Sunday, November 6, 2016

Don't Believe the Economic Pessimists

Source: Wall Street Journal
No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming...

Keep reading here, the Wall Street Journal Oped. I'll post the whole thing in 30 days as usual.

Somehow the WSJ thinks anyone is interested in growth and serious policy on the eve of the election. Or maybe they were just tired of Trump vs. Clinton and needed to fill space.  At any rate, it might give you a little reprieve from the election coverage.


  1. > Have a bit more faith in democracy.

    Democracy is what "brought us here in the first place", to paraphrase Obama. Sadly, but revolting public lost confidence in democracy.

    1. Democracy created the U. S. tax code as it exists today. It is my opinion that we can do better.

  2. I keep looking for a "Like" button in this blog.

  3. "Achieving better growth is possible, but it will require deep structural reforms."

    Deep Structural Reform #1: Congress is no longer permitted to make changes to tax policy with regard to the business cycle. It's time to pull tax policy out of the micro-economic dregs (bye bye special interest guidance) and allow it to stand on even macro ground right next to central bank monetary policy.

    1. If only there was a like button for this comment. But I worry even that wouldn't really stop pork. I might force a law saying all local projects must be financed by local tax payers or local bonds and only multi-state projects get financed by federal dollars.

    2. Deep Structural Reform #2 - transfer pricing schemes that see American profits being shifted to tax havens are outlawed.

    3. That could be solved by getting rid of the corporate income tax

    4. James,

      Thanks for the thumbs up. "Pork" is generally used to describe government spending projects. And I would be perfectly content with government spending decisions being arrived at on a micro / Democratic level (as they are now) - I really don't see a good way around it.


      That get's into international law and finance which is too dense for me to digest. Though at the extreme, what is to be done to countries that shelter profits from U. S. taxation - bomb the hell out of them?

      That's great, you outlaw them, but it's not like the U. S. can bring an offending country to some international court of law and seek reparations awarded by a neutral 3rd party.

    5. James,

      "That could be solved by getting rid of the corporate income tax."

      If you get rid of the corporate income tax - my personal income becomes the corporate income of Frank Restly, Inc.

      And really - international finance (without cooperation) becomes a tit-for-tat / beggar thy neighbor game. So the U. S. pushes their corporate tax rate to 0%. In return, country so and so pushes their corporate tax rate to negative 5% - they pay companies to keep profits in their banks.

      How far would you want to go with this before realizing that closing tax shelters requires international cooperation?

    6. Frank

      When, for example, Apple designs a telephone in America, has it manufactured in China, sells it in Germany and pretends the resulting profits on that sale are earned in Ireland - that is between the USA and Apple and has little to do with Ireland. (Germany might have something to say about it too.)

    7. I understand the problem very well. I just don't see how if the U. S. acts alone and makes the process illegal, then suddenly everything will be hunkey-dorey.

      Correcting wrongs in international finance requires cooperation between countries.

      In my mind that is more than just a "structural reform" that could be successfully implemented by the U. S. on it's own accord.

    8. Frank,

      If a country could afford the loss in tax revenues and outrage from the public and still operate well, then sure - they should be free to pass a negative corporate income tax.

      The corporate income tax is another complete misnomer designed to tax the wealthy. If that's the game, we may as well be up front about it and just raise personal income taxes.

    9. James,

      "That could be solved by getting rid of the corporate income tax"

      I presume that you were responding to Absalon's statement:

      "Deep Structural Reform #2 - transfer pricing schemes that see American profits being shifted to tax havens are outlawed."

      Even if the U. S. pushes the corporate tax rate to 0% - essentially getting rid of the corporate tax, another country could offer a negative corporate tax rate - so how has the problem of offshore tax havens been solved?

  4. Last paragraph in WSJ Op-Ed was worth the cost of subscription. BTW: please don't ignore the moral foundations of liberty that is often obscured by positivist science; the Republic is in trouble. More Hayek less Keynes.
    William Holland NY

  5. "Deep structural reforms" - I doubt that will make much difference. Usually this type of language is just a front for wanting to squeeze the poor and enrich the rich.

    The economy, like the internet, tends to route around obstacles.

    I will read the article in thirty days when I don't have to pay for it.

    1. It's probably a good idea to actually read the article before attacking the author's motives.

    2. "It's probably a good idea to actually read the article before attacking the author's motives."

      I was pretty clear that I had not read the article.

      I have read articles by Professor Cochrane on this topic before and they have advocated policies like deregulating barbershops as the path to materially increasing growth.

      I promise that when Professor Cochrane publishes the whole article, I will read it. I will even diarize it now to remind me.

    3. "I was pretty clear that I had not read the article"

      I know. That's why I said it.

    4. @Absalon,

      At a minimum, surely you don't object for calls for a simplified tax code. That could do a lot for growth.

    5. "At a minimum, surely you don't object for calls for a simplified tax code. That could do a lot for growth."

      Sure. Simplify the tax code. However, I do not believe that simplification would do very much for growth. Combine low real interest rates, high p/e ratios, tax exemption for pension funds and accelerated depreciation and the effective tax rate on new investment for American companies is effectively zero across large swathes of the economy and the cost of capital is effectively zero.

    6. Absalon,

      "..cost of capital is effectively zero.."

      Which would also make the return on capital effectively zero - yes - one man's cost is another man's return?

      Do you know anyone that would put capital at risk for zero return?

      I think what you are missing is that tax policy can be used to "grease the wheels" so that both the investor and the recipient of capital can be satisfied.

    7. Frank

      My point is that cutting tax rates is not going to bring forward a lot of new capital investment because the effective rate of tax on investment is already so low and the cost of capital is at historic lows.

      You are talking about actually going the extra step from reducing tax cost to making it negative and turning it into a subsidy. I think that Professor Cochrane would disagree with such a proposal.

    8. Absalon,

      "You are talking about actually going the extra step from reducing tax cost to making it negative and turning it into a subsidy. I think that Professor Cochrane would disagree with such a proposal."

      A subsidy is only bad when it gives preferential treatment to one group or individual. For instance, John has repeatedly complained that Democrats give preferential treatment to solar and wind power via various subsidies (as opposed to coal, oil, or natural gas that get their subsidies from Republicans primarily).

      I am talking about a "subsidy" (if you want to call it that) that affects every U. S. tax payer.

      If the federal government suddenly realized a budget surplus and sent out a check for $100 to every U. S. tax payer - would this be considered a subsidy?

  6. Professor, great article, I agree with every word, including "and" and "the".
    But... I am really sorry for throwing a wet blanket on the real possibility of such policy proposals. Professor, I know that out there in the West, in Palo Alto, on the Stanford Campus, life is beautiful. The Campus is simply gorgeous. But, in the trenches, especially in Washington DC trenches, life is very different...:-)

    Consumption Taxes? Fuggedabbboutit. Progressives will never agree to consumption taxes in lieu of income taxes. They may agree to impose them UPON any other taxes, that is, more taxation, but never in lieu. Nancy Pelosi was very clear on this in a Charlie Rose interview some time ago.
    Replace regulation in High Finance? Never going to happen. Especially with Lizzy Warren in the Senate. Any proposals to deregulate High Finance are dead on arrival. Furthermore, it is not clear to me that the current High Finance oligopoly wants any changes. They are too comfortable in their small club, and they would not like more competition.
    Vouchers and Charter schools? Over the dead bodies of Progressives - never going to happen. Such policies are unmentionable for Progressives, they are like Lord Voldemort. The Education Unions will never ever allow that to happen, and since they are big contributors of Democrats, it is dead on arrival.
    Labor market reform for more competition? No, not happening. Did you read Jason Furman and Alan Krueger's article in the WSJ last Friday (Nov 4)? Their new mantra is monopsony in labor markets. And their policy prescriptions are more regulation and a higher minimum wage. So much for Ivy League educated economists.
    Energy? Progressives and Democrats are in love with solar and wind; and it is a very passionate love, because it makes us more European, more sophisticated, more learnéd. They will never agree to eliminate those credits.
    Obamacare? Our next likely President, she has stated unequivocally that she will build on Obamacare, not replace it. Democrats will never allow that their hero's signature program be replaced, they will never vote for it.
    Reforming Social Security and Medicare? Never going to happen. These programs are the crown jewel of the redistributionist Progressives, they are proud of those programs. The Democratic Caucus will never agree to change an iota.
    Taming Regulation? Nope. Leviathan is fine just as it is.

    So no, Professor. I know I am gloomy and you encourage people like me to "have more faith in democracy". Well, sorry for being cynical, but a recent President talked about "a pen and a phone", and he talked about governing around democracy, and not in democracy.

    Your phrase "global policy elite" elicited a chuckle. This policy elite came back in full force with a vengeance. Summers, Krugman, and many others. Not sure they will agree with even 10% of your agenda.

    1. "Consumption Taxes? Fuggedabbboutit. Progressives will never agree to consumption taxes in lieu of income taxes."

      If you call it a "carbon tax" then you are probably going to get a significant number of progressives on side.

    2. Manfred,

      "Consumption Taxes? Fuggedabbboutit. Progressives will never agree to consumption taxes in lieu of income taxes."

      Sure they would. Progressives are a flexible bunch. You have progressives confused with liberals. But in exchange for a consumption tax, are the powers that be willing to eliminate:

      U. S. Bankruptcy Law

      Patent law

      Copyright Law

      Trademark Law

      Trade Secrets Law

      If people that derive their income from financial contracts are unwilling to pay taxes on that income to government, then I would expect they would be willing to give up any legal protections afforded to them by government.

  7. Hey, here's an economist who breaks ranks with you. You should feel ashamed because he's right...

  8. As an essay in basic macro/growth theory, this is a very nice article, and I agree with all of it. I think of our current situation, not as secular stagnation, but as political-regulatory stagnation. So far, JC is on track.
    But as an essay in welfare economics, it's pretty deficient. Yes, we could do a lot better. However, to do better will require facing up to those who will lose from what JC clearly considers Pareto-sanctioned policy improvements towards better growth. So, to accomplish the good ideas of the article, we need to compensate, i.e., buy out, the losers -- those losers who have raided the public purse through their political connections. How to do that? And should they really be compensated for their losses? That is an interesting public policy question, clearly worthy of debate and discussion. Could it even be done? I doubt it, frankly.
    And, finally, as an essay in that subbranch of welfare theory called public choice, JC hints at serious issues, esp. in the last paragraph, but does not even hint at how we need to reform our democratic system -- which is inherently unstable, remember? -- from not just eliminating these non-Pareto sanctioned growth policies currently in place but also from preventing them from reoccurring. Now, there's another big debate that needs to be taken up. Who is really talking about these very fundamental political process issues? I haven't heard a single politician raise them, and precious few academics either. Clearly, these fundamental public choice problems are completely outside the public intellectual debate, i.e., the "elites" (curse their very name) seem blissfully unaware of them.

  9. Good article, but I am always dispirited by what is polite conversation on the American right.

    Not one word on property zoning? Surely the largest structural impediment in today's economy.

    Cutting "national security" spending? One trillion dollars a year--'how much of this is necessary to protect our sovereignty?

    Legalize push-cart and truck vending?

    Reforming health care? How about the communist Veterans Administration system of federally owned hospitals with federal employee staff providing benefits to former federal employees?

    Oh well.

    1. "Not one word on property zoning? Surely the largest structural impediment in today's economy."

      The United States is a very large country with lots of empty spaces. If the Libertarians truly thought that there were very large gains to be had from a different zoning regime they are perfectly free to go and buy a hundred square miles somewhere and create their own city and zoning regime.

  10. I am entertaining the proposition that the policy change that happened in the early 1970s that killed economic growth was the delinking of the dollar to gold. Of course, it could also be the creation of the EPA.

    Take your pick.

  11. The problem with a democracy, as opposed to a republic, majority rule can be despotic. Some statistics from various gov agencies bear this out. 2007, RGDP: 15T. 2016, 16.4T. Mean growth, 1.17%, sigma, 1.6%. Unemployment: 2007, 4.6%. 2010, 10%. Participation rate: 2007, 66.5%. 2016, 62.7%. Debt/GDP: 2007, 64.8%. 2016, 104.7%. Mean deficit, 775B. Sigma 430B. 2010, deficit was 1.4T,10% of GDP. Excess reserves: 2007, 1 Billion. 2016, 2.26T. As an empirical base line over nine years, one would think the deep thinkers in the administration would realize their policies have not worked. Sand in the gears and a liquidity trap. Sadly I am not optimistic.

    1. Me in the middle is David Seltzer

    2. This David Seltzer?

      Big fan of "The Omen" original with Gregory Peck and the remake with Liev Schreiber.

    3. No Frank. We are both from Chicago. He is an artist and I was a market maker on the CBOE and Amex. The other David is far more talented.

  12. I always believe in the USA's establishment and system, and that's why I aim to study there. But now I am deeply worried about the future of this great country after the stunning election result.

    1. Every country in the world is facing enormous challenges and stresses. The United States is in a much better position to deal with those challenges than most.

      The biggest governance problem America has is that the population wants a strong army, social security and medicare but are not willing to pay the taxes to pay for them. I expect a lot of political strife in and around the Republican Party itself as they try to reconcile the electorate's demands for entitlements with an unwillingness to pay taxes.

      So - get your degree in America and keep your mind open about where you go after getting the degree.

  13. Professor Cochrane,

    Lately it has occurred to me that I have been reading your blog for at least 3 years. At some point, I became aware that reading so much of what both you and other economic bloggers write has given me a dim view of Washington's ability to absorb the best ideas and write good legislation wrt economic affairs.

    I figure then it's always been like this; There's always been this gap between the possible competence in legislation and what actually gets achieved. The laws still make upward progress on average anyway, but it's excessively gradual. Even discounting the human fallibility hidden in the best sounding ideas, surely we ought to be implementing demonstrably better legislation.

    Then you think that "well, it's all down to politics", and so these thoughts all get stored away into the mental filing cabinet of How-The-World-Works (tm).

    Now we have a new, unexpected president coming in. No one knows for sure how he will govern. Sometimes I hear an optimistic view that likens him to a 3rd party candidate -- willing to follow paths that Democrats/Republicans routinely refuse even though it would be welcomed by the public.

    This makes me go "Hmmm...what does it cost me to open up that filing cabinet and just start submitting these ideas to his (perhaps kitschy) website? ("

    The mental objections though are obvious: they are your ideas and you are the actual professional who has spoken to Congress! In addition, I figure you might have ways to pass these proposals along a more promising route than via a textbox on some new website.

    I think some of your anonymous readers would love to hear your response. You have organized extremely compelling policy ideas on growth, tax code, healthcare, banking regulation and perhaps more that I'm forgetting. And you obviously should be very proud of them. I know you presented a version of the growth proposal to Congress, but please tell me that all of these have a chance of finding their way to the right people.

    And/or maybe there's something people like me could do to advocate for them?

    1. We all fall into the trap of thinking that people would support our ideas if only they were better informed.

      Years ago I was on a five person all candidates panel representing the whole range of views ( I was second from the right :-) ). The most left wing and the most right wing candidates gave virtually identical speeches that went like this:
      "I represent a point of view that is unfairly ignored and suppressed. If only we could get a fair hearing we would win because we represent the view of the common man."

      They had no sense of irony as they gave those speeches to an audience of hundreds of voters with local media present.

  14. We enjoyed your attempt to decipher Hillary Clinton's nearly incomprehensible 300 billion dollar infrastructure spending program.

    Will we see a similar look into Trump's one trillion dollar infrastructure spending program?

    1. Can you point me to an actual detailed program that I can review? In the meantime I'm reading Paul Ryan's "better way" which is very interesting and very detailed.

    2. Will we see a similar look into any one of Ryan's numerous "Better Way" policy proposals?

  15. Now that the republicans control the presidency, house, & senate should people not be optimistic about what the future will hold. There will now no longer be any gridlock in D.C. and we now will be able to get fiscal & monetary policy working in the same direction. I think that this will help our GDP growth and we will finally get to see stuff get done in this country. Whether it was a democrat or republican in office, I think it was time to get people working together and not against each other. With the republicans in charge of all 3 powers of control I think we will see a growing economy here over the next 4 years.

    1. Ryan - The Republicans are deeply divided. Even before the election they could not agree among themselves on a budget proposal. Trump wants to spend money on infrastructure. The Republicans in Congress have been opposing such spending for years. Trump and Ryan are far apart on important issues. Trump just ran a campaign that exploited the fact that a large number of Americans hate a lot of their countrymen. The idea that everyone is suddenly going to work together is quite unrealistic.

    2. Ryan,

      "With the Republicans in charge of all 3 powers of control I think we will see a growing economy here over the next 4 years."

      I presume that you have researched this statement - how has the U. S. economy performed when the Republican party controls the House, the Senate, and the Presidency compared to all other combinations?

      It hasn't happened very often so the evidence should be taken with a grain of small sample sized salt. First, GDP (and real GDP) measurements did not begin in the U. S. until about 1947. So, taking that as our starting date:

      Republicans controlled both Houses and the Presidency in the following years:

      1953-1955, 2001-2007

      How has U. S. economic performance over that time compared with the rest of the post World War II record?

    3. Absalon,
      I do agree with the fact that the republican party is deeply divided and that Trump may not be the prototypical republican. However, with that said Trump is "republican" and ever since he became the president elect it seems as if more and more republicans are backing him and coming to his side. I definitely think that there will be less gridlock than in the past and that they will all 3 work together and we will see positive economic action go to work in this country.

      Very interesting point made here and how you are comparing it back to history. However, when looking at the 2001-2007 time period in this discussion I think we need to use great caution. There were a lot of external factors during this time period that had strong effects on our economy and economic policy. The 2 main ones during this time period are the dot com bubble bursting, and the terrorist attacks of 9/11. With that being said I don't know if this time period would make a good comparison of today and what to expect with republicans in charge of all 3 powers of control.

  16. Cochrane writes, we ought now come together to tackle America's greatest economic problem, slow growth. "Greatest economic problem" is a carefully chosen phrase, and its apparent nuance begs the question: is slow growth really our greatest challenge?

    Many of us answer no. The problem of slow growth should be discussed only in the broader context of the most important global priorities.

  17. Thank you alt-right for this great victory.


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