Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Tax Policy, Government Spending, and Public Debt

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Tax Policy, Government Spending, and Public Debt · The Capitalism and Freedom in the Twenty-First Century Podcast

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[MUSIC]
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>> John Hartley: This is the Capitalism and Freedom of the 21st Century podcast
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where we talk about economics, markets, and public policy.
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I'm John Hartley, your host.
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Today I'm joined by Glenn Hubbard, who is the Russell Carson professor of finance
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and economics and the director of the Jerome Chazen Institute for
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Global Business at Columbia Business School,
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where he previously served as dean.
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Glenn served as chair of the White House Council of Economic Advisors
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under George W Bush and previously served as deputy assistant secretary of
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the treasury under George H.W Bush.
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Glenn has published numerous academic articles across many subfields in
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economics and is also the author of several books, including the Wall and
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the Bridge, Balance the Aid Trap, and Healthy, Wealthy, and Wise.
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Glenn also serves on many corporate boards and is incredibly knowledgeable on all
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things economic policy related and draws on years of experience in government and
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advising several presidential candidates.
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Welcome.
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>> Glenn Hubbard,: Thanks, thanks for having me.
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>> John Hartley: Glenn, so you grew up in Florida, you were an Eagle Scout.
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You graduated with two degrees in three years from UCF.
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You got your PhD economics from Harvard before joining the faculty at Columbia,
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how did you first get interested in economics?
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>> Glenn Hubbard,: Well, it's a great question.
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When I went to college, you mentioned UCF, University of Central Florida.
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When I started, it was actually called Florida Technological University.
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I went because I wanted to be an electrical engineer and
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it was the core of a lot of engineering work in Florida because
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of the space program, defense contractors and so on.
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As I studied engineering,
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I realized I was more interested in people than an engineer might be.
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It turned out to be a good thing for me in the sense that all the math I took as
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an engineer made economics actually pretty easy.
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I was really blessed in college to have some extraordinary teachers
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who really turned me on to economics.
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The other two outside influences I had for economics was one was Alan Greenspan.
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I started college in the middle 1970s and Alan Greenspan had been
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president Ford's CEA chair, so he's not yet fed chairman at this point,
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but a super successful economic consultant, policy advisor.
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I thought, I really like that.
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The other person that I admired a lot and ultimately went to graduate school to
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work with is Martin Feldstein, who sadly passed away a few years ago,
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Marty was one of the early champions of studying incentives in economics.
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People think of it as conservative, I just think of it as good economics.
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And he brought an empirical lens to a lot of policy questions, that for somebody
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like me, who had been trained more in engineering and in math, was great.
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So long winded answer but
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I loved economics from early days because of those guys and my teachers.
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>> John Hartley: That's fascinating.
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I know Martin in many respects, considered to be the founder of public economics,
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and he went on to serve as a chair of the Council of economic advisors under Reagan,
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the same job that you held under George W Bush.
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I'm curious, how do you first get interested in policy,
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specifically in working in Washington?
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How did you come to serve the George H.W Bush administration?
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I know John Kogan is kind of another person who's been something of
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a mentor to you.
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How did that all come together after you sort of had some time after your PhD in
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economics?
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What led you to Washington?
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>> Glenn Hubbard,: Well, it was an interesting journey for me.
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Economists I admired, like John Kogan or Michael Boskin at Stanford, or
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John Chauvin, who himself wasn't directly in policy but
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heavily influential in policy, really drew me to practical policy questions.
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But again, Feldstein was the roadmap for me.
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When I was selecting grad schools, there was a cover story of
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the New York Times Sunday magazine called Superstar of the New Economist.
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And it was a picture of Martin Feldstein and Owlish glasses as a young
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man revolutionizing empirical public economics.
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And I thought, that is the kind of work that should be moving policy rather than
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just empty rhetoric.
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So that's what drew me.
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When I went to the George H.W Bush administration,
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I had had a number of economist friends who had served in Washington,
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probably most prominently David Bradford,
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who had the job that I would take as head of the office of tax analysis.
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And so that office had attracted some very good academics in the past,
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and I found the Washington culture fairly easy, if I can say,
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coming from a collegial world of academia, it wasn't so hard.
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Nicholas Brady was the treasury secretary and paid a lot of attention to
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economists and economic thought, so I can't say enough good about it.
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That first tour of duty also taught me there were so
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many interesting questions that someone like Secretary Brady might ask that we
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just didn't know the answer to.
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It led me to a lot of the work I did later on international taxation, for example,
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came from Brady's question.
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So I just think Washington, if you're an applied economist,
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is a terrific laboratory to learn questions and explore how to do things.
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>> John Hartley: That's fascinating.
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It's amazing, I think, too, some of these mentors,
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like Nick Brady who I think was a famous mentor to current fed chair Jay Powell,
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and also just thinking about Martin Feldstein.
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It was a new thing at the time to actually use data to try
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to answer some of these questions about incentives.
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And I think a lot of people today may not realize how innovative that was
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at the time, economics was such a theory dominated field.
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>> Glenn Hubbard,: Yeah, you're making a huge point.
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I mean, if I think about not all of the contributions to the work that people like
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myself did came directly from public economics.
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I think of scholars like Zvi Griliches and Dale Jorgenson, who were two of my
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teachers, who used practical econometrics to solve a number of applied micro
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problems, about investment, about labor, about productivity.
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As you say, this kind of obvious in the economics profession today,
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but not in those days,
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because people were content to have middlebrow theory answers to questions.
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And call it a day when in fact, of course, if you are the treasury secretary,
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you don't need just a sign, you need a magnitude.
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Does a tax cut work?
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Does a tax increase have bad effects?
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How do I know?
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So I just think this work not only was incredibly important, but
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today the work that people continue to do on income distribution, on labor supply,
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on investment, on whether unemployment insurance affects labor market outcomes.
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All of these questions that people were wrestling with in the 1970s are still
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big today.
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>> John Hartley: Absolutely, and on that point, you wrote a number of highly
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influential papers, empirical papers on tax policy in the 1990s,
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particularly on corporate taxes and user cost of capital.
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Since then, we've seen, so this continued.
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Some people call race to the bottom in terms of corporate tax rates.
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Countries are trying to make their corporate tax rates more competitive to
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bring in more investment.
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Do you think that past corporate tax reforms or
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more recent corporate tax reforms like the Tax Cuts and
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Jobs Act have sort of continued to deliver on increasing fixed investment.
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And what do you think about this whole new OACD,
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Janet Yellen-led 15% global minimum corporate tax arrangement?
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>> Glenn Hubbard,: A lot of great questions there John.
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So I'm a big believer that the corporate tax has a number of important distortions,
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not only of investment and capital accumulation, but
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ultimately of productivity and wages.
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So some of my work has been on labor markets, some on investment.
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I got interested in the investment side largely because of
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an intellectual concern.
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If you think about the real world, policymakers tend to weigh in to influence
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investment when something has happened, like a recession or something like that.
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So traditional studies of the cost of capital or Tobin's Q and
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effects on investments were always clouded by this policy endogeneity problem.
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So what I did was focus on tax reforms, because in a tax reform,
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you have important variation across firms in different tax incentives
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that you can recover the true elasticity of investment or
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the capital stock with respect to the user cost or queue.
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And I was coming up with answers that were very similar to the basic neoclassical
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predictions that Jorgensen and others had made more theoretically in the 1960s.
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So I thought that that was influential work in the sense that corporate tax
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changes may have a big bite.
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I tried to follow up on that when I was at treasury in the early 90s,
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I co-led the integration study.
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Treasury had been tasked after the 86 Act to prepare a study of corporate
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tax integration,
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which is to say eliminating the double taxation of corporations in some way.
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So the study that treasury put out really foreshadowed Bush
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in 2001 and 2003, trying to remove dividend and
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capital gains taxation while keeping the corporate tax form.
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I think TCJA had a significant effect on investment,
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why people fight over that today?
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In fact, there's been some wonderful recent scholarship by a new entrant into
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our profession, Patrick Kennedy, and some co-authors on this point, excellent paper.
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I think part of the problem in measurement is, not long after the passage of TCJA,
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which is very positive to corporate investment.
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The Trump administration signed off on a series of tariffs that were quite bad
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economic policy and certainly increased the uncertainty environment for
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business investment, making it hard to measure.
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But I think the work that these new waves of studies, like Kennedys and
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others, I think, give me the view that investment incentives are alive and
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well as a policy mechanism.
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And certainly in the world we live in now, in which the Fed may be more
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constrained in macroeconomic policy, fiscal policy is back.
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And so it is important to know what works and I think investment incentives and
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corporate tax cuts work.
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Now, you asked about the OECD tax harmonization, tax coordination work.
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I am not a fan, I don't see anything wrong with tax competition.
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In fact, if you look across the world and
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ask yourself some countries have larger states and other smaller states.
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The variation in the financing mechanism of a large state relative to a small
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state, to be concrete, say,
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take a European country relative to the United States.
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That's not coming from corporate taxes.
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European economies have typically had low corporate taxes relative to the old us
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system.
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It's coming from consumption taxes.
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So really the fundamental public choice question for
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public finance experts is look, if you want to have a large government, fine,
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but you're not gonna pay for that with distorting corporate taxes.
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You're gonna have to pay for that with a consumption tax.
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And if you tell voters anything other than that, you're lying.
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>> John Hartley: Absolutely, and it's interesting to see how versed the US has
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been to joining the global minimum corporate tax arrangement and
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we'll see what Congress does in future years.
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But I share a bit of your skepticism just in terms of how something like this could
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be sustained for a period of time.
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And the incentives around defecting, I think, are always big and
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there's always this sort of competition going on amongst tax and
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incentive regimes around the world.
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I wanna talk a little bit more about taxes, but more so on the individual side.
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You were George W Bush's top economic advisor during the 2000 campaign and
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were an architect of the Bush tax cuts.
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Which were largely reductions in personal income tax rates, both for
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ordinary income tax rates and for capital gains tax rates.
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I'm curious,
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what do you think about the legacy of the Bush tax cuts 20 years later?
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A lot of people don't maybe realize that the cuts for
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lower brackets are still very much still in place.
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Capital gains and dividend taxes are still lower than what they were before the Bush
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tax cuts, they're also now equal.
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That wasn't the case before, what do you think is the best case to be made for
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individual tax cut reform?
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Or just somewhat more reasonable individual tax rates in an era where
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we have economists like Thomas Piketty and Emmanuel Saez arguing for
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top marginal individual tax rates of 70%.
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>> Glenn Hubbard,: That's a great question.
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When I left the treasury right after Bush lost, I had to pay a fine because
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I had shellacked on the blackboard in my office, broaden the base,
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lower the rates, and then I had to pay the government to fix the blackboard.
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And I was willing to do that, I still think that's the right answer.
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Remember when Bush signed off on a large tax cut?
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There was a large forecasted budget surplus and there was a debate in our
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group among economists about what the right way to use that money is.
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I mean there was a consideration for example,
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of pre funding Social Security as well.
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I think it was Bush's judgment, and politically probably wise,
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that the only thing that could sail through was a tax cut.
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I think one of the things I would say you already said,
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which is it's amazing how durable this is.
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Most tax policy just comes and goes.
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Whenever people talk about permanent tax changes, I go, what's that?
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Well, the Bush tax cuts are pretty close to that.
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For everybody but at the top,
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the law kind of looks like Bush signed off on dividends and capital gains.
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Despite the stern and drawing and the little surtaxes added here and there,
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honestly, it's still a much more favorable environment than Bush went into.
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I think that war, if not won, has been engaged.
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I think when people look back over deficit performance,
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sort of post Bush tax cuts, part of it is tax cuts, to be candid.
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Part of it is very large spending increases, and
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part of it is a variety of wartime expenses.
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Whether it was the war on terror, the war in Afghanistan,
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I would call COVID like a war.
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All of those things are there.
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So I don't think one can blame the fiscal deterioration of
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the past 20 years on the Bush tax cuts.
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And I do think they did an awful lot of good.
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>> John Hartley: Absolutely, and I think people don't quite realize,
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it's interesting, a lot of these tax discussions.
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The key number that people always debate is this top marginal rate.
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And I think it's such an incomplete picture of a tax system in
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the sense that you look at, for example, Canada,
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it may have a very similar top marginal rate in many provinces,
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say, to New York and California.
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When all taxes, state and Federal, are in,
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you get a top marginal rate of just around 50%.
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But in the US, that top marginal rate starts around 400, $450,000,
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whereas in Canada, it starts around about $150,000.
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>> Glenn Hubbard,: Right.
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>> John Hartley: And it's just such a major difference in terms of,
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how much the middle class is being taxed?
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And I think a lot of economists out there don't appreciate that.
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I want to jump just a bit into a little more on this question of deficit spending,
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rising debt that's increasingly, I guess, ignored while it continues to rise.
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How do you think we should think about taxes in the context of rising deficit
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spending, rising debt, rising interest rates along with inflation?
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>> Glenn Hubbard,: That's a great question, if you look at the pressures on
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deficits in debt the next ten years is likely to see.
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One is we have a very high initial condition of the deficit.
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We're now at a $2 trillion deficit,
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an essentially relatively healthy economy that just makes no sense.
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Interest payments are rising substantially as the Fed has begun,
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or sort of in the middle probably of its fight against inflation.
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And we're probably gonna have to spend much more on defense,
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maybe at least a full percentage point more of GDP than we do now.
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All of that means that some combination of other spending choices or
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tax changes have to soak up the difference.
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So I think we're going to have to have a rich discussion in the next few years on
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exactly that.
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Here's the problem.
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Neither side, meaning Democrats,
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Republicans wants to have an honest conversation with the American people.
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We can't say that you can never raise any tax and
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we can't say that we can solve this whole problem by taxing the wealthy.
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The math just doesn't work, irrespective of your political views.
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So what we're gonna have to do is be honest that most of us, that is
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all of us middle and upper middle income people, will be making some sacrifices.
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It could be done through reduced present value of entitlement benefits on
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Social Security and Medicare.
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It can be done through higher taxes but
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the notion that this is somehow a problem for the rich just doesn't happen.
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And of course, that's why tax reform right now is so hard,
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because everybody knows what I said is just true, [LAUGH].
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But it's very hard to say that to people.
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I want to go out and reduce benefits or raise taxes on middle income people.
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That doesn't sound like a political winner.
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>> John Hartley: Absolutely, and it's fascinating.
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People maybe don't fully appreciate how much defense spending has declined since
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the Second World War as a percentage of GDP.
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Meanwhile, entitlements keep rising as a percentage of GDP and
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what the government spends its money on in the US is really
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dramatically changed in the post-war period.
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And I think that's, I'm not fully appreciated enough.
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>> Glenn Hubbard,: Well, I would argue the US,
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in its current political configuration,
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can't afford the entitlements we're promising the American people.
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Meaning, absent a European style tax system to fund a much larger state,
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we need a different kind of entitlement system.
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Probably one that's focused much more on the least well off among us,
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as opposed to making decisions that most people could just make for themselves.
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In a practical term, that would mean high minimum Social Security benefits, but
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not the fiction that because I make more money
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than a middle income person that I should get more Social Security benefits.
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No.
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Likewise, on Medicare, we could move to a premium support system.
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And if I'd like something better, well, I can pay for that.
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So there are things we could do, but right now,
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people don't seem to wanna talk about them.
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>> John Hartley: And you've written a number of really fantastic
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things on this question.
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Everything from your book balance that came out about ten years ago with
19:28
Tim Kane on a bunch of ideas like fiscal policy rules, or
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how you think about cyclically adjusted balanced budget?
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And also these ideas in terms of universal catastrophic coverage,
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how do we really take care of those least among us?
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But at the same time,
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don't initially expand the welfare system that we have to the upper middle class,
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which a lot of these tax devices or tax credits some tend to do.
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I`m curious, what is your sort of dream optimal tax system?
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Is it some sort of version of a progressive sort of consumption tax?
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That minimum distortion?
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>> Glenn Hubbard,: Yeah, I mean, basically, for most economists,
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if you say clean sheet of paper, let's design a tax system.
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If you want something that gives you the greatest possible efficiency,
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lowest dead weight loss, great sense of fairness, a consumption tax does it.
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I think for the US, that wouldn't mean the kind of value added taxes that are used
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in Europe, which in more technical terms are called credit invoice systems.
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For the US, you could have a cash flow tax on all businesses.
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So relative to the current way we tax business,
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it would just say I take in revenue, I subtract all purchases from other firms,
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including investment, and I subtract wages.
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And whatever that gap is, that's my tax base for households,
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you'd pay a wage tax, so that's a consumption tax.
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Because if you just think about, go back to everybody's favorite subject, ECON 101,
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think about the budget constraint.
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Wages plus present value of cash flows equals consumption, so
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basically it's a consumption tax.
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If you wanted more progressivity than that,
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you can add it at the bottom through expanded earned income tax credits.
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Milton Friedman talked about that decades ago and a kind of negative income tax.
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You could, although I wouldn`t recommend it, add even more progressivity at
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the top by adding a high total income surtax on top of that.
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But one of the things I like about the consumption tax is not just that
21:31
its the most efficient.
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It sends a clear lesson to the American people that more or less,
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that`s how were gonna pay for government i.e, we're all going to pay.
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We may, for progressivity reasons, want to tinker on either end, but more or
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less, we're all in this together.
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>> John Hartley: Absolutely, so
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I just want a little bit towards the more political economy sort of side of things.
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You are arguably the most influential economist in the Republican Party today,
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and I'm curious where you see the Republican Party going as we sort
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of stand here in the 2023 primary season.
22:09
As the GOP continues to go through it,
22:12
potentially exit its current sort of age of Trump at some point.
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I'm curious, what are the main ideas that you wanted to get across in your recent
22:20
book, the Wall and the bridge?
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>> Glenn Hubbard,: Well, you know, it's a great question because the way I think
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about it, I'm not sure I know anymore what words like Democrat and Republican mean,
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but I do think I know what a word conservative means.
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And I think the emphasis on individual freedom, dignity and liberty and
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what works, those are classic conservative principles to me.
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On the right, we may have taken a kind of wrong turn by letting
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complete neoliberal orthodoxy, meaning Hayek and
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Friedman, completely take over our views.
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That is that the only goal is efficiency.
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We just assume government does everything well and we ignore it and we move on,
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that's not terribly realistic.
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I think for today's conservatives, the right place to start is Adam Smith.
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This is the 300th anniversary of Smith's birth this year.
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But the Smith of the wealth of nations and
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the Smith of the theory of moral sentiments are just as relevant to
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conservative debates today as they were to classical liberal.
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Liberal in the British sense of the word, debates in the 18th and 19th centuries.
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So I think we've gotta start there.
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What that would mean today is rather than just a focus on competition,
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which is what Smith was very keyed on with the so called invisible hand,
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a focus on the ability to compete.
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So we ought to be really centered as conservatives on opportunity for
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people and places.
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Does everybody have a chance to stand at the starting line?
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And I think if we reorient policy that way, we go a long way.
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We can't try to match the left and
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shouldn't on trying to put everybody at the same endpoint,
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that's not reasonable and it's not even consistent with individual liberty.
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But we can try to make sure everybody's at the same starting line when somebody
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says on your mark.
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>> John Hartley: That's fascinating, a combination of Hayek-Friedman, but
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a bit more of an emphasis on taking care of those least among us.
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I mean, it's fascinating to think, too.
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I think the last part of The Wealth of Nations is really all focused on taxation
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and certainly to The Theory of Moral Sentiments, which is a little bit,
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I think, neglected in terms of Adam Smith's work.
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It really is kind of a work of behavioral economics.
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>> Glenn Hubbard,: It is, and
24:34
Smith later in his life called The Theory of Moral Sentiments his great book.
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Even though today, especially in the economics perspective,
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we think of The Wealth of Nations as the central book and
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certainly the more impactful in the world.
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But in The Theory of Moral Sentiments, Smith used a lot the expression mutual
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sympathy, which in today's vernacular, I think you would say empathy.
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That is the idea of having everybody in the same boat.
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I think of that as a classic liberal thought, British liberal thought, and one
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today's conservatives in this country as well as in the United Kingdom need to own.
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Why are we ceding this ground to populists when
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we have classical liberal ideas that can help real people?
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And I think at the end of the day, real people, aka voters,
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can be driven if they see what works.
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>> John Hartley: Absolutely, I think there is a big difference between classical
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liberalism and libertarianism, which I think people don't necessarily appreciate.
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And I think that's part of the distinction that you're making.
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Well, this has been really such an interesting conversation.
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Glenn, it's been a real honor to have you on.
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Thank you so much for joining us today.
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>> Glenn Hubbard,: Thank you, my pleasure.
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>> John Hartley: Today our guest was Glenn Hubbard,
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who is the Russell Carson professor of Economics and Finance.
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And the director of the Jerome Chazen Institute for
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Global Business at Columbia Business School.
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Where he previously served as Dean and also served as Chair of
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the White House Council of Economic Advisors under George W Bush.
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This is the Capitalism and Freedom in the 21st Century podcast where we talk about
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economics, markets and public policy.
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I'm Jon Hartley, your host, thanks so much for joining us.
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