Sunday, August 01, 2010

Numbers, facts don’t add up for economic adviser

Published in The Tennessean, Sunday, August 1, 2010

Numbers, facts don’t add up for economic adviser

by Richard J. Grant

There are many economist jokes out there, most of which end in, “you still wouldn’t reach a conclusion.” These jokes are funny because most laymen don’t know what economics is. Nevertheless, there is room for healthy disagreement within any science.

Sometimes we suspect disagreement within the same person. Since becoming the Chair of the Council of Economic Advisers, Christina Romer has been ridiculed for seeming to forget her past as an economist in order to embrace the agenda of the Obama administration. This has come up again recently with the publication in the American Economic Review of an article co-written with her husband, David, who, like her, is a professor at UC Berkeley.

The article is an impressive exercise in economic history in which the authors estimate that a “tax increase of one percent of GDP lowers real GDP by almost three percent.” They focused on changes in postwar tax revenue, not tax rates. Also, they didn’t study all cases but, to avoid complication, narrowed their focus according to their perceptions of policymakers’ motivations for the tax changes.

Romer’s critics are perhaps too quick to ridicule her for inconsistency in her support for letting most of the “Bush tax cuts” expire. In that recent article, she does not directly consider responses to recession. But she does find that tax cuts are most strongly associated with increased long-run economic growth. Also, tax increases intended “to reduce an inherited budget deficit” don’t seem to reduce growth as much as other such tax increases.

In this respect, Romer’s findings (in this academic article) are not really inconsistent with her statements as head of the CEA. In another article, made available to newspapers last week and which reads more like campaign literature, she cheers what she calls “one of the broadest tax cuts in American history, helping 95 percent of working families.” Given that her research focuses on tax revenues as a percentage of GDP, she makes no distinction between tax credits and changes in marginal tax rates. From this perspective, the tax credits more or less offset the effects of the soon-to-rise marginal tax rates by shifting resources from future investment to current consumption.

The trouble with refundable tax credits is that a large portion of them are not “tax cuts” at all: they are government spending. Given that a third of working Americans have no income-tax liability, it is impossible to reduce their income taxes further. It is dishonest to pretend to do so.

When seen in the full context of Obama administration policy, most families are net losers. The increase in the national budget deficit is bigger than the sum of the “stimulus” checks. In other words, current tax liabilities are removed from sight by running up future tax liabilities. Try explaining that to your grandchildren.
The problem exposed here is not so much inconsistency as it is a weakness in the foundation upon which most economic research is conducted. Romer’s real problem is that she gives a veneer of respectability to the administration’s policies, which are consistently bad.

She finds herself making indefensible claims about huge numbers of jobs “created or saved.” How can she say that “clean energy projects alone are responsible for nearly 200,000 new jobs” without admitting that these subsidized jobs produce less value than those same people could have produced in a market unhampered by government interference? Subsidized jobs, even “green” ones, are unsustainable.

Does Romer really believe that – constitutional questions aside – the government is really competent to be “investing” in “expanded broadband access, advanced-vehicle manufacturing and a smart-energy grid”? Where in all her research has she found any hope that any government can be entrusted with such economic planning?

As we already knew, economists can disagree. That doesn’t mean they are both wrong. But one of them is; and if we can’t tell which one, then the joke is on us – and our grandchildren.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010