By Laurence Kotlikoff
August 21, 2012
Some 500 of my colleagues in economics, almost all academics, have signed a statement applauding former Governor Mitt Romney’s economic plan and condemning President Barack Obama’s handling of the economy. The statement amounts to an endorsement of Romney’s presidential candidacy. As such, it represents a disservice to the economics profession as well as to the statement’s signatories, five of whom are Nobel laureates.
Economics holds itself out as a science, yet here we have supposedly impartial scientists declaring that all of Romney’s proposed economic policies are good and that everything the president has done on the economics front has been misguided and flawed.
No impartial economist would make such blanket assertions. By their very nature, such statements represent political, not scientific, opinion. Yet the signatories not only identified themselves as professional economists; they also specified their university or other institutional affiliations, thereby implicating places such as the University of Chicago in their political pronouncements.
Having run for president on the Americans Elect platform before it was disbanded in May, I may be questioned about my own impartiality in objecting to the politicization of economics. But in my short campaign, I limited my public statements and Web postings to the policies I favor, and I almost entirely avoided any criticisms of either the president’s or former governor’s positions. I did this because I was running as an economist, not as a politician.
The decision of the 500 U.S. economists, many from the leading ranks of the profession, to trade in their credentials as economists for that of campaign workers is just the latest sign that something’s rotten in economics. The documentary “Inside Job,” demonstrated how prominent economists failed to disclose, as standard ethics require, when they are being paid for their professional opinions.
Then there is the increasingly nasty op-ed war pursued by political economists, such as Paul Krugman and Glenn Hubbard, who have so closely aligned themselves with one of the two parties that it’s impossible to know where their politics stop and their economic analyses begin.
The worst part of all this is that the new political economics routinely diverges so far from economic theory and fact.
Take the very first statement in the Romney endorsement, namely that the Republican candidate’s economic policy would “reduce marginal tax rates on businesses and wage incomes and broaden the tax base to increase investment, jobs, and living standards.”
Any well-trained economist — and the Romney 500 are certainly very well-trained — knows that tax cuts produce both incentive and redistribution effects. We call these substitution and income effects. The Romney tax plan has relatively minor incentive effects and the income effects of its base broadening go in the wrong direction.
Here’s the point, absent the jargon. To invest more, we need to save more. But to save more, we need to consume less. In the 1950s, the U.S. saved 15 percent of national income. The net domestic investment rate was equally high. Today, America saves 1 percent of national income and invests only 5 percent of national income, with the four percentage-point difference being made up by the current account deficit — by Chinese and other foreign investment.
The U.S. didn’t go on a six-decade spending spree because of changes in the share of national income consumed by federal, state and local government. Nor did the consumption spree reflect worsening incentives to save. Marginal effective tax rates on saving have dropped enormously during the postwar period. Most American households have long faced zero effective marginal tax rates on saving because they can set money aside within their 401(k) and other retirement accounts.
So if government isn’t consuming more and if people have much better incentives to save, why does the U.S. save and invest next to nothing? The answer is the income effect. Every administration starting with Dwight Eisenhower’s has expanded America’s Ponzi scheme, which takes resources from young savers (including those not yet born whose current spending is zero) and gives them to old spenders. This huge intergenerational redistribution has produced an enormous increase in the absolute and relative consumption of the elderly.
This is just what the life-cycle model of saving predicts. If you take money from the young and tell them they will get it back in spades when old, and then give this money to retirees, the following will, as a matter of theory and practice, happen: The elderly will go shopping, the young won’t bother saving, national consumption will rise, and domestic investment will fall.
Expanding Social Security, Medicare and Medicaid benefits, shifting the structure of the tax system to lower the burden on retirees relative to workers, and cutting taxes have all saddled the U.S. with unsupportable obligations. Running two futile and incredibly expensive wars over the past decade have further contributed to the bills that America’s children face.
None of this, of course, is mentioned in the economists’ endorsement of Romney. Instead, the statement indicates that today’s elderly, including the likes of Warren Buffett, should experience no reduction in their Social Security or Medicare benefits. That is, the statement endorses leaving future generations to cover what now amounts to a $222 trillion fiscal gap between future expenditure and taxes.
Economic theory isn’t up for grabs. Economic facts aren’t a matter of choice. And the integrity of the economics profession isn’t free for disposal. The 500 economists owe our profession a sincere apology.
Read the full article at Bloomberg.com.