Economic growth is this election’s most important issue – enter a comprehensive growth manifesto by renowned economist John Cochrane


To quote Bill Clinton strategist James Carville circa 1991, which you won’t find me doing often, “it’s the economy, stupid.” Much is the same with next year’s election, except that the Democratic Party of the Bill Clinton era has exited stage left (yes, pun intended). It was Bill Clinton after all who declared that the era of big government was over and who was able to triangulate between the American public, a Republican Congress, and traditional Democratic policy on important domestic and foreign policy issues ranging from welfare reform to the protection of Kosovo and Bosnia from the rampages of the Serbs (these are foreign policy intervention lessons that can be applied to Syria as well, but that is a future topic perhaps).

The Hoover Institution’s John Cochrane, a Professor of Economics at the University of Chicago, carries this theme forward in a recent essay. This is a highly robust growth manifesto, and I highly encourage my friends to read it, share it, and provide your thoughts.  It is relatively long, but highly worth the read to get the full detail and data on why growth above 3% is so important and why accepting anemic growth as the new normal isn’t something we have to do. He also offers specific policy prescriptions that would create conditions for much higher growth.

Cochrane is unabashedly an adherent of the free market and the importance of competition and the forces of creative destruction to drive productivity as the key driving factor in growth. He states:

Higher productivity typically comes from new companies, which displace old companies—and displace the profits of their owners, and the healthy pay and settled lives of their managers and workers. Southwest enters and either displaces the legacy carriers—Pan Am and TWA—or forces wrenching changes for survivors such as American and United. A&P displaced mom and pop stores. Walmart displaced A&P. Amazon may displace Walmart. Nobody likes the process. Everyone needs the results.

Nothing other than productivity matters in the long run. A factor of three increase in income in 50 years, and the much larger rise in income and health since the dawn of the industrial age, dwarfs what unions bargaining for better wages, progressive taxes or redistribution, monetary, fiscal or other stimulus programs, minimum wage laws or other Federal regulation of labor markets, price caps and supports, subsidies, or much of anything else the government can do.

Cochrane appeals to the need to focus on the simple things that most people and policy makers can agree are hurdles to growth. His metaphor is that our economy is like a garden that is currently choked with weeds. Why are we spending time debating fertilizers for our garden when we should first get down and simply pull the weeds out? So what is the challenge in pulling weeds that are patently obvious to all are a problem? In Cochrane’s estimation, it relates to the lack of leadership appeal, as he indicates that:

Alas, such a common sense, weed-the-garden program has little attraction to many ambitious politicians. Many politicians want a big new program, big new laws and initiatives—a New Deal, a Fair Deal, a Great Society. They don’t see cleaning up the mess left behind by their predecessors as the way to getting one’s face carved on Mt. Rushmore, let alone to win an election. Economists like big new ideas and programs too. Nobody got a Nobel prize for saying, let’s take Adam Smith’s 250 year old classics to heart

It won’t be a surprise that Cochrane is not an advocate of large wealth redistribution schemes, but it may surprise the reader that he views these issues not as a clash between super wealthy and super poor, rather it is the massively complex redistribution schemes that simply shift money between wealthy and middle class individuals.  As he puts it:

It is tempting to cast the question before us as growth vs. redistribution, or growth vs. inequality, as the rhetoric of redistribution and inequality pervades the arguments from those who want to continue the policies that are strangling growth.

But giving in to that rhetoric is a mistake. The US, in fact, has one of the most progressive tax systems in the world. And the relatively minor costs of government assistance to truly poor, needy, mentally ill or disabled people are not major impediments to growth. The weeds choking the economy represent cronyist redistribution to wealthy people, well-connected industries, and other powerful groups such as public employee unions, and large transfers among middle income people (social security and Medicare). They are not, by and large, the result of genuine and effective redistribution from rich to needy poor.

Recognizing that income inequality is a problem, is taxing the rich and redistributing it really the best policy option? Cochrane thinks not, and offers a powerful insight into the mind of the average American when he states that:

When the average person (voter) expresses concern over inequality, what they really mean is that they are concerned that average people are not getting ahead economically. If the average person were getting ahead, whether some big shot CEOs fly on private jets or not would make little difference. Conversely, the average voter, if not the average left-wing pundit, does not support equality of misery. If the average person continues to do poorly, it would bring them little solace for the government to tax away the lifestyles of the rich and famous.

Long-term robust economic growth is the only way to deliver sustained improvements in the lot of average Americans, and the less fortunate in particular. Redistributing Marie-Antoinette’s jewelry did little for the average French farmer.

In the rest of the essay, Cochrane outlines the specifics that he believes will drive growth, or put another way, he puts a great amount of effort into ideas focused on the themes of if we simply removed the artificial barriers and the unintended consequences of those barriers, then growth would be less inhibited and natural force would allow economic growth to ensue. Many of these areas he tackles won’t be shocking: regulation, tax policy, healthcare, subsidies, entitlements, energy, and the environment. But one would be wrong to simply brush this aside as, “I have heard all of this before…” and therefore not read into the details. The thoughts and ideas that Cochrane espouse here go well beyond the typical shibboleths of the right (such as, “we need to cut regulations…”) and dives within the full measure of what ails the U.S. economy and what inhibits growth within each. For example, Cochrane goes beyond the traditional critique of regulation in that it slows companies down, prevents small businesses from entering, and poses more economic cost than benefits, all of which are undoubtedly true but perhaps overly simplistic. He observes that these are indeed areas of problem and concern but goes on to indicate that the massive growth of regulations and their governing agencies also undermines the rule of law and creates de facto executive, legislative, and judicial agencies all rolled into one. This type of framework coupled with all of the pernicious impacts that are well-known that I reference above doubles down on a system that rewards and protects the entrenched and connected interests and shifts wealth and growth away from innovators to crony capitalists. You want growth that trickles to the average American? Eradicate these agencies and their thousands of pages of rules that only a lawyer can appreciate and thus only large companies and the mega-wealthy can afford and which ultimately fosters arbitrary rule and the diminishing of the rule of law that only serves the well-connected. His critique of financial regulation through Dodd-Frank is particularly scathing and on point:

Under the Dodd-Frank act, a highly regulated industry has become suffocatingly regulated. The Federal Reserve embeds hundreds of employees at each major bank, who pass judgment on every decision. The justice department and SEC routinely pursue banks and other financial institutions for multibillion dollar settlements, and now will pursue individuals with criminal charges. The fixed costs of running a compliance department are so high that it is nearly impossible to start a new financial company in the US. Just one new bank has been chartered since the passage of Dodd-Frank.

The parts of the financial system that failed and were bailed out in 2008 — Fannie and Freddie, commercial banks — were already among the most highly regulated businesses in America. Regulation did not fail for being absent. Regulation failed for being ineffective.

Alas, the basic structure of the Dodd-Frank act simply doubles down on the same basic design that has failed again and again: The government guarantees a wide swath of debt, by promise (deposit insurance) and by ex-post bailout. An army of regulators tries to keep banks and other financial institutions from exploiting the guarantee and taking too much risk, and clairvoyantly to forecast panics and take action to stop them. That’s like sending your brother in law to Las Vegas with your credit card, but asking his kids to keep an eye on him.

Like much else in America, our government works to cross purposes. It subsidizes debt with tax deductibility, deposit insurance, too big to fail guarantees, regulatory preference for holding short-term assets, liquidity rules, credit guarantees, Fannie and Freddie, the home mortgage interest deduction, community reinvestment act, student loan programs and so forth. And then it tries to regulate against using debt with bank asset regulation, stress tests, consumer financial protection, macro-prudential policy, and so on.

The alternative is clearly laid out in many sources: Risky investments must be largely financed by issuing equity, not by borrowing very short term money. When that happens, the mass of regulation is simply not needed in order to stop financial crises. Then we will “only” face the task of removing needless regulations whose main purpose is to create subsidies and protections for various clienteles.

Cochrane has spent a great amount of his career focused on issues in healthcare policy, and by virtue of working in the industry I get a front-row seat to the government induced dysfunction. The traditional libertarian/conservative critique is that big government creates a problem and then claims they are the only ones that can fix it with more government intervention; healthcare is an industry in America blanketed with these examples of compounding errors. Cochrane illustrates this with the historical narrative of the heavy hand of government dating back decades in healthcare and the continued doubling down of terrible mistakes and their unintended consequences. I have the great misfortune of living this every day by witnessing the hospital and caregivers that struggle to keep up with the thousands of pages of poorly written and unaccountable de facto legislation flowing like a tsunami from agencies like CMS at institutions with dictates on cost and quality measures and payment adjustments. These are inevitably fiendishly complex and are often punitively focused in areas that in which the health institutions can’t directly control or even worse, prescriptions on health policy and care protocols that are actually outdated from a clinical research perspective. Too often these rushed and ill-thought out directives often conflict with another mandate coming from the same or different government agency. The downstream impact is cost is going up and we are seeing the rapid consolidation in the insurance and hospital industries.  These are the unintended consequences that Cochrane refers to frequently.  Cochrane tackles the healthcare theme within the confines of the insurance market and the Affordable Care Act in an effective critique:

The ACA, thousands of pages of law, tens of thousands of pages of regulations, and even more decision-making power by newly empowered regulators, such as the thousands of waivers given to individual companies, represents an enormous increase in Federal intervention in the market for healthcare and health insurance. Like finance, health was already highly regulated. And like finance, most of the ACA simply doubled down on the same basic regulatory structure that had caused so many pathologies before.

The central problem of preexisting conditions was an artifact of regulation. In the ideal form of health insurance, you buy cheap catastrophic insurance when young, but the insurance policy can follow you as you age, change jobs, and move from state to state, and does not radically increase premiums if you get sick.

Why don’t we have that ideal insurance? Because previous rounds of regulation outlawed it. In the 1940s the US government allowed tax deductions for employer-provided group insurance, but not employer contributions to individual insurance or individuals’ contributions to such insurance. By laws, insurance is not portable across state lines. Thus, there is no reason for anyone who might get a job or move to buy long-term individual insurance that protects against the emergence of pre-existing conditions. In response to the preexisting conditions problem, the ACA forces community rating — everyone pays the same price—tries to mandate healthy people to buy insurance, and steps up pressure on employer provided group plans, which are the source of the problem.

Similarly, once insurance was tax deductible, there was an incentive to salt it up. You would not buy car insurance that “paid for” oil changes — especially if you had to deal with insurance paperwork each time. But with a tax deduction it’s worth buying health insurance that “pays for” routine small expenses. Then the government (state and local too) instituted mandates that insurance must “pay for”—and, of course, charge premiums to cover—all sorts of additional procedures, which makes insurance too expensive.

We need to allow simple, portable, largely catastrophic, lifelong, guaranteed-renewable health insurance to emerge. Right now it’s illegal. To the extent that the government wishes to subsidize health insurance—and it should—then it should give straightforward vouchers, which people can use to buy insurance, or to fund health savings accounts. Such vouchers should take the place of Obamacare, Medicaid, and Medicare.

Healthcare and insurance is not just distorted from the demand side—too many people paying with someone else’s money. The supply side is ossifyingly restricted as well. New hospitals, new clinics that specialize in cheaply providing one service well, new doctors, new nurses, new insurance companies, all find a wall of laws, regulations, and officials blocking their path. For a reason: To maintain the profits of and cross-subsidies provided by the existing incumbents. Non-profit status itself blocks efficiency: you can’t take over an inefficient non-profit, and non-profits can’t issue equity to make important investments. In reducing the cost and improving the quality of healthcare, efficiency is far more important than trying to avoid a competitive rate of return to owners.

Cochrane tackles just about every major economic issue in this manifesto – including those that I take a particular interest and elaborate on above as well as energy, environmental regulation, job creation, entitlement reform, debts and deficits, trade, wage legislation, and tax policy. I will only elaborate further on tax policy and recommend reading the essay for the rest of the story, but the tax proposals are perhaps those that would most be viewed by the rank and file as radical, but upon further review might start making sense in the way that Cochrane outlines the logic and impact. For example, Cochrane advocates for the elimination of corporate taxes. This may seem a tremendous boon to the wealthy and harmful to the poor, but Cochrane breaks this argument apart:

The right corporate tax rate is zero. Corporations never pay taxes. Every dollar of taxes that a corporation pays comes from higher prices of their products, lower wages to their workers, or lower returns to their owners.

Which one, depends on who can get out of the way. While it is politically tempting to suppose that wealthy stockholders bear the burden of corporate taxation, they are in fact the most likely to be able to avoid taxation. While imposing a corporate tax may hurt existing stockholders, by lowering the value of the stock, there is no reason new investors will give the corporation money unless they can get the same after-tax return they can get elsewhere, and in particular abroad. Thus, new investment dries up until the company can pay the same after-tax return to its investors—by raising prices, lowering wages, or reducing scale to generate greater before-tax profits. In addition, these days the owners and investors of corporations are as much your and my pension fund as they are rich individuals.

For all these reasons, eliminating the corporate tax is as likely to be more rather than less progressive. The higher prices a corporation charges hurt everyone. The lower wages corporations pay hurt workers. The income it passes along to its owners is subject to our highly progressive tax system.

Other concepts include eliminating taxes that provide disincentives to paying for labor (the payroll tax), savings, and investments and shifting much more to consumption taxes.  I particularly enjoy his logic on the problems with estate taxes:

The estate tax is a particularly distorting tax on saving and investment. One may sympathize with the moral judgment that rich kids don’t “deserve” inherited wealth. But the point is on the incentives of the giver. The tax code should not give strong incentives to middle-age people to stop building their businesses, investing their money, spend their money on round the world cruises and their time with tax lawyers. Nor should it force the breakup of privately held businesses to pay taxes. Maybe the kids don’t deserve it, but if people cannot provide better lives for their children, we remove one of the strongest and oldest human incentives for economic activity.

But this is not simply about taking an axe to tax rates, it’s about eliminating the deductions and credits that contribute to complexity and inefficiency in our tax codes that require an IRS and an army of accountants and lawyers focused on compliance:

When we say broaden the base by removing deductions and credits, we should be serious about that. Thus, even the holy trinity of mortgage interest deduction, charitable donation deduction, and employer provided health insurance deduction should be scrapped. The extra revenue could finance a large reduction in marginal rates.

Why? Consider the mortgage interest deduction. Imagine that in the absence of the deduction, Congress proposes to send a check to each homeowner, in proportion to the interest he or she pays on money borrowed against the value of the house. Furthermore, rich people, people who buy more expensive houses, people who borrow lots of money, and people who refinance often to take cash out get bigger checks than poor people, people who buy smaller houses, people who save up and pay cash, or people who pay down their mortgages. A rich person buying a huge house in Palo Alto, who pays 40% marginal income tax rate, gets a check for 40% of his huge mortgage. A poor person buying a small house in Fresno, who pays a 10% income tax, gets a check for 10% of his much smaller mortgage. There would be riots in the streets before this bill would pass. Yet this is exactly what the mortgage interest deduction accomplishes.

Charitable donations follow the same logic. Suppose Congress proposed to match private charitable donations with federal dollars. Rich people get 40% match, but poor people only get 10%. Not only would that cause riots, but then there would be a much closer eye on just what “charities” mean in today’s America if they received direct checks from the Treasury. We may moan at the complexities of federal expenditures, but there is at least some oversight. Charities spend tax money largely in the dark. The shenanigans of the Clinton foundation are only the most recent visible example of how “nonprofits” are often the latest scam in the American legal system. Notice how every sports star or celebrity has a charitable foundation? They are great ways to escape estate taxes and investment taxes as well as campaign finance laws. Your kids can serve as the executives of the foundation.

The rest of the read is fascinating and there is much that I wanted to remark upon and copy into this post but don’t want this to turn into more of a novel than it already is. I will conclude with saying that one would be hard pressed to find as cogent, concise, and intellectual libertarian view of all of these issues proclaimed in one readable and entertaining place. I highly recommend the read.


2 thoughts on “Economic growth is this election’s most important issue – enter a comprehensive growth manifesto by renowned economist John Cochrane

  1. Pingback: The Next Frontier in Healthcare Reform and Why it Will Harm Consumers – The Gymnasium

  2. Pingback: We are from the government and while we created this mess, we are here with a 900 page dictate to help – The Gymnasium

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