My Hoover colleague Richard Epstein is a law professor, not an economist. Although law professors sometimes tell me to stick to economics and leave thinking about law to them (Richard has never done so to me, by the way), I have never responded in kind. I think law professors should feel free to think and write about economics but should subject themselves to criticisms by economists.
Fortunately, I don’t have a criticism of Richard’s most-recent piece on economics. Far from criticizing, I think it’s a first-rate analytic piece, especially given the difficulty of the subject he tackles. As he points out in the first few paragraphs of his recent Hoover article, “Not Obama’s Economy,” it’s hard to tease out the effect of one president on an economy when there are so many factors at play.
So to do so, Richard chooses a marvelously simple but powerful analytic approach. He looks at the major changes to policy under President Obama and considers whether each was likely to foster or hamper economic growth. His bottom line, using basic economics, is this: each policy was likely to hamper economic growth. So then when we see higher economic growth under Trump, and we can point to factors that are reasonably good candidates for causes of that growth, such as the tax reform bill in December and the ongoing deregulation of various sectors of the economy, there’s a good case to be made that Trump’s policies are much more responsible than Obama’s policies for the recent high growth.
Is it a slam dunk? No. But it’s the best attempt I’ve seen so far to address this important issue.
Richard cautions, though, as would any economist or economically literate law professor, that one factor that is undercutting growth and will undercut growth is Trump’s hostility, expressed in recent regulations, to free trade.
Postscript.
There’s one sentence in Richard’s piece that I don’t completely understand. He writes:
The passage of the Motor Vehicle Act, National Labor Relations Act, the Fair Labor Standards act, the Civil Aeronautics Act and the Agricultural Adjustment Act—cartels all—retarded economic activities for decades to come.
I get the bad effects of the last 4 of the 5 laws he names. I hadn’t heard, though, of the first one—the Motor Vehicle Act—and some googling didn’t return results that satisfied my curiosity.
Note: As Paul A. Sand points out below, Richard almost certainly meant to refer to the Motor Carrier Act, not the Motor Vehicle Act.
READER COMMENTS
Thomas
Aug 28 2018 at 8:05pm
Possible this: https://en.wikipedia.org/wiki/National_Traffic_and_Motor_Vehicle_Safety_Act
David Henderson
Aug 29 2018 at 12:09am
Thanks, Thomas, but no. That Act was in 1966. FDR was president from 1933 to 1945.
Thomas
Aug 28 2018 at 8:06pm
“Possibly”, not “possible”.
EconRob
Aug 28 2018 at 10:30pm
Definitely an interesting writeup by Epstein. I agree with Epstein in stating:
“In order to render economic judgment on any president, it is necessary to look beyond aggregate statistics to make some independent evaluation of the discrete policies that mark a presidency. That task requires some time to decide which particular policies were pro-growth or pro-employment. And it is there that Klein falls flat, because he fails to identify any Obama policies whose positive momentum sparked the economy.”
While Klein does fall flat, it seems to me that Epstein falls rather flat in two extremely important areas himself 1) showing the “enormous” “gains from Trump’s (imperfect) domestic program” and 2) crediting an administration for short or medium-term macroeconomic activity while (at the minimum) ignoring the FOMC’s impact.
On the latter, the economy is largely performing just as it has for for years. Unless Epstein’s null hypothesis was either that the economy was headed for the dumps sans-Trump and/or a Trump win should result in a faltering economy (this may be Epstein’s argument given the mention of “Trump-created obstacles”), I don’t see much persuasive writing in Epstein’s Hoover article. I mean, Epstein actually mentions the “stock market” continuing at all-time highs as an attempt at persuasion. Macroeconomic performance including employment growth, the trend in unemployment, and rgdp growth has remained largely the same for since pre-Trump.
On the former, the fact that an economist (Henderson) gives Epstein praise such as “it’s the best attempt I’ve seen so far to address this important issue” (issue being economic performance) despite ignoring the real driver in economic growth is very disappointing. For the most part, and over the short/medium term, the executive office should really only be credited for not screwing-up economic performance (which is an extremely low bar) as central banks are the entity largely responsible for economic performance. At least Klein (“These trends didn’t begin with Trump’s election.”) didn’t drop the ball in this regard.
Writings related to short/medium-term macroeconomic performance attributed to the executive office matters mostly for pageviews and clicks while monetary offset matters for serious analysis – of which Epstein and Klein fail miserably.
EconRob
Aug 29 2018 at 9:47am
eeek! Just noticed in my editing that I have a typo with former/latter. I think those whose reading comprehension is more astute than my writing get the point.
Paul A Sand
Aug 29 2018 at 7:05am
I think he’s referring to the Motor Carrier Act of 1935: https://www.encyclopedia.com/history/united-states-and-canada/us-history/motor-carrier-act
David Henderson
Aug 29 2018 at 9:43am
Thanks, Paul. I think that’s it. That was a horrible law. See the article in the Concise Encyclopedia that deals with it.
Jon Murphy
Aug 29 2018 at 9:04am
Indeed a very good article. There is one nit I would pick, however [emphasis added]:
To a first approximation in the current US economy, the idea that a tax reduction is a good thing is probably a good presumption. But I think one would want to be cautious with it: if not accompanied by spending reductions (that is, by simply expanding the debt), then it may crowd out investment spending in the near term and lead to higher taxes in the longer term. If firms and individuals anticipate these higher taxes in the future, then they may increase their savings now in anticipation of higher taxes in the future.
Further, if the tax reductions harm key institutions, such as the justice system, then the tax reductions may actually lead to lower economic performance since things like property rights are less well-protected (this does not describe the current US state of affairs as there is a lot of bloat that can be cut before the justice system).
Michael Byrnes
Aug 30 2018 at 6:36am
This is a good point. As I recall, there was a detailed analysis of the tax bill (by Wharton, I think), that made exactly this point – the benefits to growth from this plan were front-loaded because of the increasing impact of rising debt over time.
Alan Goldhammer
Aug 29 2018 at 9:05am
I’m pretty much in agreement with EconRob’s assessment above. In addition, Epstein is really sloppy with this writing. He should know better than to say, “…the Obama administration also passed the Dodd-Frank legislation …” Last I noticed, Congress has the full responsibility for originating legislation and passing all laws.
It’s always interesting to look back at history as Epstein does and draw conclusions but one has to be judicious in such attempts. Most economists have noted that the needed stimulus to pull the country out of the great recession was insufficient. It was only the quantitative easing by the Federal Reserve that helped move the country forward.
His comments on the Affordable Care Act miss the mark. Efforts were made to find a bipartisan solution to a real problem at the start of the Obama Administration (I certainly had some first hand knowledge as to the involvement of the pharma industry at that time) but the recalcitrant Republican party did not want to take part (remember Senate Minority Leader Mitch McConnell’s statement of non-cooperation???). Epstein complains about a number of ACA features but just as with any critic does not offer any solutions.
Stock market performance since the start of the Trump administration but has not been any better than what we saw when Obama was in office as the country emerged from the great recession (I judge this by my own equity portfolio as well as the overall index). This is a net plus for investors but does not confront the brutal fact that wages for most workers have barely budged when adjusted for inflation. One also has to be careful in assessing such increases in valuation and account for stock buybacks on the part of companies that are repatriating foreign earnings following the recent “tax reform” legislation. It will take a little more time to assess this impact as we look at SEC filings but my preliminary take from selected companies I’ve looked at is that this is a significant contributor to rising stock prices.
My read of the article is that it is more ‘revisionist history’ than an astute analysis.
Hazel Meade
Aug 29 2018 at 1:55pm
Well, as usual people attribute to the President too much that is really attributable to Congress. Trump should not be credited with the tax reform bill. Everything in it is someone else’s idea, and it was Paul Ryan that pushed it through Congress, not Trump. Trump if anything may have caused it to be less good that it otherwise may have been by scuttling agreements with the Democrats on better versions.
David Henderson
Aug 31 2018 at 7:31pm
You write that Trump should not be credited with the tax reform bill. False. He signed it. You’re right that he didn’t come up with it, but without him, it would not be law.
Thaomas
Aug 30 2018 at 3:07pm
How does the increase in the deficit not more than offset the efficiency gain of reducing the corporate tax rate for a net negative on economic growth?
David Henderson
Aug 31 2018 at 7:33pm
Because the tax cut bill was not just a tax cut. It reduced two major sources of deadweight loss: the corporate income tax rate and the itemized deductions on individual income taxes.
Because capital is so mobile, the corporate income tax is one of the most inefficient taxes there is. And notice, on the individual side, the clever substitution of a large standard deduction not just for itemized deductions but also for the per-person deduction.
Thaomas
Sep 1 2018 at 11:39am
I’m not sure why making charitable deductions etc. cheaper for high income people than low income people is a big improvement, but even is it is, how does that offset the increase in the deficit that could have been avoided by offsetting the revenue lost from the corporate tax rate decrease with higher collections from personal income taxes?
David Henderson
Sep 1 2018 at 12:16pm
You wrote:
I’m not sure why making charitable deductions etc. cheaper for high income people than low income people is a big improvement,
Huh? Please explain. Moreover, you missed some of the most important parts of the switch to a higher standard deduction, including the effect on deductibility of mortgage interest and limit on the deduction for state and local taxes, which is binding mainly on high-income people.
You wrote:
but even is it is, how does that offset the increase in the deficit that could have been avoided by offsetting the revenue lost from the corporate tax rate decrease with higher collections from personal income taxes?
You’ve subtly moved the goalposts. My answer was directed to your original point.
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