As the Fed was battling the after effects of the Great Financial Crisis, a group of finance types wrote an open letter to Fed chair Ben Bernanke (November 15, 2010). They urged the Fed Chair to discontinue the Bank’s “quantitative easing” (QE) plan, warning:
“We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”
Subsequent events proved this group to be completely wrong. The US Dollar went on a tear, becoming the strongest major global currency in the post crisis era. There was no inflation; it continues to be below historical long run averages. The group’s fundamental model of how the global economy and monetary system worked proved to be completely wrong.
Not that you would have known that if you asked them. Four years later, on October 2014, Bloomberg reporters Caleb Melby, Laura Marcinek, and Danielle Burger sought some mea culpas from each and every signatory.
None were forthcoming:
Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010 warning of the risks associated with the bank’s policy of quantitative easing are standing by their claims — even as the biggest U.S. companies are flourishing, inflation is muted and holding Treasuries has been one of the best trades out there.
Not only did the signatories refuse to admit error, some defiantly claimed – against clear evidence to the contrary – to have been right.
Bad punditry + bad economics = post-truth era.
Fast forward to November 2017, one month before President Trump signed into law the Tax Cuts and Jobs Act (TCJA). Similarly, a different group (with Michael Boskin, John Cogan, Douglas Holtz-Eakin, John Taylor as co-authors of the 2010 letter) penned an open letter to Treasury Secretary Steve Mnuchin, celebrating the joys of tax cuts and the unbridled prosperity that would ensue:
Reducing Corporate Tax Rates, as Proposed, Will Increase Economic Activity
A lower corporate tax rate also lowers the user cost of capital, which not only induces U.S. firms to invest more, but also makes it more attractive for both U.S. and foreign multinational corporations to locate investment in the United States.
There is some uncertainty about just how much additional investment is induced by reductions in the cost of capital, but based on an extensive body of scholarly research, many economists believe that a 10% reduction in the cost of capital would lead to a 10% increase in the amount of investment. Simultaneously reducing the corporate tax rate to 20% and moving to immediate expensing of equipment and intangible investment would reduce the user cost by an average of 15%, which would increase the demand for capital by 15%. A conventional approach to economic modeling suggests that such an increase in the capital stock would raise the level of GDP in the long run by just over 4%.
After the first full year of the Tax Cuts and Jobs Act, the increased investment attributed to the tax cut is precisely zero. Net capital expenditures (CapEx) above historical trend is also precisely zero.
And, it is unlikely to tick up appreciably anytime soon. The January 2019 survey comment from the National Association of Business Economists’ (NABE) survey (CNBC recap here) notes:
The majority—84%—of respondents indicates that one year after its passage the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans. This is similar to the 81% in the previous survey.
This confirms what we have consistently warned against in these pages: The ideologically-driven narratives of the ever-wrongs make for bad policy, poor economic analysis, and terrible investment strategies.
They continue to say things will happen that keep on not happening. They promise an immediate uptick in capital expenditures (capex), but there has been none. They say job growth will improve, but it is actually worse than the prior few years. A temporary GDP sugar high, a surge in stock buybacks and dividend increases, and a surge in deficits. All very foreseeable. The group seems to act as a permanent reminder that Upton Sinclair was correct: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
It’s not too much of a challenge to envision the next battle to be fought on this front: It will be either Alexandria Ocasio-Cortez’s 70 percent top marginal tax rate or Elizabeth Warren’s 2-3 percent ultra-wealth tax (or both). I view both proposals as starting points for further discussions [BR: Smart to anchor the debate at a high number, making a modest increase look reasonable]. There’s likely no chance either gets enacted, but they’re a good place to start a discussion.
During the upcoming political season, I can guarantee you that the talk will be how these proposals will destroy the economy and discourage “job creators,” innovators, and entrepreneurs. (There’s already this: “It would be disastrous for the economy” – Ken Moelis, CEO of investment bank Moelis & Co. who reportedly joined the Billionaire Boys Club last year.) The billionaires will soon have their puppet “economists” (looking at you, Steve Moore) spouting this nonsense. Don’t believe it.
Michael Dell was recently owned in Davos by MIT professor Erik Brynjolfsson when he mused about where in the world – ever – such high marginal tax rates had ever worked:
“No, I am not supportive of that, and I don’t think it would help the growth of the U.S. economy,” he said in response to questions from The Washington Post.
When Dell was asked to explain why he thinks that, he said, “Name a country where that’s worked — ever.”
Co-panelist and MIT professor Erik Brynjolfsson jumped in to offer an answer: “the United States.”
Have a look at our historical top marginal tax rates here. The average for two decades – through the 50s and 60s – was 85%.
There will be much hand-wringing and pearl-clutching among billionaires and their lackey economists, as these proposals run counter to the former’s wealth and the latter’s priors.
We’ve literally been there and done that and come out none the worse – and arguably better – for wear.
The minimum wage is a favorite target of this group as well. Continued comprehensive academic studies (here) found “overall number of low-wage jobs remained essentially unchanged over five years following the increase. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution.” (See Minimum Wage Increases Do Not Destroy Jobs). And, of course, anyone who’s been paying attention at all knows that Seattle has been thriving as its minimum wage has been gradually increasing over the past few years.
Nick Hanauer presciently wrote that the pitchforks would be coming for the plutocrats. This from his 2014 missive to other mega-wealthy:
“At the same time that people like you and me are thriving beyond the dreams of any plutocrats in history, the rest of the country—the 99.99 percent—is lagging far behind. The divide between the haves and have-nots is getting worse really, really fast. In 1980, the top 1 percent controlled about 8 percent of U.S. national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.
But the problem isn’t that we have inequality. Some inequality is intrinsic to any high-functioning capitalist economy. The problem is that inequality is at historically high levels and getting worse every day. Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.
And so I have a message for my fellow filthy rich, for all of us who live in our gated bubble worlds: Wake up, people. It won’t last.”
Five years later, here we are.