This is In Real Terms, a column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback so far!
This week, the Tax Policy Center — a well-regarded non-partisan think tank — issued a report saying that Ted Cruz’s tax plan would cost the government $8.6 trillion over the next 10 years. Which is fine, except that back in October, the Tax Foundation — a well-regarded nonpartisan think tank — looked at the same plan and estimated it would cost $768 billion. Even in the world of federal budgets, an $8 trillion gap is a lot of money.
Meanwhile, on the Democratic side of the race, a fight broke out among economists over the likely impact of Bernie Sanders’s tax and spending plans. Others have covered the battle in more depth, but the short version is that Gerald Friedman, a University of Massachusetts economist who has consulted for the Sanders campaign,1 released a report estimating that Sanders’s proposals would create millions of new jobs, increase household incomes by tens of thousands of dollars and boost the overall size of the economy by more than a third. (The Sanders campaign has embraced Friedman’s analysis. According to The Washington Post’s Jim Tankersley, however, Friedman is not planning on voting for Sanders.) Mainstream Democratic economists responded by saying, more or less, “You’ve got to be kidding me”; former Obama administration economic adviser Austan Goolsbee likened the Sanders plan to “magic flying puppies with winning Lotto tickets tied to their collars.” The Tax Foundation, for its part, estimates the Sanders proposals would shrink the economy by nearly 10 percent over the long term.
If the supposed experts can’t even agree on the direction of a plan’s impact, is there any hope for a normal voter? Yes — but it helps to understand a few things about how experts reach these estimates, and why they differ so widely.
First, this week’s jumbled headlines notwithstanding, there is actually a lot that the experts do agree on. The Republican plans, especially Donald Trump’s, would reduce federal revenues by trillions of dollars. Sanders’s plan would increase both taxing and spending by trillions (the disagreement surrounds whether the new taxes would pay for all the new spending).
|IMPACT ON FEDERAL REVENUE OVER 10 YEARS (TRILLIONS)|
|CANDIDATE||TAX POLICY CENTER (STATIC)||TAX FOUNDATION (STATIC)||TAX FOUNDATION (DYNAMIC)|
Second, most of the disagreement among experts is about the broader economic impact of the various plans, not the plans themselves. Here’s what I mean by that: Figuring out how much extra money a tweak to the tax code would bring in, or how much a new policy would cost, is relatively straightforward. This is what is known as “static” analysis — taken in isolation, how would these plans change things? Economists can usually agree on an answer, or at least come close. (Emphasis on “usually.” Some proposals, such as Sanders’s single-payer health system or Cruz’s value-added tax, are so dramatic that experts reach wildly different estimates of their impact.)
The trouble is, these plans don’t exist in isolation: Changes in tax policy have far-reaching ripple effects on the economy. In theory, there is little doubt that we should try to take such “dynamic effects” into account, but in practice there is often significant disagreement among economists about how exactly to do so. The Tax Foundation, which tends to lean to the right, thinks the tax increases that Sanders is proposing will slow the economy, further reducing tax receipts (since there will be less money to tax) and making the revenue impact look larger than it would under a static model. Friedman, at UMass, thinks the extra government spending that Sanders is proposing will speed up the economy, making the plan less expensive than it looks at first.2
Unfortunately, the Tax Policy Center — which, despite some criticism from Republicans in the last presidential race, is probably the closest thing out there to a neutral observer — doesn’t produce dynamic estimates. But its well-regarded static estimates can still be a useful baseline. Take the TPC’s recent analysis of Rubio’s tax plan, which the center concluded would reduce federal revenue by $6.8 trillion over 10 years, or about 2.6 percent of economic output. That’s close to half of all discretionary spending. Think of that as a worst-case scenario for Rubio. The Tax Foundation’s dynamic analysis — which concludes Rubio’s plan would cut revenues by $2.4 trillion, or about 1 percent of economic output — is, if not a best-case scenario, then at least an optimistic one. (The range of credible outcomes is wider for Cruz’s plan because it has more moving parts.)
Not all points along that spectrum of possible outcomes are equally plausible, of course. Most mainstream economists think Friedman’s analysis of Sanders’s plan is based on unrealistic assumptions — and I tend to agree. (Economists have directed their harshest criticism at Friedman’s analysis, not at the Sanders plan itself, much of which is basically a more aggressive version fairly standard liberal policies.) But that doesn’t mean mainstream economists are right. At a certain point, voters still have to decide who they believe.
Too big to fail?
When Narayana Kocherlakota stepped down as president of the Federal Reserve Bank of Minneapolis last year, he seemed certain to leave the Fed a more boring place. (I assure you, this is possible.) Kocherlakota was famous among Fed watchers for pulling a rare about-face on policy in the aftermath of the recession. Once a “hawk” who feared inflation, Kocherlakota became the Fed’s most outspoken “dove,” advocating for aggressive action to bring down unemployment.
Few expected Kocherlakota’s successor, Neel Kashkari, to follow in his footsteps. A former Goldman Sachs banker, government official and failed California gubernatorial candidate, Kashkari had all the hallmarks of a conventional central banker.
But maybe Kashkari will keep Kocherlakota’s maverick flame burning after all. We still don’t know much about his views on monetary policy, but in his first speech in the new job Tuesday, Kashkari made headlines by calling for a major overhaul of Wall Street. Kashkari, who as a Treasury official under George W. Bush oversaw the bailout of the financial industry, said the big banks remain “too big to fail” and either need to be much more heavily regulated or else broken up. He followed up that speech by telling the Financial Times that the bailouts had eroded Americans’ trust in government and that the Fed needs to do more to respond to widespread “economic anger.”
With China slowing down, Europe in tatters, the stock market slumping and oil prices falling through the floor, U.S. consumers have been pretty much the only thing keeping the economy going. So it was more than a little concerning when the Commerce Department last month said that retail sales had fallen in December.
Well, never mind that. This week, the government not only said sales rose in January; it revised its December estimate to say sales rose then, too. Neither gain was particularly impressive, but at least things are headed in the right direction. Meanwhile, a key measure of the industrial sector showed better than expected growth in January, suggesting U.S. manufacturers are surviving the global slowdown.
On the other hand, Larry Summers thinks there’s a one-in-three chance the U.S. will fall into a recession in the next year. So that isn’t great.
Number of the week
In 1952, 2.7 million workers walked off the job (or were locked out by their employers) in 470 major work stoppages (those involving at least 1,000 workers) across the U.S. Last year, according to new data from the Bureau of Labor Statistics, there were 12 strikes and lockouts, involving just 47,000 workers. As the chart below shows, it’s been a long decline, which broadly mirrors the decades-long erosion of union membership.
More from us
I wrote about the presidential campaign’s shift to two states — South Carolina and Nevada — that better reflect the nation’s economic anxiety than Iowa or New Hampshire. (For more on South Carolina’s economy, and how voters there feel about it, see this excellent Wall Street Journal story from Bob Davis and Valerie Bauerlein.)
Jed Kolko looked at one source of anxiety in particular — the risk of robots taking our jobs — and found that it is hitting Republican-leaning cities harder than more Democratic ones.
Andrew Flowers explored Marco Rubio’s attempt to craft a paid family-leave policy without raising taxes.
Emily Badger says the best way to keep cities affordable might be to build more housing for the rich.
Marshall Steinbaum and Kavya Vaghul find that student-loan delinquencies disproportionately affect minority neighborhoods.
CLARIFICATION: A headline on a chart in an earlier version of this post referred imprecisely to work stoppages as worker protests. The chart shows both strikes and lockouts by management.