil from this idea, with the result that much of federal policymaking is driven by the desire to act like the sugar plum fairy. It will require strong leadership to appeal to voters and other elected officials on behalf of the nation’s future. A leadership of that vision and discipline will be necessary to change the style of policy to produce better growth. Facilitating economic growth is more a philosophy than a specific piece of legislation. It is a commitment at every juncture in the policy process to evaluate tradeoffs among social goals, environmental goals, political backers’ goals and economic growth--and err on the side of growth...

And I think: Brink Linsey gave Holtz-Eakin 2000 words. We are now 600 words into his piece. And we are, technocratically and information-wise, precisely nowheresville. Just chop off these first 600 words, and every potential reader would be better off.

More word-salad follows:

The Obama administration championed a new health care law that raised $700 billion in new taxes and created two new entitlements at a time when the spending-swollen federal debt was already exploding. The White House also chose social objectives over growth. It unleashed the Environmental Protection Agency, choosing a green agenda over growth. It launched the National Labor Relations Board on a union agenda at odds with growth...

And I think: Holtz-Eakin has not gotten the memo. Technocrats know that it really looks as though ObamaCare will improve the fiscal position of the federal government in its first decade and its first two decades, at least. Holtz-Eakin's political masters know that the correct party line now is that ObamaCare savagely cuts American seniors' well-deserved entitlements to first-class Medicare. Deficit hawk debt-worriers see tax increases as a good thing. Who does Holtz-Eakin think his audience is here?

We are now approaching 700 words of word-salad:

The second flaw in recent policy approaches has been its misguided reliance on temporary, targeted piecemeal policymaking. Even if one believed that countercyclical fiscal policy (‘stimulus’) could be executed precisely and had multiplier effects, it is time to learn by experience that this strategy is not working. Checks to households (the Economic Stimulus Act of 2008), the gargantuan stimulus bill in 2009 (American Recovery and Reinvestment Act), ‘cash for clunkers’ (the Car Allowance Rebate System), tax credits for homebuyers (the Federal Housing Tax Credit and the HIRE Act, consisting of a $13 billion payroll hiring credit, expensing of certain investments, and $4.6 billion for schools and energy), the Small Business Jobs Act of 2010, and the state-local bailout Public Law 111-226 ($10 billion for education, $16 billion for Medicaid) have all failed to generate growth...

I read this, and I am struck by the extraordinary disconnection between what Holtz-Eakin writes and the serious economic literature. There is the throwing-around as if they are huge of numbers that are quite small in the context of a $16 trillion/year economy--all those he mentions together amount to less than 0.3% of a year's GDP--coupled with the failure to grapple with both theoretical and empirical literatures that strongly suggest that countries that have adopted austerity policies more to Holtz-Eakin's liking (Britain, the Eurozone) have done considerably worse than the (at best middling-performing) United States, and have done so with fiscal multipliers that appear to be on the high side of those thought plausible back when this all started in 2007.

And then the bashing of U.S. fiscal policy is followed by a bash of South Carolina Republican Ben Bernanke's monetary policy as well:

The policy regime of macroeconomic fiscal (and monetary) fine-tuning backfired in the 1960s and 1970s, leaving behind high inflation and chronically elevated unemployment, and it is working no better in the 21st century...

Once again, no engagement at all with the now-substantial literature that strongly suggests that U.S. monetary policy has been best of (an admittedly sorry) class in the North Atlantic since 2008.

Instead, there should be a commitment to raising the long-term growth rate of the economy through permanent reforms...

Why either/or? Why not both/and? Why not proper cyclical macroeconomic management and proper structural reform policies aimed at long-term growth in economic potential.

But by now I have given up expecting any kind of even semi-technocratic argument. That is not the genre this piece is in.

What kinds of permanent, structural reforms are necessary? There are a lot of potential candidates but I think one handful will ensure that the 21st century is the second American century: (1) entitlement reforms to make the social safety net sustainable, pare down the federal debt, and reduce its economic drag; (2) modernize the tax code to eliminate distortions and raise international competitiveness; (3) bring a 21st century immigration system built on principles of economic policy; (4) transform the embarrassing and underperforming U.S. K-12 education system; and (5) clean out the regulatory overgrowth that limits U.S. economic flexibility and dynamism.

But it would be a mistake to imagine that we are about to be presented with a substantive policy argument on any of these five points.

Begin with entitlement reform. The policy problem facing the United States is that spending exceeds any reasonable level of taxation for the indefinite future. There is a mini-industry devoted to producing alternative numerical estimates of this mismatch, but the diagnosis of the basic problem is not complicated and leaves bare the prescription for action. The budget problem is primarily a spending problem and correcting it requires reductions in the growth of large mandatory spending programs—Social Security and federal health programs. Since 2010, Social Security has been in cash-flow deficit. There are even larger deficits and future growth in outlays associated with Medicare, Medicaid, and the Patient Protection and Affordable Care Act (ACA). These share the demographic pressures that drive Social Security, but include the persistent increase in health care spending per person in the United States. Any informed observer, especially credit market participants, can recognize these trends. Improving the outlook for entitlement spending would send a valuable signal to these observers and improve the economic outlook. The spending future outlined above represents a direct impediment to job creation and growth. The United States is courting further downgrades as a sovereign borrower and a commensurate increase in borrowing costs. Any sharp rise in interest rates would have dramatically negative economic impacts, equaling or exceeding the experience of late-2008...

Is this a joke?

FRED Graph FRED St Louis Fed

Well, yes, it is a joke. But what is the joke, exactly? On whom, and by whom?

Businesses, entrepreneurs and investors must also consider the future deficits as an implicit promise of higher taxes, higher interest rates, or both. For any employer contemplating locating in the United States or expanding existing facilities and payrolls, rudimentary business planning reveals this to be an extremely unpalatable environment. In short, entitlement reform is a pro-growth policy move at this juncture. Our research at the American Action Forum indicates that the best strategy to both grow the economy and eliminate deficits is to keep taxes low and reduce public employee costs and transfer payments.

It seems as if Holtz-Eakin is frozen in time, back in 1990, with government deficits that were genuinely projected to explode in the near-term, with relatively high real interest rates on government debt making debt-management unsettling, with repeated signs in financial markets that bad deficit news was significantly bad for bond prices--back when America was still dealing with the fact that David Stockman's plan to rush the tax cuts through the congress before it understood them and then give congress no option but massive social insurance state retrenchment had gone horribly wrong and nobody was sure what to do about it.

That's not the world we live in today--we all know that. Or do we? Does Holtz-Eakin still think he lives in that world? Does he just want to speak to an audience that lives in that world?

With the size of the government contained by entitlement reform, the next step is to overhaul and modernize the U.S. tax code. Essential elements of that overhaul are lower rates on business income--both corporate and non-corporate, a competitive system of taxing overseas income, and broad elimination of distortionary tax preferences. The types of reforms that generate beneficial economic effects extend past reducing the corporate tax rate to include repealing the corporate AMT, making the R&D tax credit permanent, and exempting 95 percent of foreign source dividends. At the same time, one could improve work incentives by simplifying individual income tax rate brackets (recent proposals have suggested two brackets of 10 and 25 percent) and excluding a substantial portion of dividends and capital gains from taxation...

This is, I must say, a paragraph that goes very badly with Holtz-Eakin's earlier:

Leadership is a key... the willingness to sacrifice in the present--no Twizzlers, no Twinkies, no T-shirts, no tanks, no television--in order to devote those dollars to higher skills, bigger production facilities, development of new technologies, advanced machinery and other investments in the ability to produce more and better... Politicians recoil... much of federal policymaking is driven by the desire to act like the sugar plum fairy...

"The desire to act like the sugar plum fairy". Yep, Doug, you have nailed yourself.

Step three is to recognize that immigration reform can raise population growth, labor force growth, and thus growth in GDP. In addition, immigrants inject entrepreneurialism into the U.S. economy. New entrepreneurial vigor embodied in new capital and consumer goods promises a higher standard of living. A better and more open immigration system could thus raise the pace of economic growth substantially and reduce the cumulative federal deficit...

The end with the "reduce the cumulative federal deficit" strikes an odd note. And the lack of specifics--which immigrants, how many of them, on what conditions--of any sort is, if we needed it, yet more evidence that this is not a work intended to be any part of a technocratic dialogue.

The next step is to acknowledge that education in America is a disgrace. Tests scores in primary and secondary school remain flat, high school dropout rates are still distressingly high, and growth in college graduation rates has bogged down. Furthermore, our nation shows regular gaps in achievement between wealthy and low wealth students. Regardless of often having better than average funding, poor neighborhoods usually lack great teachers. There is as well a shamefully predictable gap in achievement based on race and ethnicity that persists. On average, students of color have a much lower, 50 percent likelihood of graduating. Of those students of color who do graduate, they typically exit high school with the functional equivalent of an 8th or 9th grade education. This feeds an embarrassingly persistent and worsening gap between our students’ performance and that of students in the rest of the industrialized world. The Organisation for Economic Co-operation and Development (OECD) found that in 2006, America ranked 25th out of 30 industrialized countries in math and 24th in science.

In the past, only parents with enough money could choose a school outside their government assignment--and money can still buy escape. However, around the ‘assigned sector’ of public education, there is a whole other world slowly emerging. Increasingly, there are more choices in the public sector that families can access, among them public charter schools and access to private schools with scholarship or tax credit support. The tragedy is that the government near-monopoly has prevented these new choices from being fully implemented and throwing open doors to the students that need them most. While thousand of parents have accessed choice programs immediately as they become available, thousands more sit on waiting lists while their children and their hopes languish. Better options driven by parental choice can expand as quickly as we can provide them the students and the resources to do so...

Here, again, it seems as though we are seeing light emitted long-ago from a now-dead star. Five years ago it was still possible to see charter schools and school choice as a possible magic bullet for the improvement of American education. Today it is much less possible to do so. And, again, no engagement. There have been no numbers, no facts, no concrete policy proposals, nothing empirical or implementable in the entire piece so far, save for a few of the wrong numbers at the beginning.

The final step is a new approach to regulation. The recent rapid increase in burdensome regulations comes at a considerable cost to American businesses, consumers, workers, and the economy in general. In 2013 the federal government imposed over $113 billion in compliance costs and an estimated 67 million net paperwork burden hours on American individuals and businesses. These costs take a real toll on employment: just $1 billion in additional regulatory compliance costs are associated with a 3.6 percent decline in industry employment. The cumulative effect of regulation is significant, and therefore policymakers should take existing regulatory burdens into account when writing new rules. A comprehensive re-evaluation of existing regulations, starting with the most burdensome, duplicative, and costly, should be undertaken to limit the negative impact on employment and prosperity.

"$1 billion in additional regulatory compliance costs are associated with a 3.6 percent decline in industry employment". Something is wrong here. $1 billion... over what time frame? 3.6% decline... on what base? There is a powerful and valid point to be made that increasing regulatory compliance costs is an extremely wasteful burden on businesses, reducing employment and reducing real wages for workers remaining. But this is perhaps the most innumerate way of making this point that it is possible to imagine.

I want to stop, to shake him, and to say: WHAT IS GOING ON HERE?! YOU USED TO BE AN ECONOMIST--A GOOD ONE!!! YOU USED TO BE THE KIND OF PERSON WHO WOULD LAUGH AT THE INNUMERACY OF ANYONE WHO WOULD SAY, WITH A STRAIGHT FACE: "$1 billion in additional regulatory compliance costs are associated with a 3.6 percent decline in industry employment", and think that they had conveyed any meaningful information about regulatory burdens and required benefit-cost hurdles.

What has happened to you?

And then the end:

Poor growth is the great threat at this moment. But a new strategy for better growth is the great opportunity for the future.

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