April 28, 2017
Much of the response to the tax cutting plans of Donald Trump shows us yet another illustration of the “which way is up?” problem in economics. The point is that economists can’t even seem to agree on the most basic issues about the economy and the problems we now face.
I usually use the “which way is up?” problem to refer to the people who warn us about robots taking all the jobs. This is a theme that gets lots of air time in the media and is supposed to have us all very worried. There are two huge flaws in the story.
The first is that the robots taking all the jobs story is one of incredible abundance. It’s one where we can have all the goods and services that we could want and not have to work for them. We should all be getting big pay increases and large cuts in hours. This will be just fine, since the robots will produce the goods and services that we want to buy with our larger paychecks.
There are slightly more sophisticated stories that can be told about the robots taking our jobs, but these don’t really make the cut either. One is that robots only take the jobs of less-educated people. This is certainly not true as a matter of logic. Why can’t robots do brain surgery? Is there any reason to think diagnostic software can’t replace many doctors? There is no reason a priori to assume that robots and artificial intelligence will have more impact on the demand for workers with less education than workers with more education. And, the efforts to show empirically that this has been the case don’t fly.
The other more sophisticated version of the robots taking all the jobs story is that it is a distributional issue, with money going from the people who work to the people who own the robots. The problem with this story is that people are able to own robots because the government gives them patent and copyright monopolies. If we are concerned about too much upward redistribution to robot owners, we can just make these monopolies shorter and weaker. This is not some huge technological problem confronting humanity, it is a problem of overly restrictive intellectual property rights.
The other big flaw in the robots taking all our jobs story is that the data refuse to support the case. Robots taking all the jobs means that productivity is soaring. The robots allow us to produce a far larger volume of goods and services in an hour than in the pre-robot world. But the Bureau of Labor Statistics tells us that productivity growth has slowed to a crawl, less than 1.0 percent annually over the last decade. This is down from a 3.0 percent rate from 1995 to 2005 and also in the long Golden Age from 1947 to 1973.
The opposite side of the robots taking all the jobs story is that we are running out of workers. This is the story where the mass retirement of baby boomers will mean that no one is around to change our bedpans. In this world, we desperately need robots to pick up some of the work.
Somehow we have ostensibly serious people making both of these arguments, some of them at the same time.
Okay, but now we are seeing a version of this “which way is up?” problem arise with reference to Donald Trump’s tax cut plans. Earlier this week, Neil Irwin had an interesting NYT Upshot piece about how the problems of low inflation seem likely to persist for the foreseeable future. Irwin looks around the world and sees huge amounts of excess capacity nearly everywhere. While there is some evidence of a modest pickup of inflation, it is likely that low inflation will be more of a problem than high inflation in the next few years.
By contrast, the NYT had a piece today, by James Stewart, warning of the disaster that could be caused by high deficits that would result from the Trump tax cuts. It told readers:
“While economists debate the impact of vast additional government borrowing on debt markets, most argue it would drive up interest rates, curbing the very growth the cuts were intended to foster.”…
“The Urban-Brookings Tax Policy Center estimated that when additional interest payments were included, Mr. Trump’s campaign tax proposals would add $7.2 trillion to the national debt by 2026 and $20.9 trillion by 2036.
“’The losers are future generations,’ said Mr. Rosenthal [Steven M. Rosenthal, a business tax expert and senior fellow at the Urban-Brookings Tax Policy Center].”
Just for orientation, Irwin was warning us that the main economic problem for the foreseeable future is that we will have a lack of demand in the United States and around the world. This is leading to needless unemployment, since more people would be working if there were just more demand in the economy. By contrast, the piece by Stewart is telling us that the Trump tax cuts will lead to too much demand, pushing up interest rates and slowing economic growth.
In case you are wondering, no, both cannot be true. Either we have a problem of global warming or global cooling, we can’t possibly have both at the same time.
But let’s try to think this through more carefully. It is conceivable that the Trump tax cuts could boost demand in the U.S. too much, where we actually do run up against capacity constraints. But note what this looks like in a world where low inflation (a.k.a. secular stagnation) is still the major problem.
If the U.S. pushes too hard on the accelerator, we don’t see the soaring interest rates of which the article warns, rather we would see even modest rises in interest rates bringing in massive flows of capital from other countries. This would in turn push up the value of the dollar. A higher valued dollar will lead to larger trade deficits.
The larger trade deficits would mean some job loss in manufacturing, but in the context of a rapidly growing economy, the impact might be relatively modest. On the other hand, our additional imports from Europe and the developing world could provide an important boost to growth in these areas. Of course, they could stimulate their own economies, but if political obstacles or silly superstitions about inflation (yes, I’m talking about Germany) prevent such stimulus, then the United States will be providing an important public service. The net effect on the U.S. and the world look pretty good.
What about the future generations who we are told are the losers? Well, first of all, we kicked future generations in the teeth big time with the austerity restricted growth of the last decade. Because concerns about budget deficits obstructed efforts to stimulate the economy, the economy is now around 10 percent smaller than had been projected by the Congressional Budget Office for 2017 back in 2008, before the crash. This means we are losing $2 trillion a year in output ($6,000 per person per year) due to unnecessary austerity. Call that what it is: an austerity tax.
The well-being of our children will be determined by the prosperity of the economy that we leave them (along with the larger society and the natural environment), not the size of the national debt. For folks who are enamored of endlessly touting the massive debt that we give our children, ask yourself what the current burden of the debt service is? If you don’t know the answer then you should look it up before saying silly things.
It is currently around 0.9 percent of GDP ($160 billion a year) after we net out the money refunded by the Federal Reserve Board. By comparison, the debt service burden was over 3 percent of GDP in the early and mid-1990s, more than three times as large. Yes, this could get worse if the Fed sold off its assets, but why should it?
Finally, ask those concerned about our children how much we are paying in patent rents. If they don’t know what you are talking about, then they don’t know enough economics to be talking about burdens on our children.
One way the government pays for things is through direct spending. Another way is by granting patent and copyright monopolies. These monopolies allow companies to charge prices for their products that are far above the free market price. They can be thought of as privately imposed taxes. In the case of prescription drugs alone, the patent rents are now approaching $400 billion a year. This is more than 2 percent of GDP and more than 20 percent of what we collect each year in income taxes.
If anyone tries to tell you that it is burden if the government imposes a tax of $10,000 on a prescription drug, but not if a government granted patent monopoly allows the drug company to charge $10,000 more than the free market price, then they don’t understand economics. The point here is that the debt basically tells us zero about the well-being of future generations and those who try to argue otherwise don’t deserve to be taken seriously.
None of this implies that Donald Trump’s tax cuts, which are likely to give hundreds of billions of dollars each year to the richest people in the country, are a good idea. These people are absolutely the last ones who need the money. But the argument that the resulting debt will impoverish our kids doesn’t hold water.
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