August 22, 2002
Glenn Hubbard Keeps Pitching

From the Financial Times: CEA Chair Glenn Hubbard: "If you ask the narrow question, are steel tariffs in the US economic interest, the answer is no."

Good to see that Council of Economic Advisers Chair Glenn Hubbard is still in there pitching, still clear on what the difference between good and bad economic policy are. But where are the Trade Representative, the Assistant to the President for Economic Policy, and the Treasury Secretary? If CEA gets no support from anywhere else in the government, the White House tends to treat the question "are these economic policies good for the country?" as an irrelevant academic distraction. By contrast, if Treasury and the National Economic Council strongly back the proposition that the most important thing is getting policies right for the long run, then the CEA's arguments become very powerful.

If you read the full interview of Glenn by the Financial Times, you see a striking disconnect: the FT wants Glenn to talk about whether the Waco Economic Forum and the tax cuts for investors likely to be proposed as a result of it will strengthen the short-run recovery. Glenn doesn't want to talk about that. (In his shoes, I wouldn't want to talk about that either.) He wants to talk about how to change the tax code to level the playing field with respect to different long-run vehicles for financing capital investment. But that is not what the FT wants to hear.

Senior economists within the Bush Administration have recently pointed to weakness in US equity prices and the possibility of a protracted slump in business investment as the biggest risks facing the US economy.

The White House is now seriously considering a host of incentives to boost investment in the US. Among them, more generous tax treatment of capital gains, capital losses, dividends and retirement savings plans.

The Financial Times discussed the issue on Wednesday with the Glenn Hubbard, chair of the White House Council of Economic Advisers.

FT: What do you say to critics who say these are long-term investment incentives now under consideration that don't address the immediate slump in demand?

Hubbard: One of the things we've seen around the world is an increase in the equity risk premium (the premium, over and above returns on relatively safe government bonds, that investors now demand to hold onto risky shares). I think it is very important to take policies that promote good long-term productive risk-taking.

I don't accept the notion that we still have a large capital overhang outside of telecommunications and think the incentives we already have in place - fiscal and monetary - will be very potent.

As for the proposals the president has mentioned, if the purpose is to go after long-term investing, it's hard to imagine better policies than eliminating the tax bias against equity finance or reducing it in some way.

FT: But the investment binge of the late 1990s doesn't seem to suggest an absence of investment incentives or a need for new ones. We had what seemed to be overinvestment.

Hubbard: We probably had a speculative boom, and we certainly, after the fact, look like we had too much investment. The question is, at this point, what kind of proposals are best able to stimulate productive risk-taking whether it be through business investments or financial investments?

FT: Would you agree that your focus is on long-term economic growth - productivity growth, the economy's potential?

Hubbard: It's clear the president is talking about long-term policies, but they also have powerful, positive short-term effects. The policies the president has talked about will have positive effects on asset prices in the short-run, and that's simply because taxes are (negatively) capitalised (automatically priced) into assets.

FT: You don't agree that improving tax treatment of capital losses and some of the other measures under consideration might encourage stock selling?

Hubbard: The idea of changing tax treatment of capital losses might. I'm not saying which ideas, among those under consideration, I would recommend to the president. That was one of the ones he listed that might have that feature in the short-run.

But I could easily design it in a way in which it wouldn't encourage stock selling - I could allow carry-overs in which it wouldn't have a short-term effect. There are ways to get around that.

FT: You made another point about how you expected consumer balance sheets to be improved by these measures and how that would - all other things being equal - encourage spending.

Hubbard: The simplest mechanism would be the increase in stock prices resulting from the tax proposals, which would improve balance sheets.

FT: You said that you were looking at downside risks to the economy. Beyond business investment, what are the biggest risks?

Hubbard: The equity price declines recently are probably the economy's largest single risk.

FT: Anything else?

Hubbard: Oil prices.

FT: What about housing?

Hubbard: I don't think the housing market has a bubble. I do think equity prices are a risk as are energy prices.

FT: Looking at the bigger picture here, what do you say to those who've gone through your speeches, President Bush's speeches and the Economic Report of the President and then have looked at the steel tariffs, the lumber tariffs and a number of other moves that critics argue show the Bush Administration is not as pro-market as advertised?

Hubbard: The President campaigned and got a very large cut in marginal tax rates. That is probably his centrepiece economic initiative. The president also got new trade-promotion authority, which is something the previous president didn't seem able to do. That alone is a huge piece of economic legislation for the country.

The steel tariffs are a complicated question. If you ask the narrow question, are steel tarriffs in the US economic interest, the answer is no. But that's not the decision the President had to make. He had to make a very difficult structural adjustment that would rationalise the steel industry for the long-term and enhance the prospects of obtaining trade promotion authority, which he got.

Posted by DeLong at August 22, 2002 08:34 AM | Trackback

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Wierdly, Glenn said yesterday that there's no link between deficits and long-term interest rates.

Posted by: Jason McCullough on October 1, 2002 02:20 PM
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