Goolsbee on Tax Incentives

Today President Obama appointed Austan Goolsbee to be his new chair of the Council of Economic Advisers, replacing Christina Romer, who has headed back to Berkeley.  Because Goolsbee is already a member of the CEA, the appointment helps Obama avoid a Senate confirmation process that could have easily become a referendum on his administration’s economic policies.

Given that the appointment seems more one of convenience that anything else — Goolsbee is not a macroeconomist, which would seem to be what one would want at the moment.  His primary expertise is in tax policy.  So let’s look at some of his work:

On private research and development — where the President has proposed new incentives — Goolsbee wrote in the American Economic Review:  “When the government increases R&D spending through subsidies or by direct provision, a significant fraction of the increased spending goes directly into higher wages, an increase in the price rather than the quantity of inventive activity.”  That hardly seems like a ringing endorsement of more R&D tax credits. 

Goolsbee has also written on investment tax incentives, which are also being pushed by Obama.  In the Quarterly Journal of Economics, he writes: ” much of the benefit of investment tax incentives does not go to investing firms but rather to capital suppliers through higher prices.  A 10 percent investment tax credit increases equipment prices by 3.5-7.0 percent.”  It seems that Obama wants to do for capital what he’s tried to do for housing, just inflate prices without really changing the fundamentals and spend a lot of money doing so.

Here’s to hoping that Goolsbee doesn’t suffer the fate of his predecessor by abandoning everything he’s previously written in the interest of political expediency.