A convenient myth: Climate risk and the financial system

A Convenient Myth: Climate risk and the financial system. At National Review Online. 

In an October 21 press release, Janet Yellen — Treasury secretary and head of the Financial Stability Oversight Council (FSOC), the umbrella group that unites all U.S. financial regulators — eloquently summarized a vast program to implement climate policy via financial regulation:

"FSOC is recognizing that climate change is an emerging and increasing threat to U.S. financial stability. This report puts climate change squarely at the forefront of the agenda of its member agencies and is a critical first step forward in addressing the threat of climate change."

You do not have to disagree with one iota of climate science — and I will not do so in this essay — to find this program outrageous, an affront to effective financial regulation, to effective climate policy, and to our system of government.

Climate economics

An essay on climate economics at National Review. 

***

Climate policy is ultimately an economic question. How much does climate change hurt? How much do various policy ideas actually help, and what do they cost? You don’t have to argue with one line of the IPCC scientific reports to disagree with climate policy that doesn’t make economic sense.

Climate policy is usually framed in terms of economic costs and benefits. We should spend some money now, or accept reduced incomes by holding back on carbon emissions, in order to mitigate climate change and provide a better future economy.

But the best guesses of the economic impact of climate change are surprisingly small. The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100.

Now, 5 percent of GDP is a lot of money — $1 trillion of our $20 trillion GDP today. But 5 percent of GDP in 80 years is couch change in the annals of economics. Even our sclerotic post-2000 real GDP grows at a 2 percent annual rate. At that rate, in 2100, the U.S. will have real GDP 400 percent greater than now, as even the IPCC readily admits. At 3 percent compound growth, the U.S. will produce, and people will earn, 1,000 percent more GDP than now. Yes, that can happen. From 1940 to 2000, U.S. GDP grew from $1,331 billion to $13,138 billion in 2012 dollars, a factor of ten in just 60 years, and a 3.8 percent compound annual growth rate.

Five percent of GDP is only two to three years of lost growth. Climate change means that in 2100, absent climate policy or much adaptation, we will live at what 2097 levels would be if climate change were to magically disappear. We will be only 380 percent better off. Or maybe only 950 percent better off.

Northern Europe has per capita GDP about 40 percent lower than that of the U.S., eight times or more the potential damage of climate change. Europe is a nice place to live. Many Europeans argue that their more extensive welfare states and greater economic regulation are worth the cost. But it is a cost, which makes climate change look rather less apocalyptic.

Inflation and expectations at NRO

Essay at National Review Online. 

Inflation: The Ingredients Are in the Pot, and the Fire Is On. (But will it boil?) 

John H. Cochrane and Kevin A. Hassett

The end of the COVID-19 recession is in sight. If the Atlanta Fed’s real-time estimate of 8.3 percent Q1 growth proves accurate, real GDP is only four-tenths of a percent below the all-time high from Fall 2019. And the vaccinated, post-COVID boom is on the way. Most people have money, and are ready to spend it. Yet unprecedented fiscal and monetary “stimulus” continues.

Is persistent inflation around the corner? Inflation and commodity prices are up sharply. The latest Michigan survey shows people expect 3.7 percent inflation next year. Shortages of everything from lumber to semiconductors have raised input prices for businesses, while the percentage of small businesses reporting that they cannot find qualified workers is at a record high. The ingredients are in the pot, and the fire is on.

But will the pot boil? Since 2008, observers have warned of imminent inflation, yet inflation has barely budged.

Inflation is hard to foresee, because inflation today depends in large part on what people expect of inflation in the future. If businesses expect higher prices and wages next year, they raise prices now. If workers expect higher prices and wages next year, they demand higher wages now.

Inflation has been so low for so long that most Americans understandably see persistent inflation as ancient history, and that any blip up today will quickly be reversed.

Yet faith that our government will take prompt action to reverse inflation seems increasingly unfounded.

The Federal Reserve’s new policy framework and its officials’ speeches are eerily reminiscent of the early 1970s, and repudiate the standard lessons of that experience. One may rightly worry that should inflation emerge, the Fed could repeat mistakes of the 1970s.

Vaccines at NR

I repackaged and rethought some of my earlier thoughts on vaccine allocation and markets vs. government for National Review here. Text here, without the lovely pop-up ads: 

Free Markets Beat Central Planning, Even for COVID-19 Tests and Vaccines January 12, 2021 

Surely, we can’t let there be a free market for COVID-19 tests and vaccines. Indeed, tests and vaccines encapsulate many of the “market failure” parables from introductory economics courses.

But the argument for free markets is not that they are perfect. The argument is that the known alternatives are much worse. And we have seen a catastrophic failure of government at all levels around the world to handle this pandemic, especially in delivering tests and vaccines.

The CDC delayed testing for about two months. While it dithered, it blocked private parties from testing. University labs, for example, were blocked from making and conducting their own tests. During those two months, someone could sell you a thermometer to detect a COVID-19 fever, but if someone tried to sell you anything more effective, the FDA would stop them. Once it finally approved paper-strip tests in November, the FDA insisted that $5 paper-strip tests require a prescription and be bundled with an app, driving the cost to $50. Rapid testing that lets people who are sick isolate, and lets businesses ensure that employees are healthy, is only just becoming widely available, held back for six months by the FDA.

Let’s imagine that the government had not prohibited free-market activities. This is not anarchy, just a lightly regulated sensible market on top of whatever the government wants to do.

Private companies would have developed tests quickly and would have worked to make them faster, better, and cheaper. Why? To make money! Lots of people, businesses, schools, and universities are willing to pay for good, fast testing. Medical companies, knowing they could make a lot of money so long as they beat the competition, would have raced to develop and sell tests. We would have had $5 or less at-home paper-strip tests by late spring. And that would have enabled much of the economy to reopen.

CBDC in EU

I wrote an oped for Il Sole 24 Ore on central bank digital currency, as part of a series they are doing. It's here in their premium edition (gated) here on their blog, in Italian on top and English below. Thanks much to Luciano Somoza and Tammaro Terracciano for translation and inspiring the project.

THE DIGITAL EURO IS A THREAT TO BANKS AND GOVERNMENTS. AND THAT’S OK. 

A central bank digital currency (CBDC) is in principle a very good idea. It offers the possibility of very low-cost transactions to households and businesses, especially in securities and international transactions. More excitingly, CBDC offers us a foundation for an efficient and nimble financial system that is completely insulated from recurrent crises. 

But CBDC poses a puzzle, as it undercuts many of governments’ and central banks other questionable objectives. Central banks want to prop up conventional banks, who benefit from taking deposits. And governments are unlikely to want to allow the anonymity that is the great attribute of physical cash. 

One vision for CBDC basically gives everyone access to bank reserves. Reserves are interest-paying accounts that banks hold at the central bank. When bank A wishes to pay bank B, it notifies the central bank, which just changes the numbers in each account on the central bank’s computer. The transaction can be accomplished in milliseconds, and costs basically nothing. Why don’t we have that? We should.

Volalitily, now the whole thing

An essay at The Hill on what to make of market volatility, from Dec 31. Now that two weeks have passed, I can post the whole thing. I add some graphs too.  (Though at the rate things are going any forecast will have been proved wrong in two weeks!)

What’s causing the big drop in the stock market, and the bout of enormous volatility we’re seeing at the end of the year?

The biggest worry is that this is The Beginning of The End — a recession is on its way, with a consequent big stock market rout. Is this early 2008 all over again, a signal of the big drop to come? 

Maybe. But maybe not. Maybe it’s 2010, 2011, 2016, or the greatest of all, 1987. “The stock market forecast 9 of the last 5 recessions,” Paul Samuelson once said, and rightly. The stock market does fall in recessions, but it also corrects occasionally during expansions. Each of these drops was accompanied by similar bouts of volatility.  Each is likely a period in which people worried about a recession or crash to come, but in the end it did not come.

Still, is this at last the time? A few guideposts are handy. 

There is no momentum in index returns. None. A few bad months, or days, of stock returns are exactly as likely to be continued as to be reversed. The fact is well established, and the reason is simple: If one could tell reliably that stocks would fall next month, we would all try to sell, and the market would fall instantly to that level.

Twenty percent volatility is normal. Twenty percent volatility on top of a 5 percent average return, means that every other year is likely to see a 15 percent drop.

Big market declines come with a recession, as in 2008. But recessions are almost as hard to forecast as stock prices, and for much the same reason. If we knew with confidence that a recession would happen next year, businesses would not invest or hire, and people would not spend, and we’d have a recession now.

Recessions do have some momentum. But the cyclical indicators of the real economy are strong, much stronger than they were in 2007-2008. Unemployment is 3.7%. There is no slowdown in real GDP growth or industrial production, or business investment in the most recent data. Inflation is close to the Fed’s target, so there is little reason to fear the Fed will quickly raise rates and cause a recession. Now, the market aggregates more information and faster than the rest of us. Still, the lack of any slowdown adds weight to the suspicion that this correction may pass as well.

In thinking about the economy, remember that it has passed from “demand” to “supply.” At 3.9% unemployment, we cannot get greater growth from simply putting unemployed people and machines to work.

The stages of the business cycle

As we complete the transition from a demand-limited economy to a supply-limited economy, it is perfectly natural for interest rates to rise. One or two percent above the inflation rate is perfectly normal. As interest rates rise, it is perfectly natural for interest-sensitive sectors like housing and autos to decline a bit – but other sectors do better. Demand shifts between products, and auto or housing slowdowns do not mean an overall slowdown.

The economy no longer needs or can use monetary or fiscal “stimulus.” Now growth must come more productivity. Growth-oriented policy requires efficiency, “structural reform,” better incentives, not just money in pockets. In my view, the US has gotten an extra percent of growth, mostly from deregulation and a bit from the incentive effects of the tax cuts. But these are over, and further reform is unlikely. So a growth slowdown is certainly in the cards.

What about the yield curve? It is flattening – the difference between long-term rates and short term rates is narrowing. And an inverted yield curve has, historically, been a good forecast of a recession to come.

But we are not yet at inversion, as the graph shows. Moreover, there have been long periods of nearly flat yield curves in the past, when the “supply” economy kept growing before the next recession, most notably the mid 1990s. In fact, if inflation remains contained, it is possible that the world starts to resemble earlier eras with permanently inverted yield curves. In a non-inflationary environment, long-term bonds are safer for long-term investors. Last, the form of inversion matters as well as the fact. An inversion that comes from the Fed quickly pushing up short rates to cause a slowdown, fighting inflation, is likely to, well, cause a slowdown. An inversion that comes when long-term rates plummet, seeing trouble ahead, is likely to be followed by trouble ahead. We have neither of those circumstances.

So what is going on? I hazard a guess.

Volatility occurs when there is great uncertainty. Investors are worried big events are on the horizon, and can’t quite figure out what is going to happen. Prices aggregate information, so seeing a price decline can make you think other people know something you don’t in a time of great uncertainty. We see this clearly in studies of high frequency data, when bond markets are adapting and digesting Fed statements, and we know there is no other news to react to.

We are, no doubt, in a time of high uncertainty about policy and politics. Volatility broke out almost coincident with the November election, and I think the markets are trying to digest just what the political chaos of the next two years means for the economy.

Surely no major growth-oriented economic reforms will come out of Congress. Congressional democrats will bring the full weight of the legal system against the Administration. Cabinet secretaries trying to clean up regulation will have a hard time when being constantly subpoenaed.

The government shutdown over 1/10 of 1% of the Federal budget devoted to a border wall is emblematic. It is, of course, entirely symbolic as any border wall will be stuck in the courts for decades. But it is precisely when issues are symbolic that compromise is impossible.

So the best economic news that markets can hope for is two years of complete government paralysis, and therefore a return to 2 percent or so growth.

Things could be much worse, and markets know it. A large policy blunder in the next two years, such as a big trade shock could well happen.

More deeply, the US is now unable to respond to any genuine crisis — economic, financial, military. Imagine that another banking crisis hits, and President Trump asks Congress, again, for a trillion bucks to bail out banks, and another trillion for fiscal stimulus. Or imagine if he does not, and whether the Administration can implement better ideas to fight a new and different crisis. Imagine what happens if China invades Taiwan, or a big bomb goes off in the middle east.

Europe is not in much better shape. It has followed the Augustinian approach to structural reform – Dear Lord, give me reform, but not quite yet. Italian banks, and too many German banks, are still stuffed with Italian government debt. Brexit, Cinque Stelle, and Gilets Jaunes mean that pro-market, free trade, growth-oriented structural reform not likely, and there is a limit to what even the ECB can do. China is as usual obscure, and more fragile than they want us to believe.

Throughout the world, government debt remains the big danger. Where is there a lot of debt, no plan to repay it, shady accounting, extend-and-pretend, off-balance sheet guarantees, and the debt is mostly short term and prone to runs? Government debt. If a serious recession comes, in a time of dysfunctional government, it may well provoke a government debt crisis, which would be an economic conflagration beyond anything we have seen.

So, we live in a time of great uncertainty, brought about by great political uncertainty. Great uncertainty leads to volatility. Volatility means that stocks are more risky, and thus must pay a greater expected return to get people to hold them. The only way for the expected future return to rise, is for today’s price to go down. So we see a correction – mild so far, to compensate for the mild risk of holding stocks through a few months of ups and downs.

There is a silver lining to this story. If prices are low because required returns have risen, then if nothing bad happens, long-term investors will do fine. Bond prices go down when yields go up, and the larger yields eventually make up for the price loss.

But greater uncertainty means a greater chance that something truly terrible will happen. As well as a greater chance that it won’t. The big message of the moment is that risk is higher. Managing risk, not following some sage’s directional bet, is the best investment advice anyone should start with.

(I also wrote here "The Jitters" related thoughts about the spring 2018 bout of volatility.)

Volatility

An essay at The Hill on what to make of market volatility:

What’s causing the big drop in the stock market, and the bout of enormous volatility we’re seeing at the end of the year?

The biggest worry is that this is The Beginning of The End — a recession is on its way, with a consequent big stock market rout. Is this early 2008 all over again, a signal of the big drop to come? 

Maybe. But maybe not. Maybe it’s 2010, 2011, 2016, or the greatest of all, 1987. “The stock market forecast 9 of the last 5 recessions,” Paul Samuelson once said, and rightly. The stock market does fall in recessions, but it also corrects occasionally during expansions. Each of these drops was accompanied by similar bouts of volatility.  Each is likely a period in which people worried about a recession or crash to come, but in the end it did not come. 

Still, is this at last the time? A few guideposts are handy. 

There is no momentum in index returns. None. A few bad months, or days, of stock returns are exactly as likely to be continued as to be reversed. The fact is well established, and the reason is simple: If one could tell reliably that stocks would fall next month, we would all try to sell, and the market would fall instantly to that level.

Twenty percent volatility is normal. Twenty percent volatility on top of a 5 percent average return, means that every other year is likely to see a 15 percent drop. 

Big market declines come with a recession, as in 2008. But recessions are almost as hard to forecast as stock prices, and for much the same reason.

...

They asked me to hold off a few weeks before posting the whole thing. So either wait two weeks or head over to The Hill. I also wrote here "The Jitters" related thoughts about the spring 2018 bout of volatility. 

Buybacks redux

Two more points occur to me regarding share buybacks. 1)When buybacks increase share prices, and management makes money on that, it's a good thing. The common complaint that buybacks are just a way for managers to enrich themselves is exactly wrong. 2) Maybe it's not so good that banks are buying back shares.  3) The tax bill actually gives incentives against buybacks. What's going on is despite, not because.

Recall the example. A company has $100 in cash, and $100 profitable factory. It has two shares outstanding, each worth $100. The company uses the cash to buy back one share. Now it has one share outstanding, worth $100, and assets of one factory. The shareholders are no wealthier. They used to have $200 in stock. Now they have $100 in stock and $100 in cash. It's a wash.

Why do share prices sometimes go up when companies announce buybacks? Well, as before, suppose that management had some zany idea of what to do with the cash that would turn the $100 cash into $80 of value. ("Let's invest in a fleet of corporate Ferraris"). Then the stock would only be worth $180 total, or $90 per share. Buying one share back, even overpaying at $100, raises the other share value from $90 to $100.

That was the big point. Share buybacks are a good way to get money out of firms with no ideas, into firms with good ideas. We want firms to invest, but we don't necessarily want every individual firm to invest. That's the classic fallacy that I think it turning Washington on its head. Best of all we want money going from cash rich old companies to cash starved new companies. Buybacks do that.

1) Management getting rich on buybacks is good.

OK, on to management. Management, buyback critics point out, often has compensation linked to the stock price. They might own stock or own stock options. So when the buyback boosts the stock price, then management gets rich too. Aha! The evil (or so they are portrayed) managers are just doing financial shenanigans to enrich themselves!

The fallacy here, is not stopping to think why the buyback raises the share price in the first place. If it is the main reason given in the finance literature, that this rescues cash that was otherwise going to be mal-invested, then you see the great wisdom of giving management stock options and encouraging them to get rich with buybacks.

Debt Oped

An oped on debt in the Washington Post. Growing debt and deficits are a danger. If interest rates rise, debt service will rise, and can provoke a crisis. Really the only solution is greater long-run economic growth and to reform -- reform, not "cut" -- entitlements. And the sooner the better, as the size and pain of the adjustment is much less if we do it now.

This is written with Mike Boskin, John Cogan, George Shultz, and John Taylor. George Shultz was the inspiration, and wrote the first draft. He radiates an ethic of government as responsible stewardship, and displeasure when he does not see such. It is a pleasure of my job at Hoover to work with such distinguished colleagues.

The Post gave it two headlines, in one "horizon" and in the other "doorstep," in different versions. The latter is a bit more alarmist than we care for.  Like living above an earthquake fault, living on a mountain of debt can be quiet for a long time. Until all of a sudden it isn't.  A pdf version

***

A Debt Crisis is on the Horizon

By Michael J. Boskin, John H. Cochrane, John F. Cogan, George P. Shultz and John B. Taylor

We live in a time of extraordinary promise. Breakthroughs in artificial intelligence, 3D manufacturing, medical science and other areas have the potential to dramatically raise living standards in coming decades. But a major obstacle stands squarely in the way of this promise: high and sharply rising government debt.

In the name of Science

Source: climatefeedback.org

"Climate Feedback" has produced a "scientific review" of my WSJ oped with David Henderson on (Oped ungated full text here, see also associated blog post.)

In the blog post, I wrote,

"If it is not clear enough, nothing in this piece takes a stand on climate science, either affirming or denying current climate forecasts. I will be interested to see how quickly we are painted as unscientific climate-deniers."

Now we know the answer. 

To recap, the oped said nothing about climate science, nothing about climate computer model forecasts, and did not even question the integrated model forecasts of economic damage. We did not deny either climate change nor did we argue against CO2 mitigation policies in principle. For argument's sake we granted a rather extreme forecast (level of GDP reduced by 10% forever) of economic costs. We did not even question the highly questionable cost-benefit analyses of policies subject to cost benefit analysis. We mostly complained about the lack of any cost benefit analysis, and the quantitative nonsense of many claims.

So, it's curious that there could be any "scientific" review of a purely economic article in the first place. How do they do it? 

Tax Reform Again

A Wall Street Journal oped on tax reform. This complements an earlier oped and see the tax link at right for many others.

The bottom line: I argue for a national VAT instead of (and that is crucial) individual and corporate income taxes, estate taxes, and anything else.

Why? I want to break out of our stale argument. "Lower taxes to boost the economy"  vs. "you just want tax cuts for the rich." It's not going to go anywhere.

I also want to break out of the process. Proposing cuts within the current structure of the tax code, even if proposing them with offsetting cuts in deductions, leads naturally right back to the mess we're in.

Once you tax income much of the rest of the mess follows inexorably.  If we go back to the beginning, and tax spending not income, so much mess vanishes.

Growth full oped

Source: Wall Street Journal

On November 7 I wrote "Don't believe the economic pessimists," an oped about growth in the Wall Street Journal. Now that 30 days have passed, I can post the whole thing here. pdf here (my webpage).

Don't Believe the Economic Pessimists

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. “Secular stagnation” or “hysteresis” account for slow growth. Prosperity demands more borrowing and spending—even on bridges to nowhere—or deliberate inflation or negative interest rates. Others advocate surrender. More growth is impossible. Accept and manage mediocrity.

But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure. The U.S. economy suffers from complex, arbitrary and politicized regulation. The ridiculous tax system and badly structured social programs discourage work and investment. Even internet giants are now running to Washington for regulatory favors.

If you think robust growth is impossible, consider a serious growth-oriented policy program—one that could even satisfy many of the left’s desires.

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.

Clinton Plan

The WSJ asked me to review the Hillary Clinton economic plan, motivated by her August 11 speech introducing it.  The Op-Ed is here.

I read a good deal of the "plan" on hillaryclinton.com. What I discovered is that there is so much plan that there really isn't any plan at all.

WSJ growth oped -- full version

WSJ Oped. Now that 30 days have passed, I can post the whole thing. Previous post.

Ending America’s Slow-Growth Tailspin

Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes.

The differences in these small percentages might seem minor, but over time they have big consequences. By 2008, the average American was more than three times better off than in 1952. Real GDP per person rose from $16,000 to $49,000. And those numbers understate the advances in the quality of goods, health and environment that came with growth. But if U.S. growth between 1950 and 2000 had been the 2% of recent years, instead of 3.5%, income per person in 2000 would have risen to just $23,000, not $50,000. That’s a huge difference.

Looking ahead, solving almost all of America’s problems hinges on re-establishing robust economic growth. Over the next 50 years, if income could be doubled relative to 2% growth, the U.S. would be able to pay for Social Security, Medicare, defense, environmental concerns and the debt. Halve that income gain, and none of those spending challenges can be addressed. Doubling income per capita would help the less well off far more than any imaginable transfer scheme.

Delong and Logarithms

Brad Delong posted a response to my oped on growth  in the Wall Street Journal. He took issue with my graph, reproduced here,

by making his own graph, here

He characterizes the difference between our graphs with his usual gentlemanly restraint,

"Extraordinarily Unprofessional!!:" "total idiocy" The University of Chicago and the Wall Street Journal Have Very Serious Intellectual Quality Control Problems

and so forth.

If you read Brad, you may wonder what skulduggery I used to make the plot. I will now reveal the dark secret. It's a clever Chicago-school mathematical trick:

Logarithms.

Growth Interview

I did a short interview with the WSJ's Mary Kissel about my growth oped. If you can't see the embed above, try this direct link or this one. 

WSJ Growth Oped

I did an oped on growth in the Wall Street Journal, titled "Ending America’s Slow-Growth Tailspin." I'll post the full thing here in 30 days.

Blog readers will recognize a distilled version of my longer essay on growth (blog post here, html here,   pdf here), and the graph from Smith v. Jones blog post. I think out loud. The growth essay is much more detailed on diagnosis and especially on policy.

There are three basic ideas (two too many for a good oped).

1) Growth is everything. Increasing growth will do way more for every problem you can name than anything else on the economic agenda. Even if workers in 1910 could have taken all of Rockefeller's wealth, they would have been disastrously poor compared to today.

2) Can policies actually improve growth? The tut-tutters mocked Jeb Bush's 4% aspiration. I outline the "we've run out of ideas" school of thought, most recently in Bob Gordon's thoughtful book; the "everything is right but the zero bound" secular-staglation school, and the view that the growth giant is being held back by a liliputian army of politicized regulators.

As evidence,  I improved on the graph from an earlier post of the World Bank's ease of doing business score vs. GDP per capita,

Tax Oped -- full version

Source: Wall Street Journal

An Oped at the Wall Street Journal, "Here's what genuine tax reform looks like." I posted the teaser a month ago, now I can post the whole thing.

Left and right agree that the U.S. tax code is a mess. The men and women running for president in 2016 are offering reform plans, and proposals to fix the code regularly surface in Congress. But these plans are, and should be, political documents, designed to attract votes. To prevent today’s ugly bargains from becoming tomorrow’s conventional wisdom, we should more frequently discuss the ideal tax structure.

The first goal of taxation is to raise needed government revenue with minimum economic damage. That means lower marginal rates—the additional tax people pay for each extra dollar earned—and a broader base of income subject to tax. It also means a massively simpler tax code.

Tax Oped

Source: Wall Street Journal

An Oped at the Wall Street Journal, "Here's what genuine tax reform looks like." With a new art style by WSJ. (Ungated via Hoover. I have to wait 30 days to post the whole thing.)

 I buried the lead, which I'll excerpt here:

"...Why is tax reform paralyzed? Because political debate mixes the goal of efficiently raising revenue with so many other objectives. Some want more progressivity or more revenue. Others defend subsidies and transfers for specific activities, groups or businesses. They hold reform hostage.

Wise politicians often bundle dissimilar goals to attract a majority. But when bundling leads to paralysis, progress comes by separating the issues. 

Thus, we should agree to first reform the structure of the tax code, leaving the rates blank. We will then separately debate rates, and the consequent overall revenue and progressivity.... we can agree on an efficient, simple and fair tax, and debate revenues and progressivity separately.

We should also agree to separate the tax code from the subsidy code. We agree to debate subsidies for mortgage-interest payments, electric cars and the like—transparent and on-budget—but separately from tax reform.

Negotiating such an agreement will be hard. But the ability to achieve grand bargains is the most important characteristic of great political leaders."

This is, I think, the most novel idea in the oped. All tax reform packages mix changes to the structure of the tax code with specific rates. Then, the wonkosphere goes on a witch hunt of who pays more and who pays less, and the attempt to fix pathological problems in the structure falls apart.

I think our politicians really could negotiate a tax code in which all the rates are left blank. Then, we have a separate debate about what those rates will be.  In fact, tax rates ought to change a lot more often than the tax code itself.

Similarly,  the key to removing the pernicious subsidies in the tax code is again to separate the issues. Taxes are for taxing, then we can debate subsidies.

We need to move from the equilibrium of, I have my subsidy/deduction/credit/special deal, so I won't complain about yours, to the equilibrium of, I gave up my subsidy/deduction/credit special deal, so I'll make darn sure you give up yours too.