Why the Trump Tax Cuts Are Awesome/Terrible (Part 1)
Our latest Freakonomics Radio episode is called “Why the Trump Tax Cuts Are Awesome/Terrible (Part 1).” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.)
Kevin Hassett, chairman of the Council of Economic Advisers, explains the thinking behind the controversial new Republican tax package — and why its critics are wrong. (Next week, we’ll hear from the critics.)
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post.
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Before we get on with today’s episode, here’s a chance for you to participate in something you’ve heard about in earlier episodes. We’ve been following a project called Behavior Change for Good, in which an all-star team of social scientists is running experiments to find the best ways to improve outcomes in health, education, and personal finance. Their first big experiment is called StepUp. It’s meant to help people kick-start an exercise habit. It lasts one month; participants will be nudged with text messages and incentivized with Amazon cash. The researchers are hoping to sign up a few hundred thousand participants. Their partner in this is 24-Hour Fitness, which has more than 400 gyms in 13 states. If you are a 24-Hour Fitness member and you want to sign up, we’ve got a special link for you. It’s 24go.co/freak. If you participate in the experiment via that link, the researchers will be able to separate their data into “freaks” and “non-freaks,” and we can report their findings. If you want to check out the Behavior Change for Good project to make sure they’re legit, you can listen to our earlier episodes. They’re called “How to Launch a Behavior-Change Revolution” and “Could Solving This One Problem Solve All the Others?”
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Back in early January, on a brutally cold weekend in Philadelphia, I attended the annual conference of the American Economic Association, which brings together more than 10,000 economists from around the world. It’s always held in early January, often in a cold-weather city. Why? One theory is that… they’re economists, and that’s when hotels and convention centers are cheap. The purpose of the A.E.A. conference is for economists to present new research; to soak up the wisdom of their elders and encourage the ambitions of their juniors — also: to drink, flirt, gossip, and hunt for better jobs. Economists, as you likely know from listening to this show, are a particular breed. For one thing, many of them are devoutly apolitical. But every now and again, especially when the political climate is as heated as it is these days, their apolitical tone is ruptured.
That’s what happened during one panel discussion. It was titled, quite benignly, “Tax Reform.” But it fell barely two weeks after President Trump signed into law one of the most sweeping and controversial tax laws in modern history, and the lead speaker on the panel was one of the chief architects of the new tax plan — the economist Kevin Hassett, who is chairman of the President’s Council of Economic Advisers. Also on the panel were three former C.E.A. chairs: one Republican, Glenn Hubbard, who served under George W. Bush; and two Democrats, Austan Goolsbee and Jason Furman, both of whom chaired the C.E.A. under Barack Obama. So things got pretty political pretty fast. There were a lot of eye rolls, a lot of exasperated groans. The new tax law has many changes but the most prominent is a huge reduction in the corporate tax rate from 35 percent to 21 percent. President Obama had also wanted to cut the corporate tax rate, but he never pulled it off. So you might think the Democratic economists would have been pleased with at least that part of the new Trump tax law. But you’d be wrong. They had specific arguments as to why — but, also, let’s face it: everything with Trump’s name on it is inherently contentious.
I am guessing that tax policy is not your most favorite topic in the world. But in honor of our upcoming Tax Day, we thought we’d give the new law the Freakonomics Radio treatment, and track down all four of the C.E.A. chairmen from that panel for a robust debate. This will require two episodes. Today, we focus on sitting C.E.A. chair Kevin Hassett. We’ll hear why he thought such a drastic tax law was needed in the first place:
HASSETT: So we had a raging problem that required antibiotics of a tax reform.
We’ll hear some hardcore economic wonk-speak:
HASSETT: There’s this thing called the capital deepening contribution to productivity growth.
And Hassett tells us what it’s like to work for President Trump:
HASSETT: He will challenge you in ways that economists often are not ready for.
And then next week, we will dissect the tax law with the former C.E.A. chairmen: Glenn Hubbard…
HUBBARD: To say it’s a disaster seems over the top.
FURMAN: The core arguments the administration made over and over again were completely false.
And Austan Goolsbee…
GOOLSBEE: The entire stimulus that some people said, “Oh, this is unbelievably large, and how can we do something that would increase the deficit by $780 billion?” I mean, come on, this is four times bigger than that!
So put on your tax hat!
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The February day I visited Kevin Hassett in Washington, D.C., turned out to be as sunny and warm as Philadelphia had been gray and cold. Hassett works in the Eisenhower Executive Office Building, next door to the White House. I was escorted down a long hallway…
DUBNER: That’s a beautiful library.
Paige WILLEY: Oh, this building is amazing.
…and into Hassett’s quite grand office. He was wearing a cardigan that might best be described as avuncular.
DUBNER: So if you would, just first say your name and what you do.
HASSETT: Sure. I’m Kevin Hassett, I’m the 29th chairman of the President’s Council of Economic Advisers.
DUBNER: You still enjoy getting to say that?
HASSETT: Yeah. Especially the number — there’s something beautiful about the number 29.
Hassett was a bit bleary-eyed, as this was the day before the publication of an important book.
HASSETT: There’s two things, really, coming out in one book. It’s the Economic Report of the President, which is a letter written by President Trump — or President whoever, in the past — that lays out his vision for how the economy is doing and how it could do better if we were to pursue his policies. And then there’s the annual report of the Council of Economic Advisers, which is for us, I guess, eight chapters that are substantive and go into what we know about, say, infrastructure investment, or tax reform.
The Trump White House, the most volatile — and unusual — White House in many generations, was relatively stable when I visited. This was a few weeks before the departure of Gary Cohn, head of the National Economic Council, reportedly over his objection to new tariffs on steel and aluminum. And those tariffs, it turned out, were just the beginning. This was also before Secretary of State Rex Tillerson was let go. Kevin Hassett, for his part, says he never had any designs on actually working in government.
HASSETT: I became interested in doing campaigns but not governing, because I didn’t feel like I had the patience for government work.
So how did he get here? Let’s go back to the 2016 election, when candidate Trump was promising big changes in Washington.
Donald TRUMP: It begins with bold new tax reform. Don’t worry, they’re going down, not up, they’re going down.
The idea was that lowering taxes, especially the corporate rate, would help job and wage growth.
TRUMP: One of our greatest job creation measures is going to be our 15% business tax rate down from the current 35% rate — a reduction of more than 40%.
HASSETT: Campaigns are interesting. I think campaigns are when policy happens, more than anything else. Because in a campaign, a candidate goes to America and says, “Here’s what I’m going to do. Elect me and I’ll do this.”
DUBNER: And it’s all viable at that point.
HASSETT: Well, then, if he or she gets elected then they try to do that. Right? And so most of the time if you look at governing, it doesn’t really get anywhere. But if you study the history of major policy changes, very often they happen right around a presidential election, when somebody wins promising to do something and they deliver because, you know, they have coattails.
But Hassett hadn’t worked on the Trump campaign — or any campaign during the 2016 election. He was, however, a fixture in Republican economic circles. He got his Ph.D. in 1990 at the University of Pennsylvania. He went on to teach at Columbia, work at the Fed, do some consulting for Treasury, and take up residence at the American Enterprise Institute, a conservative think tank.
HASSETT: Sort of like a university without having to teach, which was optimal for my utility function at that time.
Hassett for the most part held standard free-market views, in support of free trade, fiscal responsibility, and immigration — some of which ostensibly puts him in conflict with his current boss. He didn’t have much of a public profile — except for having co-authored a book, in 1999, called Dow 36,000. It suggested that the stock market, which was on a tear during the dot-com boom, would more than triple over the coming years. It didn’t, not by a long shot; even today, after a long and remarkable bull run, the Dow Jones Index is only at around 25,000. The book’s bold prediction followed Hassett all the way to his Senate confirmation hearing for the C.E.A. job.
Senator CORKER: You wrote a book in 1999 about Dow 36,000. What happened?
HASSETT: Sir, I think that one critic of mine once looked at that book and called it a “youthful indiscretion” and I think as far as youthful indiscretions go, it wasn’t such a bad one. I think that the motivation of the book then was to make sure that people understood how it important it was, if you can be a long-run investor, to invest in equities…
But Hassett has also had, throughout his career, a deep interest in tax policy: the relationship between tax policy and investment; how taxes affect low-income workers; the distributional impacts of policies like carbon taxes and cap-and-trade; and a host of other questions that go directly to Washington policy debates. All this made him a valuable resource for Republicans running for high office.
HASSETT: What happened was that Glenn Hubbard and Larry Lindsey were organizing a campaign team for President Bush, who was Governor Bush at the time, and they were going down to Austin and helping him put together a platform. And since all my friends were doing it, I decided to help them out.
DUBNER: Now, were you friends with any Democratic-aligned economists?
HASSETT: Lots, yes. I mean in fact, you know, most economists are probably Democratic aligned. So the majority of my economist friends are Democrats, for sure.
DUBNER: But you were —
HASSETT: My most frequent coauthor, Alan Auerbach, is a well-known Democrat. And Austan Goolsbee, I helped with his dissertation when he was still in grad school at M.I.T. So there are a whole bunch of us have known each other for a very long time. But I helped them — but then John McCain asked to meet with me, and basically no one would work for McCain or anybody else because everyone was so sure that President Bush was going to win. I guess everybody wants to work for a winner so they can get the job they want. But the point is that my utility function is quite a bit different from that of many people, and so the fact that if I worked for McCain and he lost, the fact that that meant that I wouldn’t get a government job had no value to me, because I didn’t want a government job. So I was, honored to be policy director for McCain, and I didn’t think that I would ever work for the Bush administration if they won. And so I didn’t see that there would be any personal cost from the blackballing everybody talked about back then, if you worked for somebody else. But I worked with McCain. It was lots of fun. And so I did five presidential campaigns, but I didn’t work on the last one because I was focused wholly on this project we had at the American Enterprise Institute called The Open Source Policy Center. And I decided to stay out of politics and just be a resource for every campaign, left or right.
The Open Source Policy Center offers analytical tools to assess the impact of public-policy proposals — including tax proposals.
HASSETT: Anybody who wanted to figure out how to score their tax plan could send us an email and then we would help them use the interface online to score it. And that’s — so I had exited politics, but then the Trump team used our Open Source stuff quite a lot. And then after President Trump was elected, then they approached me to do this job.
DUBNER: Now, this job was unfilled, as I understand it, for about eight months. You didn’t come on at the beginning of the administration, right?
HASSETT: So I spoke with most everybody, including the President, about taking the job pretty early in the process. But then once you do that, if you’re not in the first group of people that they rush through right at inauguration, then you get put into the normal Senate process and then the normal Senate process has been historically obstructionist because the Democrats have clotured everybody and made it down to one or two people a week get confirmed, and I have all these friends who have been appointed to really senior positions that still haven’t had a confirmation vote or anything.
DUBNER: Were you doing some C.E.A. work, or —
HASSETT: Yeah. So — in fact, I think Jason Furman and Austan Goolsbee and some of my other friends who have been in this position before told me that once someone’s voted out of committee, that it’s standard practice for the C.E.A. chair to work as a consultant at the White House, but not to do any of the — like not sit in this fancy office, or go give speeches as C.E.A. chair.
Hassett’s nomination was supported by, among many others, both Austan Goolsbee and Jason Furman, the former Obama C.E.A. chairs. The choice did rankle some populist elements of Trump’s coalition. But the appointment finally went forward.
Senator CRAPO: This hearing will come to order. We will begin today’s hearing…
On June 6, 2017, Hassett sat before the U.S. Senate Committee on Banking, Housing, and Urban Affairs for his confirmation hearing.
CRAPO: Mr. Hassett has had a distinguished career in economics that includes positions in academia, government, and policy.
By a vote of 81 to 16, Kevin Hassett was confirmed as the 29th chair of the Council of Economic Advisers, which had been established by the Employment Act of 1946. The Act required the White House to submit to Congress every year a full economic report; the C.E.A. was set up to assist and advise the president in that process.
DUBNER: And what made you decide that the time was right to finally try governance?
HASSETT: I don’t know. I was — I did not seek the position — when asked, I was honored. And decided maybe at this point in my career it’s something to do.
DUBNER: Some people were wondering if there would indeed — so first of all, the chairman of the C.E.A., your position was — I don’t know if demoted is the right word — but lowered out of the cabinet. So it’s no longer a cabinet position.
HASSETT: Historically it hasn’t always been in the cabinet.
DUBNER: It was only fairly recent, right?
HASSETT: And I don’t think it should be in the cabinet. And here’s why. So I think what the ‘46 Employment Act that created the Council of Economic Advisors, what it intended was that there was a place in the White House where there are professional economists who understand how economics work, who want to see the evidence before they have an opinion about whether this or that works. Now it is a political appointment — but if you’re a political member of a cabinet then, you know, part of your job is probably to just, whatever the team decides, then you become an advocate of that position. And I think that if you go back and look historically at the way C.E.A. chairs have acted, then they’ve tended to talk about the objective economics of this or that, and do so without hindrance of politics — often, not always, but often. So anyway if I were to redesign the C.E.A., I wouldn’t — I’d just leave it the way it was originally designed in ‘46, and I would try to keep the C.E.A. chair out of the cabinet.
That said, the C.E.A. chairperson’s views on the economy rarely digress from the President’s views. Which makes sense, since it’s the President who picks the C.E.A. chair. But that said, Hassett argues the annual economic report provides a rare opportunity for economics to take center stage, if only briefly, in the political arena.
HASSETT: I think that if you go back and look at the economic reports, that there have been a number of them that are very serious historic documents. I would think that the first one for President Kennedy comes to mind.
President KENNEDY: In short, the American economy is in trouble. The most resourceful industrialized country on Earth ranks among the last in the rate of economic growth.
HASSETT: for President Kennedy, we were coming off of this, sort of, hangover from the post-World War II boom, and then wondering where we were going to go next. And then for President Reagan, we had been — as really, President Trump did — we had been through a number of years where we weren’t in crisis anymore, but it seemed like we weren’t growing so hot.
President REAGAN: My fellow Americans, in recent days all of us have been swamped by a sea of economic statistics. Some good, some bad, and some just plain confusing. There are times when I think that the paper traffic that crosses my desk in a week could fill a big-city phonebook and then some.
HASSETT: The first one for President Obama comes to mind.
President OBAMA: We start 2009 in the midst of a crisis unlike any we have seen in our lifetime.
HASSETT: If you think about the terrible financial crisis President Obama’s team came in during, and I think that each of those Economic Reports of the President had a lot of vision that ended up being very useful for thinking about the trajectory of the economy, but also, if I were a historian, I would want to go back and read what the president said, ex-ante, about what he was going to do.
As Hassett and I were speaking in his office, the first copies of this year’s Economic Report — the report to be released the very next day — were being delivered to his assistant. Later on, I took a look. President Trump, in his opening letter, was characteristically boosterish. “The primary components driving my Administration’s pro-growth policy agenda,” he wrote, “tax cuts, tax reform, and smart deregulation, have inspired enormous confidence in the economy and optimism that it will continue thriving. … But the best is yet to come.”
DUBNER: How often do you see or meet with President Trump, now, in your role?
HASSETT: I’m not supposed to talk about that, but I am seeing him tomorrow for the Economic Report of the President. I’ll just say it this way, that when I surveyed previous C.E.A. chairs about the job — it’s a very complicated job, there’s not an instruction list — then I basically ended up with a list of things that I should demand to be confident that the C.E.A. is in its normal place at the White House, a list of things, like being a part of the senior staff meeting with General Kelly and everybody in the mornings. So I had that list. So when I came in my first day of work, I sat down with Gary Cohn, who runs N.E.C., to talk about day-to-day life. And before I even said anything, he said, “Well, I’ve been thinking about, you know, your job and here is the eight things I expect of you.” And it was everything on my list. So he had probably talked to similar people. But there was never any dispute or fighting or anything, or redefinition. So I think that the demotion from the cabinet thing is a sensible move. And it hasn’t influenced our day-to-day life here at all.
DUBNER: So we should infer that you have a lot of access to him and that your voice is heard in economic policy regularly, which is what one would expect of the head of the C.E.A. Let me ask you this. This president is obviously unusual in a lot of ways, and one way in which he was deemed unusual among academic economists, or at least the perception that I gathered, was that academic economists felt that he was not an empiricist in the way that some presidents are. President Obama was famous for enjoying economic analysis and dissecting it with the economists on his staff. This president, the perception is, at least, that he’s more of an intuitionist, that he comes from a business background and therefore is probably more likely to engage with a kind of idea of what success is, as opposed to base something on purely empirical research. I’d love for you to talk about that gap, maybe the gap is much smaller than I’ve just described it, but I’m really curious to know the president’s appetite for, interest in, and ability to act on, especially change his mind, in response to academic and empirical research that you’ve presented him with.
HASSETT: Yeah, you know, the President loves to see data, charts. He likes to participate in debate. He will challenge you in ways that economists often are not ready for. One example was that we were making a chart, at one point, of how home prices are doing around the country. And the President was sure that our data must be wrong because we had a different number for each state. And with color for hot and cold markets or something like that. And he said that Florida is way hotter than our data implied. So our data must be wrong. So then he went into the nuances of how the data are constructed.
DUBNER: And was he right or wrong on that count?
HASSETT: Oh well, I mean —
DUBNER: You were right?
HASSETT: We were right on that one. But, but…
DUBNER: And did he did he accept your rightness, ultimately?
HASSETT: Yeah. But it’s an example of that you’re, you know, you’re using an accepted source, and wait a minute, that’s so different from what I think, that must be wrong. And often that kind of challenge leads to an insight that’s really useful. Right, it kind of really, oh, the way they construct this is imputed rent on owner-occupied housing or something, and that imputed rent is something they haven’t changed in 20 years, the formula for. And so anyway — but yes, we interact with him. He sees slides, he responds to them. He likes debate. He changes his mind, and he likes to have lots of opinions. I think sometimes when I watch him operate, I think he might be one of the first people who really understood the genius of the wisdom-of-crowds idea, that he — so you know, ask a bunch of people what they think about something, and then why. Because you know, if you and I were making a decision about just about anything then, we might very much like to know what the other people in the office think about it, because they might think of something that we didn’t of. But yes, he likes lively debate. He likes to talk. He is really a voracious consumer of charts.
DUBNER: So I am very curious about the tax act, because it’s a big deal. It’s so far the signature legislation of the Trump administration. So I’d love you to begin with your involvement: when you came in, how early was this a priority of the Trump administration, and how did the work begin to figure out what it was going to be, then we’ll get into what it is and what’s in it and what’s not.
HASSETT: The Trump team was all over taxes during the campaign…
TRUMP: Our tax plan will greatly simplify the code and reduce the number of brackets from seven to three.
HASSETT: and it’s really how I got to know them…
TRUMP: In addition, because we have strongly capped deductions for the wealthy and closed special-interest loopholes, the tax relief will be concentrated on the working and middle class taxpayer.
HASSETT: and so you know, really, the bones of this plan were laid out during the campaign.
TRUMP: They will receive the biggest benefit, and it won’t even be close. This is a working- and middle-class tax relief proposal.
The tax bill that ultimately passed — with zero Democratic votes, by the way — was not exactly what Trump had pitched on the campaign trail.
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When Kevin Hassett discussed the Trump Administration’s new tax act, back at the American Economic Association conference in Philadelphia, he admitted that the final result wasn’t exactly what he or the White House had wanted. This was mostly due to the horse-trading necessary to get it through Congress — an especially narrow alley, since not a single Democrat in the House or Senate voted for it. There was, before and after the vote, a great deal of debate and vitriol. The Democratic line was that the new tax law rewarded the wealthy at the expense of everyone else, and couldn’t come close to paying for all the cuts. The Republicans argued that their tax bill would benefit nearly everyone. It increased the standard deduction, making tax filing simpler for many and lower for most — although it raised taxes and complicating the process for some. It did not reduce the number of brackets, as Trump had promised during the election. Nor did it lower the corporate rate from 35 percent all the way to 15 percent, as he’d promised. But it was lowered drastically to 21 percent. The corporate tax cut was the centerpiece of the plan, both economically and psychically. And, at least according to Kevin Hassett, its effect is already being felt.
HASSETT: Because exactly the things that we said would happen if this bill passed are happening: the people are moving the plants back, the wages are going up, we got more than 4 million people that have already seen a big pay raise.
Critics argue it’s way too early to say whether the corporate-rate cut will truly accomplish its desired goals. And they say that a lot of the recent headlines — about American firms repatriating foreign cash or giving workers raises or bonuses — are mostly window-dressing or P.R. stunts. So, okay, let’s drill down into why Hassett thinks his plan will work. Let’s start with his headline:
HASSETT: Yeah, I think that the headline is we think that that path to low productivity and low economic growth that we experienced over the last few years is not something that signals a radical departure from the trajectory that we’ve grown to know and love. And I think that the headline really is that we’re not heading for a new normal. We’re just heading for normal.
In other words, the “new normal” of low growth isn’t a foregone conclusion. Or is it? This is a major debate in economics at the moment. On one side are those who think we are in a new normal, or a “new mediocre” — or, in econo-speak, a state of “secular stagnation.” It’s the idea that a range of factors — from low productivity growth to an aging population — have conspired to depress growth.
HASSETT: You know, I think there’s a lot of evidence that that view is incorrect, and that it’s like a convenient political view, but not an economically sound one.
Why does Hassett believe he’s right and the doomsayers are wrong? Because, he argues, the old corporate tax rate, and complicated tax rules generally, gave American firms a strong incentive to move their capital abroad, so they did. Lowering the rate and persuading companies to bring their resources home, he argues, will result in a greater “capital deepening,” as economists call it.
HASSETT: It’s just the idea that if you got more machines, then you’re more productive, because the machines increase your productivity.
And that, he argues, will lead to higher wages.
HASSETT: If you think about it, the second Obama term was a time when you would think that we’re kind of returning to normal, where we’re recovering from this terrible financial crisis, things would be getting back to the way they were. Instead, we had this pretty radical anomaly of capital deepening contributing negatively to productivity growth for the first time since the Second World War. And so what that means is that the sort of depreciation of machines in society was bigger than the investment into machines that people were making.
DUBNER: So by your reckoning and in your view, how much of that anomalous and bad scenario was driven by this version of global manufacturing that the U.S. embraced 30, 40 years ago?
HASSETT: I think that it’s the best explanation for what we’re seeing, and that if you want to think about the economics debate, the academic debate, or the political debate, because they both were interlaced while the tax bill was hot, then there’s one school of thought that thinks that capital’s highly mobile, if you try to tax the highly mobile thing, it moves and you don’t get much revenue from that. And when you do that the immobile factor ends up bearing the cost. And so in that view, we’ve had this unprecedented slow wage growth and slow economic growth because we tried to tax the mobile thing, the mobile thing ran away. And then the immobile thing, which in this case would be workers, ended up holding the bag. And so the workers saw their wages not go up because the firms were locating the jobs over there and moving the capital that could have driven their productivity up over there, and so they were stuck basically holding the bag. And then the other school of thought is, well, marginal incentives don’t really matter that much. Investment’s not that responsive to these things, people are going to locate where they’re going to locate. But taxes are a small part of that puzzle. And the reason that we’re growing slowly is not because the Obama team enacted unwise policies, but because the whole world is slowing down.
DUBNER: So you’ve just stated the Democratic position, essentially — the latter position is the Democratic position.
HASSETT: Right, it’s not our fault, the Martians gave us slow growth. It’s the new normal, and there’s nothing we can do about it. Now, I think that if you go back and look at, say, my papers on that since graduate school — and I have watched the literature evolve and I have a very strong idea how this corporate tax bill will work and why it would be good for the economy. And that belief about what the literature says was not a partisan thing. If President Clinton had — if it was President Clinton, and she had asked me to go on T.V. and talk about the tax bill, then that’s — I would have said the same things.
DUBNER: And for that matter, President Obama said for years that he wanted —
HASSETT: Wanted a 28 percent rate. And Luigi Zingales — it was an off-the-record lunch and so I’ve never spoken about it, but Luigi Zingales, I guess, blogged about the time that he saw me have lunch with President Obama, and I had Obama convinced to be pretty aggressive about corporate tax policy, based on the science, based on the fact that it’s the right thing. And he was contrasting President Obama’s response to my analysis to that of some of the economists that served him, who were vocal critics of the tax bill. But I think it’s working the way we expected —
DUBNER: You mean vocal critics now?
HASSETT: Vocal critics during the debate, at least. I think that the vocal critics are going to probably be harder and harder to find, assuming that the thing works according to plan.
DUBNER: How strong a prediction are you willing to make, whether it’s on a G.D.P. dimension, whether it’s unemployment and wage, I guess employment we — we’re not so concerned about right now, it’s pretty good, but wage dimension and so on.
HASSETT: There’s an easy short answer, which is that we’re not in the new normal. It’s my belief we’re just back to normal, and the growth rate — so our growth-rate forecast for the next 10 years is below the median Economic Report of the President forecast, but significantly above the low-growth pessimistic outlook of the Obama administration in their last four years. You know, their economists are arguing that we’re on pretty weak ground. They must believe that because that was the ground that they sort of established. I think they genuinely believe it. But we’re hoping to prove them wrong, and I think that the data so far are doing that.
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Even though the new tax bill lowers taxes for most Americans, it hasn’t resonated very broadly. Why? One reason, to be sure, is that the President himself isn’t very popular. But also: many of the bill’s intended benefits are necessarily long term. A lot of the near-term changes that were up for discussion — changes that Trump had promised on the campaign trail — didn’t come through. A plan to deduct childcare expenses. An expansion of the Earned Income Tax Credit. A plan to increase taxes on carried interest, the money earned by private-equity firms and hedge funds. The Republican tax law wound up including none of these. Moreover, the corporate-rate cut has been widely seen as better for firms and shareholders than actual workers. Kevin Hassett disagrees. And he comes from the very kind of place — with wage stagnation and job loss — that powered Trump’s election.
HASSETT: We were growing up in a town called Greenfield, Massachusetts — wonderful town, people should go visit it — that was experiencing at the time, you know, a kind of depression because the Greenfield Tap and Die, which had previously employed thousands of people, was down almost nobody. There were paper mills along the Connecticut River, on either side of town, that were shutting down. And most of the kids that I grew up with were pretty pessimistic about, “Well, what am I going to do with myself,” where most people ended up leaving town. And so I can remember going back, a few years after I graduated from college, and wandering around town and half the stores were closed. And there’s this video game called Fallout…
HASSETT: Do you know this video game?
DUBNER: I don’t.
FALLOUT AD: Friends, your future may not be as secure as you think. Where will you be when the atomic bombs fall?
HASSETT: But it’s basically a post-apocalyptic game where you wander around and explore a world and —
DUBNER: And that’s what it looked like, you’re saying?
HASSETT: Well, no — but it’s post-apocalyptic. But they — but even at some point, I remember reading a news story that the producers of Fallout, like maybe the third version of it, were using the paper mill that’s right across the river from my dad’s house as a set. So they went there and they had taken all these photos so that when people explore the Turner’s Falls paper mill in that video game, if they do. I’m sure your listeners of all people are probably, you know, Fallout players. Anyway, so they would be at that place, and I still go home, my dad is still there, and we walk around. The town’s on a better trajectory now. But I think that as I went to college, that one of the things that just I was focused on in my own studies was, “Why is it that places filled with talented folks, you know, smart, talented folks like Greenfield, Massachusetts, can suddenly hit this equilibrium where everybody — most everybody’s leaving, no businesses want to be there?” You know, why did Greenfield fall off the map?
DUBNER: Is the short answer to that — whether it’s textiles, whether it’s plastic — is it just about offshoring and manufacturing elsewhere? Is that not really the big component in Greenfield?
HASSETT: I think that basically for places that there are two possible Nash Equilibria.
A Nash equilibrium, named after the mathematician John Nash of A Beautiful Mind fame, is a concept from game theory. It describes a situation whereby multiple participants have reached a stable equilibrium and conclude, given the choices of the other participants, that there’s no rational reason to do anything different. To Hassett, it’s a helpful framework for thinking about the economic vitality of different communities. Like Silicon Valley at the moment…
HASSETT: One Nash Equilibrium is that everybody goes there because everybody else is going.
Or like Greenfield, Massachusetts.
HASSETT: And the other is nobody goes there because nobody else is going. And that you can flip from one to the other. And so the question is, what makes those flips happen? And that’s something that I’ve done a lot of work on over the years.
Which is why one of Hassett’s favorite parts of the tax bill — something that hasn’t gotten much attention — is financial support for what are called Opportunity Zones.
HASSETT: I think it’s one of the things that in the end, we’ll look back on as the biggest deals in the tax bill, because it’s set up a vehicle that people can use to make a difference in distressed communities. It’s made it so that there’s a new and innovative organizational form, which could be set up by a mutual-fund company, or private-equity firm, or — you and I could set one up. And it becomes a pool of resources that can invest in distressed communities and not pay taxes until you take the money out of the distressed community. And the key insight is that you could take your unrealized capital gain and roll it into a distressed community fund, and then when you take the money out, you’ll pay full capital gain. But you can start to try to make a difference right now, without having a big tax consequence. And I talked about how I think that distressed communities are a bad Nash Equilibrium, where nobody goes because nobody thinks anyone else is going to go. And I think everyone really wants to make a difference and so I think that the opportunity zone could become a kind of social norm where people feel like some share of their wealth needs to give back. And that if that happens, then you get the new Nash Equilibrium, where everyone’s racing to get there before everybody else does. So I’m very optimistic about this. Now, granted, it’s something of an experiment, but I think that there’s a lot of smart thinking behind it.
DUBNER: Well, that’s what economists are always preaching, and other social scientists, is, let’s use tax code and different law to start small experiments and try to scale them up. So in the tax act, is that a Kevin Hassett special? Is that there because of you?
HASSETT: Oh, you shouldn’t ever claim credit or take blame. I think if anyone asked me about how that would work, then I would have said, “Here’s how it works, and here’s why I think it might have a positive effect on those communities.”
The Opportunity Zone experiment is projected to cost the federal government about $1.6 billion over ten years. Which may sound like a lot — but keep in mind the overall tax bill, with that huge cut in corporate rates, is estimated to cost the federal government at least a trillion dollars over ten years. And the Trump Administration has already spent, and plans to spend, many more billions, in areas like defense and infrastructure. Increasing the deficit like this, critics argue, during a time of high corporate profits and nearly full employment is irresponsible and hypocritical. Republicans, after all, spent eight years blasting the Obama Administration for its deficit spending, much of which went into recovery from the Great Recession. Trump himself routinely criticized President Obama on those grounds, and he promised his own economic plans would be deficit-neutral.
DUBNER: Between the tax act and the new budget, there’s a lot of spending going on. I’m curious: What happened to the old G.O.P. fiscal conservative reputation?
HASSETT: Well, I think that the president rightly prioritized a couple of major problems in his first year. And if you look at what’s happened to the Defense Department, that you could argue that it’s in a similar, difficult state and requires a lot of spending — if you look at the percentage of airplanes that can’t fly because they don’t have the parts, and so on. And so I think that in the first year it makes sense to prioritize, given that there’s only so much time on the legislative calendar to get things done. But I’ve written extensively over my career on the positive economic effects of fiscal consolidation, and that means that in the end, in the medium- and long-term, that deficits do matter a lot. And to the extent that growth disappoints, then pursuing some kind of long-run consolidation is something that will be inevitable. It’d just be a question of which administration will have to do it.
Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosalsky. Our staff also includes Alison Hockenberry, Merritt Jacob, Stephanie Tam, Max Miller, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, or wherever you get your podcasts.
- Kevin Hassett, current chairman of the C.E.A.
- Glenn Hubbard, former chairman of the C.E.A. under George W. Bush
- Austan Goolsbee, former chairman of the C.E.A. under Barack Obama
- Jason Furman, former chairman of the C.E.A. under Barack Obama