Rebecca Henderson: People

Hoisted from the 2007 Archives: Dilemmas of Economists in Government

Max Sawicky on the Dilemmas of Economists in High Government Office Max Sawicky writes about the dilemmas of economists in government.

These dilemmas were very, very soft indeed in the Clinton administration. (Here's where I state that the "200,000 net jobs projected from NAFTA" number was mine: we took an estimate of overall economic efficiency gains from tariff reductions and an employment elasticity with respect to the real wage from the Labor Department, and estimated that in the long run stable-inflation employment would grow by 0.14 percent as a result of the deal. I think it was the right answer to the question being asked by the entire Washington journamalistic community in 1993; I don't think that was the right question for the public sphere to have been asking.) Indeed, the dilemmas were close to nonexistent, and limited to not getting out your megaphone and saying "that's wrong!" when one of your political masters said somthing wrong in public.

These dilemmas are much harder in Republican administrations—not just Trump administrations. For example, Dick Cheney especially let few opportunities to claim that tax cuts increase revenues pass him by.

Here is Max and company:

MaxSpeak, You Listen!: J'ACCUSE: Professor N. Gregory Mankiw takes umbrage at the implication from some "bigshot at the left-wing thinktank Economic Policy Institute" (that would be labor market genius Jared Bernstein) that he is "a hypocrite." But Jared did not use that word, and his remark was not personal...

Here's Jared Bernstein:

Predicting with a Handicap: Why are Economists’ Predictions So Often Wrong?: Economists sometimes serve vested interests, and will change their views accordingly. The best example is also one of the best economists, Greg Mankiw. This textbook-writing Harvard prof was Bush’s chief economist for awhile, and during his confirmation hearing and subsequent tenure at the White House, he constantly defended Bushonomics, including supply-side beliefs that he once argued were the musings of “cranks and charlatans."

Now, Mankiw may well have felt he could do the nation more good if he were working from the inside, trying to nudge the administration’s economic policy in a better direction (if so, he failed)...

Let me call this one for Jared: Mankiw was indeed correct in thinking that he personally could do more good for the country and the world working inside than if he were to march up to Dick Cheney, tell him "you have to stop saying that tax cuts raise revenues," and so get fired. But the Bush administration did frequently argue that tax cuts raised revenue. And there is the much harder question: is it worth the sacrifice of the economics profession's outside credibility and the further confusion of the public that is entailed when good economists defend bad policies on the outside that they are working to change on the inside?

I don't know the answer to that.

Max Sawicky continues:

[Jared Bernstein's point] went to whether NGM altered his respectable views on supply-side economics out of political considerations when he took the helm of the President's Council of Economic Advisers. Unfortunately [Mankiw] does not make the case he wants. (Nor by the way does Jared provide conclusive evidence in the original post, which is mostly about other things.)

Jared does, however, point to Mankiw's testimony at his confirmation hearing. Mankiw's defense is that he has always taken explicit issue with the most notorious of the supply-side tenets—that across-the-board reductions in tax rates would raise revenue....

In his book, NGM is forthright that the giant revenue response from a tax cut is hokum. In his testimony, he is less emphatic, or as he puts it, "skeptical" of such claims. Moreover, he asserted that the Bush Administration did not adhere to the "extreme" view, which is flat wrong, as Senator Paul Sarbanes made explicit in the hearing....

We should not be surprised when academics in political positions use and invoke their professional expertise to defend their bosses in public. This could happen in any administration. When you take a political appointment, you can't protest when you are accused of having been political. Political service can be an honorable pastime. The bigger source of embarrassment here is the disjunct between Mankiw the academic ace and Bush the economic nitwit, between the standards of professional work in academia and the intellectual corruption of really-existing Bush economic policy...

And here's Brendan Nyhan:

Brendan Nyhan: McCain and Mankiw on supply-side economics: Harvard's Greg Mankiw, who bad-mouths McCain on his blog:

The interviewer, however, did not ask [McCain]... "If you think tax cuts increase revenue, why advocate spending restraint? Can't we pay for new spending programs with more tax cuts?" I doubt that, in fact, Senator McCain believes we are on the wrong side of the Laffer curve. But unfortunately, fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party.

But what Mankiw doesn't mention is President Bush and Vice President Cheney's expressed "fealty to the most extreme supply-side views," which Mankiw conspicuously failed to change.... [D]uring his Senate confirmation hearing, Mankiw was asked about claims that tax cuts were self-financing, and he disavowed them, saying "I remain skeptical of those claims." However, he also stated that he thought the administration had not made such claims, which was—and is—false:

[T]he most extreme advocates of tax cuts, I think, sometimes paint an excessively rosy picture out of what they can get out of them. I don't think this administration has done that....

Now that he is no longer part of the administration, will he admit that Bush and Cheney have repeatedly suggested that tax cuts increase revenue? Shouldn't Mankiw have asked his question #2 to President Bush? What's good for the goose is good for the gander and all that...

And the very sharp Andrew Samwick: Advice from Andrew Samwick for Economists Who Want to Advise Andrew Samwick writes about advising politicians about budgets. Listen to him. He's smart:

Vox Baby: How To Advise on Fiscal Policy: The overriding problem in conducting fiscal policy is that politicians, in both the executive and legislative branches, face electoral pressure to please their current constituencies. It is extremely tempting for them to boost spending or lower taxes today, handing out windfalls to today's voters and leaving an unrepresented constituency—future taxpayers—to foot the bill.

It takes an enormous amount of energy to resist that temptation. That energy has to come from the politician's advisers.

In the White House, the most senior of them carry the titles Assistant to the President, in most cases preceded by the word "Deputy" or "Special" to connote their place in the hierarchy. During the year I spent at CEA, I worked with a number of them who were excellent. But if you ask them what their objectives are, or if you listen to their arguments during policy meetings, what you find is that they are working extremely hard to advance the President's policies (which they have often had a central role in shaping and hopefully improving). They may have very good intentions at heart, but in my experience they were not usually the ones looking at the larger picture who might help resist the temptation to act in a politically opportunistic manner.

There were exceptions, and I'm not looking to impugn anyone here.

There are other advisers with a central role to play in fiscal policy, however, who are Presidential nominees who undergo Senate confirmation and who can be called to testify to Congress on the President's policies. We should expect them to be the ones who look at the larger picture, who take a longer horizon into their policy discussions, and who do the heavy lifting to help the politician resist the temptation to use future generations' resources to buy votes today.

On fiscal policy, the three main advisers are the Secretary of the Treasury, the Director of the Office of Management and Budget, and the Chairman of the Council of Economic Advisers.

To address the overriding problem, these three advisers must insist on an explicit budget target. The weakest one that I would accept is that the debt-to-GDP ratio (including debt held by government trust funds) must show no upward trend. (A stronger one would be that the on-budget deficit should be in balance over a full business cycle.) Long-term entitlement programs should be in projected actuarial balance to the extent it is possible to make a projection. (You can see here what happened to one adviser who made reasonable arguments without first getting agreement on a standard.)

The standard can be that simple, and it isn't as austere as I'm trying to make it sound. It doesn't rule out cutting taxes during the weak part of a business cycle, for example, but it does rule out cutting taxes to run a deficit that the Administration has no intention of paying back during the strong part of a business cycle.

As a corollary, it does rule out passing tax cuts with explicit sunset provisions and then arguing to extend them with the budget not in balance. There can be occasional exceptions, but their presumed infrequency should immediately cause them to be fully explained. (Think of the President addressing a joint session of Congress.)

Twice a year, the Administration makes an economic forecast to underlie the budget or its mid-session review. I'd be surprised if you ever see such a forecast that predicts an upcoming recession. That means that every budget or mid-session review should be projecting on-budget surpluses or their quick resumption if we are just coming out of a recession. As I've discussed elsewhere, the "cut the deficit in half in five years" policy was at variance with this standard.

I acknowledge that my views on this don't match the usual discussions of the impact of deficits. I think too much of those discussions are about their impact on interest rates and thus the incentive for private investment. This is where economists spend a lot of their time, but that doesn't make it the most relevant question. Suppose for the sake of argument that deficits don't put much upward pressure on interest rates. Even in that case, they still have to be financed at the existing interest rate, and the burden of financing them has to be borne by someone in the future. Taxing someone in 2020 to pay for our spending binge in 2003 violates my notions of fairness, and that is a substantially more salient issue here than any additional concerns about efficiency...