Europa le nuove considerazioni di Krugman

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Europa: le nuove considerazioni di Krugman

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Europa: le nuove considerazioni di Krugman

On Saturday The Times reported on an apparently growing phenomenon in Europe: “suicide by economic crisis,” people taking their own lives in despair over unemployment and business failure. It was a heartbreaking story. But I’m sure I wasn’t the only reader, especially among economists, wondering if the larger story isn’t so much about individuals as about the apparent determination of European leaders to commit economic suicide for the Continent as a whole.

Just a few months ago I was feeling some hope about Europe. You may recall that late last fall Europe appeared to be on the verge of financial meltdown; but the European Central Bank, Europe’s counterpart to the Fed, came to the Continent’s rescue. It offered Europe’s banks open-ended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and put an end to the panic.

The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course.

Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

In a way, it doesn’t really matter how Spain got to this point — but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.

So if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is actually fairly clear. The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.

What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that in effect locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasizing the bank’s willingness to raise rates at the slightest hint of higher inflation.

So it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff. And the whole world will pay the price.

Europa: le nuove considerazioni di Krugman

A message for regular readers of this blog: unless something big breaks later today, this will be my last day blogging AT THIS SITE. The Times is consolidating the process, so future blog-like entries will show up at my regular columnist page. This should broaden the audience, a bit, maybe, and certainly make it easier for the Times to feature relevant posts.

It will also, for technical reasons, make my life simpler — you’d be surprised how many hoops I have to go through to get these things posted. But that’s not the reason.

Anyway, I expect to be doing the same sort of thing, mixing regular columns with stuff, usually wonkish, that doesn’t belong in the regular paper. Old blog posts will remain available!

Leprechauns of Eastern Europe

Over the past couple of days we’ve had two very good critiques of the Tax Foundation “model” of tax cuts, which comes closer than any other to telling Republicans what they want to hear.

Greg Leiserson takes on TF’s bizarre treatment of the estate tax, which should make no difference in the small-open-economy approach they claim to be following, but somehow becomes a huge growth factor in their analysis. Matt O’Brien follows up, among other things, on my point about leprechaun economics: If your claim is that tax cuts will induce huge inflows of foreign capital, you should be projecting large future payments of income to foreigners, so that domestic income doesn’t grow nearly as much as GDP. TF somehow doesn’t.

So are there real-world examples of the latter issue aside from Ireland? Actually, yes — the so-called Visegrad economies of eastern Europe. These economies have attracted huge capital inflows from Western Europe, in part because of low wages, in part because of low corporate tax rates. This has helped GDP grow — but national income has lagged, because so much of the growth has gone to foreign investors:

Average households have not seen enough of the fruits of economic growth. Those rewards have gone disproportionately to the owners of capital, and in these countries, that tends to mean foreigners. In the Czech Republic, Hungary, and Slovakia, the most important sectors are largely or wholly foreign-owned.

You can see what this has meant for the Czech Republic in the figure. For what it’s worth, the lag of GNP behind GDP shown there is several times as large as most predictions of extra growth from U.S. tax cuts.

Now, I don’t believe this tax “reform” will produce anything like the capital inflow its defenders claim. But even if it does, Americans won’t see much of the benefits.

La Trahison des Clercs, Economics Edition

Yesterday a former government official at a meeting I was attending asked a very good question: have any prominent Republican economists taken a strong stand against the terrible, no good, very bad tax legislation their party just rammed through the Senate? I couldn’t think of any. And this says something not good about the state of at least that side of my profession.

We can divide Republican economists into three groups here. First are those enthusiastically endorsing the specific bill, like the 137 signatories of the letter Trump has tweeted out. They’re a pretty motley crew, many not economists at all, some apparently nonexistent, and some with, um, interesting backgrounds:

Other names on the economists’ letter may raise eyebrows. John P. Eleazarian is listed as an economist with the American Economic Association. But membership to the AEA is open to anybody who coughs up dues, and membership simply grants access to AEA journals and discounts at AEA events. Eleazarian is a former attorney who lost his law license and the ability to practice law in California after he was convicted and sentenced to six months in prison for forging a judicial signature and falsifying other documents. His current LinkedIn profile lists him as a paralegal at a law firm.

Second are people like the Nine Unprofessional Economists – all of whom have, or used to have, real professional reputations, who signed that open letter asserting that corporate tax cuts might produce rapid growth. As Jason Furman and Larry Summers pointed out, they misrepresented the research they claimed supported their position, then denied having said what they said.

The nine economists’ original Nov. 25 letterestimated that under the House and Senate proposals, “the gain in the long-run level of GDP would be just over 3 percent, or 0.3 percent per year for a decade.”

The conservative economists wrote to Summers and Furman on Thursday, saying the 3 percent growth assertion “did not offer claims about the speed of adjustment to a long-run result.”

So that’s explicit aid and comfort to tax cutters, with an extra dose of dishonesty and cowardice.

Incidence and Welfare Effects of Corporate Tax Cuts (Extremely Wonkish)

OK, folks, this is basically to scratch my own intellectual itch — later this week Senate Republicans either will or won’t enact the biggest tax scam in history, and analysis won’t make any difference. But inspired by the Furman-Summers beatdown of Republican economists lending cover to disgusting dishonesty by their political masters, I found myself looking for a simple analytical representation of the effects of cutting corporate taxes. By simple, of course, I mean for economists: for anyone else this may as well have been written in cuneiform. You have been warned.

OK, so the naive, super-optimistic version of what corporate tax cuts will do — roughly speaking the Tax Foundation version, without the incompetence — treats America as a small, perfectly open economy that faces an infinite, perfectly elastic supply of foreign capital at some given rate of return. It also ignores leprechaun economics — the potentially large difference between GDP and national income when foreigners own a lot of your capital stock. Meanwhile, America is neither small nor perfectly open, so that the rate of return to foreigners depends on how much capital we suck in — and since around a third of corporate profits already go to foreigners, they’re likely to collect a significant fraction of the gains from a tax cut.

So, can we put all of that in a simple framework? I think we can. In fact, just one diagram, although for those not raised on traditional trade geometry it may look a bit intricate, But it’s all very simple, believe me!

Starting point: we can think of a downward-sloping demand for capital, reflecting its marginal product. We can also think of an upward-sloping supply of capital, with the upward slope reflecting both the size of the US — we’re probably around half of the world’s capital market not subject to capital controls — and the imperfect nature of capital mobility, even now.

We can think of corporate taxes as putting a wedge between the rate of return to capital before taxes — which is assumed equal to its marginal product — and the after-tax return received by investors. So it’s kind of like an excise tax on capital, and looks like Figure 1:

Choice and the Insurance Mandate

A key part of the Senate tax bill is repeal of the individual health insurance mandate. The budget scoring relies on this repeal reducing Federal deficits by $318 billion — and the bulk of these spending cuts would hit lower-income families. Republicans argue, however, that these families won’t really be hurt, because they’ll be making a voluntary choice not to be covered and collect government subsidies.

This argument might make sense in a world of hyper-rational individuals. In the world we actually live in, however, it’s a very bad argument. In fact, the very budget savings Republicans are counting on depend on people making bad choices.

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For if you look at CBO’s estimates of the savings from mandate repeal, more than half come from a reduction in the number of people on Medicaid. Why wouldn’t someone eligible for Medicaid sign up for free insurance? The answer, surely, is that he or she isn’t aware of the option, or simply fails to act in his or her self-interest.

If you think such things don’t happen, consider that one of the major triumphs of behavioral economics involves the demonstration that many people fail to take advantage of retirement plans that cost little or nothing — unless they’re automatically enrolled. If they are automatically enrolled, but with the option of dropping the plan, enrollment is much higher than if they’re offered the same plan, but have to opt in. Sorry, but financial decisions like whether to get health insurance are not made well, even by the well-educated and affluent, let alone the poorer, stressed people who are the main targets of GOP cuts.

Or consider the “woodwork effect” of the ACA: Medicaid enrollment increased even in states that didn’t accept Medicaid expansion, because greater publicity led some people to look into their options and discover benefits they should have been collecting all along. (Not woodwork effect exactly, but I know people in New Jersey who tried to sign up for the exchanges and discovered that they had long been eligible for Medicaid.)

So one main effect of the individual mandate is, in effect, to make Medicaid opt-out (at a cost) rather than opt-in; a lot of people who should have been getting the benefit won’t unless something like this happens, and their failure to get the benefit is a true cost, not the result of a well-informed choice.

And of course it doesn’t stop with Medicaid: many of those collecting subsidies on the exchanges wouldn’t have done something that turns out to be a big advantage without the mandate in effect forcing them to take a better look at their own self-interest.

Oh, and if you don’t believe any of this will happen, or it won’t happen on a large scale, then you can’t simultaneously believe in those $318 billion in savings.

So are reduced outlays on lower-income families a true cost to those families? Yes. Maybe not 100 cents on the dollar, but a lot closer to that than to zero.

Voodoo Too: The GOP Addiction to Financial Deregulation

The big economic policy story for this week will be the attempt to ram through the Republican tax bill, which manages both to raise taxes on middle- and lower-income Americans even as it blows up the debt, all in the service of big tax cuts for corporations and the wealthy. To the extent that there’s any intellectual justification for this money grab, it lies in the conservative insistence that cutting taxes at the top will magically produce huge economic growth.

That is, it’s still voodoo economics after all these years, and nothing — not the boom after Clinton raised taxes, not the failure of the Bush economy, not the debacle in Kansas — will change the party’s commitment to a false economic doctrine that serves its donors’ interests.

But just behind the tax story is the effort to gut the Consumer Financial Protection Bureau; and this too needs to be understood in the context of a broader GOP commitment to a demonstrably false but useful narrative.

Think about it: what would it take to persuade the right that financial deregulation is a bad idea, and some kinds of regulation are very good for the economy?

Modern financial regulation came about in the aftermath of the Great Depression, and — as you can see from the figure — the era of effective regulation was also an era of historically unprecedented financial stability. Did this stability come at the expense of economic growth? Hardly: the era of effective regulation was also the era of the great postwar boom in America, the thirty glorious years in Europe.

Nonetheless, by the 1970s a combination of free-market ideology and big money (with the latter helping to feed the former) produced a widespread belief among policymakers that those old regulations were pointless and harmful. Regulations were lifted, and, maybe even more important, malign neglect allowed unregulated shadow banking to expand rapidly. (The Trump Treasury department wants global regulators to stop using the term “shadow banking”, which it says conveys the impression that there is something wrong with such institutions. Funny how causing the worst crisis since the 1930s can give you a bad reputation.)

Schroedinger’s Tax Hike

Yes, I know that’s supposed to be an umlaut in the title. I just can’t persuade WordPress to do it.

So: There are many amazing things about the Republican tax pitch, where by “amazing” I mean terrible. But possibly the most amazing of all is the attempt to have it both ways on the question of middle-class taxes.

The Senate bill, as written, tries to be long-run deficit-neutral — allowing use of the Byrd rule to bypass a filibuster — by offsetting huge corporate tax cuts with higher taxes on individuals, so that by 2027 half the population, and most of the middle-class, would see taxes go up. But those tax hikes are initially offset by a variety of temporary tax breaks.

Now, Republicans are arguing that those tax breaks won’t actually be temporary, that future Congresses will extend them. But they also need to assume that those tax breaks really will expire in order to meet their budget numbers. So the temporary tax breaks need, for political purposes, to be both alive and dead.

If they succeed in this exercise in quantum budgeting, we’ll eventually open the box, collapsing the wave function, and discover whether the budget promise or the tax claim was a lie. But for now, they want to hold it all in suspension. Once upon a time you wouldn’t have imagined they could get away with it. Now …

Tax Cuts, Growth, and Leprechauns

Yesterday the Tax Policy Center released its macroeconomic analysis of the House tax cut bill. TPC is not impressed: their model says that GDP would be only 0.3 percent higher than baseline in 2027, and that revenue effects of this growth would make only a tiny dent in the deficit.

But Brad DeLong reminds me of a point I and others have been making: focusing on GDP is itself misleading, because we’re a financially open economy with a lot of foreign ownership already, and a large part of the alleged benefit of corporate tax cuts is that they will supposedly draw in lots of foreign investment. As a result, we should expect a significant fraction of the benefits of corporate tax cuts to go to foreigners, not domestic residents; income of domestic residents should rise less than GDP.

So I’ve been trying a back-of-the-envelope estimate of the difference leprechaun economics (so named because Ireland is the ultimate example of a country where national income is much less than GDP, because of foreign corporations) makes to the analysis.

Start with the direct effects of a corporate tax cut. The JCT puts the revenue loss at $171 billion in 2027. Assume, as is roughly the consensus, that 1/3 of this accrues to workers, but two-thirds to capital. Steve Rosenthal says that about 35 percent of this gain, in turn, accrues to foreign investors. So right there we have about $40 billion in additional investment income paid to foreigners.

Then there are the effects of the trade deficit. I can’t figure out TPC’s estimate there, but typical numbers from other modelers say that we’re looking at around $80 billion a year, or $800 billion in increased net foreign liabilities. BEA numbers say that foreign investors in the US earn on average about 2%, U.S. investors abroad around 3%. So this suggests an average return of maybe 2.5%? My guess is that this is low, because the changes would be focused on direct investment, which earns higher returns. But let’s go with it: in that case we’re talking about another $20 billion in investment income paid to foreigners.

Put it together, and for 2027 I get $60 billion in reduced GNI relative to GDP. Potential GDP is supposed to be about $28 trillion by then, so we’re talking a bit over 0.2% of GDP.

Remember, TPC estimates the extra growth in GDP at 0.3%. So according to the back of my envelope, leprechaun economics — extra payments to foreigners — basically wipe out all of that growth.

And let me say that I am not entirely clear, given this result, why there should be any dynamic revenue gains. Given how scrupulous TPC normally is, they probably have an answer. But as far as I can see there’s no obvious reason to believe that dynamic scoring helps the tax cut case at all, not even a little bit.

I’m sure that people can improve on my back-of-the-envelope here. But for now, it looks to me as if, properly counted, these tax cuts would do nothing for growth.

Days of Greed and Desperation

These are not good times, politically, for Republicans. The Virginia blowout showed that the Trump backlash is real, and will show up in actual votes, not just polls. A series of local elections have produced Democratic victories in hitherto deep-red regions. Despite gerrymandering and the inherent disadvantage caused by concentration of minority voters in urban districts, Democrats are probably mild favorites to take the House; thanks to Roy Moore, they even have a chance of taking the Senate, despite what was supposed to be an impossible map. “A wave is a’ coming” says the Cook Political Report.

And when it comes to governorships, in which, oddly enough, the winner is the person who gets the most votes, a huge flip to Dems seems likely.

Add in, too, events that are likely to damage the GOP brand even more. There’s really no question about Trump/Putin collusion, and Trump in fact continues to act like Putin’s puppet. The only question is how high the indictments will reach, and how much damage they’ll do. But it won’t be good.

You might think, given this background, that Republicans would moderate their policies in an attempt to limit the damage. But if anything they’re doing the opposite. The House tax bill is wildly regressive; the Senate bill actually raises taxes on most families, while including a special tax break for private planes. In effect, the GOP is giving middle-class Americans a giant middle finger. What’s going on?

A large part of the answer, I’d suggest, is that many Republicans now see themselves and/or their party in such dire straits that they’re no longer even trying to improve their future electoral position; instead, it’s all about grabbing as much for their big donors while they still can. Freedom’s just another word for nothing left to lose; in the GOP’s case, that means the freedom to be the party of, by, and for oligarchs they always wanted to be.

This calculus is clearest in the case of House members representing the kinds of districts — educated, relatively affluent, traditionally moderate Republican — that went Democratic by huge landslides in Virginia. If 2020 ends up being anything like what now seems likely, these members will need new jobs in 2020 whatever they do — and the best jobs will be as K Street lobbyists, except for a few who will get gigs as Fox News or “think tank” experts. In other words, one way or another their future lies in collecting wingnut welfare, which means that their incentives are entirely to be loyal ideologues even if it’s very much at their constituents’ expense.

Tax Cuts And The Trade Deficit

It’s a sad commentary on the state of affairs in America that we need to spend time debunking the Tax Foundation “model” of the effects of GOP tax cuts. But that model, with its extremely optimistic take on the growth and revenue effects of corporate tax cuts, is reportedly playing an important role in Senate discussions. So let’s talk some more about a point I’ve been trying to make: if you believe the TF analysis, you also have to believe that the Senate bill would lead to enormous trade deficits — and massive loss of manufacturing jobs.

TF provides very little detail on their model, which is itself a flashing red light: transparency is essential if you’re serious in this game. But if you read in a ways, there’s a table that tells us some of what we need to know:

So they’re saying that in the long run — which they identify as a decade — the U.S capital stock will be 9.9% bigger than it would otherwise have been. Where do the savings for that increase in capital come from? Since there’s nothing in the bill that would increase domestic savings — on the contrary, the budget deficit would reduce national savings — they come from inflows of foreign capital.

How much inflow are we talking about? Currently, private fixed assets are approximately $43 trillion. A good baseline for private capital in 2027 would be to assume that it would grow with potential GDP. If so, in the absence of the Senate bill private capital would be $65 trillion in 2027.

So the Tax Foundation is claiming that the Senate bill would raise that by 9.9%, or $6.4 trillion.

Now, it’s just an accounting identity that current account + financial account = 0 — that is, $6.4 trillion in capital inflows means an extra $6.4 trillion in trade deficits over the next decade, more than $600 billion a year. Somehow, TF isn’t advertising that point, even though it’s an unavoidable conclusion from their analysis.

What would adding $600 billion per year to the trade deficit do? Mainly it would come from manufacturing, although part of that would reflect indirect losses in service industries that supply manufacturing. So let’s say 60% comes from reduced value added in U.S. manufacturing. That’s more than 20% of U.S. value-added in manufacturing. So the U.S. manufacturing sector would be around 20% smaller than it would have been otherwise.

The Tax Foundation Has Some Explaining To Do

I’m hearing from various sources that the Tax Foundation’s assessment of the Senate plan, which purports to show huge growth effects and lots of revenue gains from this growth, is actually having an impact on debate in Washington. So we need to talk about TF’s model, and what they aren’t telling us.

The basic idea behind TF’s optimism is that the after-tax return on capital is set by global markets, so that if you cut the corporate tax rate, lots of capital comes flooding in, driving wages up and the pre-tax rate of return down, until you’re back at parity. That is indeed a possible outcome if you make the right assumptions.

But there are two necessary side implications of this story. First, during the process of large-scale capital inflow, you must have correspondingly large trade deficits (over and above baseline). And I mean large. If corporate tax cuts raise GDP by 30%, and the rate of return is 10%, this means cumulative current account deficits of 30% of GDP over the adjustment period. Say we’re talking about a decade: then we’re talking about adding an average of 3% of GDP to the trade deficit each year — around $600 billion a year, doubling the current deficit.

Second, all that foreign capital will earn a return — foreigners aren’t investing in America for their health. As I’ve tried to point out, this probably means that most of any gain in GDP accrues to foreigners, not U.S. national income.

So how does the TF model deal with these issues? They have never provided full documentation (which is in itself a bad sign), but the answer appears to be — it doesn’t. Judging from the description here, the current version of the model has no international sector at all — that is, it says nothing about trade balances. They say that they’re working on a model that

tracks the effects of rapidly increasing or decreasing desired capital stocks on international capital markets. The international sector captures the capital payments that leave the domestic economy to the foreign owners of domestic assets and adjusts the growth factors for the tax-return simulator to reflect the actual growth in incomes.

In other words, the model they’re using now doesn’t do any of that.

So while they’re peddling an analysis that implicitly predicts huge trade deficits and a large jump in income payments to foreigners, they’re using a model that has no way to assess these effects or take them into account.

Maybe they’ll eventually do this stuff. But what they appear to be doing now is fundamentally incapable of addressing key issues in the tax policy debate.

Leprechaun Economics, With Numbers

Yesterday I noted that most discussion of the growth effects of the Cut Cut Cut Act, such as they may be, focuses on the wrong measure. GDP might go up because lower corporate taxes will draw in foreign capital; but this capital will demand and receive returns, which mean that part of the gain in domestic production is offset by investment income received by foreigners. As a result, GNI – income of domestic residents – will rise less than GDP. And surely, as in Ireland with its leprechaun economy based on low corporate taxes, GNI is the measure you want to focus on.

Now, inspired by Greg Leiserson’s post on problems with the Tax Foundation model – the only one that shows significant growth effects from Cut Cut Cut – I think I can give an illustration of how much this might matter. It relies on a stylized version of the TF model, which is a model I don’t believe for a minute, so this isn’t a real estimate. But it’s a sort of proof of concept.

So, as Leiserson says, the TF model assumes that thanks to international capital mobility there’s a fixed after-tax rate of return capital must earn. Cut the corporate tax rate, and capital flows in, driving down the pre-tax rate of return by just enough to offset the tax cut.

The following figure shows the story. Here r* is the required rate of after-tax return, t is the initial tax rate, t’ the post Cut Cut Cut rate. MPK is the marginal product of capital curve. The tax cut leads to a capital inflow that moves the economy down that curve. The rise in GDP is the integral of all successive increments to capital, so it’s the area a+b+c.

But the extra foreign capital, by assumption, receives the rate of return r*. So the area c is an addition to GDP but not to GNI; the true gain to the economy is only a+b.

Now let’s create some stylized numbers. It looks as if 8% is a reasonable number for after-tax required return; with a 35% tax rate, this means a pre-tax rate of 12.3%. Cut the tax rate to 20%, and the pre-tax return should fall to 10%. The increment of capital should have a rate of return roughly halfway between, 11.15%.

Tax Foundation asserts that capital inflows will be enough to raise GDP more than 3%, which is wildly implausible. But let’s go with it for the sake of argument. This means inflows of around 30 percent of pre-CCC GDP.

So how much does this raise foreign investment income? The answer is, 8% times 30%, or 2.4 percent of GDP out of a GDP rise of 3.45 percent in my example. In other words, the true gain to the US is 1.05%, not 3.45%. That’s a big difference, and not in a good way.

The point is that even if you believe the whole “we’re a small open economy so capital will come flooding in” argument, it buys you a lot less economic optimism than its proponents imagine.

Leprechaun Economics and Neo-Lafferism

At one level, trying to have a serious discussion of the economic impacts of the Cut Cut Cut Act – sorry, the Tax Cuts and Jobs Act – is arguably a waste of time. Republicans who believe, or pretend to believe, that tax cuts will produce an economic miracle, who didn’t change their minds after the Clinton boom, the Bush debacle, the Kansas disaster, and the strength of the economy after 2020 aren’t going to be persuaded by further analytical discussion.

But some of us have spent our lives trying to understand such things, and there are some intellectually interesting aspects of the current tax debate even though the would-be reformers aren’t interested in a real discussion. So let me indulge myself.

The thing is, while Republicans always claim that tax cuts will produce miraculous growth, both the proposed tax cuts and the supposed sources of the miracle are a bit different this time. Instead of focusing on individual tax rates – aside from the estate tax – this time it’s mostly about corporate taxes. And instead of claiming huge increases in work effort from lower marginal rates, they’re mostly claiming that lower corporate taxes will bring huge capital inflows, raising wages and GDP.

There are multiple reasons to be skeptical about these claims; the actual magnitude of any positive effect on GDP is likely to be far smaller than anything Republicans say. The Penn-Wharton model says that GDP in 2027 would be between 0.3% and 0.8% higher with the tax cuts than without, i.e., basically an invisible effect against background noise; and this doesn’t even take into account the longer-run negative effects of discouraging higher education, slashing nutrition programs, and all the other things that will probably happen due to higher deficits.

But let me make a different point: GDP is actually the wrong measure. If you’re going to be pulling in foreign capital, you’re going to be paying more investment income to foreigners; so gross national income – income accruing to domestic residents – is going to go up by less. And surely that’s the measure we care about.

Friday Night Music: Elephant Revival and Larkin Poe

An old favorite and a new discovery on my part, very different but both great, and both with shows in NYC this week. Both performances are covers, but awesome.

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