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Economists Weigh In On Tax Compromise

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Economists Weigh In On Tax Compromise


Economists Weigh In On Tax Compromise

Economists Weigh In On Tax Compromise

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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NPR's Guy Raz talks with economists Simon Johnson and Greg Mankiw about their thoughts on the tax compromise. Johnson is a professor at the Massachusetts Institute of Technology and a senior fellow at the Peterson Institute for International Economics. Mankiw is a professor of economics at Harvard University. He was also chairman of the Council of Economic Advisers under President George W. Bush.


From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

GUY RAZ, host:

And I'm Guy Raz.

If there's one thing about the proposed tax deal between the White House and congressional Republicans that is certain, it is this: the cost. At least $700 billion will be added to the deficit. The hope, of course, is that an extension of the Bush-era tax rates, a cut in payroll taxes and other incentives for business will spur growth.

So why are economists divided over the potential benefits of the deal?

Well, joining us for the answer are two economists. Harvard professor Greg Mankiw is in Cambridge. He was President George W. Bush's top economic adviser. Also with us is Simon Johnson, a professor at MIT and the former chief economist at the IMF. He's also in Cambridge.

Gentlemen, welcome.

Professor SIMON JOHNSON (Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management): Nice meeting you.

Professor GREG MANKIW (Economics, Harvard University): Nice to be with you.

RAZ: Greg Mankiw, first to you. What do you expect the short-term economic impact to be if this deal gets through Congress?

Prof. MANKIW: Well, I think what the main impact of the deal is that it's preventing a very large tax increase that was put into current law 10 years ago. And by preventing that, it's basically preventing the slowdown that would have occurred if that tax increase had gone into effect.

But I think it also have a positive effect because quite a few things in there not only continued current law but actually cut some taxes in addition - such as the payroll tax cut, the expensing for investment by businesses. And so that'll provide a little bit more stimulus to the economy.

RAZ: So you expect to see the economy grow next year?

Prof. MANKIW: I do. I don't think it's going to grow gangbusters. I think the aftermath of financial crisis tends to see slow growth and slow recoveries. And I think that's what we've been seeing and we probably will continue to see. But I expect growth to be positive, and I hope positive enough to get the unemployment rate down a little bit.

RAZ: Simon Johnson, you wrote in The New York Times today that the deal is irresponsible. But do you not agree with Greg Mankiw that at least in the short term it will spur economic growth?

Prof. JOHNSON: Yes, I agree that the direction is positive. It's stimulative. But there's a cost which is the increase in the deficit and the increase in the debt. And the question is for that cost, which I take - and I take that cost very seriously - I think there are big fiscal risks approaching us - how much stimulus are you getting?

I don't want higher taxes for anyone, but you have to weigh the cost of this course of action. And I'm afraid. I think what they've agreed to is irresponsible.

RAZ: Mark Zandi, the chief economist for Moody's Analytics, is forecasting lower unemployment as a result by this time next year, an acceleration in the recovery.

Given that the Republicans would only go with a deal that included the tax cuts for the wealthiest Americans, what was the alternative, Simon?

Prof. JOHNSON: Well, I'm not sure that was the situation. That's certainly what they said. I don't know if they really pushed it as far as they could. I don't know if the case was made to the American people that there are other ways forward. And I'm just talking about the economic merits of this policy versus alternative policies.

We could have got more stimulus for the same extra fiscal risks that we're taking on if we had chosen a different course of action.

RAZ: Greg Mankiw, part of this package includes a payroll tax cut but only for employees. I wonder whether had there been a provision to cut payroll taxes for employers, whether that might have had an additional stimulative effect.

Prof. MANKIW: Well, that's a good question. That's what I've been puzzling about. I think they thought that by giving it to employees, the employees are more likely to spend the money and that contribute more to aggregate demand. Plus, it probably looked better, politically.

But I think we can also make the argument, if you give it to employers in the short run whereas the wages are given, employer payroll tax cut would lower the cost of hiring labor and increase employment.

Indeed, the estimates of the Congressional Budget Office suggest that employer payroll tax cut is more effective at stimulating demand than an employee payroll tax cut. Although, I'm sure even the CBO would admit we don't really know that for sure. We don't have a lot of experience with this kind of intervention.

RAZ: What are the risks, Greg Mankiw, if this package does not do what it is intended to do? I mean, what happens to the economy if this fails?

Prof. MANKIW: Well, I agree with Simon that we have sort of two kinds of problems. We have the sort of the short-run problem, and we also have a long-run debt problem, which I think was a structural budget deficit. And so I think what the president needs to do is he needs to, on the one hand, focus on the short run as he's been doing, but then he needs to pivot soon to start focusing on that long-run problem.

Fortunately, his deficit commission did a very good job of laying out a foundation for a bipartisan compromise. So I think the president has an agenda in front of him. The question is whether he's going to step up to the plate and embrace the recommendations of his own commission.

RAZ: Simon Johnson, you acknowledged that this package, if it goes through, will spur economic growth, but you say the risks are too big. What do you see as the potential downsides if it doesn't work?

Prof. JOHNSON: Well, look, financial markets are testing European countries, particularly euro zone countries, right now most severely on exactly this issue. Can they run fiscal surpluses in times of stress? And I'm afraid some of those European countries are going to fail that test with dire consequences for themselves and perhaps for other people around the world.

That test will come to us. The Europeans - a (unintelligible) core of the euro zone will survive. That will become a potential (unintelligible) safe haven for global savings. The financial market's attention will turn to the United States. The fiscal pressure will be on us. And I'm afraid the people who advocated these tax cuts will have to answer the question in one year or two years or three years: Why did you push through those tax cuts at this time of heightened fiscal risks around the world?

Because there will have to be dramatic action taken at the time. That dramatic action in the United States will be most disruptive and most damaging to what will still be a very weak recovery and what will still be very high unemployment.

RAZ: Does this deal, Greg Mankiw, effectively put an end to the possibility of a double-dip recession? I mean, that's the argument that President Obama's top economic adviser, Larry Summers, has been making to Democrats. Do you agree?

Prof. MANKIW: Well, I agree with Larry that it reduces the risk of a double-dip recession. I don't think it puts it to an end. Unexpected events or kind of small shocks could happen at any time, but I think it does reduce that risk.

RAZ: Simon Johnson?

Prof. JOHNSON: I think it has a minor, nearly insignificant effect on the risk of an immediate double dip, and it increases the probability that we're going to have a major showdown with financial markets when they turn their attention to us and when they start to question seriously whether we can run a budget surplus - a primary budget surplus before you include interest payments, and whether we can do that in an extreme stress scenario.

That's the question they're asking right now of Ireland, Portugal, Spain, Italy, France and Belgium. It will be our turn soon.

RAZ: Simon Johnson, Greg Mankiw, thank you.

Prof. JOHNSON: Thank you.

Prof. MANKIW: Thank you.

RAZ: Simon Johnson teaches at MIT. He's the former chief economist for the International Monetary Fund, and Greg Mankiw is a professor of economics at Harvard. He chaired the Council of Economic Advisers under President George W. Bush.

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