Lazear of "Scoring" of Legislation

Ed Lazear has an op-ed in the WSJ today concerning Congress' requiring the CBO to "score" legislation for economic growth.  To this point, the CBO has not done that on the grounds it wants to maintain an unbiased position. But, as Lazear points out, to not consider the effects on growth is to bias things in favor of passing legislation.  He offers several reasons why scoring is a good idea, and how it can be done while maintaining objectivity.

Bullish or Bearish on the Economy, or Do We Just Muddle Along?

The stock market has returned to the levels that existed prior to the financial crisis.  Market experts are discussing whether the bull market can continue or whether the bottom will drop out again soon.  Opposing views can be found in many places, including this link

I am not as concerned about the equity markets as the economy as a whole.  Is there reason to be bullish on the economy or not?  On the plus side:  the American economy continues to be more innovative and resilient than most economies; immigration reform may actually come and immigrants tend to offer dynamism to the economy; households are getting their financial house in order--most corporations have already done so; inflation is still contained; productivity is high; among other things.

What about he negatives? These include: the recovery is very tepid and shows little sign of picking up soon; labor force participation rates, especially of men, are down; baby boomers are entering retirement age implying further reduction in labor force participation rates and increased transfer payments in the form of social security and medicare; there is too much of a concern over the short run--this includes the government, pundits and the Fed; dysfuntional government; a larger share of the population is dependent on the government for their income; Europe has problems; among other things.

I tend to be optimistic most of the time, but it is difficult to be optimistic right now.  I suspect we will continue to muddle along for awhile, but not see robust growth any time soon.

Are We Becoming Europe?

I met a sociologist once who commented that he had visited at Princeton University while on sabbatical. He said, "I used to hate the rich; now I hate them with cause." I understood what he meant, for the rich, especially those who grew up rich, seem to feel entitled to all sorts of benefits and expect others to behave deferentially to them. It might seem then, that I would be ready to raise taxes on the rich. But, other things are involved than merely trying to punish the rich for being rich.  While greed is one of the seven deadly sins, so is envy.  (My former colleague, Victor Claar, has written and spoken on envy in recent years.)

If we are to receive the benefits of a stable government, we have to pay taxes.  But, as noted in a book years ago entitled, THE LAW AND THE PROFITS, governments do not have a tight budget constraint. If they want to spend more they can either tax or borrow more. What should be the amount of people's income that go to taxes? There is no "correct" answer, but one that gets worked out through our political process. 

Recently, Steven Rattner had an op-ed in the New York Times, in which he argues for higher taxes on the rich. He writes, "Don't forget that the taxes on capital gains and dividends are absurdly low."  I don't know on what he bases that other than personal opinion, and maybe he is correct. But, he completely ignores that the dividends have already been taxed as corporate profits. Rattner wants all of the extra revenue to come from the wealthy, even thought the wealthy already pay the vast majority of federal income taxes. When forty percent of households pay no federal income tax, what skin do they have in the game?

Another piece in the NY Times is by Eduardo Porter. He argues that we should increase the share of GDP that goes to taxes in order to maintain a better safety net than we now offer. Progressivity isn't the key but broader taxes that collect more revenue as well as more generous welfare programs. He argues that that is what the richer countries in Europe do and we should too.

These two pieces are just a sample of editorials and op-ed pieces in which an argument for larger government is offered. Porter is more forthright in his plan by saying we should be more like Europe. But, the European countries are having a harder time maintaining their programs, and this is not just the case for the basked cases like Greece. Germany has made reforms that have  loosened labor markets; France is still resisting such liberalization, but is also seeing downgrades to its debt.

A book I am reading, and will do a review of when finished, is The Redistribution Recession by Casey Mulligan. He shows that the generosity of the benefits we offer the unemployed and others has increased substantially since 2007. A result is that many unemployed would need a high-paying job to be better off than they are receiving govenrment benefits.  We may be moving closer to Europe whether intended or not. For a couple of decades unemployment in Europe remained higher than in the U.S. The Great Recession altered that briefly. The question now is whether we will follow Europe's path, which has included persistently higher unemployment and slower economic growth.

We Can't Return to the "Golden Age" of the Postwar Era

Robert Shiller's column in yesterday's New York Times epitomizes an approach and argument that I find totally fallacious and even silly.  The title is "Taxes Needn't Discourage Philanthropy."  He begins by asking the question--"How high can taxes go?" He notes that the top marginal rate in 1944 was 94%.  Yet, we didn't have class warfare and we didn't have an economic disaster. Of course, we were in World War II at the time, which he acknowledges.  He notes that one reason for the high rates was to ensure that the war would not create new millionaires.

After the war, the rate came down a little but not much. In 1963 the top rate was still 91%. Shiller argues that the high rates didn't impact growth negatively since the real GDP growth rate from 1948 to 1963 was 3.7%. This was higher than the overall average growth rate of 3.2 % from 1929 to 2011. He argues that one reason was that we had greater social harmony in those fifteen years, some of which was a hangover from the patriotism felt during WW II. It takes a while, but he eventually gets to his theme of encouraging philanthropy by encouraging positive feelings of reciprocity.  While worthy of comment on its own, I want to focus on the idea of using the first fifteen years after the war as evidence of things we could do today.  I think it is wrong.

People often regard the way things were when they were teens and young adults as some sort of norm.  For people older than I am, this time period was the fifties and early sixties--a time when American business was strong and the economy grew rapidly, as noted by Shiller.  However, this "golden age" was not a normal time period. In fact, it was an aberration.  The was was not fought on US soil and American industrial facilities were not destroyed. The same can not be said for most of Europe and Japan.  We faced no competition for most of that period.  In the sixties, Japanese goods were considered to be cheap and junk by most Americans.  American business people did not have to be particularly wise or innovative to be successful.  Few people talked about the importance of small business since the presumption was that big industry was the norm.  Major industries were oligopolistic and the firms often viewed as invincible.  General Motors was the quintessential American firm.  The economic situation was not viable in the long run.  Europe recovered, as did Japan, and new compeition came along.  To argue that any government policy that persisted at that time must have had either good or benign effects because of the success of the American economy at the time is misguided.  America's role in the world was unique and not sustainable over time.

Another point Shiller makes is that the American public was more harmonious at the time. He writes, "Many people sacrificed their lives during the war, and, for a while, it seemed that the survivors were especially chartiable to one another, on both a personal and an institutional level.  I wonder if African Americans in the deep South who lived at that time would agree with Shiller.  It was a time of white, male dominance that is totally unacceptable today.  Even at the end of  the war, Jews still often could not get into Ivy League schools, or at least could not get on the faculty.  People thought diversity at the time referred to Italians and Irish, not Hispanics and Cambodians.  To me, it is more difficult to see solidarity when society is increasingly diverse.

As the political and economic debate in the country has focused on whether the role of the federal government should be constrained or more dominant, I see references to the early-postwar times as evidence that high marginal tax rates can be associated with strong economic growth.  Shiller's piece is just one of a number of examples I could have used.  But the world has not stood still since 1963.  We need better evidence than appeals to a bygone "golden age."

China's Growth Rate is Slowing

There are stories in the newspapers today about China's growth rate is slowing down and some other concerns about their economy are discussed.  When the U.S. and most of the West had the financial crisis in 2008, China tried to set itself up as a model of how to run a successful economy.  Now some say that it may not be such a great model.  I don't know why anyone thought it was. Yes, China has been  growing at rapid rates for some time. But, it is easier to grow when you are catching up with the advanced economies. Japan did so in the 50s and 60s, South Korea more recently and now China.  Like China, Japan used more government direction than we do in the U.S., and many here thought it would be better if we had an industrial policy.  But, Japan has not been the economy we want to copy for a couple of decades now.  China will not be in the future either.

Justice and Economic Growth

Michael Sandel is a professor of government at Harvard who teaches a popular course on justice. He now has published a book based on the course and it was reviewed in Sunday's New York Times. The reviewer, Jonathan Rauch, notes that many public policy disagreements are really differences about justice. I suspect he is correct, although Tom Sowell's book, A Conflict of Visions, remains a better discussion of his point. But Rauch begins his review by recalling a conversation with a prominent conservative commentator who railed against the Obama administration's handling of General Motors and Chrysler. Rauch states that he found the fury of the commentator puzzling. He asks, "Was it such a crime for the government to treat differently situated stakeholders differently, even if doing so was unorthodox?" Clearly, Rauch thinks the answer is no, but I must respectfully disagree.

When economists give advice about how a poor country can encourage economic growth a common part of the answer is the importance of the rule of law. When decisions about who owns productive resources are left to the whims of the reigning government, few people make long-term investments in the resources. A predictable constancy is necessary if investments are to be made. Or, as Mancur Olsen put it--the wealth of a society depends on its ability to make long-term investment commitments. Such investments will not be made when the fruit of the investments may be confiscated at a later date. To alter bankrutpcy proceedings for the sake of political expediency is to move away from the rule of law. Rauch is aware that the rule of law is involved, but dismisses it when he writes, "Is justice absolute and process-driven, so that we should stick to rules come what may? Or is it situational and outcome-aware, so that we should sometimes imporise to take account of special circumstances?" Rauch seems to favor the latter. I favor the former, along with Hayek, Sowell, and Milton Friedman (to name a few).

We may be moving into a period of slower growth rates for the country. The focus on the short term that exists in Washington, the alteration of rules due to the emergency of a recession, and probably health care reform will reduce somewhat incentives to invest. For the latter, David Brooks offered an interesting discussion of health care reform as a trade-off between vitality and security. The social safety net will be enhanced but marginal tax rates will increase. The latter will reduce growth rates in the future.

Living in a liberal democracy means that decisions about trade-offs like those just mentinoed are decided through political processes. If society prefers less growth but bigger safety nets, then who am I to say society is wrong? Most Europeans I have met prefer their society to ours. But I am not certain most Americans prefer European economic and social systems to ours. Time will tell.