Tag: austan goolsbee

Austan Goolsbee’s Budget Math Is Wrong - More than 100 Percent of Long-Term Fiscal Challenge Is Government Spending

Austan Goolsbee, the former Chairman of President Obama’s Council of Economic Advisers, had a column in the Wall Street Journal that argues government spending isn’t too high.

That’s obviously a silly assertion, as I explain here, here, and here, but I want to focus on what he wrote about tax revenues.

Here’s the relevant passage from his column.

The true fiscal challenge is 10, 20 and 30 years down the road. An aging population and rising health-care costs mean that spending will rise again and imply a larger size of government than we have ever had but with all the growth coming from entitlements—while projected federal revenues as a percentage of GDP after the rate cuts of the 2000s will likely remain below even historic levels of 18%.

He’s right that the main problem is in the future. As I’ve noted before, America is doomed to become Greece because of rising entitlement spending.

But he’s completely wrong when he implies that the problem is because taxes will stay below the long-run average of 18 percent of economic output. Here’s a chart I posted last year showing that tax receipts will soon rise above the long-tun average - even if the 2001 and 2003 tax cuts are made permanent. And these numbers are from the left-of-center Congressional Budget Office.

It’s rather shocking that a former Chairman of the Council of Economic Advisers isn’t aware of this CBO data. Or, if he is aware of the data, it’s unseemly that he would deliberately mislead readers.

But let’s set aside any discussion of why Goolsbee made such a fatuous claim about revenue. What really matters is that this is a debate about fiscal policy and the size of government.

The folks on the left want to convince us that inadequate revenue is causing deficits, both in the short run and long run.

We can see that they’re wrong in the short run.

But what’s especially remarkable is that they are wildly wrong about the future.  The long-run data from the Congressional Budget Office shows that the federal tax burden over the next 70-plus years will jump to more than 30 percent of GDP.

This CBO baseline data assumes the 2001 and 2003 tax cuts expire, so it exaggerates the increase in the future tax burden compared to current policy. But even if you correct for this assumption and reduce tax receipts by about 2-percentage points  of GDP (and presumably even more than that in the long run), it’s clear that the tax burden will be far above the historical average of 18 percent of GDP.

It’s easy to understand why Goolsbee ignores this data. After all, why report on information that completely debunks the left-wing argument about the supposed need to increase the tax burden.

But this isn’t the first time Goolsbee’s been wrong about tax policy. Let’s dig into the 2010 archives and share this video, which takes apart his arguments for class-warfare tax policy.

So what’s the bottom line? Well, we know Goolsbee and other leftists are being deceptive about taxation.

But my main takeaway is that I wish the left would be honest and admit that taxes already are projected to increase. And I’d like them to level with the American people and admit that they want the tax burden to climb even faster because they want government to get even bigger.

Four More Things Washington Shouldn’t Do

Today AEI’s Rick Hess and Stanford’s Linda Darling-Hammond—two folks who don’t always see eye to eye—have a New York Times op-ed that decries federal micromanagement in education, then lays out four things they think Washington should do.

If only they’d stopped at lamenting micromanagement.

Let’s take their four should-do’s in order:

First is encouraging transparency for school performance and spending. For all its flaws, No Child Left Behind’s main contribution is that it pushed states to measure and report achievement for all students annually….To track achievement, states should be required to link their assessments to the National Assessment of Educational Progress (or to adopt a similar multistate assessment). To shed light on equity and cost-effectiveness, states should be required to report school- and district-level spending…

This sounds great, but the key is in the doing, and there is precious little evidence Washington can force real transparency. NCLB is exhibit A: Yes, the law required states to break out data for all students and numerous subgroups, but the underlying information was essentially a lie, with states setting very low performance thresholds and calling it “proficiency.” And despite what many NCLB supporters will tell you, when you break down NAEP data—as I have done—there is little support for the notion that traditionally underperforming groups, or anyone else, have done better with NCLB than without it.

How about requiring common standards, both for academics and spending?

Even if you started with excellent, challenging academic standards, they would quickly be gutted at the behest of teacher unions, administrator associations, and probably even parents if many kids and schools didn’t meet them and were punished as a result. We’ve seen it many times, and there’s nothing about being federal that inoculates government against concentrated benefits and diffuse costs; the people most directly effected by a policy having the greatest political power over it. And financial data? As Adam Schaeffer has found, there are countless ways to hide the truth about district finances, and there’s little reason to believe that Washington will be either willing or able to sustainably force clarity.

One last thing: Where in the Constitution is the federal government authorized to demand “transparency”? Nowhere.

Second is ensuring that basic constitutional protections are respected.  No Child Left Behind required states to “disaggregate” assessment results to illuminate how disadvantaged or vulnerable populations…were doing.  Enforcing civil rights laws and ensuring that dollars intended for low-income students and students with disabilities are spent accordingly have been parts of the Education Department’s mandate since its creation in 1979.

Here there’s a slight connection to the Constitution: under the Fourteenth Amendment Washington has the duty to ensure that states and districts do not discriminate. But the presumption underlying what Darling-Hammond and Hess argue—that test data can reveal discrimination—is dubious. Can and should disparities in group scores really be laid exclusively at the feet of schools, districts, and states? Aren’t myriad factors involved in academic outcomes, many of which are outside the control of government?

Third is supporting basic research. While the private market can produce applied research that can be put to profitable use, it tends to underinvest in research that asks fundamental questions. When it comes to brain science, language acquisition or the impact of computer-assisted tutoring, federal financing for reliable research is essential.

We hear this one a lot, and in theory it makes some sense: people won’t risk their money on research that has no discernable payoff. The problem is few people ever contemplate the full cost of government funding “basic” research, or the unintended consequences.

The main concern is that putting money into things with no discernable payoff might yield just that—no payoff. So we hear about successes—government got us to the moon!—but rarely about how much has been lost in failed efforts. People don’t shy away from funding basic research just because they’re shortsighted. It’s also because they factor in risk.

Then there’s this: while we would like to think that all scientists are superhumanly selfless, they are not. They are as self-interested as the rest of us. Perhaps that’s why Austan Goolsbee—yes, Obama administration Austan Goolsbee—found in 1998 that much government R&D funding translated not into more breakthroughs, but higher wages for researchers.

What about the presumption that private markets wouldn’t put money into “brain science” or new tutoring techniques? Highly dubious. Education companies would have strong incentives to invest in research that could make them more efficient and effective because that would increase their profit margins.  The problem is, it is almost impossible to run for-profit schools in the United States, which can’t meaningfully compete against “free” government schools. In Chile, however, we see burgeoning evidence that profit can lead to greater scale—which is crucial for research—and better outcomes.

Of course, there’s nothing in the Constitution authorizing the feds to finance research.

Finally, there is value in voluntary, competitive federal grants that support innovation while providing political cover for school boards, union leaders and others to throw off anachronistic routines.

Again, sounds good, but as Hess and Darling-Hammond themselves admit:

The Obama administration’s $4.35 billion Race to the Top competition tried to do some of this, but it ended up demanding that winning states hire consultants to comply with a 19-point federal agenda, rather than truly innovate.

It’s easy to say that Washington should enable district and union leaders to ignore political concerns, but federal policy is as much government policy as state and local, and government at all levels is a creature of politics. Government and politics cannot be separated, and to expect one governmental level to be above politics while the others are below it is, to say the least, extremely optimistic. And again, there’s no constitutional authority to issue education grants.

Darling-Hammond and Hess are right that Washington has meddled far too much in education. They are on thin ice in asserting that different meddling will work much better.

No Hope or Change When it Comes to Fannie Mae

The Washington Post is reporting that President Obama has assigned his staff with the task of designing a new set of government guarantees behind the U.S. mortgage market. Although as the Post also reports the “approach could even preserve Fannie Mae and Freddie Mac.” That’s correct. Despite their role in driving the housing bubble and the already $160 billion in taxpayer losses, President Obama appears to be considering just putting the same failed system in place. Of course, we’ll be promised that it will all work better this time.

Perhaps most offensive is that the Post reports that Obama “officials don’t want to punish the thousands of Fannie and Freddie employees who have specialized knowledge about the mortgage market.” Seriously? What about the many blameless employees of AIG, Lehman Brothers, or Bear Stearns? Or New Century for that matter. Did the janitors and receptionists at those firms really cause the crisis? The truth is that the employees of Fannie and Freddie have been lining their pockets at the expense of the taxpayer for years. What the Administration is really saying is that they wouldn’t want all the political operatives at these favored firms to lose their perks. After all, Obama officials will need somewhere to land after 2012 and Goldman Sachs has only so many slots.

What’s most depressing is that you can’t say Obama hasn’t been given the facts. As the Post makes clear, his economic advisers spelled out the case against massive subsidies for the mortgage market. Austan Goolsbee, chair of Obama’s Council of Economic Advisers, points out: by subsidizing mortgage investments, the government drives capital away from other types of investments. If Obama truly wants to help the middle and working class, then he’d want capital to flow into investments that increase labor productivity, which is the ultimate source of wage growth.  Running up asset prices, like houses, does not make us wealthier in the long run.

But then what should I expect. The President has already entered campaign mode. It would be nice to see the economics win over the politics. But it looks like such a thing will have to wait for another administration.

Debunking White House Pro-Tax Increase Propaganda

The White House recently released a video, narrated by Austan Goolsbee of the Council of Economic Advisers, asserting that higher tax rates on the so-called rich would be a good idea.

Since Goolsbee’s video made so many unsubstantiated assertions and was guilty of so many sins of omission, here’s a rebuttal video, narrated by yours truly.

This new Center for Freedom and Prosperity video includes the full footage of the White House production, so viewers can decide for themselves which side is correct.

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.