Tuesday, May 30, 2017

Capretta vs. Moore on the Mulvaney budget proposal: compare and contrast

Here is an encapsulation of the irony-rich nature of the times we live in. Both Stephen Moore and James C. Capretta are, at least broadly considered free-market economists - and yet I've recently come to have a profound disagreement with each.

In the case of Moore, I've eyed him warily ever since his just as Reagan converted the GOP into a conservative party, Trump has converted the GOP into a populist working-class party" remark. He's one guy I really thought would be impervious to the Kool-Aid.

In the case of Capretta, it's his recent insistence that any alternative to the "A"CA include even stronger inducements for citizens not to interrupt their health-insurance coverage. Excuse me, but government is not supposed to be in the business of inducing anybody to do anything.

But today we are faced with a juxtaposition of their views on the Trump-administration budget proposal that budget director Mick Mulvaney has unveiled, and I honestly don't know which guy comes close to the mark on their points of divergence.

Moore brings a there's-a-pony-in-here-somewhere optimism  - that he shares with his friend and collaborator Larry Kudlow - to the proceedings, saying it's a fairly simple formula: cut taxes and watch the growth happen:

A recent front-page story in The Wall Street Journal proclaims that 3 percent economic growth isn't achievable. We are told that 2 to 2.5 percent growth is the best we can do, because of low labor-force and productivity growth. 
If that were true it would be dismal news for the country. The long-term growth path for the U.S. economy from 1950 to 2000 was 3.3 percent. Now we can't even strive for a number below the average? Almost every year he was in office, President Barack Obama forecast that he would achieve more than 3 percent growth -- but he never once got there. So the left says it must be impossible. Since they can't figure out how to get growth, nobody can.
But the naysayers are dead wrong. Start with the tax plan that Larry Kudlow and now-Treasury Secretary Steven Mnuchin and I put together for Donald Trump during the campaign. That plan cuts U.S. business taxes from 35 percent (the highest in the world) to 15 percent (which would be among the lowest rates in the world). This will lure more jobs and businesses back to the United States. Apple CEO Tim Cook says the Trump tax plan could bring $250 billion of Apple profits back to these shores, where it can be reinvested in Michigan, Ohio, California and so on rather than Ireland, China or Europe. 
The plan also simplifies the tax system and cuts the taxes of 26 million small businesses, which create about two-thirds of the new jobs in America. Without healthy, prosperous employers, you can't have healthy, well-paying jobs.
This alone can boost economic growth by as much as 1 percentage point per year and will generate about $3 trillion more tax revenue over the next decade.
One reason many economists believe that 2 percent growth will be the new normal is demographic changes. Baby boomers are retiring, and there presumably aren't enough younger workers to lift growth higher. That's flat-out wrong. We have at least 5-7 million Americans of working age who aren't working and could and should be on the job. 
How can we get Americans to start working or working more hours? Here again, tax cuts matter. A tax cut raises take-home pay and makes work more rewarding. It happened in the 1980s after the Reagan tax cuts: We saw huge gains in people entering the workforce, especially women. 
One problem, according to Capretta: the Mulvaney budget is not predicated on the Moore-Kudlow tax cuts:

  . . . the budget plan provides no details at all on the administration’s tax plans. Instead, it assumes a revenue-neutral tax reform, which will only occur if higher growth offsets some of the revenue loss associated with lower rates. Separately, the budget also assumes $2 trillion in additional revenue from the growth effects of the administration’s policies, of which tax reform must be considered the centerpiece. In other words, instead of building into the budget forecast a major tax cut, as the president has touted, the administration says its tax policies will result in an additional $2 trillion in revenue over the next decade. This is what is known as a heroic assumption.
The administration claims it will get this additional revenue because its policies will push economic growth up from just under 2 percent annually in recent years to 3 percent per year beginning in 2021. The Congressional Budget Office (CBO) assumesthe economy will grow 1.9 percent annually starting in 2021, and most economic forecasters expect growth to hover around 2 percent for the foreseeable future.
Higher growth is essential for an improved fiscal outlook. But the Trump administration hasn’t proposed anything that would justify such a large deviation from the consensus forecast. The administration says it is pushing for pro-growth tax reform, but that’s not the same thing as actually proposing a pro-growth tax reform plan. At this point, projecting 3 percent growth in the outyears of the budget is little more than wishful thinking. 

So which is it? While, as I say, I have  fundamental issues with both economists, I am well aware that both of them are experts and my observations are merely at the engaged-citizen level.

But, given that this is the big chance for free-market champions to show the nation they have their ducks in a row for the first go-round at which they have an ostensible seat at the table, it would be nice to know whose take on this is unmitigated by either giddiness or myopia.

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