Monday, March 6, 2017

Kevin Hassett v. Nate Silver on What Cause the Great Recession

A few years ago Nate Silver took on some nonsense written by Kevin Hassett:
It is no wonder that markets are imploding around us. Obama is giving us the War on Business. Imagine that some hypothetical enemy state spent years preparing a “Manchurian Candidate” to destroy the U.S. economy once elected. What policies might that leader pursue? He might discourage private capital from entering the financial sector by instructing his Treasury secretary to repeatedly promise a brilliant rescue plan, but never actually have one. Private firms, spooked by the thought of what government might do, would shy away from transactions altogether. If the secretary were smooth and played rope-a-dope long enough, the whole financial sector would be gone before voters could demand action.
Of course the Great Recession was imploding around us well before Obama was elected as President. Nate provides an alternative explanation:
Wall Street needs to get its house in order. A big reason for the financial crisis is because of market failures -- the country had to endure the weight of two consecutive bubbles, first in tech stocks and then in housing. Another big reason is because the Fed kept interest rates much lower than they ought to have been. There were a number of reasons for that, but the fact that the NASDAQ would pitch a fit anytime that Greenspan or Bernanke wouldn't meet their expectations on perpetually low interest rates was probably one of them. There appears to be no acknowledgment of any of this, no attempt whatsoever to come to grips with reality. Instead, all we get is denial and anger. Nobody is going on CBNC and saying: "You know what, our bad. We had a lot of good and honest disagreements with the Bush administration's policy. We have a lot of good and honest disagreements with the Obama administration's policy. There are a lot of things we couldn't have anticipated. We were trying the best we could. But we also gave you a lot of bad advice. And that advice cost you a lot of money. And for that, we're sorry." Why can't anyone on Wall Street man up and do that?
This sounds about right except for the complaint that the Federal Reserve kept interest rates “too low for too long” as former economist John B. Taylor keeps babbling about. But I have another problem with what Nate wrote as he stopped too soon with the nonsense in Hassett’s rant:
Another diabolical idea would be to significantly increase taxes on whatever firms are still standing. That would require subterfuge, since increasing tax rates would be too obvious. Our Manchurian Candidate would have plenty of sophisticated ideas on changing the rules to get more revenue without increasing rates, such as auctioning off “permits.”… First, one way the economy might finally take off is for some entrepreneur to invent an amazing new product that launches something on the scale of the dot-com boom. If you want to destroy an economy, you have to persuade those innovators not even to try. Second, you need to initiate entitlement programs that are difficult to change once enacted. These programs should transfer assets away from productive areas of the economy as efficiently as possible. Ideally, the government will have no choice but to increase taxes sharply in the future to pay for new entitlements. A leader who pulled off all that might be able to finish off the country…On the tax hike, Obama’s proposed 2010 budget quite ominously signaled that he intends to end or significantly amend the U.S. practice of allowing U.S. multinationals to defer U.S. taxes on income that they earn abroad. Currently, the U.S. has the second-highest corporate tax on Earth. U.S. firms can compete in Europe by opening a subsidiary in a low-tax country and locating the profits there. Since the high U.S. tax applies only when the money is mailed home, and firms can let the money sit abroad for as long as they want, the big disadvantage of the high rate is muted significantly. End that deferral opportunity and U.S. firms will no longer be able to compete, given their huge tax disadvantage. With foreign tax rates so low now, it is even possible that the end of deferral could lead to the extinction of the U.S. corporation. If any firms are to remain, they will be festooned with massive carbon-permit expenses because of Obama’s new cap-and- trade program.
Cap and trade is a bad idea? Even Greg Mankiw disagrees. Hassett also attacks Obamacare, which I guess is the reason Trump made his CEA chair. Of course the notion that Obama was proposing to massively increase taxes is what we know call “alternative facts”. It seems that Hassett’s real complaint was that we still have a repatriation tax and that we do not make it easier for multinationals to shift profits to tax havens.

1 comment:

George H. Blackford said...

I have a somewhat different take on this.

It seems to me that the changes in economic policy that took place during the forty years leading up to the financial crisis that began in 2007 are astounding. This is particularly so when it comes to the tax code. The maximum marginal income tax was reduced from 70% to 35%, the maximum capital gains tax from 28% to 15.7%, the maximum corporate profits tax from 50% to 34%, the maximum tax on dividends from 70% to 15%, and the maximum marginal estate tax from 70% to 35%. At the same time, payroll taxes were increased as were taxes on cigarettes, gasoline, and other sales and excise taxes as government fees and fines and the tuition at public colleges and universities were increased as well. All of these changes have made our system of government finance more regressive—that is, they increased the proportion of income taken by the government from low and middle-income families relative to the proportion taken from upper-income families.

Changes in the area of market regulation have been particularly dramatic as well. Much of our regulatory system had been dismantled, either through legislative changes, deliberate under funding of the regulatory agencies, or through the appointment of individuals to head these agencies who did not believe in regulating markets and were willing to minimize the enforcement of existing regulations.

A third area of economic policy in which there have been profound changes is in the area of international finance and trade. Of particular importance was the abandonment in 1973 of the managed international exchange system set up by the Bretton Woods Agreement in 1944 and replacing it with what became known as the Washington Consensus which championed unrestricted international finance and trade. This eventually led to innumerable bilateral trade agreements negotiated with China after Nixon's historic visit in 1972, the North American Free Trade Agreement in 1994, and our joining the World Trade Organization in 1995.

All of these changes were championed in the name of economic efficiency and have, in fact, made it possible for countless individuals to amass huge amounts of wealth over the past forty years. What’s wrong with that? Haven’t we all benefited from the generation of all that wealth? Well, not exactly.