FactCheck has decided to revive its campaign on Social Security contributing to the budget deficit in the context of claiming that Senator Bernie Sanders is wrong on this issue. The basic point that Sanders and other targets of FactCheck have made is that Social Security was explicitly set up to be funded separately from the rest of the budget. It is legally prohibited from spending any money other than what it receives through its designated taxes and from the interest on the bonds bought with these funds.
I have a fuller criticism of the FactCheck argument here, but Sanders is really just referring to the law on this one. FactCheck's problem is with the law, not Sanders.
It seems some establishment types are getting worried about the support that Senator Bernie Sanders is drawing in his presidential race. Breakingviews, the syndicated financial news service that promotes its "agenda setting insight," went full scare tactics in a piece warning about "Bernienomics."
The punchline is in the first sentence:
"A Bernie Sanders White House would be $8 trillion in the hole over a decade."
Wow! $8 trillion in the hole, who would vote for that guy?
Okay, let's first get out of the children's section and put this in terms that at least some of Breakingviews' readers would understand. An $8 trillion shortfall is a really big number, but expressed as a share of projected GDP in the ten years after President Sanders takes office it comes to about 3.4 percent. That is hardly a trivial figure, but probably a bit less scary than $8 trillion. After all, at their peak, the wars in Afghanistan and Iraq cost more than half of this sum.
But this is the less important point. Somehow it escaped the attention of the Breakingviews crowd that if everyone has Medicare through the government, then they no longer have to pay health insurance premiums. According to the Centers for Medicare and Medicaid Services (Table 1) this will save us roughly $15 trillion (@6.3 percent of GDP) over the first decade following the election of President Sanders.
There is a problem of how we get the money that we are now paying to private health insurers, mostly through our employers, to the government to pay for universal Medicare, but this is a political issue, not a problem of inadequate resources. In other words, most of us would not feel terribly aggrieved if the money that our employers are currently sending to private health insurance companies for our insurance were instead sent to the government to pay for universal Medicare.
This is what Senator Sanders is proposing. It would have been nice if Breakingviews could have been honest enough to explain this simple fact to its readers instead of trying sleazy scare tactics. But, that is what folks do when they don't think they have a very good argument.
Nope, that isn't the complaint of leftist agitators in Greece or Latin America, that is a comment from Axel A. Weber, who is identified in the NYT as "a former senior official at the European Central Bank who is now chairman of the investment bank UBS." This comment appears along with several other complaints from bankers about the I.M.F.'s support for low interest rates by the Fed, the European Central Bank, and other rich country central banks. Of course the I.M.F. comments on monetary policy all the time and has done so since it was created 70 years ago.
The piece also has this gem:
"'When I travel around the world, I find hardly anyone supporting the Fed’s policy on interest rates,' said a senior European official, who did not want to be publicly identified criticizing the I.M.F. 'The fund has become very short-term-oriented.'"
This tells us a great deal about who this senior European officials speaks with.
Hey, we should all be thankful that Ben Bernanke saved us from a Second Great Depression and a Martian invasion. Yes, the Second Great Depression theory is being touted yet again, this time by Robert Samuelson. He tells us that unemployment would have soared to 25 percent without the bailout of the banks.
As I've written any number of times, neither Bernanke, Samuelson, or anyone else has said a word as to why a big stimulus package from the government would not have quickly gotten the economy going again and unemployment falling. This is what finally got us out of the first Great Depression; the government spent a ton of money to fight World War II. There is no magic or mystery to spending on wars, any spending in the economy has the same effect.
If someone wants to make a political argument, that we could not have gotten political support for a serious stimulus, that's fine, they should put that argument on the table. But that is a political argument, not an economic one. Furthermore, we have never seen our political leaders refuse to take steps to boost the economy out of a severe recession in the post-World War II era. George W. Bush signed the first stimulus when the unemployment rate was 4.7 percent. So it would be an interesting political argument, but one that lacks any evidence to support it.
After going through the account of how Bernanke saved us from the Martians (sorry, the Second Great Depression), Samuelson genuflects about the cause of the prolonged downturn. He notes that Bernanke blames the financial crisis, while he attributes the prolonged downturn to the loss of confidence. Fans of data everywhere attribute the weakness to the loss of $8 trillion in housing wealth.
With the plunge in house prices, we saw the end of the boom in residential construction, costing us roughly 4 percentage points of GDP (@$720 billion annually in today's economy). The loss of wealth also led to a drop in consumption, in accordance with the housing wealth effect that economists have been writing about for around 60 years. The drop in consumption was around 2–3 percentage points of GDP ($360 billion to $540 billion annually in today's economy).
There was nothing that would obviously rise up to fill this massive gap in demand. We did get the stimulus in 2009–2010, which helped a great deal. But it wasn't large enough or long enough to get us back to full employment. It's hard to imagine what anyone thought would fill the gap in the absence of a larger stimulus.
I know this is all distressingly simple, and folks really want to believe the downturn was very complicated and mysterious (who could have known?), but it wasn't. The basic story was pretty much as clear as day for anyone who could look at the economy with open eyes. Unfortunately, we didn't have anyone like that in a position of responsibility in the last decade.
David Brooks is shocked, shocked to find out that political considerations might affect Hillary Clinton's stand on the Trans-Pacific Partnership (TPP) in the presidential campaign. Brooks goes through the basic story. Yes, Clinton had been a supporter of the TPP in the Obama administration, but now Brooks tells us that Clinton has changed her position because she'll say what "she needs to say now to become Bernie Sanders in a pantsuit."
Let me give a brief sidebar on the sexism here. Yes, Hillary Clinton is a woman. Does that mean it is not possible to discuss her political positions without referring to what she wears or how she looks?
I'll skip over Brooks' general complaint about how Clinton has changed her positions on other issues. I want to talk about the TPP.
Brooks has apparently become a big humanitarian worried about the plight of people in the developing world.
"Third, there’s the humanitarian issue. Clinton once supported the Pacific trade deal for good reason. According to a report from the Peterson Institute for International Economics, the deal would bolster U.S. gross domestic product growth and jobs over the next decade. It would lift Malaysian growth by 6.6 percent and Vietnamese growth by 14 percent. It would also build a solid Asian alliance to balance Chinese hegemony. If Clinton’s flip-flop ends up sinking the deal, she will have helped sentence millions of people to further poverty and destabilized the world’s most dynamic region."
That sounds pretty awful. But before we worry too much about the millions of people who Secretary Clinton has sentenced to poverty in Malaysia and Vietnam, it is worth looking at these numbers a bit more closely. First, Brooks meant GDP, not growth. When the benefits of the TPP are fully realized in about a dozen years, the report projects that Malaysia's GDP will be about 6.6 percent higher and Vietnam's GDP will be about 14 percent higher.
Second, the vast majority of these projected gains do not come from anything that the United States or the other TPP countries are giving Malaysia and Vietnam, they come from reducing their own tariff and other trade barriers. This is almost always the story with trade agreements. In the standard modeling, tariffs are distortionary taxes. If you reduce or eliminate them, your country will benefit even if no other country has made any change in their own barriers.
Ben Bernanke was on the Diane Rehm show on Tuesday (unsolicited plug: one of the most serious talk shows around). Anyhow, there was much good back and forth on the show. I will skip over most of what the former Fed chair said (here's my comment on saving Lehman), but I do want to address his response to the question of why the Fed didn't see the financial crisis coming.
Here's the sequence:
"REHM It's remarkable that you said that the recent financial crisis was the worst in human history, even worse than the Great Depression. But that's where I think an awful lot of people wonder, if it was so big, why didn't you see it coming and why couldn't you have done something to stop it before it happened?
"BERNANKE Well, again, we were aware of the fact that house prices were very high. And we thought it quite possible that they would correct at some point. By 2006, 2007, we also were aware of the problems in the subprime lending market. What we did not anticipate and no one anticipated was the vulnerability of the financial system overall to a run, a panic. You know, in the 19th century, early 20th century, we had bank runs all the time. People would run to the bank, pull their cash out and the bank would have to close. That was this, in the 1930s story. So now we have deposit insurance. We didn't see that coming.
"BERNANKE But there's still a lot of short-term money in banks — whether it was lent through what's called the repo market or — in any case, money that is not insured, which ran just like the old-fashioned depositors ran. And, you know, we — there was just not enough appreciation that that was possible or that it would happen. Once it happened, it brought the whole financial system down, essentially to its knees. And then, you know, the rest is history, as they say."
The Washington Post deserves credit for being the first major media outlet to discover the sharp increase in women's labor force participation in Japan. It ran a piece headlined, "How American women fell behind Japanese women in the workplace," which pointed out that employment rates are now higher for women in Japan than for the United States. (The difference in employment rates would be even larger if the article focused on prime-age — 25–54 — women.)
This shift has been clear in the OECD data for several years, but has been almost completely ignored. (There have been a few rants on the topic at BTP, for example here, here, and here.) Anyhow, it is always good to see the media discovering major trends in the world, even if they might be a bit slow to notice.
Eduardo Porter had a good piece in the NYT pointing out the importance of having independent evaluations of government programs. The point is that the agencies undertaking a program have a strong incentive to exaggerate its benefits. He discusses this in the context of weatherization programs, but the problem applies more generally.
One of the areas noted by Porter is in the rating of mortgage backed securities (MBS). During the housing bubble years, the bond-rating agencies routinely gave investment grade ratings to MBS that were stuffed with junk mortgages. They ignored the quality of the mortgages because they wanted the businesss. They knew if they gave honest ratings, the investment banks would take away their business.
While Porter notes this is a problem with the issuer pays model (the banks pay the rating agencies), there actually is a very simple solution. In the debate on Dodd-Frank, Senator Al Franken proposed an amendment which would have the Securities and Exchange Commission pick the rating agency, instead of the issuer. The bank would still pay the fee, but since they were no longer controlling who got the work, it eliminated the conflict of interest problem. The amendment passed the senate 65-34, with considerable bi-partisan support.
Unfortunately, as Geithner indicated in his autobiography, the Obama administration apparently did not like the dismantling of the perfect system we have today. The Franken amendment was removed in the conference committee and the existing structure was left in place. This was possible because the bond-rating agencies and the banks have real lobbies, whereas the folks who like honest evaluations don't. Of course the news media didn't help much, giving the issue very little coverage. And what attention it did get largely reflected the views of the financial industry.
Anyhow, this is a good example of the difficulties in putting in place the sort of independent auditing process that Porter seeks.
Ben Bernanke just released his memoir which includes his account of the events around the financial crisis. According to Andrew Ross Sorkin, Bernanke claims the decision to not save Lehman in the fall of 2008 was not really a decision. Bernanke claims that the Fed did not have the ability to save Lehman. This is not true. Since the Fed has essentially a limitless ability to lend money, it surely could have provided enough loans at below market interest rates, for a long enough period of time, that Lehman would eventually have been a viable bank.
Sorkin points to $200 billion in losses suffered by Lehman creditors. This is comparable to the sums lent to both AIG and Fannie and Freddie (combined) at the time they faced insolvency, so getting enough money to at least temporarily patch any holes would clearly have been doable. In October of 2008, the assets held by Lehman were near their lowest levels. (That's not based on an analysis of specific assets, just looking at house prices and the price of other assets.)
Suppose that the Fed had lent Lehman the money needed to meet all its immediate obligations and gave the bank Timothy Geithner's "no more Lehmans" guarantee. This was a commitment that big banks would not be allowed to fail. Geithner repeats it endlessly in his autobiography. This would have allowed the bank to continue to operate and presumably make around $3 billion a year in profit (its pre-crisis level) on its ongoing business.
It is amazing how the elite media can be dragged along by their noses into accepting that the Trans-Pacific Partnership (TPP) can have a big impact on trade and growth. If I had a dollar for every time the deal was described as "massive" or that we were told what share of world trade will be covered by the TPP, I would be richer than Bill Gates. The reality is that the vast majority of the trade between the countries in the TPP is already covered by trade agreements as can be seen.
Source: International Monetary Fund.
We continue to hear superlatives even as the evidence suggests the trade impact will be trivial. For example, the NYT reported that U.S. tariffs on Japanese cars will be phased out over 30 years. Wow! The most optimistic growth estimates show a gain by 2027 of less than 0.4 percent, roughly two months of normal GDP growth.
This doesn't mean that the TPP can't have an impact. It will lock in a regulatory structure, the exact parameters of which are yet to be seen. We do know that the folks at the table came from places like General Electric and Monsanto, not the AFL-CIO and the Sierra Club. We also know that it will mean paying more for drugs and other patent and copyright protected material (forms of protection, whose negative impact is never included in growth projections), but we don't yet know how much.
We also know that the Obama administration gave up an opportunity to include currency rules. This means that the trade deficit is likely to persist long into the future. This deficit has been a persistent source of gap in demand, leading to millions of lost jobs. We filled this demand in the 1990s with the stock bubble and in the last decade with the housing bubble. It seems the latest plan from the Fed is that we simply won't fill the gap in this decade.
Naturally, the paper had an editorial celebrating a deal on the Trans-Pacific Partnership (TPP). In it they referred to the TPP as a free-trade deal and denounced opponents for appealing to "protectionist sentiment." If we want to think about this one seriously, does the Post have any evidence whatsoever that the reduction in tariffs and other barriers in the TPP are economically larger than the increase in protectionist measures in the form of copyrights and patents? If so, it has never bothered to share this information with readers.
We get that the Washington Post likes patent and copyright protection. Its friends and advertisers benefit from these government granted monopolies. But, just because the Post likes patents and copyrights does not make them any less protectionist.
At a time like this it is hard not to remember when the Post claimed that Mexico's GDP had quadrupled between 1987 and 2007 because of NAFTA. (I have no idea why they chose 1987 as the base year.) The actual growth figure was 83 percent. Anyhow, the point is that these are not people who feel bound by the evidence in making their case for trade agreements.
Why does the NYT find it so hard to separate its news reporting from opinion when it comes to trade deals? Yet again, we are told that the Trans-Pacific Partnership (TPP) can be "legacy making" for President Obama. After all it is:
"drawing together countries representing two-fifths of the global economy, from Canada and Chile to Japan and Australia, into a web of common rules governing trans-Pacific commerce. It is the capstone both of his economic agenda to expand exports and of his foreign policy 'rebalance' toward closer relations with fast-growing eastern Asia, after years of American preoccupation with the Middle East and North Africa."
Sounds really exciting right? Well the vast majority of the "two-fifths of the global economy" is accounted for by the United States, Mexico, Canada, and Australia, countries that were already drawn together in trade deals. For these countries the TPP will have little impact on trade. The only countries in the deal that really qualify as "fast-growing eastern Asia" would be Malaysia and Vietnam.
As a practical matter, the stronger patent and copyright protections in the pact may do more to impede trade than the tariff reductions do to promote trade, making its status as a "free-trade" agreement questionable. (To its credit, the NYT piece did not use this term.) It would be useful if the paper focused more on the facts and less on the celebration.
A Washington Post article on the Trans-Pacific Partnership (TPP) referred to President Obama's assertion that the pact will boost growth. It would have been appropriate to point out that almost no economists support the claim that the pact will have a noticeable positive impact on growth.
The most favorable positive assessment comes from the Peterson Institute. It projects that the agreement would boost growth by 0.03 percentage points annually over the next dozen years. This would mean, for example, that if growth would have been 2.2 percent without the TPP, it would be 2.23 percent with the TPP. Other projections have been lower. For example, an analysis by the United States Department of Agriculture concluded that the gains would be too small to measure.
It is also worth noting that none of these studies took into account the negative impact on growth from the higher drug prices that would be the result of the stronger protectionist measures in the TPP. The United States currently spends more than $400 billion a year on prescription drugs. This amount will almost certainly increase in both the U.S. and elsewhere as a result of stronger patent and related protections in the TPP. Higher drug prices will pull money out of people's pockets, leaving less to spend in other areas, thereby slowing growth.
For these reasons, it would have been useful to point out that President Obama is making a Trump-like claim in arguing that the TPP is a mechanism to increase economic growth. That is simply not a plausible story.
Remember when then Federal Reserve Board Chair Ben Bernanke assured the public that the problems in the financial system will be restricted to the subprime market? This one ranks, along with some comments from and about Alan Greenspan, as one of the worst economic predictions of all time. In other words, the folks at the Fed really missed it.
This is worth remembering because it seems that the Fed is trying to get the excuse making going in advance for the next economic crisis. The NYT reported on a Fed conference where they expressed skepticism as to whether they could stop the next crisis.
There are a range of views presented, not all of them silly. (Using interest rates as the primary tool against bubbles is not a good strategy.) However the idea that the Fed is helpless against bubbles looks like some serious lowering of expectations.
The distortions created by the housing bubble were easy to see by anyone with open eyes. Residential construction as a share of GDP was hitting record levels even as demographics would have suggested the opposite. (Baby boomers were retiring or at least downsizing.) Consumption was hitting record highs as a share of disposable income, driven by housing bubble wealth. House prices had surged by 70 percent above inflation, after tracking the overall inflation rate for the prior century. And the bad loans were there en masse for anyone who cared to notice.
The Fed has a variety of tools but the most simple one is simply talking about a bubble. The financial markets will not ignore information (not a mumbled "irrational exuberance") from the Fed as they showed in response to Fed Chair Janet Yellen's comments about bubbles in the social media and biotech sectors.
There is no reason that the Fed should not have been issuing clear warnings (i.e. massive quantities of research) documenting the bubble from 2002 onward. The only cost to the Fed is a few researchers time, the potential savings are in the trillions. That seems a no-brainer. The Fed should have also been using its regulatory power to curb the issuance and sale of bad mortgages, but information is a good place to start.
Also, it is not plausible for an organization that argues an inflation target is important to say that information from the Fed has no impact on markets. It obviously believes otherwise.
Okay, I'm sure it was just an error in editing, but come on. An NYT article on Germany on the 25th anniversary of the unification told readers:
"A new government report showed that gross domestic product per capita in eastern Germany has more than doubled in the past 25 years, but is still one-third the level in the western part of the country."
I'm sure this is supposed to read that per capita GDP in former East Germany is one-third less than in the western part of country. Even this figure is somewhat misleading since the population of former East Germany is much older and more likely to be retirees than the rest of the country. There is probably still a difference in living standards among the working age populations, but nothing like what would be implied by this sentence.
As BTP readers know, I have my share of typos, but NYT has a bit more resources than my blog.
Note: It appears that even the one-third less number is an exaggeration as Robert Salzberg's points out in his comment below.
The Washington Post's difficulties in separating its news and opinion pages showed up again in a piece by David Fahrenthold that warned the public against Senator Bernie Sander's agenda in his presidential campaign. The piece is headlined "how Bernie Sanders would transform the nation."
Fahrenthold is quite direct about his opinion of Sanders. He begins by referring to Sanders' proposal to have free tuition at public colleges, then tells readers:
"And, once government was paying for college, colleges would run by government rules. Sanders’s rules. For one thing, Sanders thinks student centers are a waste of government money. He’d make sure they didn’t get any more of it.
"If he becomes president, Sanders would spend an enormous amount of money: $3.27 trillion. At the very, very least. But he is not just a big-spending liberal. And his agenda is not just about money.
"And his agenda is not just about money.
"It’s also about control."
Got that? Bernie Sanders wants to control everything. Better not vote for that guy.
As folks familiar with Washington politics know, government largess comes with varying degrees of control, depending largely on who the beneficiary is. For example, TANF, the government's main benefit program for low income families, comes with all sorts of controls, including work requirements. When Planned Parenthood gets government money, it has to commit itself not to spend any on of it on performing abortions.
On the other hand, the government hands out tens of billions a year in tax breaks to homeowners on their mortgage interest and imposes virtually no controls. It gave big companies subsidized loans through the Export-Import Bank and also imposed almost no controls. And, it gives drug companies patent monopolies—threatening to arrest competitors—again with no controls.
The government already gives substantial aid to colleges, largely in the form of subsidized loans and Pell grants. The government already puts conditions (i.e. control) on the institutions that get this money. Will Sanders put more controls in place if the government is picking up the full bill? Perhaps, but presenting this as a zero/one story, as Fahrenthold implies, is just silly.
It also would have been helpful if Farenthold tried to express the $3.27 trillion figure in a way that provided information to readers rather than just scare them with threats of "enormous" spending. This sum is equal to a bit less than 1.4 percent of projected GDP over this period. By comparison, at their peak, the wars in Iraq and Afghanistan raised military spending by 1.8 percentage points of GDP compared to the pre-9/11 level.
Elites like the Trans-Pacific Partnership (TPP). After all, it was designed to redistribute more income to sectors like the pharmaceutical industry, the financial industry, and the entertainment industry. The point is to use an international agreement to over-ride national and subnational governments that might pass laws to protect workers, consumers, or the environment.
In keeping with this spirit, the NYT touted the virtues of the TPP in an article describing President Obama's efforts to conclude negotiations and get the deal through Congress:
"For President Obama, who cited the potential agreement during his address this week to the United Nations, success in a negotiating effort as old as his administration would be a legacy achievement. The proposed Trans-Pacific Partnership would liberalize trade and open markets among a dozen nations on both sides of the Pacific, from Canada to Chile and Japan to Australia, that account for about two-fifths of the world’s economic output."
This paragraph tells readers that the NYT really really likes the TPP. After all, legacy achievement is pretty damn good. Does it beat out the Affordable Care Act, the Dodd-Frank financial reform, the stimulus that helped pull the economy out of the trough of the recession?
Apart from this editorializing, the rest of the paragraph is not true. While the countries in the TPP do account for two-fifths of the world's economy, it is not clear that it would "liberalize trade" between most of the countries. The United States already has trade agreements with most of the other countries in the TPP, including Mexico, Canada, and Australia. In these cases, most of the barriers to trade have already been eliminated. Even the barriers with other countries are already low in most cases. This means that the TPP will do little to lower trade barriers.
On the other hand, a quite explicit purpose of the deal, as noted in this article, is to increase protectionism in the form of longer and stronger patent and copyright protection. Perhaps the NYT likes these forms of protectionism, but they are still protectionism. This means that it is wrong to say that the TPP will liberalize trade. It is entirely possible that the net effect of the deal will be to increase the size of the trade barriers between the countries in the pact.
Steve Mufson picked up the Washington elite's quest to get more money for some of the country's biggest corporations by telling readers that the Export-Import Bank is not really corporate welfare because it makes a profit.
"It isn’t much welfare; the bank has an excellent lending record — a default rate of 0.175 percent as of September 2014 and a 50 percent recovery rate on defaulted loans — and the appropriation for about $110 million covers administrative expenses."
This displays the sort of basic confusion on economics that readers have come to expect from the Washington Post. The point is that the government is subsidizing loans to some of the largest companies in the country. By relying on the creditworthiness of the U.S. government, the Ex-Im Bank is allowing a small number of huge companies, who always account for the overwhelming majority of Ex-Im bank lending, to get loans at below the market rate. This is similar to Fannie Mae and Freddie Mac which allow mortgage holders to get mortgages at a below market rate by providing a government guarantee.
This is a clear subsidy outside of Washington Post land. If it serves a public purpose, for example promoting homeownership, then it is arguably a good policy. But the nonsense and name-calling being put forth to justify the Ex-Im bank hardly make the case.
Anyhow, since the honchos will undoubtedly keep pushing the Ex-Im Bank until Boeing gets its money, how about a compromise? Any company that gets below market interest loans as a result of Ex-Im bank subsidies has to agree not to pay its top executives more than 10 times the president's salary ($400k) for a five year period. That's a $4 million hard cap on all compensation. The company's top execs and all board members sign a certification to this effect promising them 10 years hard time if they lie.
What do you say folks? Can the CEO of Boeing and GE get by on $4 million a year? There are jobs at stake, right?
The NYT apparently thinks it has a big news story in its article telling readers that companies use temporary visas to bring over tech workers who learn skills and then transfer them to workplaces in India and other countries. The jobs are then shifted overseas to take advantage of lower cost labor.
This is one of the main goals of the trade agreements the United States has signed over the last three decades. The point has been to allow U.S. firms to take advantage of lower cost labor in the developing world. For the most part this has meant shifting manufacturing jobs, like those in the steel and auto industry. However the same logic of the gains from trade applies to more highly skilled jobs, like the tech jobs discussed in this article.
It's not clear why the NYT thinks this is news, this is what is supposed to be the result of recent trade deals. Those who are displaced by foreign competition are obviously losers, but the rest of the economy benefits by having lower priced goods and services.
On net, workers who tend to be similar to the ones being displaced are losers when this displacement happens on a large scale due to the overall effect on wages. Those who are largely protected from foreign competition (by protectionist restrictions, not economic laws), like doctors and lawyers, benefit. It's not clear why the NYT thinks it has news here, it is reporting on how trade policy has been designed to work.
Yesterday, Republican presidential candidate Donald Trump released his plan for changing the tax code. The basic story is that he would give big tax cuts across the board, with the largest tax cuts going to the wealthy. He assured everyone that it will be revenue neutral since it would lead to a huge spurt of economic growth. (His number was 6.0 percent, topping Jeb Bush's 4.0 percent by two full percentage points.)
Many of the reports on the plan did note the growth assumption and pointed out that few, if any, economists took it seriously. As a practical matter, we have seen this one before. Ronald Reagan put in place a large tax cut in the 1980s and George W. Bush did the same in the last decade. You have to try very hard to find a positive growth effect from either. Certainly no one could make the case with a straight face that these sorts of proposals could even get us to Bush's 4.0 percent number, much less Trump's 6.0 percent.
But apart from what the tax cuts may or may not be able to do in terms of growth, there is also the matter of how the Federal Reserve Board would react. If that sounds strange to you then you should be very angry at the reporters at your favorite news outlet, because they should have been talking about this.
Suppose that Donald Trump's tax cut really is the magic elixir that would get the economy to 6.0 percent annual growth. But what if the people at the Fed's Open Market Committee (FOMC) don't recognize this fact? Suppose the FOMC thinks the economy is still bound by the pre-Trump tax cut rules and believes that inflation will start to accelerate out of control if the unemployment rate falls much below its current 5.1 percent level.
In this case, we would expect to see the Fed raise interest rates sharply as they saw the Trump tax cuts boosting growth. Higher interest rates would slow house buying and new construction, discourage car sales, and put a crimp in both public and private investment. If the Fed raises interest rates high enough, it could fully offset the boost that Trump's tax cut is giving to the economy. In this case, even though the Trump tax cuts might have been the best thing for the economy since the Internet (okay, better than the Internet), we wouldn't see any dividend because the Fed would not allow it.
For this reason, the Fed's likely response to a tax cut is a fundamental question that reporters should be asking. If the Fed is likely to simply slam on the brakes to offset any possible stimulus, then a tax plan will have little prospect of providing a growth dividend.
Since the press have been obsessing (rightly) over the possibility that the Fed is about to embark on a series of rate hikes, it would be reasonable to believe that someone would think to bring together the Fed's interest rate policy and the candidate's economic plans. Thus far it seems no reporters have discovered the connection.
Note: Typo corrected.
In his interview with Donald Trump on 60 Minutes, CBS reporter Scott Pelley felt the need to assert that Social Security is "a basket case." Actually, according to the latest Social Security trustees report it can pay all scheduled benefits through 2033 with no changes whatsoever. If nothing is ever done to the program it is always projected to be able to pay retirees a larger real benefit than what they get today, or more than 75 percent of scheduled benefits. If we put in place tax increases comparable to those in the 1980s (equal to less than 10 percent of projected wage growth over the next three decades), the program would be fully funded indefinitely.
Given these facts, it would be interesting to know the basis for Pelley's decision to call the program a basket case. Its prospects over the next two decades are almost certainly better than those of his network.