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A brief guide to Kevin Hassett, Trump's new chief economist

April 12, 2017

President Trump has officially named the American Enterprise Institute’s Kevin Hassett as the chair of his Council of Economic Advisers. The CEA chair serves as the White House’s chief economist, and while Trump has demoted the position from the Cabinet-level standing it enjoyed under past presidents, it remains one of the most important economic policy jobs in the federal government.

[] April 7th, 2017 [Vox]

That makes Hassett’s selection important — and intriguing. Unlike Larry Kudlow, the CBNC host and syndicated columnist previously rumored to be Trump's top choice for the job, Hassett is a formally trained, PhD-holding economist who has been a faculty member at Columbia and a researcher at the Federal Reserve. That’s in line with history; every single CEA chair since Alan Greenspan has held a PhD (and Greenspan earned his shortly after leaving office in 1977), and picking someone like Kudlow who hadn’t even done doctoral coursework would’ve been totally unprecedented.

And unlike Peter Navarro, the vociferously anti-trade economist who is head of Trump’s newly created National Trade Council, Hassett is a fairly mainstream free market conservative. He was a senior adviser on Mitt Romney’s 2012 campaign and has been a mainstay in Republican economic policy circles for two decades now. Tellingly, a number of liberal economists, including Obama CEA chairs Jason Furman and Austan Goolsbee, cheered his appointment when it was first rumored— not because they agree with him, but because he’s a fundamentally serious thinker who could bring some rigor to the Trump White House:

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Hassett’s reputation suffered a hit due to his co-authorship of the 1999 book Dow 36,000, in which he and James K. Glassman argued that stocks were extremely undervalued and that the Dow Jones average would in a matter of years reach the 36,000 marker (today, in 2017, it’s still well below that at 20,750). Hassett and Glassman even bet a critic that if, by the end of 2009, the Dow was closer to 10,000 than 36,000, they'd each give $1,000 to the Salvation Army; the Dow ended the year at 10,428, and they made good on their promise.

But that book isn’t the totality of Hassett’s work, and a fuller examination of his record shows someone who, while hardly likely to win over committed liberals, is more heterodox than his résumé might suggest, and who is sharply at odds with President Trump on trade.
Hassett is a fan of the government directly hiring people

Perhaps Hassett’s most surprising stance, if you know him only for his work with Romney and advocacy of lower taxes and entitlement reform, is his sympathy for government efforts to directly hire people. "Look at the stimulus and the number of jobs we've actually created, and it comes out to a couple million bucks per job created," Hassett told the Atlantic's Derek Thompson in 2010. "My idea is simpler. Find the unemployed and hire them."

He expanded on this idea in 2013 testimony to Congress’s Joint Economic Committee. While Hassett is generally skeptical of fiscal stimulus, and was vocally critical of President Obama’s stimulus package, he came to view long-term unemployment as a severe crisis requiring direct government intervention.

“It is clear that something terrible happens to individuals as they stay unemployed longer, but that this negative effect is not responsive to normal policy interventions,” he told the committee. “Accordingly, it is imperative that we think outside the box and explore policies that reconnect individuals to the workforce." Those policies could include, he continued, "a short-run jobs program that recruits the long-term unemployed to assist with the normal functions of government."

In an interview he did with me after his testimony, he argued that direct hiring actually made sense on fiscally conservative, cost-saving grounds, as well as humanitarian ones. “If somebody's 40 years old, and not employed for 25 years, that costs governments lots of money, and if we think rationally about reducing spending, maybe it's worth it to pay for their first year at a private employer,” he told me. “Direct hiring, or a direct subsidy for hiring, could save taxpayers a fortune. And it could save a life.”

In 2012, Hassett also teamed up with Dean Baker, a prominent liberal economist at the Center for Economic and Policy Research, to argue for German-style work-sharing programs, in which unemployment is averted by encouraging companies to reduce workers’ hours and subsidizing the workers’ lost wages. This can be cheaper for governments than paying for unemployment benefits, and prevents workers from exiting the labor force and losing skills over time.

These were arguments made back when the US unemployment rate was in the 7 to 9 percent range and job creation was a much more prominent part of the debate than it is now. While many economists believe there's still some slack in the labor market and job creation measures could do some good or boost wages, this isn't as obvious as it was four years ago, and it's entirely possible that Hassett's assessment of the situation has changed.

But Hassett’s openness to government employment dovetails nicely with the Trump administration’s stated interest in spending big on infrastructure projects and its aggressive focus on job creation. You could imagine Hassett moving Trump’s agenda in a direction that emphasized putting the long-term unemployed, or labor force dropouts, to work again.

It isn’t normally notable that a right-leaning economist is an enthusiastic supporter of free trade; that used to be a given. But Donald Trump has scrambled his party’s views on trade, and appointed protectionists like Peter Navarro and Wilbur Ross to high-level positions in his administration. That makes the selection of Hassett, a dyed-in-the-wool free trader, somewhat notable.

In January 2008, while serving as an adviser to the primary campaign of John McCain, he bemoaned the trade skepticism he perceived from Democratic candidates Barack Obama, Hillary Clinton, and John Edwards. “The part of President Clinton's record that I respected the most was his trade record and very aggressive pursuit of free trade,” he told the crowd at a New America event featuring advisers from the McCain, Obama, Clinton, and Edwards campaigns. “It seems to me that all the Democratic candidates but especially Mrs. Clinton have kind of apologized for that record when the right thing to do for all of the little people — the guys out there who benefit from free trade — is to celebrate it.”

"The success of the United States has come not from its natural resources or its large population but from its free-market system," he and Glassman wrote in a 2003 essay. "Liberalized trade — in broadly multilateral, regional, or bilateral agreements — is a key ingredient in the recipe for prosperity."

Hassett has been particularly vocal in promoting the benefits of trade to low-income developing countries. "The benefits for developing countries are even great — on a proportional basis — than for the United States," Hassett and Glassman continued. "If trade stops or even slows down, developing countries would be devastated."

Hassett was even more emphatic in a 2008 op-ed pegged to that year’s G8 summit. He blamed "agricultural subsidies and trade barriers in developed nations" for "stifling the growth of the agricultural industry in poor nations." “If the developed world announced today it would suspend all trade barriers (and end its own unnecessary subsidies) for agricultural products, then capital would flow to the developing world with unprecedented speed and force,” he wrote. “And by next year, you could be sure prices would be lower, and output higher.” He lamented the failure of the World Trade Organization’s Doha Round, which sought to reduce agricultural subsidies in rich countries to speed development in poor ones.

It’s hard to imagine that one staffer could turn around Trump’s entire protectionist agenda, especially with longer-standing advisers like Navarro and Ross in the equation. But Hassett has a chance to serve as the one vocal voice in favor of trade in the administration, and ensure that Trump’s more dramatic moves on the issue receive some pushback.

Like any self-respecting conservative economist, Hassett is passionate about cutting the corporate income tax. But his arguments on this score are slightly different from the typical concerns that the US’s rate is too high relative to other countries, or that it’s out of step with international practice by trying to tax profits made overseas, or even just that corporate taxes discourage investment.

Hassett’s main argument instead is that corporate taxes strongly suppress wages, and that cutting them will rapidly raise the living standards of American workers.

There’s an active dispute among economists about who actually pays the corporate tax. Money that corporations earn goes, roughly speaking, to two groups of people: the people who own the company (capital) and the people who work for the company (labor). So the tax can be paid either by taking money from capital owners, or by reducing wages. This has huge implications for how progressive the tax is. The more it’s paid by capital, the more progressive it is and the less harmful it is to the middle class; the more it’s paid by labor, the worse a deal it is for workers.

Most modelers estimate that roughly 80 percent of the tax is paid by capital, and 20 percent by labor. The Treasury Department puts the split at 82/18, the Tax Policy Center at 80/20, the Congressional Budget Office at 75/25. Before relatively recently, it was standard practice to assume that capital paid the whole tax, and some observers argue that remains the correct approach, given research showing that shareholders tend to be the exclusive beneficiaries of cuts in taxes affecting corporations.

Hassett thinks this is all wrong. His research, conducted with AEI’s Aparna Mathur, suggests that most or even all of the burden of corporate taxes is borne by workers, not capital. In an influential 2006 paper analyzing data in 72 countries across 22 years, they estimated that a "1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.” A second paper in 2010 found a slightly smaller effect (a 0.5 to 0.6 percent decrease in wage rates per 1 percent increase in corporate tax rates) but still concluded that labor was ultimately paying the tax.

That suggests that cutting corporate taxes would be a very easy way to raise wages for ordinary workers. Many other economists and tax researchers have argued that these results are implausible, and the consensus in the field remains that most of the tax is paid by capital (as Treasury and the CBO both assume). Hassett’s stance, then, marks him as an outlier.

Hassett has also gone a step further and, with his AEI colleague Alex Brill, argued that cutting the corporate income tax could raise economic growth enough to actually increase revenue: a Laffer effect. They conclude, based on a data set covering rich, developed countries from 1980 to 2005, that the revenue-maximizing corporate tax rate is about 26 percent, significantly below the US rate.

It’s clear Hassett enjoys corporate tax cuts, but his stance on the specific corporate tax cut being devised by House Republicans, which would feature a “border adjustment” process for imports and exports, is less clear. He sounded enthusiastic about the idea in an interview with Kudlow in July, but he also argued that it was desirable because it would boost exports and eliminate an “uneven playing field” with foreign countries that use border adjustment on their sales taxes. This runs against the arguments of the tax’s proponents, who insist it wouldn’t change the balance of imports and exports at all.

Hassett is open to a carbon tax

Like many conservative-leaning economists and wonks, and unlike basically every actually elected Republican politician in the country, Hassett has expressed openness to a carbon tax, especially as an alternative to cap-and-trade schemes. Emissions trading, he has argued, is too susceptible to gaming and features prices on carbon that vary too rapidly. Carbon taxation, by contrast, is less corruptible.

“A program of carbon-centered tax reform, by contrast, lacks most of the negative attributes of cap-and-trade, and could convey significant benefits unrelated to GHG reductions or avoidance of potential climate harms, making this a no-regrets policy,” he wrote with AEI’s Kenneth Green and Steven Hayward in 2007. “A tax swap would create economy-wide incentives for energy efficiency and lower-carbon energy, and by raising the price of energy would also reduce energy use.”

He has also written two papers with Mathur and Tufts economist Gilbert Metcalf arguing that a carbon tax would be less regressive than conventionally assumed, if you model its effect over a person’s whole lifetime rather than considering their income in a particular year. "This suggests that concerns over the distributional impact of a shift to a carbon tax may be overstated," they conclude.

 

 


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