Wednesday, September 14, 2016


I was invited to testify at a hearing of the House budget committee on Sept 14. It's nothing novel or revolutionary, but a chance to put my thoughts together on how to get growth going again, and policy approaches that get past the usual partisan squabbling. Here are my oral remarks. (pdf version here.) The written testimony, with lots of explanation and footnotes, is here. (pdf) (Getting footnotes in html is a pain.)

Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.

Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average, we would, in the next 30 years, triple rather than double the size of the economy—and tax revenues, which would do wonders for our debt problem.

Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.

How do we fix it? Our national political and economic debate just makes the same points again, louder, and going nowhere. Instead, let us look together for novel and effective policies that can appeal to all sides.


Let’s get past “too much” or “too little” regulation, and fix regulation instead.

Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop, prosecutor, judge, jury and executioner all rolled in to one. Most dangerous of all, regulation is becoming more politicized.

Congress can fix this.

Social programs

Let’s get past spending “more” or “less” on social programs, and fix them instead.

Often, if you earn an extra dollar, you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives, we will help people better, encourage growth and opportunity--and in the end we will spend less.

Spend more to spend less.

Spending is a serious problem. But moving spending off the books does not help.

For example, we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes, and sending checks to homeowners – but larger checks for high income people, people who borrow a lot, and people who refinance often.

Suppose we eliminate the mortgage deduction, and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller, help lower-income people a lot more, and be better targeted at getting people in houses.

The budget would look bigger. But we would really spend less -- and grow more.


Tax reform fails because arguments over the level of taxes, subsidies, or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.

First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code, preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.

A massive simplification of the tax code is, I think, more important than the rates – and easier for us to agree on.

Debt and deficits

Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.

First, let’s face the big problem: a debt crisis, when the U.S. suddenly needs to borrow a lot and roll over debts, and markets refuse. This, not a slow predictable rise in interest rates and crowding out, strikes me as the biggest problem.  Crises are always sudden and unexpected, like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until, one day, it couldn’t.

The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions, widespread credit and bailout guarantees.

Buy some insurance. Like every homeowner shopping for a mortgage, the US chooses between a floating rate, lower initially, and a fixed rate, higher initially, but forever insulating the budget from interest rate risks, which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.

Above all, undertake this simple, pro-growth economic policy, and grow out of debt.

Concluding comments

You may object that fundamental reform is not “politically feasible.” Well, what’s “politically feasible” changes fast these days.

Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing.


  1. "Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing."

    Presumably we are talking about Congress here (and not the American people in general). Prior to 1913, the quantity of dollars in circulation was set by an act of Congress. Upon passage of the Federal Reserve Act, control over the quantity of dollars in circulation was handed over to a third party.

    And so using this as a model, "the right thing" is for Congress to cede control of one or more items (taxes, spending, etc.) to a third party.

    Finally, the quote often attributed to Churchill was never uttered by him.

    Abba Eban (Israeli politician and diplomat, March of 1967)
    “Men and nations behave wisely when they have exhausted all other resources.”

    In July of 1980, the first person to ascribe this saying to Churchill James R. Thompson of Illinois during the “International Coal Show” in Chicago.

    1. Thanks for the correction. It's just the sort of thing Churchill should have said, so I see how the urban legend persists.

    2. I would like your thoughts on Congress ceding power (taxation, spending, or other) to a third party. If they can't do it right, perhaps they should appoint someone who can.

      Also, on the quote attributed to Churchill, context is everything. Following the link I gave, here is a related statement from Abba Eban (June of 1967):

      "The question is whether there is any reason to believe that such a new era may yet come to pass. If I am sanguine on this point, it is because of a conviction that men and nations do behave wisely once they have exhausted all other alternatives. Surely the other alternatives of war and belligerency have now been exhausted."

      This doesn't sound like something that Churchill would have uttered.

      "Churchill opposed Gandhi's peaceful disobedience revolt and the Indian Independence movement in the 1920s and 30s, arguing that the Round Table Conference was a frightful prospect. In response to Gandhi's civil disobedience campaign, Churchill proclaimed in 1920 that Gandhi ought to be lain bound hand and foot at the gates of Delhi, and then trampled on by an enormous elephant with the new Viceroy seated on its back."

  2. John - good luck on your testimony today. Your ideas are right on; almost as if I wrote them:)

    The only thing I want to add is that your ideas are correct but have very little chance of being implemented in this electoral system. That's why a political restructuring has to be done before meaningful reform can happen.

    I will see you in about a month at the Hoover retreat and in advance, please check out a reform I have been working on. It is called the Citizens Legislature (or Neighborhood Legislature). It accomplishes the task of taking political funders and cronies out of power so that they can't block reform and so that reform can be implemented because it is the best practice and not because a funder uses influence.

    You can see it at I look forward to meeting you.

    John Cox

    1. Thanks. It seems to me we are in the midst of a grand political restructuring!

  3. thanks prof Cochrane.., wonder what DT would do? with protectionism on its way, BDP might shrink 1/3.., good luck today

  4. I particularly liked several of your comments about tax policies. Personally I would prefer to remove almost all deductions and credits and move them, as you suggested in part, to transparent line items in our budget. Currently, due to the complexity of our Tax codes and regulations, do have a clear and detailed picture on where our revenue comes from. Loud noises about this or that bracket, particularly from people most of whose income is not taxed as ordinary income, is distracting, to those who listen to it. Keeping a graduated income tax, and taxing all income as ordinary, and then providing targeted transparent grants in the budget would be, clean. Much more like steak than sausage. V/r Brian Bott

  5. Did you get any questions and (my real question) how did you answer?

  6. Your testimony; "Better to light a candle than curse the darkness." An old Chinese proverb, I'm told. As for taxes, A consumption tax obviates much of the arbitrary nature of the tax code.

    1. A consumption tax means the rates paid by different products can be fiddled with to benefit the connected. Probably harder to do for a single company, though it's been done before (all companies selling product X with sales between Y and Z headquartered in a state with over N inches of rain each year).

    2. So instead of a few different tax rates for a few different types of income (wages, investment, corporate) we get millions of different tax rates for millions of different types of consumption goods. And this is supposed to be less arbitrary / complicated?

    3. I didn't go on and on about it here, but my tax plan has exactly the same rate for all goods. Rule number one, don't transfer income, or subsidize activities, by distorting prices.

    4. Steve Forbes couldn't get elected on a flat income tax and you really think a flat consumption tax is going to get any traction?

      Take a look at the myriad of exemptions, exceptions, etc. to the state of Illinois (or any state) sales tax and tell me how you are going to keep 500+ Representatives and 100 Senators from tweaking a national consumption / sales tax to serve their own constituencies.

      This is the problem you never really address in your statement to Congress because Congress is part of the problem.

      My rule #1: To bake a simpler cake you need fewer cooks in the kitchen.

    5. John,

      Your statement above:

      "First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank."

      Did you mean "leave the rate (singular) blank"?

  7. Great remarks.
    What I would like to know is if the Honorable Members of the Committee actually paid attention and asked good pointed questions denoting some interest in the subject matter, or if they just rolled their eyes playing Solitaire with their smartphones.

  8. You can't have high mandated healthcare costs, high mandated energy costs, high mandated regulatory costs, high mandated labor costs, high mandated taxes and a thriving economy. We have made our choices. I do agree though that the single most valuable thing we could do to help restore equity, trust and growth to the economy would be to grossly simplify the tax system.


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