Rhetoric of economic policy -- Biden plan analysis

Last week saw four interesting statements by economists regarding the economic effects of Biden economic plans. 

My focus will be "An Analysis of Vice President Biden’s Economic Agenda: The Long Run Impacts of Its Regulation, Taxes, and Spending" by  Timothy Fitzgerald, Kevin Hassett, Cody Kallen and Casey Mulligan, a 50 page report. (Yes, hosted by the Hoover Institution, my employer). The Wall Street Journal gave it major coverage in its editorial page, offering a thoughtful summary.   

I  contrast that piece with  a letter  signed by 13 Nobel-Prize winning economists  endorsing Biden's economic policies. A separate open letter  signed by 1072 regular economists wrote, and a similar Economists for Trump letter.   

I am a bit late to the game, as it took me a while to read the weighty Hoover report. However, unlike letter writers, I have no illusions that my opinions will sway the election. 

And, if the polls are right and Biden wins, the question of just what Biden's policies will be, and their economic effects, will have perhaps greater resonance after the election than in the Biden vs. Trump choice of the election.  As they formalize, debate, and institutionalize the plans, surely quantitative analysis of the likely outcomes will matter.  

I highlight this report not because of its contribution to the issue of the day. This report marks a dramatic innovation in rhetoric, how economists analyze political plans. The authors really have started a revolution in policy analysis. This was evident in their previous work at the CEA, but the report highlights it. 

*****

The report. 

The deep innovation: This is entirely, and appropriately, a neoclassical analysis. This report shows you how to do serious, quantitive, applied, large-scale detailed and transparent incentive-based analysis. 

(I use "incentive-based" as a clearer and less charged word than "neoclassical" these days. It gets to the central point.) 

This report puts the neoclassical growth model at the center of policy analysis, rather than the simple Keynesian ISLM model. And that's exactly appropriate for permanent long-run policies, not short-run get out of a depression policies. 

This is a Big Deal. Past the current election, the report sets out a machinery that can revolutionize policy analysis. (Granted, the report is just the latest in a development of this effort. The recent Economic Reports of the President which the authors cite and build on are precursors.) But that machinery is the big point of this post, and an invitation of a project for others to emulate -- no matter whose policies look good or bad by it. (Trade and immigration restrictions will not look so good by these methods.) 

By contrast, most analysis of "president x" plan, when you get under the hood, amount to this: Candidate X proposes to spend $1 trillion additional dollars. Multiply by 1.5 to deduce that this will "stimulate" the economy and raise GDP by $1.5 trillion dollars, or 7.5% ($20 Trillion GDP). Divide by 150 million employed to conclude that candidate X will "create" 10 million new jobs.  Yes, this sort of hydraulic Keynesianism pervades current policy analysis. 

Just how higher taxes don't reduce such stimulus as much takes some skulduggery. But most analysis of taxes is entirely on their redistribution effect, who pays a bit more, who pays a bit less, in enormous detail, without the slightest concern over who actually bears the burden of taxes -- no "corporations" do not pay a cent of taxes, in the end workers, consumers, or investors do -- and zero treatment of disincentives and behavioral responses. 

Most analysis present results of a black box, unverifiable. The report is by contrast transparent, reproducible, and tells the story of its economic mechanisms. 

An example of incentive-based analysis, and explaining the mechanisms: what are the effects of the corporate tax? Not "corporations pay their fair share!" as we know by simple addition corporations pay nothing. 

Any empirically-grounded estimate of the effects of taxes (or business regulation) must confront the fact that national average after-tax returns on capital have been fairly constant over long periods of time and across a broad cross section of countries despite large differences in rates of capital taxation. [For example, calculations of after-tax capital-rental rates for the twentieth-century U.S. find rates of about 8 percent per year at the beginning of the century – when corporate and personal income taxes were unconstitutional – and also about 8 percent at the end of the century (C. B. Mulligan 2002). For cross-country patterns, see Caselli and Feyer (2007).] This is strong evidence that, in the long run, the owners of capital have close substitutes to investment in the businesses of a specific country. Faced with a high tax rate on their capital income, eventually they reduce investment in the jurisdiction until pre-tax profits are high enough to compensate for the high tax rate. In effect, workers and consumers eventually pay for capital-income taxes rather than the capital owners who are legally liable for the tax.

(They acknowledge criticisms of this view.) In short, tax capital and you get less of it -- a lower capital stock, until the remixing machines are more productive, enough to pay the tax. With less machines, we get less GDP. And with less GDP, workers are less productive too, and so wages decline. 

So why do jobs decline? If we're not Keynesian, the labor market clears, so one might think wages decline, but not number of workers. Indeed, the decline in productivity 

reduces the marginal product of labor, and hence wages. However, such a wage change has little effect on overall employment or hours worked because of opposing income and substitution effects on labor supply. 

Translation: if you get a lower wage, the incentive to work is lower as each additional hour gets you less money. But you're also poorer, and poorer people work more. We usually think these effects roughly offset so lowering after-tax wages does not hurt jobs. 

People work less overall because the Biden agenda also increases marginal tax rates on work as it redistributes to the unemployed, low-income households, and producers in protected industries....

Most of the additional labor (or consumption) taxation comes from changing rules for subsidizing ACA plans. Regulation generates a labor wedge to the extent that it reduces competition.... 

Most of the additional labor (or consumption) taxation comes from changing rules for subsidizing ACA plans. Regulation generates a labor wedge to the extent that it reduces competition.

These changes give the substitution effect without the income effect, driving people to work less. 

But to the point, let us examine less the answer than the audacious question. The report does not analyze demand-side "stimulus," direct government employment, jobs programs or other bits of economic magic, or at best short-run analysis. It gets employment effects from labor supply, circumstances under which people choose not to work as much. This is entirely appropriate for long-run questions. 

The quantification of cost of regulations is another analytical innovation that should become routine. They approach climate regulation in a straightforward way: The Biden-propsed climate policies amount to producing energy in a less economically efficient way, while raising taxes to subsidize the price of energy. There's no getting around it, less efficient ways of producing energy reduce GDP, and taxes distort economic activity. That "green" energy requires so many "jobs" is a cost, not a benefit. They quantify this channel. 

Regulation is much harder to evaluate than standard policies that fit easily in the neoclassical growth model or even Keynesian demand models. One of many innovations of this report is a blueprint of how to do it. 

Admittedly, 

 we do not assess the benefits those policies might deliver aside from rough estimates of the tonnage of carbon abatement. Climate change is real.  

But this is a general failing. Where is the estimate of how many tons of carbon the whole green new deal reduces, how much global temperatures decline, and how much GDP is thereby saved in 2100? Not in the Biden plan! (At least as far as I have seen - I welcome numbers if they are there.)

Though it seems long, the report has a strictly limited scope. It assesses a few tax, regulation, and energy proposals, but it does not try to be a full evaluation of the Biden plan. As such it is extremely conservative, in the other sense of the word -- it simply ignores thousands of policies where it might have easily found economic damage. On the other hand, it is much more detailed than the typical academic article.  This is the novelty: serious, medium-scale reproducible incentive-based analysis. 

I would have gotten lost, and learning how to boil policy down to something manageable is an important lesson. The energy part of the Biden Plan alone goes on and on. A few random quotes: 

Ensure that environmental justice is a key consideration in where, how, and with whom we build – creating good, union, middle-class jobs in communities left behind, righting wrongs in communities that bear the brunt of pollution, and lifting up the best ideas from across our great nation – rural, urban, and tribal...

Mobilizing the next generation of conservation and resilience workers through a Civilian Climate Corps. 

 ...comprehensively address the most pressing, intersectional environmental justice issues and hold polluters accountable. ... Biden will establish a new Environmental and Climate Justice Division

"Intersectional environmental justice" issues? How do we analyze that? Go on and read the Democratic Party platform, and the total number of proposals is overwhelming. How do you deal with that? 

You don't. The report limits its scope to a medium-sized number of quantifiable policies. This is a sweet spot -- much more detailed than typical analyses, but still at a manageable level to be comprehensible. 

. 

The result is remarkably benign.  A cocktail party conversation of conservative economists, who have worked for Trump, asked how will confiscatory taxation, green new deal, and regulatory onslaught will affect the economy, might respond in end-of-western-civilization tones -- similar but opposite to the uninformed enthusiasm expressed by the letter writers, documented below. 

The report's answer is only a loss of 8.5 percentage points of GDP, and 3 percentage points of employment (jobs). That's only a 1 percentage point drag on growth per year over two administrations, a four year delay in the march of prosperity. The UK's GDP per capita is 32% lower than the US ($42,944, vs. $62,795) so they're only accusing Biden of taking us 1/4 of the way to the UK, and many people might not consider that a disaster.  Herkenhoff, Ohanian, and Prescott find that land use regulation alone costs the US 12 percentage points of income. 

In sum, these are very modest claims of damage -- which I think raises the believability of the project.  

An example of wisely pulled punches: 

...our model does not have any role for business activity to affect TFP growth. We agree that TFP growth is not automatic, and much of it originates with activities related to innovation and entrepreneurship. Lacking a quantitative understanding of this process, we treat them as zero in this paper but do not deny the assertion that additional taxes and regulations would reduce the growth of TFP and not just its level.

Their bottom line was only 8.5% reduction in the level of GDP. It is entirely worth speculating whether Bidenomics would reduce the growth rate of GDP, driven by innovation. Any such effect would dwarf the level effect eventually. But "Lacking a quantitative understanding of this process," they say nothing. 

At another level, though I have to be a bit critical. As impactful writing, do not take this report as a model of rhetoric! It is nearly unreadable if you're not a well trained economist. They put the tables in the back where you can't see them! The report starts with taxes, which are eye glazing, not the more innovative analysis of regulations. 

**** 

The Letters 

The Nobel Prize Winners offer a short letter. Its core: 

we believe that Biden’s overall economic agenda will improve our nation’s health, investment, sustainability, resilience, employment opportunities, and fairness and be vastly superior to the counterproductive economic policies of Donald Trump.

Throughout the coronavirus crisis, Biden has recognized that science-based, public health solutions are critical not only to saving lives, but to any viable strategy to restore economic confidence, recovery, and jobs. Similarly, on issue after issue, Biden’s economic agenda will do far more than Donald Trump’s to increase the economic strength and well-being of our nation and its people. Simply put, Biden’s policies will result in economic growth that is faster, more robust, and more equitable.

Now, the Biden plan at its core consists of a sharp rise in tax rates, pushing many marginal rates well past 50%, a pledge to both spend and via unions and other regulations deliberately increase economic "wedges," and to deliberately use more expensive but less carbon-emitting energy. Such a plan might be defended as an important sacrifice of economic growth for greater equality, or for environmental benefits not quantified by GDP, or for social justice. Indeed "less growth but more equitable" might -- might -- be a defensible position. But just how does it produce "economic growth that is faster?" 

The signatories turn economics on its head. OK, they have Nobel Prizes, I don't -- maybe all the standard signs of the effects of economic policies are wrong. But how? The offer no analysis, no mechanism, no quantification, and not even citation to others who have done so. Just their "belief" and  authority as Nobel Prize winners. Or is it just their moral judgement and partisan feeling, no less sincere, but not any more special than yours and mine? 

The economists against Trump offer a personal list of charges, reminiscent (deliberately, I hope) of the charges against George III in the Declaration of Independence

His chaotic and ineffective approach to negotiation has damaged relations with trade partners...

His managerial incompetence has damaged the credibility and effectiveness of the public sector....

His administration’s public health response to COVID-19 was described by medical scientists as having turned "...a crisis into a tragedy" and as having underperformed relative to other democracies by "orders of magnitude."

Ah, dear party of science enthusiasts, just which democracies other than maybe New Zealand do you have in mind here? Europe is exploding with covid-19, and last time I looked Trump does not rule them  

He has consistently undermined the independence and credibility of our major health agencies,...

He has dramatically overemphasized the extent to which economic growth and public health are in conflict during a pandemic. In fact, many countries that have been more effective in their viral containment efforts have also performed better economically.

Umm. Sweden? 

His personal behavior during the COVID-19 outbreak...

He regularly spreads dangerous misinformation...

And so on. The best

He has a poorly-informed, zero-sum view of economics that engenders needless viciousness and cruelty.

Really? And your redistribution, unions, and various adjective-justice plans are not about zero-sum economics, but just growing the pie? 

OK, I get your outrage at the President's behavior and his twitter account. Lots of passionate partisans including Republican Never-Trumpers feel that way.  But you're writing as economists, trading on what's left of our profession's claim to scientific expertise, to objective analysis of policy and its outcomes. What reader, seeing your signature on this letter, would dream to believe that you can offer documented, reproducible policy analysis free of partisan bias? 

(Admittedly,   

He claimed to have the unique ability to generate growth (in real GDP) of between 4% and 6%, but never surpassed 2.9% in his first three years in office. Furthermore, analysts at Goldman Sachs and Moody’s Analytics have projected that Joe Biden’s economic plans, if implemented, would actually generate faster growth in both employment and real GDP.

So they do cite a study, though they don't give a link, and interestingly not one produced by academic economists. I have not read either, but the WSJ characterized the Moody's study in the nakedly Keynesian terms I did above.  The incremental economic analysis relative to partisan passion in this letter remains zero.  And in fact GDP did regularly come in above forecasts in the Trump years, and regularly under forecasts in the Obama years. But that fact may reflect more on how forecasts are made.)  

The economists for Trump do not do much better. This one came later, and at least I can sympathize with a desire to let the public know that the entire profession is not in one partisan camp, but really all this does is to let them know there are a few economists in the other partisan camp. 

We enthusiastically endorse President Trump's re-election efforts on the basis of his track record and continued economic policy agenda. 

Prior to 2020, the President's pro-growth economic policy agenda included regulatory reform and tax reform that among other changes reduced the federal corporate tax rate to 21%. We believe this meaningfully contributed to accelerate GDP growth  and historically low unemployment which fell the the lowest level in half a century. Wage growth also picked up during this period for the first time in decades and 2019 saw the largest single-year percentage gain in median household income on record (a 6.8% increase) to $68,700. These economic gains have been widely shared across-the-board for Americans. ..

At least this one had some economic facts, which are uncontestable. 

We believe that Vice President Joe Biden's proposals to add regulations and raise taxes amid an economic contraction, namely raise the federal corporate tax rate to 28% from 21%, will meaningfully hinder the economic recovery and slow the process of Americans getting back to work.

Yes but why? Whence this "belief" and who cares about your beliefs. At least they are not presuming, as the anti-Trumpers do, that our stature as economists gives us special insight to judge the moral character of politicians. But though I agree with the analysis (I explicitly offer no political endorsement, that's not my job and you should not care who I vote for), analysis needs to be analysis to add to public debate. 

Matt Yglesias tweeted recently

We need to some day [to] try to swim back to the idea that partisan politics is a contest about who will run the government and what will they do with that power, not just a referendum on diffuse cultural trends with tenuous connections to policy.

In public when using your professional status to claim expertise, you should be in that business. 

Update:

After a few days, I have reflected a bit, and at least come to a more nuanced view. After all, I express lots of political opinions -- see Understanding the Left.  I offer views of economic policy. That's basically the point of this blog. And I don't always footnote everything with detailed studies. That's putting it mildly. Most of what I offer is a rough sketch of whatever literature I can remember and my own views as I try to sort through what sounds right and what does not. 

So why am I so annoyed at the letters? Am I not a little guilty of some of the same sins? 

Now, I don't express my views of the moral character of politicians, nor do I endorse candidates in public. The letters did that.  I try hard to separate economic analysis from political judgement, and remember the rule that both parties are sinners. The letters let their partisan passions and judgements about Trump's character bleed in to economic judgements, that somehow sharp raises in taxes and regulations are going to increase economic growth. 

But everyone is entitled to their opinions and to spout off as they wish.  I spout off about plenty of other topics on which I have little special expertise. And I unashamedly work hard to preserve a free market view, more quickly accepting confirmatory facts and logic, and more cautiously to jump on the latest puzzle. 

What annoys me the most, I think, is the essential character of a joint public letter. It does not say, I Jane Q Citizen, think the current occupant is a jerk and should be thrown out. It says we, as economists, representing the economics profession, summarizing scientific knowledge proclaim the current occupant is a jerk and should be thrown out. 

After all, why make it joint, and not just send it from each one's twitter account, and label it personal opinion? 

Making it joint, and signing it, also signals the social coercion so abundant in other academic fields and infecting economics like covid-19 in a frat boy back from a rave. Hey young assistant professor, all the bien-pensant people in your profession -- all your tenure committee, letter writers, editors and Nobel prize winners -- are on the bandwagon here. 

The point of a joint letter is to try to demonstrate unanimous opinion, both outside and inside, not just we, who happen to be economists, think that Trump should be ousted, but all good-thinking economists should join us. 

For that reason I was a little kinder to the joint pro-Trump letter. At least it signals, in response, hey, it's ok to have a differing opinion. Sure, the economics profession may be 95% for Biden, but you are not totally alone, there is a group that feels as you do. 

I signed one joint letter a long time ago -- economists opposed to the TARP. I still think it was a good idea -- it revealed to the world that there were some economists opposed to TARP, and I think we did some good in slowing down a steamroller headed in the wrong direction. The joint letter opposing the Smoot-Hawley Tariff was a great joint letter, for all the reasons these are bad joint letters.  

Bottom line, to all of us: think long and hard before organizing and signing joint letters on political matters.