Martin Feldstein, Supply Side Charlatan,  a Corrupt Social Security Privatization Advocate

Martin Stuart   Feldstein was born in November 25, 1939. He is currently the George F. Baker Professor of Economics at Harvard University, and the president emeritus of the National Bureau of Economic Research (NBER).

He is one of the top conservative economists, a long-time advocate of supply-side, trickle-down economic policy and a leading advocate for Social Security privatization .

He served as President and Chief Executive Officer of the NBER from 1978 through 2008. From 1982 to 1984, Feldstein served as chairman of the Council of Economic Advisers and as chief economic advisor to President Ronald Reagan (where his deficit hawk views clashed with Reagan administration economic policies). He has also been a member of the Washington-based financial advisory body the Group of Thirty since 2003.

Feldstein was born in New York City and graduated from South Side High School in Rockville Centre, New York. He completed his undergraduate education at Harvard University (B.A., Summa Cum Laude, 1961), where he was affiliated with Adams House, and then attended University of Oxford (B.Litt., 1963; D.Phil., 1967). He was also a Fellow of Nuffield College, Oxford from 1964 to 1967.

In 1977, he received the John Bates Clark Medal of the American Economic Association, a prize awarded every two years to the economist under the age of 40 who is judged to have made the greatest contribution to economic science. He is among the 10 most influential economists in the world according to IDEAS/RePEc.[1] He is the author of more than 300 research articles in economics and is known primarily for his work on macroeconomics and public finance. He has pioneered much of the research on the working mechanism and sustainability of public pension systems. Feldstein is an avid advocate of Social Security reform and was a main driving force behind former President George W. Bush's initiative of partial privatization of the Social Security system. Aside from his contributions to the field of public sector economics, he has also authored other important macroeconomics papers. One of his more well-known papers in this field was his investigation with Charles Horioka of investment behavior in various countries. He and Horioka found that in the long run, capital tends to stay in its home country – that is to say, a nation's savings is used to fund its investment opportunities. This has since been known as the "Feldstein–Horioka puzzle".

In 2005, Feldstein was widely considered a leading candidate to succeed chairman Alan Greenspan as Chairman of the Federal Reserve Board. This was in part due to his prominence in the Reagan administration and his position as an economic advisor for the Bush presidential campaign. The New York Times wrote an editorial advocating that Bush choose either Feldstein or Ben Bernanke due to their credentials.

Ultimately, the position went to Bernanke, possibly because Feldstein was a board member of AIG, which announced the same year that it would restate five years of past financial reports by $2.7 billion. Subsequently, as a result of risky bets made by its Financial Products Division, AIG suffered a massive financial collapse that played a central role in the worldwide economic crisis of 2007–08 and the ensuing global recession. The firm was rescued only by multiple capital infusions by the U.S. Federal Reserve Bank, which extended a $182.5 billion line of credit. Although Feldstein was not explicitly linked to the accounting practices in question, he had served as a Director of AIG since 1988.

On September 10, 2007, Feldstein announced that he would be stepping down as president of NBER effective June 2008.[5]

Feldstein served as a member of the President's Foreign Intelligence Advisory Board from 2007 to 2009.[6]. Feldstein said in March 2008 he believed the United States was in a recession and it could be a severe one.[7]

As a member of the board of AIG Financial Products, Feldstein was one of those who had oversight of the division of the international insurer that contributed to the company's crisis in September, 2008. In May 2009, Feldstein announced he would step down as a director of AIG.[8] He serves as a board member for Eli Lilly and Company.[9] He previously served on the boards of several other public companies including JPMorgan and TRW.

On February 6, 2009, Feldstein was announced as one of U.S. President Obama's advisors on the President's Economic Recovery Advisory Board.[10]

He currently serves on the board of directors of the Council on Foreign Relations, the Trilateral Commission, the Group of 30 and the National Committee on United States-China Relations.[6] Feldstein was invited to participate in the Bilderberg Group annual conferences in 2008 and 2010.[11][12] He is also a member of the JP Morgan Chase International Council.

Feldstein has been seen as a perennial contender for the Nobel Prize in Economic Sciences...

At Harvard campus, Feldstein taught the introductory economics class "Social Analysis 10: Principles of Economics" for twenty years, being succeeded by N. Gregory Mankiw. The class was routinely the largest class at Harvard, and remains one of the largest, having been passed in 2007 by Michael Sandel's "Justice" (Moral Reasoning 22). He currently teaches courses in American economic policy and public sector economics at Harvard College.

Feldstein may have made one of his greatest impacts through the concentration of his students in top echelons of government and academia. These include:

• Larry Summers, former Harvard president and U.S. Treasury secretary;
• David Ellwood, dean of Harvard's Kennedy School of Government;
•  James Poterba, MIT professor and member of Bush's tax reform advisory panel.
• Lawrence Lindsey, formerly Bush's top economic adviser, wrote his doctoral thesis under Feldstein, as did Harvey S. Rosen, the previous chairman of the president's Council of Economic Advisers,
• José Piñera, Chile's Secretary of Labor and Social Security during its pension privatization in 1980–1981,
• Jeffrey Sachs, Director of the Earth Institute at Columbia University,
•  Glenn Hubbard, Bush's first chairman of the council and now dean of the Columbia Business School.[13

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Old News ;-)

[Sep 01, 2012] Martin Feldstein should be ignored

May 3, 2011 | Bill Mitchell blog

I am still away from my office and have had a full-day of meetings today – so very little time to write. But earlier today I read another one of those articles from a senior US academic economist about the need to cut aged pensions in the US because the government is running out of money. Martin Feldstein – a Harvard professor – has been found to have engaged in highly questionable conduct (to say the least) by investigations into the causes of the financial crisis. Feldstein must surely know that the government cannot run out of money. Which brings into question his motivation for providing misleading interventions into the policy debate. He has demonstrated over a long period his willingness to hide behind the "authority" of economic theory in order to pursue an ideological obsession with privatisation and deregulation. When writing what seemed to be academic papers or opinion pieces supporting financial deregulation, for example, he didn't at the same time declare that he was personally gaining from such a policy push. His subsequent track record as a board member of companies, some of which collapsed in the crisis (AIG) or triggered the collapse has been appalling. Feldstein is not the sort of person anyone should take advice from much less pay for it.

I read the statement made by the President of the US yesterday where he said:

The cause of securing our country is not complete. But tonight, we are once again reminded that America can do whatever we set our mind to. That is the story of our history, whether it's the pursuit of prosperity for our people, or the struggle for equality for all our citizens; our commitment to stand up for our values abroad, and our sacrifices to make the world a safer place.

I thought – yes America can do whatever it sets it mind to – except create enough jobs to ensure that families have secure incomes and children have a secure future. That relatively simple task seems to escape them. But then I thought about the wording more carefully and "whatever we set our mind to" became the focus.

There are millions of Americans unemployed including nearly one-quarter of 16-19 years old who desire to work – and the American government clearly "hasn't set its mind to" providing them with opportunities to work.

The world is certainly not a safer place for the unemployed.

It comes as no surprise though given the type of economist that provides the US government with advice – Summers, Rubin, etc – a long line of deregulating, in-it-for-themselves advisers. On February 9, 2009 Harvard professor joined a long line of such characters accepting official appointments. He was appointed to the US President's Economic Recovery Advisory Board which was formed top advise him on appropriate remedies to the crisis.

Feldstein would have been one of the last people I would have appointed to such a role given his background. You only have to read this Wall Street Journal article (May 2, 2011) – Private Accounts Can Save Social Security – where Feldstein advocates cutting public pensions for the aged because the US government cannot afford to pay such entitlements. He promotes the privatisation of the pension scheme.

By way of background, Feldstein was one of the economists named in the recent investigative movie – Inside Job – which the Director Charles Ferguson said was about "the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption."

Feldstein ran the Boston-based private organisation National Bureau of Economic Research for nearly 3 decades. The NBER provides an avenue for the mainstream economists to build national prestige and a range of influential appointments. If you examine the research and publication agenda of the NBER you will appreciate that under Feldstein's direction various mainstream economic policies were promoted – including his Wall Street Journal topic – privatising the US pension and the health systems.

They also pushed economic analysis claiming to justify the optimality of deregulating the financial sector.

Charles Ferguson wrote in The Chronicle Review (Chronicle of Higher Education):

Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.

For those who haven't seen the movie, here is a transcript of the segments with Feldstein. Arrogance understates his contribution to the movie.

Ferguson: Over the last decade, the financial services industry has made about 5 billion dollars' worth of political contributions in the United States. Um; that's kind of a lot of money.That doesn't bother you?

Feldstein: No.

Narrator: Martin Feldstein is a professor at Harvard, and one of the world's most prominent economists. As President Reagan's chief economic advisor, he was a major architect of deregulation. And from 1988 until 2009, he was on the board of directors of both AIG and AIG Financial Products, which paid him millions of dollars.

Ferguson: You have any regrets about having been on AIG's board?

Feldstein: I have no comments. No, I have no regrets about being on AIG's board.

Ferguson: None.

Feldstein: That I can s-, absolutely none. Absolutely none.

Ferguson: Okay. Um – you have any regrets about, uh, AIG's decisions?

Feldstein: I cannot say anything more about AIG

Later in the movie Ferguson re-engages with Feldstein:

Ferguson: You've written a very large number of articles, about a very wide array of subjects. You never saw fit to investigate the risks of unregulated credit default swaps?

Feldstein: I never did.

Ferguson: Same question with regard to executive compensation; uh, the regulation of corporate governance; the effect of political contributions -

Feldstein: What, uh, what, uh, w-, I don't know that I would have anything to add to those discussions.

Feldstein is not the sort of person anyone should take advice from much less pay for it.

In his Wall Street Journal article he exercised all the mainstream myths about pensions and claimed that "(e)ven Mr. Obama accepts the inevitability of lower future Social Security benefits". Which doesn't sit well with his speech yesterday which claimed that America was about "the pursuit of prosperity for our people".

Feldstein claims that the American pension system is collapsing because the dependency ratio is rising or in his words:

There are now three employees paying Social Security taxes to finance the benefit of each retiree. That number will fall over the next three decades to only two employees per retiree. This would require either a 50% rise in the Social Security tax rate to maintain the existing benefit rules, or a one-third cut in projected benefits to maintain the existing tax rate.

The correct statement is that the employees produce real goods and services which define the material standard of living for those who do not produce real goods and services (but may have in the past). The taxpayers only look as if they finance social security in the US because of the accounting arrangements that are in place to account for the tax receipts.

The reality is that the public pension scheme does not require any funding at all – as a branch of government it can always pay the pensions as long as they are denominated in US dollars.

So Feldstein is lying by claiming that tax rates have to rise or benefits fall. Neither is required when you understand the intrinsic financial issues involved.

So his claim that "(t)hat's why every serious budget analysis calls for reducing the growth of Social Security benefits" is spurious and just rehearses his regular calls to private social security and deregulate markets in general. He has no credibility at all on this position.

A serious budget analysis would suggest that health care costs are rising because the American government is too scared to introduce a competitive insurance scheme and the private insurance industry has excessive market power. In making that statement I am not acknowledging that there is a budget blowout issue. It is merely a reflection that Americans spend more on health per capita than anyone and are among the least healthy. Something is wrong and it is not an impending budget collapse.

All the tinkering with the US pension scheme such as that proposed by (as Feldstein says) "(t)he bipartisan Simpson-Bowles Fiscal Commission appointed by President Barack Obama" – like "slowing the rise in Social Security benefits by increasing the age at which full benefits would be payable, and by changing the benefit formula so that the ratio of benefits to previous wages gradually declines for most future retirees" – completely misrepresent the true nature of the problem facing a nation with a rising dependency ratio.

Feldstein chooses to perpetuate that ignorance presumably because he senses some personal gain in do so – given his track record that was exposed in the Inside Job.

What is the problem with a rising dependency ratio?

First of all, what is a dependency ratio?

The standard dependency ratio is normally defined as 100*(population 0-15 years) + (population over 65 years) all divided by the (population between 15-64 years). Historically, people retired after 64 years and so this was considered reasonable. The working age population (15-64 year olds) then were seen to be supporting the young and the old.

The aged dependency ratio is calculated as:

100*Number of persons over 65 years of age divided by the number of persons of working age (15-65 years).

The child dependency ratio is calculated as:

100*Number of persons under 15 years of age divided by the number of persons of working age (15-65 years).

The total dependency ratio is the sum of the two. You can clearly manipulate the "retirement age" and add workers older than 65 into the denominator and subtract them from the numerator.

In the US Bureau of Labor Statistics publication – Monthly Labor Review (November 2009) – there was an article Labor force projections to 2018: older workers staying more active, which provided information about the dependency ratio in the US.

The publication defined the "economic dependency ratio" as:

… a measure of the number of persons in the total population (including the Armed Forces overseas and children) who are not in the labor force, per hundred of those who are.

The following graph (taken from BLS data) projects the economic dependency ratio out to 2018. No particular issues are noted.

In this paper – Age Dependency Ratios and Social Security Solvency – which was prepared by the US Congressional Research Service at The Library of Congress is interesting because it considers dependency ratio projections out to 2018. It doesn't get the economics correct (presuming there might be a social security funding problem should thedependency ratio worsen) but it seems to get the demographics correct. It concludes:

If one considers the 130 year period from 1950-2080, the greatest demographic "burden" - when the number of dependents (children plus the elderly) most exceeds persons in the working-age population - is already in the past

Anyway my point isn't to argue whether the dependency ratio as traditionally defined is rising or falling. I do not consider that to be an issue of social security solvency. However, I do see it as an issue in terms of the provision of real goods and services.

Interestingly, the BLS Monthly Review noted above also highlights the dramatic decline in participation rates particularly among males in the US.

The standard measures of dependency are partial at best. If we want to actually understand the changes in active workers relative to inactive persons (measured by not producing national income) over time then the raw computations are inadequate.

To get a more detailed view of "dependency" we consider the so-called effective dependency ratio which is the ratio of economically active workers to inactive persons, where activity is defined in relation to paid work. So like all measures that count people in terms of so-called gainful employment they ignore major productive activity like housework and child-rearing. The latter omission understates the female contribution to economic growth.

Given those biases, the effective dependency ratio recognises that not everyone of working age (15-64 or whatever) are actually producing. There are many people in this age group who are also "dependent". For example, full-time students, house parents, sick or disabled, the hidden unemployed, and early retirees fit this description.

However, usually the unemployed and undereemployed are not included in this category because the statistician counts them as being economically active. But clearly in terms of defining the problem as being one of ensuring their is enough real output available for each of the future generations to enjoy they should be included. Not only for the dramatic loss of current output that mass unemployment creates but also the dynamic intergenerational impacts that unemployment delivers.

For example, teenagers who endure entrenched unemployment are typically not able to acquire the necessary skills which maximise their potential productivity in adult life. So the "dependency" is magnified across time even if they subsequently gain work.

If we then consider the way the neo-liberal era has allowed mass unemployment to persist and rising underemployment to occur you get a different picture of the dependency ratios. The adjusted ratio for the US at present and into the future is much worse than the official estimates would suggest.

I do not have time to day to make those calculations but the point is important.

The reason that mainstream economists believe the dependency ratio is important is typically based on false notions of the government budget constraint. So a rising dependency ratio suggests that there will be a reduced tax base and hence an increasing fiscal crisis given that public spending is alleged to rise as the ratio rises as well. So if the ratio of economically inactive rises compared to economically active, then the economically active will have to pay much higher taxes to support the increased spending. So an increasing dependency ratio is meant to blow the deficit out and lead to escalating debt.

These myths have also encouraged the rise of the financial planning industry and private superannuation funds which blew up during the recent crisis losing millions for older workers and retirees. The less funding that is channelled into the hands of the investment banks the better is a good general rule.

But all of these claims are not in the slightest bit true and should be rejected out of hand. It is not a financial crisis that beckons but a real one. Are we really saying that there will not be enough real resources available to provide aged-care at an increasing level? That is never the statement made.

The actual challenge of an ageing population is that more real resources will be required "in the public sector" than previously. But as long as these real resources are available there will be no problem. In this context, the type of policy strategy that is being driven by these myths will probably undermine the future productivity and provision of real goods and services in the future.

The irony is that the pursuit of budget austerity will undermine the ability of nations to provide these required flows of real goods and services. Fiscal austerity entrenches unemployment and usually leads governments to target public education almost universally as one of the first expenditures to be reduced.

Most importantly, maximising employment and output in each period is a necessary condition for long-term growth. The emphasis in mainstream integenerational debate that we have to lift labour force participation by older workers is sound but contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment.

Consider the state of the teenage labour market in the US – these are the workers of the future. The more productive they are the more likely that the US will be able to continue to provide high material standards of living to its citizens over the next 40-50 years.

If you wanted to see the real dependency problem in the US you might start with this graph which is taken from US Bureau of Labor Statistics data (Labour Force Survey) and shows the teenage (16-19 years) unemployment rate. It currently stands at 24.5 per cent.

Making a job available to all those who desire to work will have a positive impact on the true dependency ratio is desirable. But policies which entrench unemployment and encourage increased casualisation which allows underemployment to rise are not a sensible strategy for the future. The incentive to invest in one's human capital is reduced if people expect to have part-time work opportunities increasingly made available to them.

These issues are about political choices rather than government finances. The ability of government to provide necessary goods and services to the non-government sector, in particular, those goods that the private sector may under-provide is independent of government finance.

Any attempt to link the two via fiscal policy "discipline:, will not increase per capita GDP growth in the longer term. The reality is that fiscal drag that accompanies such "discipline" reduces growth in aggregate demand and private disposable incomes, which can be measured by the foregone output that results.

Clearly surpluses helps control inflation because they act as a deflationary force relying on sustained excess capacity and unemployment to keep prices under control. This type of fiscal "discipline" is also claimed to increase national savings but this equals reduced non-government savings, which arguably is the relevant measure to focus upon.

Feldstein is among the senior economists who choose to ignore these realities. He is obsessed with privatisation and deregulation and so constructs everything within that lens. So his solution to the "impending fiscal crisis" is to propose a private "investment based accounts" as the basis for future Social Security in the US.

He claims that:

The challenge is how to assure that future retirees have accumulated adequate investment-based accounts to supplement Social Security and Medicare. Experience in a wide range of companies shows that a voluntary system can work if employees are automatically enrolled to have payroll deductions deposited into such accounts. Even though employees have the option to stop depositing, they do not do so. Inertia is a powerful force.

No, the challenge is to assure that future retirees have access to the desired level of real goods and services. The pension payments from government should be pitched at a level that provides an adequate access. That is not a challenge at all for a sovereign government. The challenge is ensuring there are the real goods and services available.

It might be politically determined that the society does not want the aged to have such access and future governments would have to deal with that political mandate and presumably cut aged pensions. But that would not be driven by any fiscal issue. As long as there is a mandate to provide a certain level of pension support and that level was backed by the availability of real goods and services then the US government will be able to honour that provision.

Feldstein knows that. But he wants a greater access to real goods and services for himself and his ilk and that can be more easily accomplished by denying access to others via spurious arguments about affordability.

Conclusion

The idea that it is necessary for a sovereign government to stockpile financial resources to ensure it can provide services required for an ageing population in the years to come has no application. It is not only invalid to construct the problem as one being the subject of a financial constraint but even if such a stockpile was successfully stored away in a vault somewhere there would be still no guarantee that there would be available real resources in the future.

The best thing to do when faced with an ageing population is to maximise incomes in the economy by ensuring there is full employment. This requires a vastly different approach to fiscal and monetary policy than is currently being practiced.

This should be accompanied by a strong commitment to public education to ensure that the potential of all citizens irrespective of private means or background is maximised.

If there are sufficient real resources available in the future then their distribution between competing needs will become a political decision. Economists have nothing to say about that.

Long-run economic growth that is also environmentally sustainable will be the single most important determinant of sustaining real goods and services for the population in the future. Principal determinants of long-term growth include the quality and quantity of capital (which increases productivity and allows for higher incomes to be paid) that workers operate with. Strong investment underpins capital formation and depends on the amount of real GDP that is privately saved and ploughed back into infrastructure and capital equipment. Public investment is very significant in establishing complementary infrastructure upon which private investment can deliver returns. A policy environment that stimulates high levels of real capital formation in both the public and private sectors will engender strong economic growth.

The worst thing for a government to do is oversee persistent unemployment and rising underemployment. The next worst thing they can do is hire lackeys like Feldstein to misrepresent the worst thing they are doing!

Postscript

Since when do people who end speeches with God Bless and all others who profess a love for humanity and forgiveness find it acceptable to publicly express satisfaction that another human being is dead No matter what that person did an eye for an eye is a poor basis for justice. Please don't assume I support anybody or any cause – I just prefer consistency.

That is enough for today!

Martin Feldstein Advocates Trashing The Dollar The Daily Capitalist

By Jeff Harding, on August 26th, 2011

Corporate profits in the second quarter grew to $1.1.467 trillion annualized-up from $1.455 trillion in the fourth quarter (previously $1.476 trillion). Today's report includes annual revisions. Profits in the second quarter rose an annualized 3.3 percent, following a 39.9 percent surge the quarter before (previously 35.2).

If the economy is flat and perhaps heading lower, why are corporate profits higher?

Aside from some built-in momentum from past inventory build-up and effciencies related to technology, one can only look to the dollar and its benefit to U.S. exporters as being the key factor behind corporate profits. By devaluing the dollar multinationals have done well abroad. Domestic consumer sales and disposable income are something else. Dollar devaluation is the unofficial policy of the U.S. But like most well-intentioned government policies, there is greater harm done by devaluing the dollar. It is the apparently "unseen" consequences of devaluation that policy makers fail to consider.

The "printing" of money (money inflation), either through artificially induced credit expansion or through quantitative easing, is the cause of dollar devaluation. The "unseen" result is that it causes a loss in value of the dollar. As well the dollar declines in value compared to other world currencies. This means that consumers of domestic and imported goods have to pay more. We become poorer because the dollar buys less. It also results in the consumption of capital, which is another way of saying the destruction of capital.

Thus the majority of Americans suffer more because of price inflation. The multinational exporters get the benefit because American made goods are cheaper for foreign buyers.

When a distinguished "conservative" economist like Martin Feldstein recommends more quantitative easing and dollar devaluation to aid exports and profits for multinationals, it illustrates this very flawed conventional thinking. In a Bloomberg article praising the junk dollar as creating a "bright spot" in the economy, Feldstein says:

"A lower dollar means more exports, and it also means a shift from consuming imported products to consuming goods and services that we produce in the United States," said Harvard University economics professor Martin Feldstein in a telephone interview. …

The weakening currency has another benefit for the U.S., according to Feldstein, who's also a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, which determines when recessions start and end. "One of the things about the declining dollar is that it doesn't add to the national debt," he said.

So why does Professor Feldstein favor the multinationals over consumers? He thinks that it creates manufacturing jobs which are better than other jobs and that will lead to our economic recovery. This concept is a mystery to me.

The idea that manufacturing jobs are more valuable and pay higher wages than other jobs, especially service industry jobs, is simply not true. Last year I did a simple analysis of services wages vs. manufacturing wages (admittedly not that "scientific," but still based on NIPA numbers) and found that if you averaged all the wages of all sectors in each industry, their wages were almost identical (latest data: 2008):

This makes services a large and powerful force in the economy. Also, manufacturing, despite common myths to the contrary, is still an important sector in our economy, just not as great a percentage of GDP as it was before. But don't worry: this phenomenon has been occurring worldwide. Why? Because of the technology revolution:

So when I see a distinguished conservative economist like Martin Feldstein recommend more quantitative easing and dollar devaluation to aid exports, I am dismayed by his flawed thinking. As if that isn't enough, he recommends more quantitative easing:

Policy makers, particularly at the Fed, are running out of monetary tools to stimulate the U.S. economy. Another round of asset purchases would prompt a quicker decline in the dollar, according to Feldstein. "If they did a QE3, the domestic effect of that would be relatively small," Feldstein said. "We'll get some of it, potentially, through the exchange rate, so that would simply accelerate this exchange-rate effect."

Let me translate what he is really saying:

I advocate devaluing the dollar because it will result in a destruction of valuable capital necessary for future growth. I don't particularly care about the fact that it will cause further price inflation and that American savers and consumers will become poorer because their dollar will buy less at home and abroad. I don't care either that QE hasn't worked yet to revive the economy. What I care about is that the big multinational corporations continue to do well at the expense of most Americans. As you know I am a well-known professor of economics at Harvard, a one time candidate for Fed chairman, and I often consult with these multinational companies for big money.

Why does he say those things? Is it because he has a big stake in the conventional wisdom? From his bio at Eli Lilly, he's been involved as follows:

Chief Executive Officer and President of National Bureau of Economic Research, US. Dr. Feldstein serves as Member of International Advisory Board of National Bank of Kuwait. Dr. Feldstein serves as Director of Council on Foreign Relations, Inc. and AIG Aviation, Inc. Dr. Feldstein has been Director of Eli Lilly & Co. since January 2002. Dr. Feldstein serves as Member of Economic and Business Advisory Board of Warburg Pincus LLC. Dr. Feldstein served as Director of TRW Aeronautical Systems since 1984. Dr. Feldstein served as Director of American International Group, Inc. since 1987, HCA, Inc. since 1998 and J.P. Morgan & Co. Inc. since 1993. Dr. Feldstein served as Director of Morgan Guaranty Trust Company of New York. Dr. Feldstein served as Member of International Advisory Board of Rorento N.V.

He makes about $301,000 per year just from Lilly. (You can see his multiple worldwide connections as put together by Businessweek.)

I am not saying the man is corrupt; far from it. But he is dead wrong. The economy is stalled out because of such policies. More QE will devastate the economy.

• DemonsHalo

  August 26, 2011 at 5:41 pm

  hello Mr Harding,

  The Mises Institute just posted this video today about the pre-fed history of american economy and I thought you might like it :)

  http://www.youtube.com/watch?v=TxcjT8T3EGU&feature=feedu

  • Jeff Harding

    August 28, 2011 at 11:42 am

    Thanks. I haven't seen this one, but they are all excellent. I read Woods' book, Meltdown. J

• Jeff p

  August 27, 2011 at 8:37 pm

  China has been gaming their currency, which means we are consuming products for less than it costs to make them in china. They have been resisiting revauation, but qe2 is causing increased inflation in china. Hence, china has been forced to let their currency begin to rise. Thank heavens! We need jobs, not cheap stuff, nealy for free. We have been over consuming cheap chinese proucts and under producing jobs. Revaluation vis a vis the yaun is a good thing and a free market thing.

• Venu Madhav

  August 28, 2011 at 12:51 am

  Jeff: I need your help for improving my thought process. Say the dollar is devalued a bit and that means more exports from American companies, but since all the invoices will be raised in dollars then all the foreign customers will have to purchase dollars, which means again the demand for dollars will remain proportionately high. So in the mix how is dollar really devalued for an American consumer?

  Further, the American consumer on the other hand will find more jobs available owing to higher exports, but as has been the case for long, the imports are disproportionately higher than exports and hence the dollar suffering value is imminent, purely due to trade imbalances. Now, if the dollar devalues and the cost of imports goes up then very well the case for improving manufacturing within the shores of US will enhance thus causing a good way to create jobs and contain trade deficits. Service intensive economies will suffer when the net export on manufactured products take a beating. How much of the services really are generating exports and bringing in dollars is the key question?
  The statistics on the salaries are little misleading. If you closely look at it, 50% of the manufacturing workforce earns ~ $17 and 50% of education workforce earns ~$20; slightly leads to the point that education could be unaffordable to the 50% of manufacturing populace? The case even more vindicating for Healthcare of course sheerly due to the size of workforce for healthcare and social services.

  Thus I think it is rational to try increasing manufacturing exports (dollar devalue) and help sustain the overall living standards and incomes across all other types of services.

  • Jeff Harding

    August 29, 2011 at 2:46 pm

    Venu, thank you for your comment and thanks for reading the Daily Capitalist. A couple of points though.

    1. Technically you are correct that foreign buyers have to buy dollars, but consider the fact that we keep printing more dollars than there is demand for so dollars pile up and are devalued relative to other currencies.

    2. Cheaper dollars increase exports but they also decrease imports. How many jobs are lost based on that?

    3. Service industries don't have to 'bring in dollars." The fact is that imports have been growing since the early 1980s and yet our economy has expanded despite that. Bastiat (and Smith) demonstrated long ago that trade was good for us, and running a deficit is not important. Especially with fiat money and freely floating exchange rates. A gold system would automatically regulated such "imbalances."

    4. The stats are not perfect as I point out, but the fact also remains that this sector has grown hugely and yet we have still prospered (not saying we haven't gone backward lately, but that since 1980, we've expanded). Our backward slide has nothing to do with trade. Also, manufacturing employment has dwindled not because we aren't still the largest manufacturer in the world, but because of capital investment in technology which makes those workers more productive.

    5. What you are advocating is mercantilism and government regulation of the economy to meet its political goals. Why favor factory workers over software engineers? Do you think the government has a better idea of where to apply money and labor than the market? I.e. why would you substitute the decisions of millions in a decentralized efficient marketplace with a few bureaucrats?

    • Venu

      August 29, 2011 at 8:02 pm

      Jeff: Thank you very much for sharing your wisdom. The following are my inputs on further thought:
      1. The government is printing dollars purely because they do not have the financial resources to sustain all of it's responsibilities and owing to the popular Keynesian economists' ruling commandment that in times of distress in economy the government has to catalyze the economic forces. Question is what is the right level of stimulus and how is the system seeing the circling back of the money towards productive gains.
      2. I am not very sure how many jobs will be decreased with reduced imports. Again, a balance of imports-exports needs to be attained what is the healthy ratio?
      3. The period of mid 1980s to 2008 is going remain as an interesting period for years to come as the geo-political matters along with investor confidence in dollar achieved peak levels because wall street became the driver for the entire global economy and drove leverage to incredibly unimaginable levels.
      4. The prosperity achieved through service industries is driven by credit engines that successfully changed hands and the loser in the end is the guy who stuck last in the chain and could not get out of the credit cycle. What happens if the number of these guys is incredibly high?
      5. If free market economics really ruled then I am very positive 2008′s crash could have been averted. Talk of the stimulus funds to financial institutions that ended beefing up only their cash reserves but did not help the economy, question is why did this happen if market based economics was the real driver?
      I am not in favor of more government interference than required. Obviously, you cannot run an economy only on software engineers; a guy who's been all along in the construction industry for 20 years cannot migrate to software development and this mobilization will not be smooth without sacrifices at the personal and economy levels, which is what Goldsmith prophetically suggested in 1994 about GATT.
      Now, in a decentralized economy the individual entities might be optimizing locally but what about a large scale optimization which addresses the economy as a whole.

• Biff Bifford

  August 28, 2011 at 11:17 am

  Venu:

  The dollar is the worlds reserve currency, and has been since we defaulted on the Bretton Woods act in 1972. The only reason any country has a need to purchase our continuing inflated currency, is the fact that, in order to buy oil from O.P.E.C. a country must exchange their currency for U.S. dollars. This is the agreement Nixon made with "Saudi" Arabia back in 1972 in exchange for their protection. From that point on, the feds have had the ability to print money at will. Increasing M2 supply only leads to commodity inflation and less purchasing power. What we need is less demand for U.S. currency, so we can began to balance the money supply, and reduce price inflation as a result of these QE's, which have been all but wiped out since the recent market crash. It appears Wall Street wants more QE to artificially stimulate the stock market, and preserve the wealth of those invested. The poor suffer greatly, by increasing food and energy prices. If you don't believe me, how much was gas before all this QE began. What about corn, sugar, coffee. In fact, check the prices of all commodities before QE began. All QE is - is a stimulus for the rich - a enormous transfer of wealth from the poor and middle class to the wealthy. It appears that our officials are interested in protecting the wealthy, while asking the poor and middle class to "eat cake."

  These failed fed policies coincide with failed Obama policies. If our president would have spent his first two years in office massaging the small business, and stimulating entrepreneurs, with grants and loans, we wouldn't be in this fiscal mess. As far as these companies are concerned, they have made so much money from exporting their goods and services that they have hoarded the cash. The government allows them to hide their money in banks internationally, without repatriating those dollars here in the states. The companies claim they are over taxed. Hmmm. I wonder if G.E. felt over taxed last year after not paying any taxes and receiving billions in tax credits. This country has lost a sense of itself. This is apparent by the pugilism between parties in Washington.

  QE is damaging the country. If the U.S. is mad at China, then change our trade policies! But instead, they would rather play currency wars, and drive the world into poverty, while preserving the wealth of the irresponsible persons who cause this problem in the first place. One last thing: In my industry, back in the early 1990′s a production manager was paid and average salary of 65k to 75k. Gas was just over a dollar than, and the average home in Los Angeles was well under 200k. Unfortunately, those wages are the same now for those jobs, and since than, we see how much gas and food have risen, and if you can even get a loan for a home - why buy one? You may not be employed long enough to keep it!

  QE is a destructive fed policy that should have only been used to unfreeze the credit markets and not to stimulate Wall Street and protect the rich!

EconoSpeak More on Martin Feldstein

More on Martin Feldstein

ProGrowth Liberal just posted interesting information about Martin Feldstein on Social Security. Here is an extract from my new book, The Confiscation of American Prosperity, regarding Feldstein's obsession with the subject.

Feldstein first came to national attention in 1974, the same year that Arthur Laffer produced his famous napkin. Feldstein published a model that "proved" that Social Security caused enormous losses for the US economy. According to Feldstein, Social Security was reducing personal savings by 30 to 50 percent. He estimated that if Social Security had not existed, the stock of plant and equipment in the United States would have been as much as 50 percent larger and total personal income 20 percent greater than the level in 1971 (Feldstein 1974). Since Social Security had only been functioning 24 years at the end of the time period that his data covered, Feldstein's article implies that the present effect of Social Security on total personal income today would be far higher ‑‑ perhaps almost 50 percent since the program has had another 35 years at the time of this writing.

The same Jude Wanniski, who popularized supply side economics, later recalled, "I came across a paper that a fellow at Harvard had written on Social Security, saying it was causing the national saving rate to decrease. And I thought, 'Great .... I've got to publish it'" (Bernasek 2004). In other words, because Feldstein's results were welcome, people of influence rushed to embrace him.

The only problem was that Feldstein's work was seriously flawed. A few weeks before the election of Ronald Reagan at the 1980 annual meeting of the American Economic Association in Denver and after Feldstein had already ascended to the head of the National Bureau of Economic Research, two less famous economists, Selig D. Lesnoy and Dean R. Leimer, reported that they were unable to replicate Feldstein's results (later published as Leimer and Lesnoy 1982). Upon analyzing Feldstein's work, they discovered that his results critically depended upon an elementary programming error. With that error corrected, Feldstein's data no longer had the disastrous effects Feldstein claimed. Instead, his model showed that Social Security could have actually had a positive impact on savings.

In all fairness, errors in economic model building are extremely common. In 1982, the Journal of Money, Credit, and Banking began a project to replicate previously published articles. The results were unsettling to say the least. Sixty‑six percent of the authors were unable or unwilling to supply the materials necessary to rerun the model. The authors who responded did so after an average delay of 217 days. All but one of these articles had problems, including programming errors, such as Feldstein committed (Dewald, Thursby and Anderson 1986). This project was hardly likely to inspire confidence in the scientific rigor of economics.

Feldstein admitted his programming error. Undeterred, he soon rejiggled his model. By adding a few new assumptions, he was able to "prove" once again that Social Security was still destructive. Some years later, in 1996, Feldstein gave his own Richard T. Ely lecture. There, Feldstein regaled his audience with new data demonstrating one more time the harmful effects of Social Security. According to Feldstein, the present value of privatizing Social Security would be an astounding $20 trillion dollars ‑‑ about twice the GDP of the United States (Feldstein 1996, p. 12).

In a 2005 Wall Street Journal opinion piece, disingenuously entitled, "Saving Social Security," Feldstein returned once more to his bête noire. This time he was arguing in support of an unpopular piece of Republican legislation to mix Security and private accounts. Feldstein promised great benefits from this "reform": "A higher national saving rate would finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits" (Feldstein 2005b). So, Feldstein would rescue Social Security by gutting it.

Earlier in the year, the American Economic Association had given Feldstein a platform to renew his attack on Social Security in his presidential address. Here Feldstein adopted a new pitch. He protested that the program did too little to redistribute income from the rich to the poor. His argument was that because the rich live longer than the poor, they will have more opportunity to benefit from Social Security (Feldstein 2005a).

Without bothering to contest Feldstein's questionable calculations about the redistributional impact of Social Security, this last attack is especially notable for its unusual rhetorical turn. Not too long ago, the same Professor Feldstein discussed the question of inequality with the New York Times. Feldstein began as if he took the subject seriously, observing, "Why there has been increasing inequality in this country has been one of the big puzzles in our field and has absorbed a lot of intellectual effort." Feldstein's own intellectual effort in this debate left something to be desired. Rather than address the question of inequality seriously, he merely trivialized the question, responding to the reporter: "But if you ask me whether we should worry about the fact that some people on Wall Street and basketball players are making a lot of money, I say no" (Stille 2001).

This dismissal of the question of inequality was not some uncharacteristic, off‑hand remark. In an earlier article, entitled, "Reducing Poverty Not Inequality," Feldstein described the proper approach to an imagined increase in inequality occurring because a small number of affluent people received $1000 each at no cost to the rest of society. For Feldstein, only a "spiteful egalitarian" would not welcome such an improvement in society (Feldstein 1999, p. 34).

Of course, Feldstein and his fellow 'spiteful inegalitarians' have been adamant in their hostility to any redistribution of income toward the less fortunate. Such policies threaten to hinder the magical trickle down upon which all progress supposedly defends. Suddenly, however, when it gave credence to his attack on Social Security, Professor Feldstein refurbished himself as a populist advocate of redistribution of income from the rich to the poor by arguing that Social Security benefited the rich. Professor Feldstein never bothered to explain why the rich are so hostile to this program that benefits them so lavishly.

One might expect such a flurry of conflicting arguments from an unscrupulous salesman who wants to earn his commission from a confused customer, but not from one of the most prominent academic economists in the country. One might suspect that ideology rather than an objective search for the truth is at work.

Feldstein did not limit his political activism to Social Security. For example, he used the Wall Street Journal to publicize his work predicting that Clinton's economic taxes would harm the economy while raising little revenue (Feldstein 1993). Unlike his Social Security work, this article made a specific prediction. Unfortunately for Feldstein, his estimates turned out to be demonstrably false. The economy experienced a sudden burst of prosperity during the rest of the Clinton administration.

Alicia H. Munnell, a former student of Feldstein whom he thanked in the acknowledgements to his original Social Security paper and who later rose to become a member of the President's Council of Economic Advisers and Assistant Secretary of the Treasury for Economic Policy, offered this damning verdict in a Business Week article following the Denver meeting: "I get the feeling that the NBER does adopt a position on an issue ‑‑ explicit or implicit ‑‑ and then they go about generating research to support the position" (Anon. 1980). In light of Feldstein's later work, I see no reason to revise her evaluation.

Even if an economist avoids rudimentary programming errors and questionable procedures in handling the data, problems with economic models still remain. The economy is far too complex to reduce it to a mathematical equation or a computer model, even a very large and sophisticated one. As a result, such models necessarily rely on simplifying assumptions.

Although Feldstein proved nothing with his unrelenting attacks on government programs, he demonstrated how clever economists, armed with sophisticated mathematical and statistical techniques, along with the help of well‑trained graduate assistants, are capable of manipulating models to get whatever results they desire. As economists like to joke, that if you torture the data long enough they will confess. So, although economists such as Feldstein can give their work the appearance of scientific precision, their work must necessarily remain suspect.

For example, Social Security's presumably negative effect on saving was at the core of Feldstein's model, but saving has a contradictory effect on the economy. Some models assume that saving encourages investment, while others assume that saving depresses demand, which, in turn, holds back investment. No matter which assumption about the effect of saving economists choose, they can point to reputable theories and models that support them. Admittedly, as economists marginalized Keynesian theory, the models that show the positive influence of saving have become more common. That shift does not reflect an advance in knowledge, but rather a consequence of the right‑wing offensive.

Also, economists can pick and choose among various time periods and data sets, avoiding combinations that do not confirm what they want to find. While such models ‑‑ including many of the models to which I have referred in this book ‑‑ might suggest new lines of research or raise questions about previously accepted truths, they cannot constitute proof by any means.

So, economists may build their models and pundits or politicians can foist the results of these models on the unsuspecting public as if they were scientific evidence, but they are not grounded in science. For example, almost two decades after the errors in Feldstein's original model had been revealed, conservative ideologists, such as those at the Heritage Foundation, still continue to trumpet his long‑discredited calculation as serious evidence of the damage done by Social Security (see, for example, Mitchell 1998).

I believe that Social Security is one of the most effective government programs ever devised in the United States, but I can neither prove nor disprove that assertion with a computer model. In fact, Feldstein's results might possibly turn out to be correct after all, but nobody can know for certain. Different economists have come up with a wide range of estimates (see Lesnoy and Leimer 1985).

Unfortunately, the public rarely has the opportunity to hear about the full range of economic information. Ideological filters determine who gets hired or tenured in economics departments. Those economists who manage to defy the conventional wisdom face the added barrier of getting their work published in "reputable" journals. Even if such papers manage to find their way into journals, they lack the "megaphone" of powerful agencies, such as the Heritage Foundation, which give wide distribution to long‑discredited material without much fear of being exposed. So, ultimately what the public learns about how the economy works are those results that conform to the desires of the rich and powerful.

Posted by Michael Perelman at 11:24 AM

13 comments:

ProGrowthLiberal said...

Robert Barro was reflecting on his Ricardian Equivalence paper several years after its 1974 publication and came to what he thought the effect that a Social Security program would have on national savings. His answer - none.

October 8, 2007 12:10 PM

Shane Taylor said...

Some economists remind me of Jeremy Irons' character (one of two) in Dead Ringers. Sanity fraying, he designs surgical instruments which could inspire H.R. Giger. After mangling a patient's body with the instruments, his twin brother (also Jeremy Irons) removes him from the operating room. The visionary protests, "There's nothing the matter with the instrument, it's the body. The woman's body is all wrong!"

October 8, 2007 2:22 PM

Bruce Webb said...

Lets not forget that when it comes to Social Security almost none of its opponents are willing to fight fair.

They freely draw dates and Infinite Future dollars that rely on a specific economic model and then simply refuse to discuss the details of that model. It is not that their arguments for Intermediate Cost or against Low Cost are unconvincing, they simply don't exist.

Given the movement in time of both Shortfall and Depletion, with the later moving from 2029 in the 97 Report to 2041 in the 2007 you would think the obvious questions would be "What changed?" and "Can it continue?" Good luck, they simply refuse to go there, probably because they wouldn't like what they would find.

It is interesting that at times you can know from the context of their commenting that they are thoroughly familiar with the data, some of this can only come from actual reading of the Reports. The problem is not fundamentally one of education, for the most part this is not being discussed from an actual economic position at all.

Why are they so insistent? Simple they hate FDR and the New Deal and always have. They don't dislike Social Security because it is broke, they hate it because they see it as Socialism. And it is all the more infuriating that they can't assault it head on. People like Social Security. Which drives Randites and their Fellow Travellors nuts. (Well for a substantial fraction you could substitute 'putt' for 'drive' on the nuttiness front.)

October 8, 2007 3:43 PM

ProGrowthLiberal said...

When I try to view our blog the normal way, I get only the first couple of paragraphs out of the first post. I see a few comments to my post so maybe it's just my computer, but does our blog page have a bug?

October 8, 2007 5:46 PM

coberly said...

Bruce

the scary part is that no one else cares to discuss the details either. i could understand the Randians true believing their arguments and numbers, but the complete blackout on honest discussion in the press worries me.

October 8, 2007 6:51 PM

juan said...

[Martin Feldstein] estimated that if Social Security had not existed, the stock of plant and equipment in the United States would have been as much as 50 percent larger and total personal income 20 percent greater than the level in 1971 (Feldstein 1974).

Excellent! No possibility of overinvestment and all the nasty phenomena associated with it -- what a wonderful theory (ideology). Still, benefit of doubt, he may have been influenced by a recent trip to then new DisneyWorld.

October 8, 2007 10:50 PM

coberly said...

juan

or someone

where would the extra investment have come from?

the money going into soc sec goes right back out again in benefits or to government borrowing from the trust fund.

any stock market investments that replaces SS woud still have to pay out every day exactly what SS pays out in order for the investors to have something to live on in their old age... so that money is not available to compound.

i can think of a few other problems with the idea that SS hurts "savings," but i am no economist and wonder if i am missing something.

on the other hand i am not encouraged to wade through long and difficult arguments that turn out to be based on false assumptions.

October 9, 2007 11:57 AM

coberly said...

one notes that the SS surplus, lent to the government, in some respect enables lower taxes, the money saved by which is presumably invested by the higher bracket types in productive enterprises...

did Feldstein factor that into his model?

October 9, 2007 12:00 PM

juan said...

coberly,

i believe he was doing a 'what if' -- what if ss had never been created and same money had been used for investment in plant and equip. ..then there would have been 50% more production capacity and wages would have been much higher.

which entirely ignores that, within capitalism, overproduction of means of production is not only possible but made evident with every recession, and that this is not conducive to higher wages but, instead, higher unemployment. 50% more industrial capacity in 1971 would only have made those years' recessions worse, including a still more severe fall in rate of profit than did take place.

Feldstein must have still been suffering 1960s' business cycle conquered delusions, must have been like these guys:

Samuelson: 'by means of appropriately reinforcing monetary and fiscal policies, our mixed-enterprise system can avoid the excesses of boom and slump and look forward to healthy progressive growth'.
Harrod, 1969, 'full employment should now be regarded as an institutional feature of the British economy'.
Stoleru, 1970: 'It has often been said that a crisis such as the Great Depression could no longer take place today, given the progress made in techniques of state countercyclical intervention. These claims, presumptuous as they may seem, are not without foundation.'

Other hand, these folks in Belgium:

1969: 'This Marxist analysis reached three conclusions: first, that the essential motor forces of this long-term expansion would progressively exhaust themselves, in this way setting off a more and more marked intensification of interimperialist competition; secondly, that the deliberate application of Keynesian antirecessionary techniques would step up the worldwide inflation and constant erosion of the buying power of currencies, finally producing a very grave crisis in the international monetary system; thirdly, that these two factors in conjunction wuld give rise to increasing limited recessions, inclining the course of economic development toward a general recession of the imperialist economy. This general recession would certainly differ from the great depression of 1929-32 both in extent and duration. Nonetheless, it would strike all the imperialist countries and considerably exceed the recessions of the last twenty years. Two of these predictions have come true. The third promises to do so in the seventies.'

Pretty evident who was correct.

October 9, 2007 4:22 PM

Anonymous said...

sorry, inaccurate to say that 50% more plant and equipment = an equivalent rise in capacity. they are not identities. still, the point remains same.

October 9, 2007 4:25 PM

Jack said...

How wonderful. Yet another thread of discussion which lends evidence to the theory that the social sciences, economics in particular, are subject to the subjective interpretation of data. What a surprise. The researcher discovers that which he intended to discover, or that which he expected to discover. Sounds like the old Rosenthal Effect to me. A research phenomenon that a guy named Rosenthal demonstrated about 45-50 years ago. And this is news to professional economists?

So now that michael has done a rather superb job of demonstrating that one of academia's most distinguished economists is either a liar or a dumb schmuck, what is the lay man to expect from the field of economics? And why on earth are economists given any significant role in planning and structuring economic policy? Let's see, Friedman was a great thinker, but he and his Chicago buddies went around the world destroying economies. Greenspan supported every stupid decision of the Bushites, but now disavows any agreement with their economic activities. And Feldstein is a dissembler of the highest order. The only thing I don't like about this run of mediocre thinking is that they're all very bright Jewish guys and we're supposed to be more thoughtful regarding science and the search for truth. Not a good reflection. Can I move that they be excommunicated?

October 9, 2007 9:38 PM

Anonymous said...

Better, much weightier, reflection:

"Out of a shortlist of twenty of the best known, most respected and influential philosophical thinkers, nominated by the In Our Time audience, Karl Marx has been voted the Greatest Philosopher of all time by BBC Radio 4 listeners.
[...]
In Our Time, presented by Melvyn Bragg, ran the online poll over a period of five weeks and attracted over a million hits to its extended website.
[...]
Nominee % Accepted votes
1. Marx 27.93%
2. Hume 12.67%
3. Wittgenstein 6.80%
4. Nietzsche 6.49%
5. Plato 5.65%
6. Kant 5.61%
7. Aquinas 4.83%
8. Socrates 4.82%
9. Aristotle 4.52%
10. Popper 4.20%

http://www.bbc.co.uk/pressoffice/pressreleases/stories/2005/07_july/13/radio4.shtml

October 15, 2007 5:09 PM

[email protected] said...

Coming late to this one also. Glad that the Nobel did not go to Feldstein, which Mankiw thinks should happen because he has been so heavily cited. This latter fact is enough to make me nauseated. Feldstein is one of the most egregiously execrable of prominent economists around, given his long and sleazy campaign against social security.

One obvious point to me is that the US economy grew considerably more rapidly during the 1945-73 period than during any other comparable period earlier (more in the 1880s, but not for so long). Does he really think the economy would have grown faster without social security? It is just patently ridiculous drivel of the worst sort.

Economist's View An Interview with Martin Feldstein

DeLong finds some fuzzy math in Martin Feldstein's WSJ op-ed (and I found some more) "

A Flea in the Fur of the Beast

"Death, fire, and burglary make all men equals." -Dickens

DeLong finds some fuzzy math in Martin Feldstein's WSJ op-ed (and I found some more)

leave a comment "

Martin Feldstein provoked Brad DeLong's ire with a Wall Street Journal op-ed that tries to show how Mitt Romney's tax cut plan could lead to no increase in the deficit or the need to raise taxes on middle- and lower-income Americans, and takes issue with five points, including one where Feldstein makes a mathematical error by counting savings from removing tax deductions as if the current tax rates were in place, rather than Romney's proposed rates. DeLong rushes through the first four objections (which he gives Feldstein a pass on since the fifth is the most easiest and makes Feldstein's point moot, since $152 billion > $168 billion is a false statement). Here are a few of the four other items

First, Feldstein argues that Romney's tax cuts cost $168 billion, once you add in the 'dynamic scoring', which is wonk-speak for magical supply side effects where tax cuts benefit the economy so as to raise GDP enough that the taxes on the additional GDP offsets some of the cost of the tax cuts. The CBPP has a good summary of the arguments against using dynamic scoring in budget estimates which can best be summarized as the effects are highly uncertain and are likely to be small. The love of conservatives for dynamic scoring is that, when fed in high estimates of the feedback from tax cuts to growth that are not well supported in empirical study (they are high than reality), they show that tax cuts have a more stimulative impact on economic growth than they actually do, and lead to the conclusion that tax cuts are much less costly than they actually are.

Second, Romney has not provided any specific deductions that he would propose eliminating and the Tax Policy Center report (pdf), which he criticized unfairly as being 'biased', makes an overwhelmingly friendly assumption that deductions on high-income could politically be eliminated (a very rosy assumption in favor of Romney's plan). By assuming this rosy political outcome, it effectively lowers the impact on the deficit by assuming more deductions will be removed for high-income people than can be credibly assumed.

Thirdly, Feldstein's plan 'moves the goalposts' as DeLong points out by including in the amount of deductions those claimed by everyone with more than $100,000 (a much larger group than Obama's focus for not extending the Bush tax cuts for only those people with incomes of $250,000). This leads his estimate of total deductions at $636 billion to be much larger than any plausible scope for deductions to be eliminated since it includes the mortgage interest deduction for people earning between $100,000 and $250,000.

While one can argue the merits of the deduction of mortgage interest for this segment of earners (and for all earners), there is no way in hell that any politician would vote for a bill to do this any time in the near future (remember, it would have to pass the House whose members have to go try and get re-elected every 2 years). The conservative Tax Foundation has data showing that of all tax returns filed, 6.8% of those are filed by people with incomes between $100,000 and $200,000, and include an average of almost $9,000 in deductions from the mortgage interest deduction. With 150 million returns filed annually, the back-of-the-envelope amount of deductions that are being added into Feldstein's number by moving the goal post just from the mortgage interest deduction is approximately $91 billion, or about one-seventh of the value of the deductions he thinks (with questionably support) could be eliminated.

The final straw for Brad DeLong was when Feldstein estimated the budgetary impact from eliminating $636 billion in deductions, where he used an average rate of 30%, which DeLong explains:

Taxpayers making more than $100K/year in AGI had marginal tax rates of 25%-35% in 2009–an average tax rate, Feldstein assumes, of 30%.

After Romney's 1/5 reduction in tax rates they will have tax rates of 20%-28%–an average tax rate of 24%.

Multiplying not the wrong 30% but the true correct 24% marginal tax rate by the $636 billion in itemized deductions gets us not $191B but $152B.

$152B < $186B

DeLong makes a great point, but even giving a pass on the average tax rate being 30% (rather than what it would be, closer to 24%), and instead focusing on just moving the goalposts from $200k down to $100k (for the income levels where the deductions start to be eliminated) and just focusing on the impact of the mortgage interest deduction, we have Feldstein's questionable 'savings' from eliminating deductions of $191 billion reduced by $27 billion ($91 billion in deductions * 30%), which puts Feldstein's math wrong again because he is now saying:

$164B < $186B

And as DeLong pointed out, there are so many dodgy assumptions that get Feldstein to his original numbers that it is more and more ridiculous for anyone to defend the idea that Romney's budget can either a) not increase the deficit, or b) not lead to increased taxes on people earning under $250k / $200k / $100k (pick your favorite).

Wednesday, September 20, 2006

An Interview with Martin Feldstein

This interview with Marty Feldstein covers its share of controversial topics. The interview is fairly long, so if you want to pick and choose the section headers are: The Art of Monetary Policy, Time Consistency in Fiscal Policy, Social Security Reform, European Social Insurance, European Union, The Return of Saving, The Economics of Health and Health Care, Executive Compensation, Supply-Side Economics, Tax Reform Panel, and The NBER:

Interview with Martin S. Feldstein, by Douglas Clement, Interview on July 10, The Region, September 2006: As a Harvard professor for nearly 40 years, Martin Feldstein has taught economics to thousands of young students, many of whom later became quite influential in their own right-as Treasury secretaries, presidential advisers, corporate leaders, even Fed governors.

As a policy adviser, he chaired the Council of Economic Advisers during the Reagan years, and landed on the cover of Time magazine in 1984 for his controversial opposition to a growing budget deficit. He has a lower profile in Washington these days but remains extremely influential, helping the current administration develop its tax cut initiatives, for instance.

And as president of the National Bureau of Economic Research, the nation's preeminent economics think tank, Feldstein has shaped the course of economic scholarship for almost three decades: identifying key issues, encouraging empirical research, creating opportunities for cooperation and disseminating working papers of leading economists long before they appear in academic journals.

But years from now it is likely that Feldstein will be best remembered as a prescient public citizen, a scholar who identified some of the most serious economic predicaments of our time, developed pragmatic solutions to those problems and then pressed policymakers-persistently-to implement them.

Social Security. Health insurance. Distortionary taxes. Unemployment insurance. The current account deficit. These are the issues that Feldstein has pushed to the forefront of popular and policy agendas decade after decade. Through a prolific stream of professional articles, newspaper columns and scholarly books, as well as frequent speeches and media interviews, he maintains a stark spotlight on crises that others try to ignore.

Educated at Harvard and then Oxford, Feldstein returned to Harvard as an assistant professor in 1967 and two years later became one of the youngest economists granted tenure by the university. In 1977, he won the John Bates Clark award as the best American economist under 40.

Numerous achievements and awards have followed, but Feldstein seems most gratified by close collaboration with colleagues. In the following interview, held during a break from the NBER's 2006 Summer Institute, a three-week gathering in Cambridge of about 1,400 economists, Feldstein notes that earlier in the day Paul Samuelson compared the Institute to Niels Bohr drawing atomic physicists to Copenhagen in the 1920s. "I thought that was a nice sentiment," Feldstein comments quietly. His smile suggests that he could hardly conceive of higher praise.

THE ART OF MONETARY POLICY

Region: In recent articles reviewing the tenures of Alan Greenspan at the Fed and Otmar Issing [former chief economist of the European Central Bank], you observed that monetary policy is as much an art as a science, that judgment must supplement forecasting models and policy rules. Given that, what is your judgment on the current course of monetary policy? I know you're not an advocate of strict inflation targeting, but then what should be done to anchor inflation expectations, either through explicit policy measures or improved communications?

Feldstein: The rhetoric that has worked for the last 20-plus years since Paul Volcker took over was an emphasis on "price stability." That didn't come with a precise number, but I think he defined price stability-and Greenspan used similar language-as meaning that price changes should be so low that people ignore them. And "price stability" actually has, in many ways, a better ring than "2 percent inflation." Why 2 percent inflation? Why not 3 percent inflation? Why not zero? I think what the public wants is price stability. They don't want to have prices rising. In practice, because of imperfections in measurement and because of concerns about deflation, you end up with a number globally now around 2 percent, and that strikes me as quite plausible.

The financial markets may like something reasonably precise, like 1, 2, 3 percent as measured. I say "as measured" because of the statistical bias in the numbers so that true inflation is lower than the measured number. The man on the street doesn't want to be concerned about small numbers and/or about "core" inflation versus "regular" inflation. He wants price stability; he wants the purchasing power of the money that he has to stay the same. And so that's what the Fed's message to him ought to be.

Region: How can that best be communicated?

Feldstein: I think it was successfully communicated during the Volcker and Greenspan eras. And Volcker started with much higher inflation rates, so it was the more difficult sell. By the time he left, the inflation rate was down to about 4 percent as headline inflation is conventionally measured, and Greenspan took it down to roughly 2 percent and then it overshot a little bit on the low side.

So I think it got communicated that the problems of inflation we lived with in the '70s were history and that the Fed was committed to not letting that happen again. It was done without putting a precise number on it, but by reacting to increases in inflation. The public looks at how the Fed responds, not just at what they say. It's easy to say, "I believe in price stability." But if you don't do something, then no matter what number you put out there, they're not going to believe it.

TIME CONSISTENCY IN FISCAL POLICY

Region: Economists have devoted a lot of attention to time consistency in monetary policy. Some suggest that time consistency in fiscal policy would also be a good idea. Given your research on public finance, do you think there's wisdom in such a stance? And given your experience in Washington, do you think it's pragmatic?

Feldstein: When I look at the current fiscal situation, in contrast to what we experienced in the '80s when the fiscal deficits were larger and rising, and debt-to-GDP ratios were rising, we're currently at a relatively comfortable level. The federal deficit-to-GDP ratio this year will be under 3 percent, probably low enough that the debt-to-GDP ratio will actually come down.

The problems are not that very far into the future, though, with increases in Social Security and Medicare costs relative to the tax revenue that comes in. The markets seem to be ignoring that, which is a puzzle, but there's nothing about long-term interest rates that suggests that the markets are afraid that Social Security and Medicare are really going to create large fiscal deficits. Now maybe they're right. And maybe the political process will raise taxes or cut benefits. What has to be done is to reform those programs. I wouldn't set my goal in terms of the fiscal deficit. I'd set it in terms of limiting the tax levels that are going to be needed to support them.

SOCIAL SECURITY REFORM

Region: For nearly 40 years, you've been a powerful advocate for reform of the Social Security system, especially for personal retirement accounts.

Feldstein: Right.

Region: But a case could be made that the system is largely unchanged from when it was first created. Are you discouraged by the lack of progress that's been made, or heartened by the incremental changes?

Feldstein: There've been no good incremental changes. There have been incremental changes, but they've gone the wrong way until about 10 years ago. Since then there have been changes, particularly getting rid of the distortions in retirement incentives by raising the benefits if you work longer, reducing the benefits if you retire earlier. So the distortions in retirement behavior that affect the European economies are no longer present in the United States.

But the reforms of Social Security and the movement to personal retirement accounts are happening around the world now, and the United States is really a laggard. And it's not just some of the developing countries, like Chile and Mexico. It's Australia and even Sweden that have moved to mixed systems with an investment-based component. So I'm encouraged that at some point the United States is going to move in that direction.

If you'd asked me two years ago, I would have said we have a president who's committed to this and sees this as his major domestic legacy, and therefore I think he's going to get it. I can't say that now. I can say the first half of that, but not the second half. The Democrats have been completely unwilling to come and discuss the subject. It doesn't look like anything the administration can do will get them to negotiate about it. There aren't enough Republicans to do it. And it shouldn't be done on a partisan basis. The administration tried, by setting up a bipartisan commission with Pat Moynihan as one of its leaders, to come up with a way of getting to that mixed system. But they've not been able, and since Moynihan died there's been no leadership on that side of the aisle.

EUROPEAN SOCIAL INSURANCE

Region: You've referred to several European countries. I would think that the demographics of Europe would be even less amenable to a favorable future for government pension programs. What is your sense of Europe's future relative to social insurance for the elderly?

Feldstein: You're right. Their demographics are worse. We would see the tax rate required to support the U.S. Social Security pension system rise to about 20 percent from the current 12 percent if we wanted to maintain the same benefit rules on a pure pay-as-you-go basis. Europeans are already up there. They have much higher replacement rates. They have earlier retirement. And for them it's going to get even worse.

But as I said, we've seen Sweden-which I think of as sort of the leading edge of welfare states-backing off the traditional pure pay-as-you-go system and moving to this kind of mixed system. Britain has very much a mixed system. It's not exactly the same structure, but it's very much a modest pay-as-you-go part plus an investment-based part.

So, I think at some point it will happen here. I don't know exactly what the formula will have to be to cause that to occur, but I think it will happen. Israel, another country with a tradition of very strong social welfare programs, has made this transition so that new people entering the labor force contribute to a mixed system.

EUROPEAN UNION

Region: Another question about Europe, if I may. In 1997, you wrote that "on balance, a European monetary union would be an economic liability." What is your judgment of where the EMU stands today, particularly since the recent reforms of the Stability and Growth Pact?

Feldstein: Well, I think it is a liability. I think that the one-size-fits-all monetary policy is seen as not working either for the countries that have weak demand and ought to have a more stimulative policy or, on the other hand, for those that are discovering they're becoming less competitive because their domestic prices are rising and they can't adjust monetary policy. I wrote a piece on the Stability Pact issue before the recent reforms, but even before the reforms, they weren't paying any attention to the Pact. The basic problem is there's no market feedback to discipline a country that doesn't have its own exchange rate or its own interest rate to warn them against fiscal deficits.

Normally, a European country that started running large fiscal deficits would see that the increased risk of their bonds would push up the interest rate they had to pay, there would be a flight from the currency and they would see that that translates into inflation. So they would have a lot of market-driven warning signals. All that is gone now. There's a 30-basis-point difference between Italian and German long-term interest rates because the market doesn't believe that it can discipline the Italians. If the Italians run a large fiscal deficit, it's effectively a European fiscal deficit. It's not a specifically Italian one.

THE RETURN OF SAVING

Region: In a recent Foreign Affairs article, you argue that the downward trend in savings by U.S. households will likely soon reverse, and that that could cause some near-term disruption. Could you explain that prediction, and tell us how that ties in with your recent op-ed in the Wall Street Journal calling for, I think your term was, a "competitive dollar abroad."

Feldstein: Right, strong dollar at home, a competitive dollar globally. Well, the brief history of our savings rate is that from a relatively low level it has been falling ever since the early '90s. This is household saving, not national saving. Household saving was coming down from around 7 percent of disposable income, and by 2003 it had gotten to 2 1/2 percent of disposable income-a remarkably low number.

That was not surprising since people's wealth had increased quite substantially, both because the stock market-despite the fall in 2000-was up substantially and because home values were up. So people felt they didn't have to save by reducing consumption. They just looked at their 401(k)s and IRAs, and at a time when asset prices were going up, the wealth effect dominated.

The fall in the savings rate is a reflection of the fact that we used to have defined benefit pension plans and we now have defined contribution plans, plus the IRAs. All of that put the increase in stock market value into the individuals' hands rather than into the companies' hands as it would have under defined benefit plans.

Then saving fell very sharply in the next two years, 2003 to 2005, about as much as it had fallen over the last decade and a half. It went from 2 1/2 percent to minus 1 1/2 percent. It's not entirely clear what caused that. There was a spurt in home prices, so there was a sharp wealth effect. But the main thing that drove it, I believe, was mortgage refinancing. Mortgage refinancing gave people a chance not only to cut their monthly payments but also to take out cash and use it to buy things. Not all of it went into purchases. Some of it went into paying off other debt. Some of it went into financial assets. But I suspect that enough of it went into buying things to drive the savings rate from plus 2 1/2 to minus 1 1/2 percent.

Well, that process of mortgage refinancing is reversing now, and with mortgage rates significantly higher, a full percentage point higher than they were a year ago, there isn't the incentive for people to refinance. So I think we will see a return to higher savings rates. Whether it'll be 2 1/2 percent or it'll be higher than that, I don't know, but I think there'll be a natural turnaround in the savings rate.

If that happens relatively quickly, it will cause a significant slowdown in aggregate demand in this country. Of course, many people are saying that we need to improve our trade imbalance, and in order to improve our trade imbalance, we have to save more. I think this is where the saving will come from. It will not come from reductions in fiscal deficits, which are already relatively low. Nor will it come from increases in business savings, which are quite strong.

But to convert the rise of savings to an improvement in our trade balance, the dollar has to be more competitive. If we simply have an increase in our savings rate and nothing changes in the exchange rate, then we will have, depending on how much the savings rate goes up, a slowdown or a downturn in aggregate activity. We need to translate those extra resources, that extra saving, into an increase in exports and a reduction in imports so that the total demand for U.S. goods and services remains on track, and the economy continues to expand. And that's the way the market ought to work: When the savings rate goes up, the exchange rate becomes more competitive, and Americans consume more American-made products and services. So that's the case for a more competitive dollar.

In the [Wall Street Journal] article, I said the government during the Clinton and Bush years has been sending out a confusing message by saying that the United States believes in a "strong dollar." Now what exactly does that mean? It seems to me what it ought to mean is we believe in a dollar that is strong at home, meaning that we believe in low inflation. We believe in protecting the value of the dollar when the consumer goes to shop.

Region: Which is why you distinguish between "strong" and "competitive"?

Feldstein: Right. At home versus globally. If we want the dollar to stay strong relative to the euro and Chinese renminbi and Japanese yen, then when the savings rate goes up, we're going to have a serious problem. So I think somehow the message has to get out that the government isn't just concerned with the renminbi, which is the only currency they seem to talk about, but is concerned with making the dollar competitive against all currencies.

Region: If I'm not mistaken, you moved markets a bit when people might have presumed that a competitive dollar meant a weak dollar. You were quoted by the Financial Times as estimating that a 30 percent to 40 percent devaluation might be needed to help narrow the trade deficit. Does it surprise you that you can move markets in that way, that you're that influential?

Feldstein: I don't know that I moved markets, and I never made a personal forecast of what it would do. I have said that in the '80s, when the dollar moved and the current account deficit was relatively smaller-it was 4 1/2 percent of GDP then as opposed to 6 1/2 percent of GDP now-it moved almost 40 percent in two years.

Some of my colleagues who have done detailed analytic calculations would say that's the kind of number that it might take now. That would not get us back to balance, but just get the current account deficit down to something like 2 or 3 percent of GDP, which would be consistent with our external debt-to-GDP ratio not rising. So I've quoted those numbers, but I've never said those were my forecasts. But these numbers are from smart people who've put a lot of effort into trying to estimate that.

ECONOMICS OF HEALTH AND HEALTH CARE

Region: A change of subject. Some of your first academic papers were on the economics of health care, in the United Kingdom in particular. More recently, you wrote a paper about health care economics that was subtitled "What Have We Learned? What Have I Learned?" How do you answer those questions?

Feldstein: The first paper I ever published was about health care in Britain. I was a graduate student in Britain at the time, and I said what they needed to do was to introduce some economic thinking. Remember, it's a state-run system. You need some cost-benefit analysis. Look at the costs of doing things, look at the benefits.

Over the last several decades in this country, where of course it's much more of a decentralized and market-driven health care system than in the United Kingdom, the combination of insurance companies and employers has driven home the message that a doctor, in deciding what to do when a patient presents, is no longer to ask, "What are all of the things I could possibly do to help my patient?" but rather, "What is the cost-effective thing to do? Where do I draw the line?"

So what do I think I've learned, and we've learned? I think I've learned that preferences were left out of all this, that it was treated like an engineering problem. Maybe preferences ought to be in engineering problems as well, but in any case, health care should reflect individual differences in preferences.

In that article, I emphasized that people have different preferences when it comes to health. Of course, everybody wants to be healthy. We all know that smoking is bad for your health. We all know that being overweight is bad for your health. We all know that exercise is good for your health. But many people enjoy smoking and they enjoy eating and they'd rather not exercise. And they're aware of the consequences. So it's a trade-off of preferences. And it may well be that when I go to see the doctor, in answering questions of how much I want to spend, I may differ from other people. Not because I have a higher income, but because I have different preferences about this. And somehow the system ought to reflect this. It ought to reflect the fact that individuals have different tastes for health versus other things and that a one-size-fits-all kind of health care is a mistake.

EXECUTIVE COMPENSATION

Region: You sit on the boards of three major corporations: AIG (American International Group), Eli Lilly and HCA (Hospital Corporation of America). I guess my segue here is health and insurance. What is your view of current debates over executive compensation and corporate governance? Are additional restrictions needed, or should there be some loosening of government oversight of corporations?

Feldstein: I think the recent SEC, NYSE and accounting rules have strengthened the role of the board in a good way. I think boards are working harder and treating themselves as more independent of management. I don't think there was a big problem before. To me, the most basic aspect of corporate governance is whether the outside directors meet alone and do that on a regular basis. Not much happens during those meetings, but you have the meeting so you have a chance to say, without management present, "Well, how do you think management is doing? And what message should we give management that would make things better?"

A board doesn't run a company, but it can provide useful feedback to management. That aspect of board independence I think is a useful thing. And when management is failing, a good independent board will force a change of management or even sell the company.

Region: Does recent controversy about stock options reflect a problem with the economics of executive compensation and incentive structures?

Feldstein: I guess in the boards that I've served on I've never felt that excess compensation was a serious problem. There was a recent NBER paper explaining why there's been this n-fold increase in executive compensation for the top companies. Well, lo and behold, the top companies are n-fold larger than they were 20 years ago, and so if you think about the compensation in proportion to the size of the business, in part because of mergers, in part because of just growth and the big ones growing more than others, that gives you an explanation of what's going on.

SUPPLY-SIDE ECONOMICS

Region: In the mid-1980s, you pointed out that "supply-side economics" was really just a return to basic ideas about creating capacity and removing government impediments. But as used in current parlance, the term seems to have a lot to do with the elasticity of taxable income. What's your rough estimate of that elasticity, and what does that imply about current tax policy?

Feldstein: Let me back up first to the '80s and then talk about taxes. I wrote a piece back then called "The Retreat from Keynesian Economics." In it I said that the broad outlines of the Keynesian economics that had come to dominate policy were an attitude that output depended on demand, that high savings were a bad thing, that a big government was necessary for stabilization, for maintaining aggregate demand, and could do more than that, could manage the economy in all kinds of ways.

By the time I wrote that piece [Summer 1981], there was beginning to be a retreat from all of those ideas. We came to understand that what really drove output in the long run, even in the medium run, was not demand, but was capacity and that a large part of that was saving and investment. So contrary to this earlier view, we were going back to earlier ideas.

At that time, people-particularly in the press-were looking for the new vision. Who was going to be the new Keynes? Where was this New Great Idea going to come from? And I said, "No new Keynes; no New Great Idea. Keynesianism was a passing intellectual phase associated with the Depression. Let's go back to the basics that economists have believed in more or less since Adam Smith-with some modifications, certainly; we've learned some things along the line." That's what supply-side economics was about: It was about creating capacity.

Now much of my own work over the years has been about taxes and about the response of households and businesses to taxes in various ways. And in particular if you look at the household response to marginal tax rates, the typical professional economist's view and also that of most tax policy officials is that people don't seem to respond very much. If you look at the relationship between labor force participation and tax rates, or working hours and tax rates, there's not much there. There is for married women, who have more discretion, but for single women, or men between 25 and 60, there's virtually no response of labor force participation.

I've argued that that's really looking in the wrong place. The measure of labor supply that matters is not just hours. The relevant labor supply includes human capital formation, choice of occupation, willingness to take risk, entrepreneurship and so on. All of these affect income and tax revenue.

What's more, taxes cause a further distortion that causes a "deadweight loss," that is, an economic inefficiency. Taxes change the way people choose to be compensated. I get compensated in fringe benefits rather than taxable cash because I have the choice between 65 cents of spendable cash or a dollar of fringe benefits. That choice of fringe benefits that are worth less than a dollar for every dollar that they cost to produce implies economic waste. It shows up as lower taxable income. A reduction in taxable income, whether it occurs because I work less or because I take my compensation in this other form, creates the same kind of inefficiency.

Economic analysis shows that if you want a single measure of the inefficiencies created by the tax on labor income, you can just look at taxable labor income. You don't have to distinguish whether a higher tax rate reduces taxable income because I work fewer hours or I bring less human capital to the table or I get compensated in the form of fringe benefits and nice working conditions.

Therefore, we should look at the data on how taxable income relates to marginal tax rates. I looked at the experience before and after the 1986 tax cut, because that was a very big, bold one. The Treasury provided data that allowed one to track individual taxpayers over time. So you could look at an individual a few years before the 1986 Tax Reform Act and at that same individual a few years later. And that comparison suggested quite a large response: Taxable income responded with an elasticity of about 1, meaning that a 10 percent increase in the after-tax share that an individual got to keep, say, going from 60 percent to 66 percent, would increase their taxable income by 10 percent. So those are big numbers.

Think about an across-the-board tax cut. Let's say you cut all tax rates by 10 percent, so that the 25 percent rate goes to 22 1/2 percent, 15 percent rate goes to 13 1/2 percent, and so on. That raises taxable incomes. The revenue cost of that tax cut is only about two-thirds of the so-called static result that you'd get if you didn't take behavior into account. So both in terms of thinking about the economic efficiency, which is very hard to explain to the lay public-I've been bending my sword trying-and also in terms of tax revenue, these are very large effects.

Of course, cutting the 15 percent rate to 13 1/2 percent has a much smaller proportional effect on the net-of-tax share than doing it at higher rates. So if this were not a change across the board but a change in the top rate of the sort that we had in '86, that would be an even bigger behavioral impact.

TAX REFORM PANEL

Region: Last year the president created a tax reform advisory panel that held public meetings around the country, with economists and others testifying before it. In November the panel came out with a report and a series of recommendations. As someone who has studied tax reform for years, how do you view the panel's recommendations, and why do you think they've gained so little traction?

Feldstein: Their proposals were pretty sensible. Of course, they didn't have a single set of recommendations. They emphasized ways of reducing the taxes on income on savings, which I think is a good thing to do. We didn't talk about that, but that's a very significant thing. They did not opt for any sort of radical flat tax reforms, and I think that's probably the right thing also. Flat taxes are a wonderful dream, but not a practical policy.

So why did it not have more traction? I don't know the answer to that question. To say that the White House is concerned with a wide variety of other things would be an understatement. Why didn't the Treasury push it more independently? I suppose that wasn't their job. Their job was to receive it and pass it on to the White House, and the White House chose for a variety of reasons not to do more.

THE NBER

Region: You've been the director of the NBER for 28 years, nearly one-third of its history. What have been the Bureau's most significant accomplishments in that period? And what is your vision for the NBER over the next quarter century?

Feldstein: A major accomplishment has been to encourage empirical research. Empirical research is a risky strategy. A researcher starting to do an empirical project has to know the data and the institutions. There's a good chance he gets it wrong. So after he's done all this work and he presents it, people will say, "Well, you didn't know about such and such." Or, "those data aren't really measuring what you thought they were measuring." So economists were reluctant to [engage in] serious empirical research.

Economics is different from some of the natural science departments or medical schools where there may be a dozen people who work on very similar things. In an economics department, it's unusual to have more than one or two labor economists or public finance economists. And even then, they probably do slightly different things. So there's nobody to talk to in your own department about the details of empirical research. In contrast, of course, you can talk about economic theory and get useful feedback from colleagues.

I'm not belittling that, but I'm saying that the profession had moved very far in that direction and was doing much less empirically because of this natural tendency for people to do things that were safe and reliable.

In addition, the National Bureau brings people together. Of course, it's normally smaller groups than this Summer Institute. The NBER program meetings bring together researchers from a dozen or more universities who are expert in the area you're working on. A researcher can present his research and get feedback. You get to know people better in this subdiscipline. You can e-mail them and say, "I'm working on this, and do you think these data are the best?"

So bringing people together and encouraging empirical research, I think, have been two of the really important things we have done. Also, as an organization, we launch projects on important economic issues like exchange rate adjustment or monetary policy in an open economy. So the Bureau directs attention on what we think are important problems. We did a lot of work on debt crises, for instance, and we were able to get people who would say, "Well, I'm really a trade specialist, I don't know very much about that, but if there's really a good group of people working on it and you'd like me to participate, yes, I'll participate." So I think we're able to focus resources.

Again, that's something you can't do in a single department. If I as a professor at Harvard-forgetting the Bureau-were to call up economists in six other departments and say, "How would you like to work on my study?" They would say, "I don't understand; I'm a professor at Yale (or Princeton or Chicago)." It would be like the Harvard football team calling some guy from Yale and saying, "How would you like to play for us?" Nobody thinks that about the Bureau. It's perfectly natural to participate in an NBER study. It's a neutral ground on which people can come together and do research.

So I think we're able to add value in terms of bringing resources to bear on important questions. We did a lot on Social Security, for example. We continue to do various things in the tax area. We have a Washington conference called "Tax Policy and the Economy." We do not advocate policies, so it's quite different from all of the other [think tanks]. We work on policy-related issues, and we can say, "If you do this policy, that's likely to be the outcome," but we stop short of saying, "Therefore, you ought to adopt a particular policy." Individually, I and other researchers can advocate policies, but as an organization we don't. But we can bring attention to it, and we keep bringing attention to issues like Social Security and health care costs and tax policy.

Region: And your vision of the Bureau 25 years from now?

Feldstein: Somebody else will be running it, so I'm not sure how it will develop. The economic problems will change. The technology may change. We may do things like more video conferencing or offering opportunities for small groups to get together.

Still, there is something about holding [in-person] meetings that brings people from all over the world here to Cambridge. And it's because of the coffee breaks and the lunches and everything else as well as just hearing the papers. It's not just to know what's in the paper or even to hear the discussion. It's to talk to others about your own work and what they're doing and get a sense of where the profession is moving.

Paul Samuelson was here today, which is really quite unusual, and I was sitting next to him in the meeting room next door. After everybody had gone around the room and introduced themselves, he said, "This must be what Copenhagen was like in the 1920s when Niels Bohr was bringing physicists together from around the world." I really thought that was a nice sentiment.

So I don't know where we will go and how it will change. You would not have predicted that it would look like this 25 years ago. In part it's the technology. I mean, the Internet is an amazing tool for us in terms of shared data and collaborative work, and distribution of the work. We had 21Ú2 million downloads of NBER working papers last year.

Region: It's a little daunting how frequently those long lists of new papers come out. But I have to guess that leadership, as much as technology, will guide the Bureau's future.

Feldstein: Well, yes. But you know we're a very decentralized organization, so there are these separate programs and program directors. So the meeting next door on monetary economics was run by David and Christine Romer from [the University of California at] Berkeley. The meeting in [this room] was the international finance and macro program, which has had a series of program directors over the years, and they've all done a very good job.

And people have been prepared to do it. The prestige and the chance to influence their part of the profession is what I think draws them to do it. I mean, I can call somebody up and say, "I think it would be good to do a project on X. Would you be willing to do it? We'll take care of all the logistics. So you can concentrate on the intellectual part of the task, picking authors and so on." I enjoy that aspect of it very much because I work with the project directors on both what questions are going to be asked and who the researchers are. There are now so many NBER project meetings that I can't go to them all. But I go to a lot.

Region: Thank you very much.

Bruce Webb said...

The Social Security section was bland. No talk of "crisis", no suggestion that Social Security as presently constructed would not be able to pay its bills. Really just a straight out assertion that private accounts were inherently better. Which when boiled down to policy terms really means "fund your 401k's and IRAs". Has the Economic Right just thrown in the towel on Social Security? Perhaps so.

calmo

Agree with Bruce. And also the bland (I have other adjectives people) view that executives, lo and behold, are managing companies that are n fold larger, just means their compensation levels are n fold larger. Niels Bohr, truly a man with a noodle, was bringing physicists together because they were excited --no noodle dysfunction for them. [Why do people, esp economists, always resort to comparisons to physicists when they need noodle buttressing? Me and Einstein are suspicious, you?][You and what's his face the Astrophysicist, got a view on that?] Ok, the savings rate is going to bounce back from the current -1.5% as MEW evaporates according to Marty the Smarty. [You need to clobber this reverence for Authority early people.] And that is because they will be earning real money (as...physicists owing to the astounding knowledge they acquired in the residential market looting) and investing it in nanotechnology. Yes, tubes right into Marty's brain so we won't have to read these tomes.

Bruce Wilder

To me, the subtle thing about economics is that an economy is a system with feedback effects. If you push, the economy will push back. Really thinking in systems terms is a subtle, but critical thing. Otherwise, economics just becomes a dead matter of worldview and whatever platitudes follow from a particular worldview, instead of puzzling over an almost living thing. Feldstein lost his capacity to think about the economy as a system almost 30 years ago. He is still a very smart guy, but in a critically important way, he stopped actual thinking about economics more than a generation ago.

On inflation: "I think what the public wants is price stability. They don't want to have prices rising. . . . The man on the street doesn't want to be concerned about small numbers and/or about "core" inflation versus "regular" inflation. He wants price stability; he wants the purchasing power of the money that he has to stay the same. And so that's what the Fed's message to him ought to be."

That's so idiotic that it could well be the text of a speech by George W. Bush. Seriously, doesn't it sound like the President?

Health care: "Of course, everybody wants to be healthy. We all know that smoking is bad for your health. We all know that being overweight is bad for your health. We all know that exercise is good for your health. But many people enjoy smoking and they enjoy eating and they'd rather not exercise. And they're aware of the consequences. So it's a trade-off of preferences. And it may well be that when I go to see the doctor, in answering questions of how much I want to spend, I may differ from other people. Not because I have a higher income, but because I have different preferences about this."

Right. Thank you, doctor, for suggesting that we insert a stent to keep open my cardiac artery, but really, I enjoy a good heart attack? Don't you?

Executive Compensation: "I guess in the boards that I've served on I've never felt that excess compensation was a serious problem. There was a recent NBER paper explaining why there's been this n-fold increase in executive compensation for the top companies. Well, lo and behold, the top companies are n-fold larger than they were 20 years ago, and so if you think about the compensation in proportion to the size of the business, in part because of mergers, in part because of just growth and the big ones growing more than others, that gives you an explanation of what's going on."

No problem that Marty can see. No problem at all.

Marty is an idiot, but a useful idiot, a dependable, reactionary, partisan whore of an idiot, useful to the worst kinds of irresponsible, reactionary politicians.

Special note to Bruce Webb: what I note in what he says about Social Security, is what he doesn't acknowledge. This is his standard rhetorical practice. Democrats are not opposed; they have no leadership. The 1984 Greenspan increase in SS taxes is never acknowledged. The fiscal deficit is small and manageable (I guess, because we have a Republican President).

Reply Wednesday, September 20, 2006 at 08:50 AM calmo said... Nice to be surrounded by non-whores like these Bruces, yes? Thank you for your articulate, no nonsense, clear and concise views Mr Wilder. If I can keep my prankster mode under control for a moment and make a contribution following your fine example: The Region's interviewer/editor side of this dialogue wherein we learn the true (current atleast)[possibly decadent] views of the illustrious [Ok, prankster control fading here] Herr Doctor Feldstein (just about pinned by the prankster), do we get a slanted, possibly even slurred view of this economist? How would it go with an interview from Mother Jones? I'm inclined to think The Region does not do justice to the man's actual contribution.

Reply Wednesday, September 20, 2006 at 09:48 AM spencer said... When he talk about the size of corporations the measure he is using is stock market capitalization not some measure of output, profits, employment, etc, etc. We have experienced a massive rise in the stock market PE because of lower inflation and interest rates that had nothing to do with CEO performance. He is adding crabs and apples to get crapapples.

What I find so interesting is that he can sound so reasonable and makes broad points where I say yes, I agree with that. But then you turn around and look at the details the Republicans actually propose and the proposed legislation turns out to be nothing like the original reasonable proposal.

Finally, note that he talks about the 1985 Reagan tax cuts that were a very different animal then the original Reagan tax cuts and what many supply-siders now propose. Almost accross the board the 1985 tax cuts -- achieved through bipartisan give and take -- were very good and achieved very much of their promise.

Reply Wednesday, September 20, 2006 at 09:56 AM Movie Guy said... Bruce Wilder - Marty [Martin Feldstein] is an idiot, but a useful idiot, a dependable, reactionary, partisan whore of an idiot, useful to the worst kinds of irresponsible, reactionary politicians.

Wilder, when you're Martin Feldstein's age (if you live that long), you will probably be drolling. Worse than you are now...

Reply Wednesday, September 20, 2006 at 10:49 AM Movie Guy said... Bruce,

There is no excuse for being that ugly about Martin Feldstein.

Just no excuse, puppy.

Reply Wednesday, September 20, 2006 at 10:54 AM DRR said... So what have you done with your life so far Mr. Wilder?

Marty Feldstein >>>>>>>>>>>>>>>>> Bruce Wilder

Reply Wednesday, September 20, 2006 at 03:39 PM Bruce Wilder said... MG: There is no excuse for being that ugly about Martin Feldstein.

BW: There's Martin Feldstein.

Reply Wednesday, September 20, 2006 at 03:47 PM calmo said... Larson has this cartoon of God busy with creation --rolling snakes "This is EASY!!" (And I wish I could find a link to it). Obviously God has done a lot of things with his life but snakes here appear to be a trouble-free delight. Now I'm not suggesting that Bruce has to come up/down/over/across to this standard (Delighted Roller of Snakes) which rings a certain bell for some of us who can recall our days with the plastercine, but DRR puts the plastercine in front of us and who can resist? Not me. What have you done with your life, you slab of plastercine? Now that plastercine has certain properties and if it's too cold, snakes are NOT easy like God says. [And it could be that if it's too hot, the snakes just turn into a gooey mess.] God just makes it look easy. DDR seems to think Marty rolled a pretty decent snake (MG too) and Bruce rolled something less. I'd say The Region thinks Marty is The Biggest Snake Ever. And I'd also say that picture is a tad bloated and hides lots about this pretty good snake I want to know. Some snakes are NOT easy as previously reported and refuse to be rolled just like all the rest. Some snakes even feel that a list of accomplishments is way too thin a roll.

Reply Wednesday, September 20, 2006 at 11:31 PM Movie Guy said... calmo,

I believe that communications and opinions of others in the USA have gone to hell. And it is a shame. A real shame.

Bruce Wilder is an excellent thinker and blog poster. He doesn't have to resort to that type of name calling to make his point.

Now, that is what I really think. And it's why I posted my response to Bruce. Who knows better.

Reply Thursday, September 21, 2006 at 08:28 AM calmo said... Good morning Movie, I confess to irretrievable biases for Bruces. And that's why I tried to employ Larson (bring out the Big Guns I say) [yes, the real snake rollers] to shift the focus from Martin to The Region. Or was it just to DDR and not the wider (vs telescopic) view that was provoked by DDR's question? I appreciate that desire to be civil and polite. Mostly. Unless I can see an opportunity for making a real fuss... It is only one of my failings, such is stature of this modestly rolled snake.

[Jun 08, 1981] Economist Martin Feldstein's Own Ox Is Gored on the Supply Side By Davis Bushnell

June 08, 1981 | People.com

Economist Martin Feldstein's Own Ox Is Gored on the Supply SideBy Davis Bushnell FacebookTwitterE-mailEconomist Martin Feldstein has no one to blame but himself. The 41-year-old Harvard professor talked so long, loudly and persuasively about the benefits of supply-side economics, Washington finally heard him. Now the Reagan administration is practicing what Feldstein (and other conservative economists) preaches, reducing federal funding to organizations like the National Bureau of Economic Research, of which Feldstein is president. Last year the organization received $2.2 million (one-third of its budget) in federal grants; that amount figures to be drastically slashed by the 1981 budget cuts.

Feldstein grimaces at the irony. According to the Wall Street Journal'(to which he is a regular contributor), Feldstein fired off an "outraged" letter to Sen. Daniel P. Moynihan, urging restoration of the funding. The Journal's characterization of the letter, Feldstein says, was a "misinterpretation," but he explains that "given the senator's background as a Harvard professor, I thought he would be able to understand the importance of this type of research."

A cutback would hurt, Feldstein admits. But he says, "We would not have to close our doors." The bureau receives aid from some 300 organizations, including corporations and unions.

Born in the Bronx (his father was an attorney), Feldstein was a scholarship student at Harvard. He took premed courses while majoring in economics and graduated near the top of his class in 1961. He went to Oxford on a Fulbright grant and stayed for six years, earning three degrees, in addition to marrying a Radcliffe graduate who was also studying there. His 40-year-old wife, Kathleen, an MIT economics Ph.D., co-writes a weekly syndicated newspaper column on economic policy with him.

Feldstein joined the Harvard faculty in 1967, and at 29 became one of the university's youngest full professors. The American Economic Association awarded him the 1977 John Bates Clark Medal, its highest honor for an economist under 40. And last year the New York Times Magazine called him "by far the most powerful of the young conservative economists." Feldstein says of the article that included that tribute, "The parts that are strictly factual are correct, and I don't have any objection to anything else."

Despite the impact of his ideas, Feldstein has never met President Reagan. He was reportedly a candidate for the chair of the Council of Economic Advisers, but he spurned Administration headhunters last winter. "I find Cambridge a pleasant place to be," he says.

Relentlessly singleminded, Feldstein is unrivaled at economic computer analysis. He is also a prolific writer (150 papers published) and a frequent witness at congressional hearings. He grudgingly admits to occasional cross-country skiing. But he says he has only one real hobby: economics.

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