The very bad House health care replacement plan just keeps getting worse.

May 4th, 2017 at 12:59 pm

Over at WaPo, with many useful links to facts, all of which are being willfully ignored in the political process. EG, the House R’s are unsurprisingly pushing ahead without a CBO score of the impact of their amendments to their already toxic American Health Care Act. Facts, of course, are not their friends.

I don’t like it anymore than you do when economists veer into political punditry, but I can’t resist a few observations. If the amended bill passes the House, and the word on the street is that it may well do so, then:

It shows that so-called Republican moderates provide no buffer at all against the hard right. They were bought off in this case by a fig leaf that they surely know won’t prevent the loss of affordable coverage. Why that is the case, I don’t know, but it suggests they do not believe their constituents will hold them accountable.

Part of that calculus might represent their belief, if not hope, that whatever comes out of the Senate will be less draconian than the House bill. Then, there’s some sort of reconciliation of the two.

A few people have asked me: if the House passes this bill, what happens in the Senate? I’ve got no idea, but I can’t imagine they want to spend a lot of time fighting about the impact of this bill over there, especially once CBO scores it. A new score would be even uglier than the last one in terms of loss of coverage, as this one will reflect the return of “medical underwriting,” higher premiums for those with pre-existing conditions, including cancer, asthma, depression, and the belief that tax cuts pay for themselves.

If Senate R’s were smart, they’d just bring this damn beast up for a vote and be done with it. But I doubt they’ll do so. So, good news, folks! We’re not done fighting about health care, and instead of improving the ACA, we’re going to have fight like h-e-double-hockey-sticks not to go backwards.

I hate to brag, but here’s my spouse in action today. You go, girl!!

Odds and ends: taxes, Kansas, GDP, residual seasonality…

May 1st, 2017 at 8:21 pm

Just a few links folks might find worth perusing.

First, a few thoughts about President Trump’s tax “plan:”

–I don’t think it makes sense to discuss corporate or business taxation anymore without including pass-through businesses, which comprise most businesses and about half of business income. And Trump’s plan opens up a fat, new loophole in this part of the code.

–The criticism of the Trump tax outline–it’s like 200 words!–has been both fulsome and pretty bipartisan. It’s actually hard to find anyone who’s not completely on the take to accept the administration’s claim that the tax cut will pay for itself.

–I’ve got one word for the tricklers: Kansas!

On an unrelated topic–I mean, it’s all related, but…–I posted this tweet the other day which is a followup on this earlier post re the 2017Q1 GDP release (the figure below should say “and” not “are”). There’s some evidence, including from BEA itself, that the seasonal adjustment procedures are not successfully extracting all the seasonality out of the non-adjusted data. So I just ran the SA data through the SA software again and got the results below. The readjusted Q1 real growth rates tend to be above the reported ones (which means other quarters must go the other way, since the annual change shouldn’t be affected).

If you’re curious about this, and who isn’t, here’s a nice explainer of the problem and what BEA is doing to fix it.

Source: BEA, my analysis


Quick note re GDP Q1 report: Keep your eye on the trend

April 28th, 2017 at 11:28 am

The economy grew at a slow rate of 0.7 percent in the first quarter of this year, according to this morning’s GDP report. But that low number–headlines stressed that it’s the slowest rate in three years–should be largely discounted. The underlying trend growth rate of the economy remains a moderate, and pretty steady, 2 percent.

There’s been a problem with seasonality in Q1 data of late, and growth rates for the quarter appear to be somewhat biased down. Also, January and February were unseasonably warm, so people spent less on heating (otoh, there was more building than we’d have expected).

The best way to control for this problem, as well as smooth out some of the noise in the annualized quarterly data, is to look at year-over-year trends. That way, if GDP levels in Q1s are biased down, this approach will factor that bias out (since they’ll be biased in each Q1). As you see in the figure, we’re right on trend.

Source: BEA

A few observations:

–Business investment growth was strong last quarter, but part of that was driven by a huge 22% (quarterly, annualized) jump in buildings, which may be a weather effect, as noted above.

–I’m putting consumer spending, which comprises 70% of GDP, on my watchlist. Nothing dramatic, and the 0.3% annualized rate in Q1 is not going to stick, but it has decelerated a bit of late. As I wrote earlier this month, slower job and real wage growth, the latter a function of faster inflation, looks to me to be taking a small bite out of that key component.

–Price growth remains quiescent. The PCE deflator, yr/yr, is up 2% and the core PCE, the Fed’s preferred gauge, is up 1.7%, where it has been for the past year.

–In other words, nothing in this report should lead the Fed to worry about capacity constraints creating price pressures.

–And, ftr, nothing in here, or anything else I’ve seen, not just today, but in my life, should lead anyone to believe that Trump’s one-pager tax “plan” will take real GDP growth from its trend growth rate of 2% to 3%. To be clear, there will be strong quarters down the road, and administration officials will say foolish things about them. But keep your eye on the trend.

Debt/GDP and growth

April 26th, 2017 at 11:26 am

I was just on a tax panel this AM with my pal Maya MacGuineas. Maya suggested that high debt levels lead to lower economic growth.

Using Richard Kogan’s data on debt as a share of GDP and real GDP/working-age person (which is closer to productivity growth than GDP growth, but seems like a relevant metric here; you get the same results with GDP/person) back to the beginning of time (1792!), here are two scatterplots.

The first plots debt/GDP against this growth measure and the second plots the change in debt/GDP against the same growth measure. Both are largely random plots.

Source: Kogan et al.


Source: Kogan et al.

To be clear, this is, of course, nothing approaching conclusive evidence that there’s no relationship between debt levels and growth. Establishing that sort of causality would require a lot more than a few scatters; you’d need control variables and a way to partial out “endogeneity,” meaning the mechanical aspects of this relationship. For example, the economy hits a bump, growth falters, and debt begins to rise, say due to offsetting, counter-cyclical fiscal policy. Then growth picks up along with higher debt levels, enforcing a positive correlation.

But I do believe these figures should prevent one from asserting that public debt erodes growth in the US case. At times it may do so, and others, not. Learning more about those dynamics is what we should be doing, IMHO.

Kogan et al stress the key point that “…policymakers can more easily restore the nation’s fiscal health when the economic growth rate exceeds the average interest rate than vice versa.  That’s because, when economic growth rates exceed Treasury interest rates, the burden of existing debt shrinks over time.” That is, g>r is important–you get into debt trouble when your debt (r) grows faster than your economy (g). See, e.g., Greece. In the US case, Kogan et al report that g>r 65% of the time since 1947, by an average 1.3 percentage points.

As I stressed on the panel, I strongly believe one’s views must be dynamic on these issues; one should be what I’ve called a CDSH (cyclical dove, structural hawk). In weak economies, you want your debt/GDP ratio to rise enough to temporarily offset the demand contraction. As the economy moves toward full employment, you want your debt ratio to first stabilize, and then, at full employment, come down. What you don’t want, and I suspect Maya would agree, is ever-rising structural deficits, no matter what’s happening in the economic cycle.

And what you really, really don’t want are big, regressive, wasteful tax cuts that exacerbate the debt for no good reason, while worsening after-tax inequality.

Dynamic scoring, interest rates, and “crowd out”

April 25th, 2017 at 12:34 am

I’ve got a piece over at the WaPo on why, when Treasury Sec’y Mnuchin says that Trump’s tax plan–which I suspect does not exist yet outside of some broad principles–“will pay for itself,” you should…um…disbelieve him.

Such claims abuse “dynamic scoring,” the process by which analysts estimate macroeconomic feedback effects from tax cuts. I provide a number of reasons why dynamic scoring abuse–DSA, or claims that tax cuts get anywhere close to paying for themselves–is a serious disease:

—The Tax Policy Center, known for careful, state-of-the-art analysis, finds that one recent version of the Trump tax-cut plan lost $6.15 trillion in revenue over 10 years without dynamic scoring and between $5.97 or $6.03 trillion with it. For the record, I don’t believe these either, but at least I can understand the assumptions and these are not abusive scores.

—The reason I don’t believe them is because I don’t think we (economists) can accurately even “get the sign right” on such estimates, meaning we can’t tell whether they’ll add to or subtract from growth. All we can know, based on history, is that they’ll be “small,” à la the Tax Policy Center effects just cited.

—How can this be? Isn’t it always the case that tax cuts boost growth? No! There’s no such correlation either across countries or across time. Team DSA argues, for example, that tax cuts will lead people to work harder, but economic theory is ambiguous on this point, as some people will maintain their same after-tax income while working less. And, of course, most people can’t tweak their work schedules like this anyway when the tax code changes.

—That’s microeconomics, but at the macro level, if the revenue loss means less investment in public goods, including both productivity-boosting physical and human capital, growth will be slower.

—Now, guess which end of that spectrum fans of his plan would choose to highlight (see figure below)? Recall how Trump “dynamically scored” the crowd size at his inauguration or the popular vote count from the election. Given a range of dynamic scores, do you trust this team to give an honest answer? In fact, Mnuchin’s already teed up his answer: The tax cuts will pay for themselves.

At least one person (OK, exactly one person) has asked me why, in arguing against large growth effects of tax cuts, I left off the impact of higher budget deficits and debt? In conventional models, they lead to higher interest rates and thus lower growth.

I left this off because I believe economists have an increasingly limited understanding of this relationship. To be clear, that’s not the same as saying that larger deficits and debt will never crowd out private borrowing and raise rates, which in turn slow growth. It’s saying there are numerous links in that chain, and intervening developments for which we must account.

EG, the Federal Reserve is clearly in the mix. The figure below plots the deficit/GDP against the composite nominal interest rate on gov’t debt and the Fed funds rate (most of these data come from Kogan et al; I added the funds rate which is on a fiscal, not a calendar year basis–doesn’t matter).

Soruce: Kogan et al

In the first few decades shown in the figure, the deficit/GDP ratio drifts down and the interest rate drifts up, as per the conventional model! Except that towards the end of the series, the deficit gets a lot more negative and so do interest rates. In fact, the interest rate tracks the Fed Funds rate a lot closer than the budget deficit.

You can plug in the real rate, try lags, whatever–the correlation’s not there. The deep recession led to large deficits and very low interest rates, the latter a function of stimulative monetary policy. Forecasters and deficit hawks kept warning that any day, the bond market would punish our profligacy and interest rates would rise, but as the figure below shows, they were repeatedly wrong.

Source: Obama CEA

The historical record doesn’t help, either. Using Kogan’s data, the correlation between the interest rate and the deficit since 1792 (!) is 0.12, i.e., small and the wrong sign. Using the real rate, it’s 0.30. Using changes (in the nominal rate) it’s 0.17. Using a more recent sample (1970-2016), the correlation is 0.10; using the real rate, it’s at least negative, but at -0.04, far from statistically significant.

These are not models, of course–just correlations. But let me put it this way: given the extent to which much deficit hawkery references “crowd out” effects, the evidence for that dynamic doesn’t jump out of the data, to say the least, which is why I didn’t include it in the WaPo post.

Finally, I liked economist Jason Furman’s discussion of these issues under the rubric of “fiscal space” in his recent piece on the “new view” for fiscal policy. First, he notes that the sovereign debt crisis was not obviously deficit-driven: “there is no correlation between countries whose debt-to-GDP ratio rose prior to the crisis and those that saw their sovereign spreads spike during 2011. The spikes in debt in places like Ireland and Spain were far more a result of the crisis than a cause.”

When fiscal multipliers are robust, say in weak growth periods when the Fed will accommodate fiscal expansion (implying a low interest rate environment), deficit spending that boosts growth can lower the debt/GDP ratio, the opposite of the “crowd out” story.

I’ve argued in various places that capital flows are in play here as well. As other countries buy safe US assets (like Treasuries), or, for that matter, any US financial assets, from securities to dollars, that too contributes to low interest rates and thwarts the simple crowd-out story.

Still, I wouldn’t wholly discount the connection between higher public indebtedness, higher interest rates, and slower growth. If you take Furman’s three criteria for fiscal space off the table–stronger demand, rising rates, non-accommodative Fed–you might see rates move up as deficits grow. I wouldn’t, as I believe the Tax Foundation does in their dynamic scores, simply assume away this connection.

We just don’t know, which, at the end of the day, underscores my broader point here, which is: I have little faith in dynamic scores to start with, and zero, nada, zip, no faith at all in claims that tax cuts pay for themselves. That’s DSA, plain and simple.

Therefore, I tend not to inveigh against regressive, Trump-type tax cuts because of interest-rate pressures. I do so because they squander valuable resources on wasteful tax cuts for the wealthy, resources that should be used to invest in public goods and to create opportunities for the disadvantaged.