“Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5 percent. In addition, we find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.”
Chistina D. Romer and David H. Romer, ‘The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks’, American Economic Review, June 2010
“The president badly needs to make more realistic pronouncements. …at the very least, his staff needs to avoid putting these exaggerations on the teleprompter. It undermines confidence and raises concerns about competence. It’s doing nobody any good – not the economy and certainly not Mr. Obama.” Michael J. Boskin, ‘Obama’s Economic Fish Stories’, The Wall Street Journal, July 21, 2010
Let me start with the issue of tax increases. President Obama has made it clear that his administration is opposed to renewing the Bush income tax cuts for households earning in excess of $250,000 per annum. He views the raising of marginal income tax rates for high earners as a positive contribution to economic growth. If implemented, these tax increases will amount to $1.4 trillion over the coming decade. If the above-cited AER paper by Romer and Romer is correct, then the President is spouting economic rubbish. Yet the first-named author of that paper, Christina Romer, is one of his two key economic advisers.
Three alternative explanations are possible for this episode of lost in translation. The first explanation is that Christina Romer did not truly co-author that paper with her husband. There are many historical examples where a more able partner bails out a less talented spouse. The second explanation is that President Obama is insufficiently smart to understand the advice that he receives from his economic advisers. The third explanation is that President Obama, for political reasons, does not want to translate the message correctly; that he is prepared to harm the economy in order to promote progressive socialism. If either of the two latter explanations is correct, then Christina Romer has a professional duty to all Americans publicly to admonish her president, and to return to Berkeley, California an honest woman.
My own assessment is that President Obama is an economics’ illiterate who advances arguments that appear to advance his politics, careless of whether they are related to the truth, over-ruling professional advice wherever this is expedient. Michael Boskin, in his above-cited column, offers further examples of such seriously harmful behavior.
For example, the president claims repeatedly that ‘every economist who’s looked at it says that the Recovery Act has done its job (i.e. the stimulus bill has turned the economy round). That is untrue. Many economists judge that the economic impact of the bill has been small, but positive in the short-run. Many other economists (myself included) judge that the bill has exerted a negative impact on the short-term recovery process, and that it will lower the trend rate of economic growth of the U.S. economy.
For example, on the anniversary of the stimulus bill, the president declared that: ‘It’s largely thanks to the Recovery Act that a second Depression is no longer a possibility.’ That is untrue. His own Council of Economic Advisers recently estimated that the impact of the stimulus bill on GDP at its trough was only 1-2 percent. A Depression is conventionally defined as a long period during which GDP or consumption declines at least 10 per cent. The decline in GDP in the current recession was 3.8 percent. So the stimulus bill could not remotely have saved the economy from a Depression.
For example, on his recent ‘Recovery Tour’ the president claimed that: ‘The stimulus bill prevented the unemployment rate from getting up to 15 percent.’ That is untrue. Christina Romer has estimated that the stimulus bill reduced peak unemployment by one percentage point, preventing it from rising to just over 11 percent.
President Obama’s economic advisers must be aware that the president is speaking falsely, either by accident or by design, on these matters. Their silence tells us a great deal about the corrupting influence of politics upon government- employed economists. If they tell the truth and contradict their boss, they will surely be removed from the White House – as Gregory Mankiw quickly learned at the hands of President George W. Bush. If they remain silent, they prostitute their professional knowledge, and will be despised by their peers for the remainder of their lives.