Econ. professors present at ‘State of the Union’ symposium
Panels cover social policy, financial regulation, populism
The Department of Economics hosted a “State of the Union” symposium Wednesday. The event comprised of three panel discussions that focused on major policy issues in the Trump era.
“Professor Marios Angeletos suggested the department organize an event to allow the MIT community to hear from scholars who have been studying these [economic policy] issues, sometimes for decades,” Department Head Nancy Rose wrote in an email sent to The Tech.
“We hope this gives our community a better understanding of facts and research that bear what’s being said and written in the popular realm; and to hear from some of the people who have been involved in policy making in these spaces,” Rose continued.
The first panel, titled “Social Policy: Taxation, Health Care and Social Security,” consisted of Professors Amy Finkelstein, Jon Gruber, and Jason Poterba; Professor Emeritus Peter Diamond; and Harvard Professor Jason Furman.
Poterba and Furman presented their analyses of the Tax Cuts and Jobs Act of 2017 (TCJA), which was signed into law Dec. 22.
“Many of you, depending on which media outlets you read, probably heard that this was just a gigantic giveaway to the rich, and that was the best you could say about this tax reform,” Poterba said. “The first thing I’m going to say is that that’s not true.”
Instead, Poterba argued, the TCJA was informed by a delineable set of motivations. In particular, corporate tax cuts could allow U.S. firms to be more competitive in the global market.
Throughout the past several decades, the U.S. has maintained a fairly stable federal corporate tax rate of around 35 percent, according to Poterba. But whereas this number once fell in the lower end of the global spectrum, the distribution has shifted over time, and today, the U.S.’s rate is now significantly above the worldwide average of 22 percent.
The TCJA lowers the corporate tax rate to 21 percent. However, Poterba continued, that may be taking it too far. Smaller subsets of countries that the U.S. is a part of, such as G7 and G20, have average corporate tax rates much closer to the U.S.’s former rate (29.6 percent and 28 percent, respectively).
Poterba also addressed the “very high-end tilt” of these reforms: according to the Congressional Budget Office’s allocation, most of the burden of corporate taxes lie with the owners of corporate capital — that is, the shareholders; naturally, then, these will also be the groups that benefit the most from the corporate tax cuts.
Furman’s assessment of the TCJA was far more critical.
“There’s a lot of different ways to judge a public policy. I tend to be pretty unabashedly about judging it in terms of the consequences it has for people,” Furman began wryly, to the chuckles of his co-panelists.
“If you take just about any metric of inequality that we have, after-tax inequality would be higher as a result of this legislation rather than lower,” Furman said, and the disparities would get worse as time goes on. (The TCJA contains several provisions that will expire or change.)
Shifting away from Poterba’s emphasis on statutory tax rates, Furman evaluated the TCJA’s impact on effective marginal tax rates instead, concluding that it would lead to around 10 percent less R&D (research and development) output.
Gruber spoke on the current status and future prospects of U.S. health insurance.
Gruber was “a key architect of the 2006 Massachusetts healthcare reform” (Romneycare), panel moderator Finkelstein explained, and he also “worked with the Obama administration and the Congress in crafting the 2010 Affordable Care Act” (Obamacare).
Gruber first addressed the recent attempts to dismantle the ACA.
The TCJA repeals the individual mandate portion of the ACA, but this has an ironic effect, Gruber argued. Premiums will skyrocket, which will drive those who can no longer afford health insurance out of the market. But many of the people who gained health insurance through the ACA are subsidized such that they only pay a fixed percentage of their income, regardless of how high the premiums are — so they will remain relatively unharmed.
In other words, removing the individual mandate essentially “shrink[s] the ACA to an entitlement program for low income people,” Gruber said.
For the long term, Gruber emphasized the importance of remaining humble and patient: humble, since no one actually understands how to control healthcare costs without reducing healthcare quality, so experimentation is necessary; patient, since the problem of rising healthcare costs does not have to be solved immediately, or even within the next decade, as the U.S. economy is robust enough to devote a significant percentage of its GDP (“we could easily spend 25 percent,” Gruber said) to support healthcare programs.
The second panel, “Financial (De) Regulation,” was composed of MIT Professors Kristin Forbes, Deborah Lucas, and Ricardo Caballero; Visiting Professor Chester Spatt; and Harvard Professor Jeremy Stein.
Since the 2007 financial crisis, there has been a substantial shift in financial regulatory policy, according to Forbes.
This shift included a general realization that simply having monetary policy (keeping inflation under control through a central bank) and microprudential policy (ensuring individual financial institutions have sufficient capital) were not enough, Forbes said. Instead, a third “M” also needed to be expanded: macroprudential policy, or the “oversight of the entire financial system.”
However, while macroprudential policy “can accomplish certain goals,” it can also lead to unintended consequences, Forbes continued. Before such regulation is implemented, a cost-benefit analysis — the topic of Spatt’s presentation — can be used to weigh the risks.
“Cost-benefit analysis, potentially, is about bringing economic analysis to bear and trying to think about regulation sensibly, or at least that’s what it should be,” Spatt explained. “Just measuring things differently can actually have huge differences in policy.”
Lucas spoke on housing finance reform, citing the housing market bubble and meltdown as “ground zero” of the 2008 financial crisis. There has been “little progress on regulatory reform,” Lucas said. Although there have been a handful of promising bipartisan bills (the Corker-Warner Housing Finance Reform and Taxpayer Protection Act, introduced in 2013, for example), several key legislators have retired or are retiring, and even centrist proposals are often subjected to criticisms from both the right and the left, according to Lucas.
The rise of populism
The third and final panel, “Populism on the Rise: Causes and Consequences,” was composed of MIT Professors Daron Acemoglu, John Van Reenen, and James Snyder; Professor Emeritus Michael Piore; and Harvard Professor Dani Rodrik.
The panelists discussed various sources of the recent rise in populism, both in the U.S. with the election of Donald Trump and the candidacy of Bernie Sanders, as well as with the Brexit vote.
Manifestations of populism range from obvious examples like economic grievances to broader social and political trends, such as a general loss of trust in government institutions and heightened tensions between different societal groups, especially along racial lines, Acemoglu said.
Rodrik examined historical populist movements (the U.S. People’s Party, for example) and their correlation with globalization patterns. Rodrik also noted the differences between left-wing populism, characterized by income and social class cleavage, and right-wing populism, characterized by ethno-national and cultural cleavage.
Snyder emphasized the importance of “young people” as an underrepresented voting bloc. Young voters supported Clinton much more than Trump; Democrats much more than Republicans; and pro-immigrant views much more than anti-immigrant views, Snyder said, but their political influence is severely limited by low voter turnout rates.
In addition to individual presentations, each panel also included some discussion among panelists, as well as a question-and-answer session with the audience at the end.
Fiona Chen and Whitney Zhang contributed reporting.