Friday, June 2, 2017

Living in a post-truth world

This is Joseph.

Larry Summers on the heroic assumptions needed to make the current budget deficit neutral:
The Trump economic team has not engaged in serious analysis or been in dialogue with those who are capable of it so they have had nothing to say in defense of their forecast except extravagant claims for their policies. Taking their supply-side perspective, do they really believe that through tax cuts and deregulation they are going to accomplish more than Ronald Reagan, who after all reduced the top tax rate from 70 to 28 percent? Between 1981 and 1988, GDP per adult grew by an average of 2.5 percent, distinctly slower than what they are forecasting. Even this figure reflects a substantial cyclical tail wind from the decline in unemployment from 7.6 percent to 5.5 percent (which from Okun’s law implies adding about half a percent to GDP growth) — something unavailable in the present context.
Two thoughts here.  One, if assumptions this heroic are allowable then there is really no point to doing forecasts, as they are too unlikely to reflect reality.  Maybe we will have a period that is a positive outlier, but maybe it will be a negative outlier as well.  One has to argue for the central tendency as the most likely outcome and this isn't in line with past rates of growth.

Two, this is a pretty good estimate of the maximum effect of supply side reforms. Moving the tax rate from 70 to 28 percent is about the entire range of plausible rates, and increasing employment could be a intermediate step here.  But that would suggest a fairly modest effect, given that the US growth rate from 1948 to 2017 was 2.00%.  

If you see the drop in employment as being unrelated to the tax cuts (recovery from recession), then Reagan had the average growth rate of the post-WWII US.  You know, it might be possible that tax rates aren't a key driver of economic growth, compared to factors like good government.  Just thinking out loud here.

And this leads to my last and most puzzling observation.  If government is run like a business then why do they keep cutting revenue?  Does comcast cut prices in the absence of competition?  Or is this a principal agent problem writ large?

h/t Economist's View

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