Few conservative economists have been as influential over the last decade as Glenn Hubbard. He was an architect of President George W. Bush’s tax cuts and of Mitt Romney’s 2012 economic plan. He has preached the importance of permanent, fundamental policy changes – such as reducing tax rates and simplifying the tax code – for improving America’s long-run economic growth prospects.
Hubbard still believes in those type of reforms, but he has taken to arguing that Republicans need more to their economic message. As the 2016 campaign begins, Hubbard believes Republicans have to worry more about encouraging people to work – given that we have an economy with a shrinking number of workers – and about economy opportunity, which has been stagnant over the last half-century.
“I’m not as vexed about inequality, as I am about opportunity.”
— Glenn Hubbard
The Republican economist's concerns will likely leave a mark on the upcoming presidential election, starting with the Republican primary. Hubbard will not say what candidate he plans to work for, but among conservative economists, there is a strong consensus: He’ll be headlining an all-star economics group for former Florida governor Jeb Bush.
“I think this really is going to be an idea-rich campaign, in the primary and the general election,” Hubbard said in a recent interview, “because the issues – growth and opportunity – are so complicated.”
In the course of a recent discussion, Hubbard laid out a wide range of ideas for how to boost growth, encourage work and improve opportunity. He started, as often is the case with conservative economists, with tax reform. He favors lowering corporate and individual rates and expanding the Earned Income Tax Credit – a kind of cash bonus – for single workers. He also suggested an openness to capping some tax deductions for affluent households.
Hubbard said he worries about policies that encourage businesses currying money or carve-outs from Washington, instead of investing in new products or services. He often flies the shuttle between New York, where he is the dean of Columbia Business School, and Washington, and he said he is distressed by the number of executives he sees making the trip.
“We need to make sure that markets and outcomes are fair,” he said, “and that if someone gets rich, it’s because they had a great idea for a business, and not because they were politically connected.”
Improving economic mobility – the ability for children born into poverty to move into the middle class, or those born middle class to achieve great wealth – will be the hardest challenge, he said. “It takes so long.” He said policymakers must tally up “a full list” of the barriers keeping people from climbing the ladder, including a sharp focus on education and skills.
He stressed the ability of parents to send their kids to alternatives to public school, such as delivering more money to states in the form of block grants tagged for low-income children whose parents would have flexibility about where to send them. In addition, he's interested in new ways of helping displaced workers train for new jobs, such as personal re-employment accounts that workers could tap when they are thrown out of work for an extended period.
Hubbard says he worries the Federal Reserve has gone too far in its extraordinary measures to stimulate the economic recovery. He also worries that the economy may not grow as fast in the future as once expected – that it is suffering from a decline in its potential growth.
He does not worry about economic inequality. He pointed out, near the end of the interview, that he had never mentioned the word. “I’m not as vexed about inequality,” he said, “as I am about opportunity.”
By Jim Tankersley – The Washington Post on February 27, 2015
The season of policy ideas is upon us in the US, with significant consequences for the nation’s economic future. President Barack Obama offered his economic suggestions in his recent budget. And presidential aspirants from both parties will soon be offering their own thoughts on how to advance gross domestic product, household incomes, and other objectives.
While this policy debate is and will be important, it is unlikely to yield breakthrough ideas to advance growth, work, and economic opportunity. In order to do this, we must go beyond the current triangle of trade-offs among jobs, income security, and near-term budget outcomes.
This triangle is really a tri-lemma — in trying to achieve two elements, we miss the third. This leads to overly constrained policy choices that try to address major challenges with minor tweaks.
For example, a focus on employment and short-term cash savings led to temporary “stimulus” following the 2008 financial crisis – instead of the larger jolt to expectations that the troubled economy needed (and needs) for a real recovery. This caused millions of Americans to lose the long-term security of rising incomes.
Another example is the Affordable Care Act, which emphasised income security and near-term budget outcomes. This came at the expense of employment by taxing work and imposing job creation penalties on businesses.
Similarly, the federal push for a higher minimum wage aims at income security with no near-term budget impact. The costs are hidden in higher prices and diminished employment opportunities.
This tri-lemma is not limited to the president’s policies. While the president’s suggested tax rates on multinationals’ incomes are still too high, other proposals also limit the gains to be had from tax reform. For example, offering greater family support through tax credits, while simultaneously reining in the budget cost by focusing assistance over narrow income ranges, risks high marginal tax rates on work which will inhibit growth.
This problem is not inevitable, but sidestepping it requires more than just additional policy ideas. What we need is a different triangle emphasising growth and opportunity, making work pay, and long-term budget goals.
An emphasis on making work pay can be advanced by wage subsidies or expanding the Earned Income Tax Credit, especially for single workers, given declines in employment and labour force participation for younger adults. Such a subsidy is positive for growth and brings more people into the workforce. A long-term budget orientation allows this pro-work investment to be financed over time by reductions in spending on programmes for low-income households that are less effective, or spending on tax benefits for the affluent. That is, the three elements of the triangle become mutually reinforcing. Likewise, a combination of business tax reform and a thoughtful federal infrastructure programme can increase growth and offer increased opportunity for work. The expenses, examined over the long-term, are defrayed by economic growth and accompanying government revenue.
In particular, an emphasis on long-term budget goals helps balance a future-oriented policy of investing in people and capital for growth with a present desire for social insurance. An example is “premium support” in Medicare — wherein beneficiaries purchase health insurance from among competing plans, with the government paying a portion of the cost of coverage depending on income. Similarly, federal aid to education could take a premium support approach, with the most extensive support for low-income students. Again, the three elements can be mutually reinforcing.
The first policy triangle of jobs, security, and the near-term budget emphasis brings out “vertical” policy thinking, with analysis in individual silos. For example, a claim that tax reform will increase investment by X per cent or GDP by Y present is used as policy analysis. What is required is more “horizontal” policy thinking: How do we combine reforms in taxation, trade, education, and research to enhance overall growth and opportunity? How can we work with colleges to make a college education more affordable?How can we help employers to provide more good jobs and on-the-job training, thereby broadening opportunity and expanding the tax base? This wider view of policy implications also avoids the unfortunate politics of division engendered by phrases like “middle class economics”, tying, say, tax cuts for middle-income families to tax increases on saving and investment by higher-income families.
The next year and a half will bring voters different policy ideas for advancing America’s economic potential. Those views will be more instructive if accompanied by a different way of thinking — problem-solving for mutually reinforcing themes of growth, work, and opportunity, with a eye on the long-term.
This op-ed by Glenn Hubbard appeared in TheFinancialTimes.com on February 25, 2015
President Obama's economic proposals in Tuesday’s State of the Union address were a disappointment. His ideas — free community college, an enhanced tax credit for child care and higher taxes on high-income earners and large financial institutions — failed to go beyond mere talking points. With no chance of engaging the Republicans, they will surely die without a hearing.
But the president’s proposals do invite a case for a comprehensive tax and entitlement reform, one based not on redistribution but on growth, work and opportunity.
Our unwillingness to confront mounting inefficiencies in the nation’s tax code and growing obligations in entitlement programs has led to increasingly limited options. Corporate tax reform is held hostage to the misguided idea that tax cuts and tax increases must be balanced within the corporate sector alone, and to the faulty assumption that beneficial tax reform will not raise economic activity.
Piling up child tax credits and subsidies for health care over narrow household income ranges, as the president proposes, leads to high rates of taxation on earnings from work as assistance is phased out. Likewise, raising marginal tax rates on investment by the well-to-do reduces asset prices and is a threat to continued economic expansion.
So how can we enhance growth, work and opportunity? Four steps can help get us there.
The first is to move to a simple business tax system, with a lower marginal tax rate and no special industry preferences. There would be no separate corporate tax, only a single business income tax for all businesses. Ideally, investment would be expensed, and its cost deducted in the year it was made, rather than deducted gradually. Businesses would be able to bring back overseas profits free of additional United States taxes. A one-time modest tax on current overseas earning could be used to help finance reform. Such a business income tax would encourage both growth and investment opportunities in the United States, while offering more jobs and higher wages to American workers.
The second step is to use the individual income tax to better reward work. The top tax rate for most Americans would be the same as the business income tax rate. To maintain progressivity, a surtax on wages would be collected on very high earners. To make work more attractive, low-income workers, including single workers, would receive an expanded earned-income tax credit and a tax credit to buy health insurance (as opposed to the more complex subsidies that exist under the Affordable Care Act). The earned-income tax credit would be phased out gradually.
Workers would have the choice of switching to options available under current law for employer-provided health insurance and a health savings account, or a tax deduction for their own health insurance and health savings account as incomes rise. Reductions in marginal tax rates to support work would be paid for by limits on tax deductions for more affluent households.
The third step focuses on education and training. Like investment in technology and machines, investment in human capital should be deductible from income. Out-of-pocket educational expenses for bona fide schooling and vocational training could be tax deductible for all but affluent households. Personal re-employment accounts could be made available to all individuals facing more than temporary unemployment, with individual financial support for training and a bonus for re-employment.
The fourth step is to strengthen retirement security, while acknowledging the need for fiscal consolidation in entitlement spending. Minimum benefits for Social Security and Medicare could be strengthened to ensure that people with low lifetime incomes avoid poverty in old age. To reduce future deficits in these programs and to free up funds to support work and opportunity for younger workers in the future, Social Security benefit growth would be slowed for more affluent individuals.
In the same spirit, changing Medicare so that individuals would purchase insurance from one of a number of competing plans, with the federal government paying part of the cost, could focus the largest subsidies for health insurance on those with low lifetime incomes. Converting Medicaid to a block grant — in which federal support would be turned over to states — would give governors the flexibility to support health insurance tax credits for low-income residents, community health centers or other experiments in health insurance and delivery at the state level.
These four steps offer a road map for growth, work and opportunity without sacrificing income security. Other policies, including free trade, open competition and immigration reform, are also important. But these four steps can take place in a budget discussion, and congressional leaders and the White House have both emphasized the need for a more timely budget resolution.
While the reforms I sketched are comprehensive, they can be implemented in discrete steps — no “grand bargain” is required. And realistic proposals to advance growth, work and opportunity, not ideological talking points, are what we need right now.