Economists who chaired the Council of Economic Advisers (CEA) for presidents on opposite ends of the political spectrum offered remarkably similar views and policy prescriptions for improving long-term economic growth in the United States economy at a panel discussion for undergraduates held March 1.
Martin Feldstein, who chaired the CEA under President Ronald Reagan from 1982 to 1984, and Martin Baily, who held the post from 1999 to 2001 under President Bill Clinton, agreed that the United States’ high tax rate on American companies doing business created an incentive for companies to keep their money outside of the United States.
“Companies are sitting on huge amounts of money that they are holding outside of the United States, and it would be nice if they brought that home and invested it in the U.S.,” Baily said. “We need to bring our corporate tax rate in alignment with other countries so that we’re not disincentivizing our corporations from locating here and we’re not creating a disincentive for foreign companies to invest in the United States…I think it’s silly that we create that incentive.”
Feldstein didn’t know Baily held that view, but he shared it, favoring a lower corporate tax. He explained that a French company with a subsidiary in Ireland will pay just 5 percent tax on profits if they bring the money back to France after paying Ireland’s taxes. An American company were in the same situation would have to pay a full 35 percent federal rate minus a credit on its profits, minus a credit for what it paid in Ireland.
“You think they bring the money back? No. They say there must be a better place in the world to shift those profits and expand businesses. Our tax is really counterproductive,” Feldstein said.
The two speakers also agreed on additional fiscal stimulus to stimulate economic growth, limiting entitlements, and raising the retirement age to keep Social Security solvent.
And both commented on the irony of their harmonious views –possibly disappointing to students who were expecting more conflict.
“As two economists who tend to see the economy the same way, it wouldn’t be that hard to work out an agreement [on fiscal issues] if you delegated the two of us,” Baily quipped.
Feldstein, who started his career as a health economist, also was critical of the Affordable Care Act. The act allows people to get health insurance when they discover they have a costly medical problem. Healthy young people are not signing up because they know they are bearing the cost of sicker people, so premiums are not a good deal from them, Feldstein said.
This adverse selection will lead to an insured pool of the sick and elderly, while younger, healthy people will stay out of the market until they, too, are sick and need coverage.
The penalty for opting out of the insurance is too weak to incentivize healthy people to enroll, he added. “We’re not going to have the level of participation to keep the system solvent,” he said.
“I think Obamacare is on a path to self-destruction. It’s not a question of whether it’s good or bad, but whether it can last.”
Baily said that Feldstein was too pessimistic about the new healthcare law and unfair to its central goals. The administration “took a huge amount of heat” for mandating health insurance coverage, precisely to offset the adverse selection Feldstein described, he argued. The mandate proved so unpopular that the penalties for opting out were weakened. “Because they backed away from really hammering people with penalties, then you get this loophole. You’re right. It’s a serious issue,” Baily told Feldstein.
“I’m not defending Obama care. I don’t think they did it that well,” Baily added. “Obama decided to make insurance comprehensive before he dealt with the cost problem,” Baily said.
The talk was conceived and organized by undergraduate students in collaboration with the institute and faculty advisers. Chris Denning, a fourth-year economics major in the College, moderated the panel discussion and planned the event with third-year Kayla Reinherz, who majors in economics and mathematics.
In a lively question-and-answer session following the discussion, Feldstein and Baily described how being an economist on the CEA is different than being an economist in any other government agency.
“The thing that’s unique about it, in comparison to other countries, is that the chairman of the Council of Economic Advisers reports directly to the president,” Feldstein said. Unlike other economists in the federal government who have to defend the policies of their department, the CEA has much more freedom to critically examine issues, he added.
The speakers also addressed a student question on rising interest rates on student loans, and suggested that federal subsidies should go to students majoring in fields that would be economically profitable after college. The suggestion was part of a larger discussion on the need for better training to help low-income individuals.
Feldstein said too much of the discussion around income inequality focuses on high-earning individuals, but there is too little focus on the poorest Americans.
“Poverty is a problem; inequality per se, is not a problem,” he said.
After the event, Rishi Sriram, a second-year in the College majoring in economics and mathematics, said that he was surprised by the policy prescriptions that Feldstein and Baily offered.
“Given the state of politics today, and how we normally hear everything is very hard to agree upon, issues are very divisive, anything in terms of restoring the economy is always difficult, it’s interesting to see how to economists on opposite sides of the pole agree on almost everything,” he said. “It’s the issue of where politics comes in versus economics.”
— Sam Levine