A paper, and publishing

Even at my point in life, the moment of publishing an academic paper is a one to celebrate, and a moment to reflect.

The New-Keynesian Liquidity Trap is published in the Journal of Monetary Economics -- online, print will be in December. Elsevier (the publisher) allows free access and free pdf downloads at the above link until November 9, and encourages authors to send links to their social media contacts. You're my social media contacts, so enjoy the link and download freely while you can!

The paper is part of the 2012-2013 conversation on monetary and fiscal policies when interest rates are stuck at zero -- the "zero bound" or "liquidity trap." (Which reprised an earlier 2000-ish conversation about Japan.)

At the time, new-Keynesian models and modelers were turning up all sorts of fascinating results, and taking them seriously enough to recommend policy actions. The Fed can strongly stimulate the economy with promises to hold interest rates low in the future. Curiously, the further in the future the promise, the more stimulative.  Fiscal policy, even totally wasted spending, can have huge multipliers. Broken windows and hurricanes are good for the economy. And though price stickiness is the central problem in the economy, lowering price stickiness makes matters worse. (See the paper for citations.)

The paper shows how tenuous all these predictions are. The models have multiple solutions, and the answer they give comes down to an almost arbitrary choice of which solution to pick. The standard choice implies a downward jump in the price level when the recession starts, which requires the government to raise taxes to pay off a windfall to government bondholders. Picking equilibria that don't have this price level jump, and don't require a jump to large fiscal surpluses (which we don't see) I overturn all the predictions. Sorry, no magic. If you want a better economy, you have to work on supply, not demand.

Today's thoughts, though, are about the state of academic publication.

I wrote the paper in the spring and summer of 2013, posted it to the internet, and started giving talks. Here's the story of its publication:

September 2013. Submitted to AER; NBER and SSRN working papers issued. Blog post.
June 2014. Rejected from AER. 3 good referee reports and thoughtful editor report.
October 2014. Submit revision to QJE.
December 2014. Rejected from QJE. 3 more thoughtful referee reports and editor report.
January 2015. Submit revision to JME.
April 2016. Revise and resubmit from JME. 3 detailed referee reports and long and thoughtful editor report.
June 2016. Send revision to JME
July 2017. Accept with minor revisions from JME. Many (good) comments from editor
August 2017. Final revision to JME
September 2017. Proofs, publication online.
December 2017. Published.

This is about typical. Most of my papers are rejected at 2-3 journals before they find a home, and 3-5 years from first submission to publication is also typical. It's typical for academic publishing in general. Parts of this process went much faster than usual. Three months for a full evaluation at QJE is fast. And once accepted, my paper sped through the JME. Another year or two in the pipeline between acceptance and publication is typical.

Note most journals count average time to decision. But what matters is average time to publication of the papers they publish, and what really counts is average time to publication in the journal system as a whole.

Lessons and thoughts?

• Academic journal publication is not a useful part of communication among researchers or the communication between research and policy. 

Anyone doing research on zero bound in new-Keynesian models in the last 4 years, and carrying on this conversation, interacted with the working paper version of my paper (if at all), not the published version. Any work relying only on published research is hopelessly out of date.

Interest rates lifted off the zero bound quite a while ago, so in the policy conversation this publication at best goes into the shelf of ideas to be revisited if the next recession repeats the last one with an extended period of zero interest rates , and if we see repeated invocation of the rather magical predictions of new-Keynesian models to cure it. If the next recession is a stagflation or a sovereign debt crisis, you're on your own.

Rather than means of communication,

• Journal publications have become the archive, 

the ark, the library, the place where final, and perfected versions of papers are carved in stone for future generations. (Some lucky papers that make it to graduate reading lists more than 5-10 years after their impact will be read in final form, but not most.)

And this paper is perfected. The comments of nine very sharp reviewers and three thoughtful editors have improved it substantially, along with at dozens of drafts.  Papers are a conversation, and it does take a village.  The paper also benefitted from extensive comments at workshops, and several long email conversations with colleagues.

The passage of time has helped as well. When I go back to a paper after 6 months to a year, I find all sorts of things that can be clearer. Moreover, in the time between first submission and last revision, I wrote four new papers in the same line, and insights from those permeate back to this one.

So, in the end, though the basic points are the same, the exposition is much better.  It's a haiku.  Every word counts.

But such perfection comes at a big cost, in the time of editors and referees, my time, and most of all the cost that the conversation has now moved on.

The sum length of nine referee reports, four reports by three editors, is much longer than the paper. Each one did a serious job, and clearly spent at least a day or two reading the paper and writing thoughtful comments. Moreover, though the reports were excellent, past the first three they by and large made the same points. Was all this effort really worthwhile? I think below on how to economize on referee time.

Of course, for younger people

• Journal articles are a branding and sorting device. 

Many institutions give tenure, chairs, raises, and other professional advancement based at least in part on numbers and placement of publications. For that purpose, timeliness of publication is less of a problem, but with a six year tenure clock at many places and five year lags, timeliness of acceptance the quality rating is a big problem. The sorting and branding function isn't working that well either. But having journals outsource quality evaluation was always an imperfect institution.  Maybe we should just have star ratings instead -- seriously, start up a website devoted to crowd-sourcing working paper evaluation. Or, perhaps tenure committees will have to actually start reading papers. I don't think the journals see this as their main function either. They're set up to publish papers, not judge people's tenure, so improving journals as a tenure granting mechanism will be a hard sell.

There is some good news that this data point represents, relative to state of journal publishing 15-20 years ago. (See Glenn Ellison's superb "The slowdown in the economics publishing process," JSTOR, undated, one of my proudest moments as a JPE editor.)

• Journals are doing fewer rounds, more desk rejection, more one round and up or out.  

Journals had gotten in to a rut of asking for round after round of revisions. Now there is a strong ethic of either rejecting the paper, or doing one round of revisions and then either publishing with minor changes or not. Related,

• Journal editors are more decisive. 

Journal editors have become, well editors.  The referees provide advice, but the editor thinks about it, decides which advice is good and not, and makes the final call. Editors used to defer decisions to referees, which is part of the reason why there were endless revisions.  This change is very good. Referees have little incentive to bring the process to a close, and they don't see the pipeline of papers to the journal. They are not in a good position to find the right balance of perfection and timeliness.

In my case, editors were very active. The referees wrote thoughtful reports, but largely made similar points. In fact, the strongest advice to reject came at the JME. But the AER and QJE editors were not impressed in the end by the paper, and the JME editor was.

So, with this state of affairs in mind, how might we all work to improve journals and the publication process?

I will take for granted that greater speed, and making journals more effective at communication and not just archiving and ranking is important. For one reason, to the extent that they continue to lose the communication function, people won't send articles there. Already you can notice that after tenure, more and more economists start publishing in conference volumes, invited papers, edited volumes, and other outlets. (blogs!) The fraction willing to take on this labor of love for journal publication declines quickly with age.  Research productivity and creativity does not take quite such a parallel decline. (I hope!)

Always the free-market economist, I note that conference volumes, edited volumes, and solicited papers in regular journals seem to be healthy and increasing, which is a natural response to journal slowdown. This is a way to get papers in print more quickly.  In the early days of the internet I had a rule never to publish in volumes, as they disappeared to library shelves and could not be found electronically. Now many of them have solved that problem. The NBER macro annual and Carnegie-Rochester conferences are good examples. The Review of Finance editor recently solicited my "Macro-finance" essay which therefore sped through publication. My active editors are also often taking a more active role in soliciting promising working papers. This helps to break the editor-to-paper match. But this isn't an ideal state of affairs either. Conference volumes tend towards commissioned work. Original work by people out of the social network of the conference organizers and editors has a tough time. (The market responds, organize more conferences.)

Suggestion one:

• Adopt the golden rule of refereeing

Around any economist cocktail party, there is a lot of whining that journals should do x y and z to speed things up. I start with what you and I can do. It is: do unto others as you would have them do unto you. If you complain about slow journals, well, how quickly do you turn around reports?

My recommendation, which is the rule I try to follow: Answer the email within a day. Spend an hour or two with the paper, and decide if you will referee it or not. If not, say so that day. If you can give a quick reaction behind your reason, that helps editors. And suggest a few other referees. Often editors aren't completely up to date on just who has written what and who is an ideal fit. If you're not the ideal fit, then help the editor by finding a better fit, and do it right a way.

If you agree to do a report, do it within a week. If you can't do it this week, you're not likely to be able to do it 5 weeks from now, and say no.

More suggestions:

• Reuse referee reports

Do we really need nine referee reports to evaluate one paper? I always offer editors of journals to whom I send rejected papers the option of using the existing referee reports, along with my response as to how I have incorporated or not their suggestions. Nobody has ever taken me up on this offer. Why not? Especially now that editors are making more decisions? Some people mistakenly view publication as a semi-judicial proceeding, and authors have a "right" to new opinions. Sorry, journals are there to publish papers. 

Why not open refereeing? The report, and author's response, go to a public repository that others can see. Why not let anyone comment on papers? Authors can respond. Often the editor doesn't know who the best person is to referee a paper. Maybe a conference discussant has a good insight. At least one official reviewer could benefit from collecting such information. Some science journals do this. 

Some people would hate this. OK, but perhaps that should be a choice. Fast and public, or slow and private. 

While we're at it, what about

• Simultaneous submission. Competition (heavens!)  

Journals insist that you only send to one journal at a time. And then wait a year or more to hear what they want to do with it. Especially now that we are moving towards the editor-centric system, and the central question is a match with editor's tastes, why not let journal editors share reviewer advice and compete for who wants to publish it? By essentially eliminating the sequential search for a sympathetic editor, this could speed up the process substantially.

I don't know why lower-ranked journals put up with this. It's the way that the top journals get the order flow of best papers. Why doesn't another journal say, you can send it to us at the same time as you send it to the AER. We'll respect their priority, but if they don't want it we will have first right. The AER almost does this with its field journals. But the JME could get more better papers faster by competing on this dimension.

The journals say they do this to preserve the value of their reviewer time. But with shared or open reviews, that argument falls apart.

We advocate competition elsewhere. Why not in our own profession?

Update: An email correspondent brings up a good point:

• Journals should be the forum where competing views are hashed out. 

They should be part of the "process of formalizing well argued different points of views --  not refereeing "the truth." We dont know the truth. But hopefully get closer to it by arguing. [In public, and in the journals] The neverending refereeing [and editing and publishing] process is shutting down the conversation."

When I read well argued papers that I disagree with, I tend to write "I disagree with just about everything in this paper. But it's a well-argued case for a common point of view. If my devastating report does not convince the author, the paper should be published, and I should write up my objections as a response paper." 

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Trade Haiku

George Shultz and Martin Feldstein, in the Washington Post

If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic. 

If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country. 

Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.

That's not an excerpt, it's the whole thing. Someday, I will learn to be this concise.

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Don't Believe the Economic Pessimists

Source: Wall Street Journal

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming...

Keep reading here, the Wall Street Journal Oped. I'll post the whole thing in 30 days as usual.

Somehow the WSJ thinks anyone is interested in growth and serious policy on the eve of the election. Or maybe they were just tired of Trump vs. Clinton and needed to fill space.  At any rate, it might give you a little reprieve from the election coverage.

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EconTalk

I did an EconTalk Podcast with Russ Roberts. The general subject is economic growth, the reasons it seems to be slipping away from us and policies (or non-policies) that might help.

As in other recent projects (growth essay, testimony) I'm trying to synthesize, and also to find policies and ways to talk about them that avoid the stale left-right debate, where people just shout base-pleasing spin ever louder. "You're a tax and spend socialist" "You just want tax cuts for your rich buddies" is getting about as far as "You always leave your socks on the floor" "Well, you spend the whole day on the phone to your mother."

We did this as an interview before a live audience, at a Chicago Booth alumni event held at Hoover, so it's a bit lighter than the usual EconTalk. This kind of thought helps the synthesis process a lot for me.  Russ' pointed questions make me think, as did the audience in follow up Q&A (not recorded). Plus, it was fun.

I always leave any interview full of regrets about things I could have said better or differently. The top of the regret pile here was leaving a short joke in response to Russ' question about what the government should spend more on. Russ was kindly teeing up the section of the growth essay "there is good spending" and perhaps "spend more to spend less" ideas in several other recent writings. It would have been a good idea to go there and spend a lot more time on the question.


From the growth essay, I think the government could profitably spend a lot more money on the justice system. That so many of our fellow citizens rot in jail awaiting trials, that the vast majority never receive a trial anyway but a hasty plea-bargain, that their legal representation is so thin, is a disgrace -- and causing huge problems. If a wrongly accused young man spends two years in jail before charges are dropped, the consequences for him and his family are awful. Business relies on a speedy and efficient justice system to adjudicate commercial disputes, and that seems to be falling apart too, partly for lack of resources.  The cost here is peanuts compared to, say, peanut subsidies.

Our public infrastructure doesn't just consist of steel and asphalt. The public software needs investment as well, or more.

Public health is one of the most essential public goods. Of all the civilization-ending scenarios you can think of, nuclear war and a pandemics top my list. Many past pandemics followed a surge in globalization -- the plague of the 1350s, that wiped out half or more of the population; the smallpox that wiped out native America in the 1500s, the 1918 flu. (Larry Summers has a good article on this point.) We are ripe for antibiotics to stop working and new diseases to spread catastrophically, if not among humans among the plants and animals on which we depend. Don't count on the UN and the WHO.

The government can profitably fund basic research. "Yes, 95% of funded research is silly. Yes, the government allocates money inefficiently. Yes, research should also attract private donations. But the 5% that is not silly is often vital, and can produce big breakthroughs." (Basic research is not the same thing as subsidies for commercializing research.)

Yes, Martha, I should have said, there are public goods here and there.

Of course, more spending on things like these does not imply more spending overall. They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.) Of course, one must also spend wisely and use the results wisely. And one could add a lot to the list. But repeating a fun joke about spending is not the right answer.

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Testimony 2

On the way back from Washington, I passed the time reformatting my little essay for the Budget committee to html for blog readers. See below. (Short oral remarks here in the last blog post, and pdf version of this post here.)

I learned a few things while in DC.

The Paul Ryan "A better way" plan is serious, detailed, and you will be hearing a lot about it. I read most of it in preparation for my trip, and it's impressive. Expect reviews here soon. I learned that Republicans seem to be uniting behind it and ready to make a major push to publicize it. It is, by design, a document that Senatorial and Congressional candidates will use to define a positive agenda for their campaigns, as well as describing a comprehensive legislative and policy agenda.

"Infrastructure" is bigger in the conversation than I thought. But since there is no case that potholes caused the halving of America's trend growth rate, do not be surprised if infrastructure fails to double the trend growth rate. It's also a bit sad that the most common growth idea in Washington is, acording to my commenters, about 2,500 years old -- employment on public works.

Washington conversation remains in thrall to the latest numbers. There was lots of buzz at my hearing about a recent census report that median family income was up 5%. Chicagoans used to get excited about the 40 degree February thaw.

The quality can be very very good. Congressman Price, the chair of my session, covered just about every topic in my testimony, and possibly better. Congressional staff are really good, and they are paying attention to the latest. If you write policy-related economics, take heart, they really are listening.

The questions at my hearing pushed me to clarify just how will debt problems affect the average American. What I had not said in the prepared remarks needs to be said. If we don't get an explosion of growth, the US will not be able to make good on its promises to social security, health care, government pensions, credit guarantees, taxpayers, and bondholders. Something's got to give. And the growing size of entitlements means they must give. Even a default on the debt, raising taxes to the long-run Laffer limit, will not pay for current pension and health promises. Those will be cut. The question is how. If we wait to a fiscal crisis, they will be cut unexpectedly and by large amounts, leaving people who counted on them in dire straits. Greece is a good example. If we make sensible sustainable promises now, they will be cut less, and people will have decades to adjust.


Ok, on to html testimony:

Growing Risks to the Budget and the Economy.

Testimony of John H. Cochrane before the House Committee on Budget.

September 14 2016

Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.

I am John H. Cochrane. I am a Senior Fellow of the Hoover Institution at Stanford University¹. I speak to you today on my own behalf on not that of any institution with which I am affiliated.

Sclerotic growth is our country's most fundamental economic problem.² From 1950 to 2000, our economy grew at 3.6% per year.³ Since 2000, it has grown at barely half that rate, 1.8% per year. Even starting at the bottom of the recession in 2009, usually a period of super-fast catch-up growth, it has grown at just over 2% per year. Growth per person fell from 2.3% to 0.9%, and since the recession has been 1.3%.


The CBO long-term budget analysis⁴ looks out 30 years, and forecasts roughly 2% growth. On current trends that is likely an over-estimate, as it presumes we will have no recessions, or that future recessions will have not have the permanent effects we have seen of the last several recessions. If we grow at 2%, the economy will expand by 82% in 30 years, almost doubling.⁵ But if we can just get back to the 3.6% postwar normal growth rate, the economy will expand by 194%, almost tripling instead. We will add the entire current US economic output to the total. In per-person terms, a 1.3% trend gives the average American 48% more income in 30 years. Reverting to the postwar 2.3% average means 99% more income, twice as much. And economic policy was not perfect in the last half of the 20th century. We should be able to do even better.

Restoring sustained, long-term economic growth is the key to just about every economic and budgetary problem we face.

Nowhere else are we talking about doubling or not the average American's income.⁶

Nowhere else are we talking about doubling or not Federal revenues. Long-term Federal revenues depend almost entirely on economic growth. In 1990, the Federal Government raised $1.6 trillion inflation-adjusted dollars. In 2016, this has doubled to $3.1 trillion. Wow! Did the government double tax rates? No. The overall federal tax rate stayed almost the same -- 18.0% of GDP in 1990, 18.8% of GDP today. Income doubled.

Whether deficits and debt balloon, whether we our government can pay for Social Security and health care, defend the country, and fund other goals such as protecting the environment, depend most crucially on economic growth.

Why has growth halved? Some will tell you that the economy is working as well as it can, but we've just run out of new ideas.⁷ A quick tour of the Silicon Valley makes one suspicious of that claim.

Others will bring you novel and untested economic theories: we suffer an ill-defined "secular stagnation" that requires massive borrowing and spending, even wasted spending. The "multiplier" translating government spending to output is not one and a half, and a temporary expedient which can briefly raise the level of income in a depression, but six or more, enough to finance itself by the larger tax revenues which larger output induces --a proposition long derided of the "supply side" --and it can now kick off long-term growth.⁸ Like 18th century doctors to whom disease was an imbalance of humors, modern macroeconomic doctors have one diagnosis and remedy for all the complex ills that can befall a modern economy: "demand!"

I'm here to tell you the most plausible answer is simple, clear, sensible, and much more difficult. Our legal and regulatory system is slowly strangling the golden goose of growth. There is no single Big Fix. Each market, industry, law, and agency is screwed up in its own particular way, and needs patient reform.

America is middle aged, out of shape and overweight. One voice says: well, get used to it, buy bigger pants. Another voice says: 10 day miracle detox cleanse! I'm here to tell you that the only reliable answer is good old-fashioned diet and exercise.

Or, a better metaphor perhaps: our economy, legal and regulatory system has become like a hoarder's house. No, there isn't a miracle organizer system. We have to patiently clean out every room.

Economic regulation, law and policy all slow growth by their nature. Growth comes from new ideas, new products, new processes, new ways of doing things, and most of these embodied in new companies. And these upend old companies, and displace their workers, both of whom come to Washington pleading that you save them and their jobs. It is a painful process. It is natural that the administration, regulatory agencies, and you, listen and try to protect them. But every time we protect an old company, an old industry, or an old job, from innovation and competition, we slow down growth.

How do we solve this problem and get back to growth? Our national political and economic debate has gotten stale, each side repeating the same base-pleasing talking points, but making no progress persuading the other. Making one or the other points again, or louder, will get us nowhere. I will try, instead, to find policies that think outside of these tired boxes, and that can appeal to all sides of the political spectrum.

Rather than "more government" or "less government," let's focus on fixing government. We need above all a grand simplification of our economic, legal, and political life, so that government does what it does competently and efficiently.

Regulation: fix the process.

"There's too much regulation, we're stifling business. No, there's too little regulation, businesses are hurting people." Or so goes the tired argument. Regulation is strangling business investment, and especially the formation of new businesses. But the main problem with regulation is how it's done, not how much. If we fix regulation, the quantity will take care of itself. We can agree on smarter regulation, better regulation, not just "more" or "less" regulation.⁹

Regulation is too discretionary --you can't read the rules and know what to do, you have to ask for permission granted on regulators' whim. No wonder that the revolving door revolves faster and faster, oiled by more and more money.

Regulatory decisions take forever. Just deciding on the Keystone Pipeline or California's high speed train --I pick examples from left and right on purpose --takes longer than it did to build the transcontinental railroad in the 1860s. By hand.

Regulation has lost rule-of-law protections. You often can't see the evidence, challenge witnesses, or appeal. The agency is cop, prosecutor, judge, jury and executioner all rolled in to one. [And, a Congressman pointed out during the discussion, recipient of collected fines.]

Most dangerous of all, regulation and associated legal action are becoming more politicized. Each week brings a new scandal. Last week¹⁰, we learned how the Government shut down ITT tech, but not the well-connected Laureate International. The IRS still targets conservative groups¹¹. The week before, we learned how the company that makes Epi-pens, headed by the daughter of a Senator, got the FDA to block its competitors, Congress to mandate its products, and jacked up the price of an item that costs a few bucks to $600. This is a bi-partisan danger. For example, presidential candidate Donald Trump has already threatened to use the power of the government against people who donate to opponents' campaigns.¹²

America works because you can lose an election, support an unpopular cause, speak out against a policy you disagree with, and this will not bring down the attentions of the IRS, the EPA, the NLRB, the SEC, the CFPB, the DOJ, the FDA, the FTC, the Department of Education, and so forth, who can swiftly put you out of business even if eventually you are proven innocent, or just slow-roll your requests for permissions until you run out of money.

This freedom does not exist in much of the world. The Administrative state is an excellent tool for cementing power. But when people can't afford to lose an election, countries come unglued. Do not let this happen in the US.

Congress can take back its control of the regulatory process. Write no more thousand-page bills with vague authorizations. Fight back hard when agencies exceed their authorization. Insist on objective and retrospective cost benefit analysis. Put in rule-of law protections, including discovery of how agencies make decisions. Insist on strict timelines --if an agency takes more than a year to rule on a request, it's granted. [I later learned this is called a "shot clock" in Washington, a nice metaphor.]

Health care and finance are the two biggest new regulatory headaches. The ACA and Dodd-Frank aren't working, and are important drags on employment and economic growth. Simple workable alternatives exist. Implement them.

The real health care problem is not how we pay for health care, but the many restrictions on its supply and competition.¹³ If hospitals were as competitive as airlines, they would work darn hard to heal us at much lower --and disclosed! --prices. If the FDA did not strangle new medicines and devices, even generics, prices would fall.

Competition is always the best disinfectant, guarantor of good service and low prices. Yet almost all uncompetitive markets in the US are uncompetitive because some law or regulation keeps competitors out.

Rather than guarantee bank debts, and unleash an army of regulators to make sure banks don't risk too much, we should instead insist that banks get their money in ways that do not risk crises, primarily issuing equity and long-term debt. Then banks can fail just like other companies, and begin to compete just like other companies.¹⁴

"The planet is dying, control carbon!" "Your crony energy boondoggles and regulations are killing the economy!" Well, that argument is not getting us anywhere, is it? The answer is straightforward: A simple carbon tax in exchange for elimination of all the growth-killing, intrusive, cronyist, and ineffective micromanagement. We can continue to argue about the rate of that tax, but it will both reduce more carbon, and increase more growth, than the current ineffective policies --and stagnant debate.

None of these recommendations are ideological or partisan. These are just simple, clean-out-the-junk, workable ways to get our regulatory system to actually work, for its goal of protecting consumers and the environment, at minimal economic and political damage.

Social programs: Fix the incentives.

"Cut spending, or the debt will balloon!" "Raise spending or people will die in the streets!" That's getting nowhere too. And it ignores central problems.

In many social programs, if you earn an extra dollar, you lose a dollar or more of benefits. Many programs have cliffs, especially in health care and disability, where earning one extra dollar triggers an enormous loss. Even when one program cuts benefits modestly with income, the interaction of many programs makes work impossible.¹⁵ No wonder that people become trapped. We need to fix these disincentives. Doing so will help people better. If we fix the incentives, though it may look like we spend more, in the end we will spend less --and encourage economic growth as well as opportunity.

Spend more to spend less. "Spending is out of control! We need to spend less or there will be a debt crisis!" "Oh there you go being heartless again. We need to invest more in programs that help Americans in need." I feel like I'm at a dinner party hosted by a couple in a bad marriage. This isn't getting us anywhere.

It is important to limit Federal spending. However, we tend to just limit the appearance of spending by moving the same activities off the books. Off-the-books spending does the same economic damage. Or more.

For example, we allow an income tax deduction for mortgage interest, in order to subsidize homeownership. From an economic point of view, this is exactly the same thing as collecting higher taxes, and then sending checks to homeowners. It looks like we're taxing and spending less than we really are. But from an economic growth point of view, it's the same thing.

Actually, it's worse, because it adds unfairness and inefficiency. Suppose a colleague proposes a bill to you: The U.S. Treasury will send checks to homeowners, but high income people get much bigger checks, as will people who borrow a lot, and people who refinance often and take cash out. People with low incomes, who save up to buy houses, or don't refinance, get a lot less. You would say, "You're out of your mind!" But that's exactly what the mortgage interest deduction achieves!

If we were to eliminate the mortgage deduction, and put housing subsidies on budget, where taxpayers can see where their money is going, the resulting homeowner subsidy would surely be a lot smaller, much more progressive, helping lower income people, better targeted at getting people in houses, and less damaging of savings and economic growth. Both Republicans and Democrats should rejoice. Except the headline amount of taxing and spending will increase. Well, spend more to spend less.

We allow a tax deduction for charitable deductions. This is exactly the same thing as taxing more, but then sending checks to non-profits as matching contributions --but much larger checks for contributions from rich people than from poorer people. Then, many "non-profits" spend a lot of money on private jet travel, executive salaries, and political activities. Actual on-budget federal spending, convoluted and inefficient as it is, at least has a modicum of oversight and transparency. If we removed the deduction, but subsidized worthy charities, with transparency and oversight, we'd do a lot more good, and probably overall tax less and spend less. Except the headline amount of taxing and spending might increase. Well, spend more to spend less.

Mandates are the same thing as taxing and spending. Many European countries tax a lot, and then provide services, like health insurance. We mandate that employers provide health insurance. It looks like we're taxing and spending less, but we're not. A health insurance mandate has exactly the same economic effects as a $15,000 head tax on each employee, financing a $15,000 health insurance voucher.

Economics pays no heed to budget tricks. Spending too much rhetorical effort on lowering taxes and spending induces our government to such tricks, with the same growth-destroying effects. If you want economic growth, treat every mandate as taxing and spending.

Taxes: break up the argument.

The outlines of tax reform have been plain for a long time: lower marginal rates, broaden the base by getting rid of the massive welter of special deals. But it can't get done. Why not?

When we try to fix taxes,¹⁶ we argue about four things at once: 1) What is the right structure for a tax code? 2) What is the right level of taxes, and therefore, of spending? 3) What activities should the government subsidize -- home mortgages, charitable contributions, electric cars, and so on? 4) How much should the government redistribute income?

Tax reforms fail because we argue about all these together. For example, the Bowles-Simpson commission got to an improvement on the structure of taxes, but then the reform effort fell apart when the Administration wanted more revenue and congressional Republicans less.

I am back at my dysfunctional dinner party. Sometimes, in politics as in marriage, it is wise to bundle issues together, each side accepting a minor loss to ensure what they see as a major gain. You clean up your socks, I'll clean up my makeup. Sometimes, however, we bundle too many issues together, and the result is paralysis, as each side vetoes a package of improvements over a small issue. Then, it's better to work on the issues separately.

So, let's fix taxes by separating these four issues, in four commissions possibly, or better in four completely separate sections of law.

1) Structure. Agree on the right structure of the tax code, with its only goal to raise revenue at minimal economic distortion, but leave the rates blank.

2) Rates. Determine the rates, without touching the structure of the tax code. A good tax code should last decades. Rates may change every year, and likely will be renegotiated every four. But those who want higher or lower rates know they can agree on the structure of the tax code.

3) Separate the subsidy code from the tax code. Mortgage interest subsidies? Electric car subsidies? Sure, we'll talk about them, but separately. Then, we don't have to muck up raising revenue for the government with subsidies, and the budgetary and economic impact of subsidies can be evaluated on their own merits

4) Separate the redistribution code from the tax code. Then we don't muck up raising revenue for the government with income transfers.

The main point is that by separating these four elements of law, each with fundamentally different purposes, we are much more likely to make coherent progress on each. You need not oppose beneficial aspects of an economically efficient tax simplification, say, if you wish to have a greater level of redistribution --well, at least any more than you might oppose any random bill in order to force your way on that issue.

Some thoughts on how each of these might work:

Structure. The economic damage of taxation is entirely about "marginal'' rates --if you earn an extra dollar, how much do you get to enjoy it, after all taxes, federal, state, local, sales, estate, and so forth. Economics has really little to say about how much taxes people pay. The economists' ideal is a tax system in which people pay as much as the Government needs --but each extra dollar earned is tax-free. Politics, of course, focuses pretty much on the opposite, how much people pay and ignoring the economically-distorting margins.

Thus, if you ask 100 economists, "now, forget politics for a moment --that's our job --and tell me what the right tax code is, with the only objective being to raise revenue without distorting the economy,'' the pretty universal answer will be a consumption tax --with no corporate tax, income tax, tax on savings or rates of return, estates, or anything else, and essentially no deductions. (They will then say "but..." and go on to demand subsidies and income redistribution, at which time you have to assure them too that we'll discuss these separately.)

A massive simplification of the tax code is, in my opinion, as or more important than the rates --and it's something we're more likely to agree on. America's tax code is an obscenely complex cronyist nightmare.

For example, that's why I favor, and you should seriously consider, eliminating the corporate tax. Corporations never pay any taxes. All money they send to the government comes from higher prices, lower wages, or lower returns to shareholders --and mostly the former two. If you tax people who receive corporate profits, rather than collecting taxes from higher prices and lower wages, you will have a more progressive tax system.

But more importantly, if you eliminate the corporate tax, you will eliminate the constant stream of lobbyists in your offices each day asking for special favors.

Far too many businesses are structured around taxes, and far too many smart minds are spending their time devising corporate tax avoidance schemes and lobbying strategies. A much simpler tax code even with sharply higher rates --but very clear rates, that we all know about and can plan on --may well have less economic distortion than a massively complex code, with high statutory rates, but a welter of complex schemes and deductions that result in lower taxes.

Subsidy code. Tax expenditures --things like deductions for mortgage interest, employer provided health care, charitable contributions, and the $10,000 credit my wealthy Palo Alto neighbor got from the taxpayers for buying a Tesla -- are estimated at $1.4 trillion,¹⁷ compare with $3.5 trillion Federal Receipts and $4 trillion Federal Expenditures.¹⁸ Our Federal Government is really a third larger than it looks.

While the subsidy code could consist of a separate discussion of tax expenditures, it would be far better for the rules of the subsidy code to be: all subsidies must be on budget, where we can all see what's going on.

Redistribution. Even a consumption tax can be as progressive as one wants. One can use the regular income tax code with full deduction of savings and omitting capital income, thus taxing high consumption at higher rates and low consumption at lower rates.

Again, however, it might well be more efficient to integrate income redistribution with social programs. Put it on budget, and send checks to people. Yes, that makes spending look larger, but sending a check is the same thing as giving a tax break. And spending can be more carefully monitored.

Infrastructure

Infrastructure is all the rage¹⁹. America needs infrastructure. Good infrastructure, purchased at minimum cost, that passes objective cost-benefit criteria, built promptly, can help the economy in the long run. Soft infrastructure --a better justice system, for example --matters as much as hard infrastructure --more asphalt.

However, there is no case that the halving of America's growth rate in the last 20 years is centrally due to potholes and rusting bridges. Poor infrastructure is not the cause of sclerosis, so already one should be wary of infrastructure investment as the central plan to cure that sclerosis.

The claim that infrastructure spending will lift the economy out of its doldrums lies on the "multiplier" effect, that any spending, even wasted, is good for the economy. That is a dubious proposition, especially when the task is to raise the economy by tens of trillions, over decades.

Modern infrastructure is built by machines, and not many people; even less people who do not have the specialized skills. A Freeway in California will do little to help employment of a high school dropout in New York, or a middle-aged mortgage broker in New Jersey. Neither knows how to operate a grader.

The problem with infrastructure is not lack of money. President Obama inaugurated a nearly trillion dollar stimulus plan 8 years ago. His Administration found out there are few shovel-ready projects in America today. They're all tied up waiting for historic review, environmental review, and legal challenges.

The problem with infrastructure is a broken process. Put a time limit on historic, environmental, and other reviews. Require serious, objective, and retrospective cost-benefit analysis. Repeal Davis-Bacon and other contracting requirements that send costs soaring. If the point is infrastructure it should be infrastructure, not passing money around. You ought to be able to agree on more money in return for assurance that the money is wisely spent.

Debt and deficits

This hearing is also about budgets and debts, which I have left to the end. Yes, our deficits are increasing. Yes, every year the Congressional Budget Office declares our long-term promises unsustainable.

I have not emphasized this problem, though in my opinion it is centrally important, and I think I was invited here to say so.

Recognize that computer simulations with hockey-stick debt, designed to frighten into submission a supporter of what he or she feels is necessary government spending, are as ineffective as computer simulations with hockey-stick temperatures, designed to frighten into submission a supporter of current economic growth and skeptic of draconian energy regulation. Yelling about each, louder, is not going to be productive.

And there are many voices who tell you debt is not a problem. Interest rates are at record lows. Why not borrow more, and worry about paying it back later? So, let me offer a few out of the box observations, and suggestions that you might agree on.

It is useful to clarify why debt is a problem. The case that large debts will slowly and inexorably push up interest rates, and crowd out investment, is hard to make in this era of ultra-low rates. Debt does place a burden of repayment on our children and grandchildren, but if we have reasonable economic growth they will be wealthier than we are.

The biggest danger that debt poses is a crisis.

Debt crises, like all crises that really threaten an economy and society, do not come with decades of warning. Do not expect slowly rising interest rates to canary the coalmine. Even Greece could borrow at remarkably low rates. Until, one day, it couldn't, with catastrophic results.

The fear for the US is similar. We will have long years of low rates. Until, someday, it is discovered that some books are cooked, and somebody owes a lot of money that they can't pay back, and people start to question debts everywhere.

For example, suppose Chinese debts blow up, and southern Europe as well. Both Europe and China will start selling Treasury debt quickly. Suppose at the same time that student loans, state and local pensions, and state governments are blowing up, along with some large U.S. companies, and banks under deposit insurance. A recession looms, which the US will want to fight with fiscal stimulus. The last crisis occasioned about $5 trillion of extra borrowing. The next one could double that.

So, the U.S. needs to quickly borrow additional trillions of dollars, while its major customers --foreign central banks --are selling. In addition, the U.S. borrows relatively short term. Each year, the U.S. borrows about $7 trillion to pay off $7 trillion of maturing debt, and then more to cover the deficit.

Imagine all this happens 10 years from now, with social security and medicare unresolved and increasing deficits. The CBO is still issuing its annual warnings that our debt is unsustainable. Now, bond investors are willing to lend to the US government so long as they think someone else will lend tomorrow to pay off their loans today. When they suspect that isn't true, they pull back and interest rates spike.

But our large debts leave our fiscal position sensitive to interest rate rises. At 100% debt to GDP ratio, if interest rates rise to just 5%, that means the deficit rises by 5 percentage points of GDP, or approximately $1 Trillion extra dollars per year. If bond investors were worried about sustainability already, an extra trillion a year of deficits makes it worse. So they demand even higher interest rates. Debt that is easily financed at 1% rates is not sustainable at 5% rates and a catastrophe at 10% rates --if you have a large debt outstanding.

This is a big part of what happened to Greece and nearly happened to Italy. At low interest rates, they are solvent. At high interest rates, they are not.

Debt crises are like an earthquakes. It's always quiet. People laugh at you for worrying. Buying insurance seems like a waste of money. Until it isn't.

So, the way to think about the dangers of debt is not like a predictable problem that comes to us slowly. View the issue as managing a small risk of a catastrophic problem, like a war or pandemic.

The easy answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Fix the indexing, improve the incentives for older people to keep working. Convert medicare to a premium support policy.

The harder problems are those less recognized. Underfunded pensions, widespread credit guarantees, and explicit or implicit too big to fail guarantees add tinder to the fire. Dry powder and good credit are invaluable.

Above all, undertake a pro-growth economic policy. We grew out of larger debts after World War II; we can do that again.

You can also buy some insurance. Every American household that takes out a mortgage faces the choice: fixed rate, or variable rate? The fixed rate is a little higher. But it can't go up, no matter what happens. The variable rate starts out lower. But if interest rates rise, you might not be able to make the payments, and you might lose the house. That is what happens to countries in a debt crisis.

For the US, this decision is made by the Treasury Department and the Federal Reserve. The Treasury has been gently lengthening the maturity of its borrowings. The Federal Reserve has been neatly undoing that effort.

Both Treasury and Fed need direction from Congress. The Treasury does not regard managing risks to the budget posed by interest rate rises as a central part of its job, and the Fed does not even consider this fact. Congress needs to decide who is in charge of the maturity structure of US debt, and guide the Treasury. I hope that guidance leans towards the fixed rate plan. By issuing long-term debt --I argue in fact for perpetuities, that simply pay a $1 coupon forever with no fixed roll over date -- and engaging in simple swap transactions that every bank uses to manage interest rate risk, the U.S. can isolate itself from a debt crisis very effectively.²⁰ But at least ask that fixed or floating interest rate question and make a decision.

As I have warned against focusing too much attention on on-budget spending, so let me warn against too much attention on deficits rather than spending. If you focus on debt and deficits, the natural inclination is to raise tax rates. Europe's experience in the last few years argues against "austerity" in the form of sharply higher tax rates, as always adding to the disincentive to hire, invest, or start innovative businesses.

Concluding comments

I have sketched some novel and radical-sounding approaches to restoring robust economic growth. Economic growth, together with commonsense fiscal discipline are keys to solving our budget problems.

This is not pie in the sky. These are simple straightforward steps, none controversial as a matter of economics. And there really is no alternative. Ask of other approaches: Does this at all plausibly diagnose why America's growth rate has fallen in half? Does the cure at all plausibly address the diagnosis? Is the cure based on a reasonable causal channel that you can actually explain to a constituent? Does the cure have a ghost of a chance of having a large enough effect to really make a difference?

You may object that fundamental reform is not "politically feasible." Well, what's "politically feasible" can change fast in this country. This is an exciting time politically. The people are mad as hell, and they're not taking it any more. They are ready for fundamental changes.

Furthermore, it is time for Congress to take the lead. These are properly Congressional matters, and no matter who wins the Presidential election you are unlikely to see leadership in this direction.

Winston Churchill once said that Americans can be trusted to do the right thing after we've tried everything else. [NB: apparently this is an urban legend. Oh well, it's a good quip if not a quote] Well, we've tried everything else. It's time to prove him right.

------

<sup>1. You can find a full CV, a list of all affiliations, and a catalog of written work at http://faculty.chicagobooth.edu/john.cochrane/index.htm. ↩

2.This testimony summarizes several recent essays. On growth and for an overview, see "Economic Growth." 2016. In John Norton Moore, ed., The Presidential Debates Carolina Academic Press p. 65-90. http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_growth.pdf; "Ending America's Slow-Growth Tailspin." Wall Street Journal, May 3 2016. http://www.wsj.com/articles/ending-americas-slow-growth-tailspin-1462230818, and "Ideas for Renewing American Prosperity" Wall Street Journal July 4 2014. http://online.wsj.com/articles/ideas-for-renewing-american-prosperity-1404777194. ↩

3. https://fred.stlouisfed.org/series/GDPCA, Continuously compounded annual rates of growth. Per capita https://fred.stlouisfed.org/series/A939RX0Q048SBEA ↩

4. https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51580-LTBO-2.pdf ↩

5. 100*exp(30 x 0.02) = 182. 100*exp(30*0.035) = 286. ↩

6. As an example of agreement on the fundamental importance of growth among economists of all political leanings, see Larry Summers, "The Progressive Case for Championing Pro-Growth Policies," 2016. http://larrysummers.com/2016/08/08/the-progressive-case-for-championing-pro-growth-policies/ ↩

7. For an excellent recent exposition of this view, see Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton University Press 2016. http://press.princeton.edu/titles/10544.html ↩

8. An influential example of these views, including self-financing stimulus: J. Bradford DeLong and Lawrence H. Summers, "Fiscal Policy in a Depressed Economy" Brookings Papers on Economic Activity. Spring 2012. https://www.brookings.edu/bpea-articles/fiscal-policy-in-a-depressed-economy/. Interestingly, DeLong and Summers condition their view on interest rates stuck at zero, a cautionary limitation that current stimulus advocates seem to have forgotten. ↩

9. See "Rule of Law in the Regulatory State." 2015. http://faculty.chicagobooth.edu/john.cochrane/research/papers/ rule_of_law_and_regulation essay.pdf ↩

10. http://www.wsj.com/articles/the-clinton-for-profit-college-standard-1473204250 ↩

11. http://www.washingtontimes.com/news/2016/sep/7/irs-refuses-to-abandon-targeting-criteria-used-aga/ ↩

12. http://www.usatoday.com/story/news/politics/onpolitics/2016/02/22/trump-ricketts-family-better-careful/80761060/ ↩

13. See "After the ACA: Freeing the market for health care." 2015. In Anup Malani and Michael H. Schill, Eds. The Future of Healthcare Reform in the United States, p. 161-201, Chicago: University of Chicago Press. http://faculty.chicagobooth.edu/john.cochrane/research/papers/after_aca_published.pdf ↩

14. See "Toward a run-free financial system." 2014. In Across the Great Divide: New Perspectives on the Financial Crisis, Martin Neil Baily and John B. Taylor, Editors, Stanford: Hoover Institution Press, p. 197-249. http://faculty.chicagobooth.edu/john.cochrane/research/papers/across-the-great-divide-ch10.pdf, and "A Blueprint for Effective Financial Reform." 2016. In George P. Shultz, ed, Blueprint for America Hoover Institution Press, p. 71 - 84. http://faculty.chicagobooth.edu/john.cochrane/research/papers/george_shultz_blueprint_for_america_ch7.pdf ↩

15. See Casey Mulligan The Redistributon Recession, Oxford University Press 2012. ↩

16. See "Here's what genuine tax reform looks like." Wall Street Journal, December 23 2015. http://www.wsj.com/articles/heres-what-genuine-tax-reform-looks-like-1450828827 ↩

17. https://www.whitehouse.gov/omb/budget/Analytical_Perspectives Table 14; http://www.taxpolicycenter.org/briefing-book/what-tax-expenditure-budget ↩

18. https://fred.stlouisfed.org/series/W019RCQ027SBEA ↩

19. See "The Clinton Plan's Growth Deficit." Wall Street Journal, August 12 2016. http://www.wsj.com/articles/the-clinton-plans-growth-deficit-1470957720. Also, for an excellent and well documented review of these issues, see Edward L. Glaeser, 2016, "If you Build it..." City Journal, Summer 2016, http://www.city-journal.org/html/if-you-build-it-14606.html ↩

20. For more details see: A New Structure For U. S. Federal Debt." 2015. In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. https://www.brookings.edu/book/the-13-trillion-question/ and http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_US_Federal_Debt.pdf. For a clear analysis of the problem, that recommends the opposite action --shortening the maturity structure to take advantage of low rates --see Robin Greenwood, Samuel G. Hanson, Joshua S. Rudolph, and Lawrence H. Summers, "The Optimal Maturity of Government Debt" and "Debt Management Conflicts between the U.S. Treasury and the Federal Reserve," also in David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt.↩</sup>

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Testimony

I was invited to testify at a hearing of the House budget committee on Sept 14. It's nothing novel or revolutionary, but a chance to put my thoughts together on how to get growth going again, and policy approaches that get past the usual partisan squabbling. Here are my oral remarks. (pdf version here.) The written testimony, with lots of explanation and footnotes, is here. (pdf) (Getting footnotes in html is a pain.)

Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.

Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average, we would, in the next 30 years, triple rather than double the size of the economy—and tax revenues, which would do wonders for our debt problem.

Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.

How do we fix it? Our national political and economic debate just makes the same points again, louder, and going nowhere. Instead, let us look together for novel and effective policies that can appeal to all sides.

Regulation:


Let’s get past “too much” or “too little” regulation, and fix regulation instead.

Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop, prosecutor, judge, jury and executioner all rolled in to one. Most dangerous of all, regulation is becoming more politicized.

Congress can fix this.

Social programs

Let’s get past spending “more” or “less” on social programs, and fix them instead.

Often, if you earn an extra dollar, you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives, we will help people better, encourage growth and opportunity--and in the end we will spend less.

Spend more to spend less.

Spending is a serious problem. But moving spending off the books does not help.

For example, we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes, and sending checks to homeowners – but larger checks for high income people, people who borrow a lot, and people who refinance often.

Suppose we eliminate the mortgage deduction, and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller, help lower-income people a lot more, and be better targeted at getting people in houses.

The budget would look bigger. But we would really spend less -- and grow more.

Taxes

Tax reform fails because arguments over the level of taxes, subsidies, or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.

First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code, preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.

A massive simplification of the tax code is, I think, more important than the rates – and easier for us to agree on.

Debt and deficits

Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.

First, let’s face the big problem: a debt crisis, when the U.S. suddenly needs to borrow a lot and roll over debts, and markets refuse. This, not a slow predictable rise in interest rates and crowding out, strikes me as the biggest problem.  Crises are always sudden and unexpected, like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until, one day, it couldn’t.

The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions, widespread credit and bailout guarantees.

Buy some insurance. Like every homeowner shopping for a mortgage, the US chooses between a floating rate, lower initially, and a fixed rate, higher initially, but forever insulating the budget from interest rate risks, which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.

Above all, undertake this simple, pro-growth economic policy, and grow out of debt.

Concluding comments

You may object that fundamental reform is not “politically feasible.” Well, what’s “politically feasible” changes fast these days.

Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing.

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Glaeser and Summers on Infrastructure

Ed Glaeser has a superb essay on infrastructure at City Journal, titled "If you Build It.." I have a few excerpts, but do go and enjoy the whole thing. Larry Summers also has a new blog post on infrastructure, with some fascinating bits if you read carefully. I wrote about some of these issues in the WSJ and recent post, but not with Ed's clarity and erudition, nor Larry's imprimatur.

Glaeser starts with a clear summary paragraph:

While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars

Ed documents well my own doubts that infrastructure spending will do much for the economy as a whole, especially in the short run. Buy the infrastructure for the infrastructure, at lowest possible cost -- not for the "jobs" or on the idea this is the key to returning to growth. Annoying as they may be, there is no case that US GDP growth has been cut in half because there are too many potholes. The Hillary Clinton plan included a praiseworthy -- and  novel, considering her party's years of opposition to freeway building -- proposal to cut commuting times. But

What about the economic value of the shorter commuting times that new infrastructure can bring? ... it’s hard to see how substantially reducing time lost to traffic congestion will turbocharge the economy. Imagine that America gets its act together and cuts traffic time sufficiently to save $80 billion—a pretty miraculous improvement. That would still represent less than one-half of 1 percent of America’s $18 trillion GDP....Transportation infrastructure isn’t a solution for America’s lackluster growth rates

The idea of public works to boost the economy goes back, I think, to the Romans, but I'm glad to read just how fresh an idea it is in America:

The idea of using infrastructure building as a weapon against unemployment first entered American politics after the economic panic of 1893. Before that recession hit, in 1891, businessman and Ohio politician Jacob Coxey drafted his “Good Roads Bill.” Coxey wanted the government to spend at least $20 million per month building roads across America, paying workers “at least 80 percent above the going hourly rate.” This building campaign, he argued, would be financed by the printing press—Coxey was a pro-inflation Greenback Party member—and would hike government spending by 75 percent. 

Fiscal expansion financed by helicopter drops remains the cutting edge of Keynesian policy macroeconomics. Keynes once said that "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." It sees instead that practical policy Keynesian economists who believe themselves a vanguard of intellectual influence are usually the slaves of some defunct politician! It's a more general problem when economics comes to the service of policies decided for other reasons.

On the stimulus aspect of infrastructure, I have long been suspicious. The Keynesian argument for stimulus works for wasted spending just as well as infrastructure. That you have to wrap it in something nice to get it past the rubes who will not believe that wasted spending is a good thing suggests faith in the idea is not as strong as it should be. Anyway, Ed takes this on with precision

... one should be wary of drawing infrastructure-related lessons from the 1930s for the twenty-first century. .. While a sensible anti-unemployment policy targets resources at areas that have high unemployment rates, many of those areas are today in long-term decline, and the last thing they need is new roads and bridges... 

...The relatively simple technology of infrastructure construction of the 1930s meant that the unskilled unemployed could easily be put to work building roads. Among the iconic images of the Great Depression are scores of men wielding shovels and picks. That isn’t how roads and bridges are built anymore, though. Big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed. The most at-risk Americans, if they’re working at all, usually toil in fast-food restaurants, where the average worker makes $22,000 a year. They’re typically not trained to labor on complex civil-construction projects. Subsidizing Big Mac consumption would be a more effective way to provide jobs for the temporarily unemployed than subsidizing airport renovation.

My emphasis because it's such a great quote. It also holds for the permanently unemployed, low-skilled or not construction union members.

The building process was also much quicker in the past, meaning that projects proposed during the Depression could be started and even finished during the Depression, making them more likely to fight temporary joblessness. Robert Moses built the Triborough Bridge complex, the construction of which got under way on Black Friday in October 1929, in just four years. Such speed is hard to imagine today. Boston’s Big Dig, to take one famous example, took 25 years from initial planning to its final completion in 2007. 

It took 6 years to build the transcontinental railroad in the 1860s. By hand.

Why have transportation projects become so much slower? Yes, they’re usually more technologically complicated, but much of the time, politics is also to blame. ... To erect the Triborough, Moses could just demolish the buildings that he needed to get out of the way—neighborhood complaints be damned. Such tactics are no longer politically acceptable, so the Big Dig and other large-scale undertakings needed painstakingly to avoid inconveniencing anybody, dramatically raising costs and delays. New Deal projects also didn’t face environmental-impact reviews, which can add years to a project timeline. Detroit’s Gordie Howe International Bridge’s review process took “four years of consultations, public hearings, traffic analyses, and environmental studies,” to take a recent example. The project should be finished around 2020—15 years after that review process began.

Ed closes with an important point. Just why are roads and bridges, today, financed by Federal tax money? Groceries are funded by the money of people who buy them. In the past, roads and bridges were public goods -- it was not practical to charge users. Now, electronics make real-time, congestion-contingent tolling practical on city streets.

Many tasks of government have nothing in common with private enterprise. Neither our military nor our courts should be in the business of extracting revenues from, respectively, foreign powers or litigants. Aid to the poor and to the elderly is meant to be money-losing. But infrastructure is different and has much more in common with ordinary businesses. After all, infrastructure provides valuable services, the use of which by one individual typically crowds out the use by someone else. E-ZPass technology has made it simple to charge for transportation. Why not, then, establish a business model for transportation infrastructure?

Back from Free-Market Nirvana, Larry Summers' latest blog post has a predictably strong argument for infrastructure investment along the lines of the Hilary Clinton plan, multiplied by about a factor of 10. But he has some wise and important words of caution as well:

How can we be sure investment is carried out efficiently? There is legitimate scepticism about this, and there is no silver bullet for this problem. ... progressive advocates of more investment should compromise with conservative sceptics and, in the context of increased spending, accept regulatory streamlining, as well as requirements that projects undergo cost-benefit analysis. Minimising cost should be the objective of infrastructure procurement.

This is a very important statement. Me, in the WSJ,

In return for more spending, Mrs. Clinton could have offered serious structural reforms: repeal of Davis-Bacon, time limits on environmental reviews, serious cost-benefit analysis, and so forth. Such a package would have been irresistible 

It's nice to agree. But minimizing cost is a breathaking proposition in American politics. A good acid test for infrastructure fans: Suppose a Chinese company offers to build your high speed train at half the cost. Do you say yes? If no, you're not really serious about infrastructure. Larry just said yes.

Larry also takes on the private sector issue,

What about the private sector? ...Policy frameworks that streamline regulatory decision-making and reduce uncertainty could spur investment in these sectors. There is a case for experimenting with mobilising private capital for use on infrastructure that has been a public-sector preserve, such as airports and roads. But, the reality that government borrowing costs are much lower than the returns demanded by private-sector infrastructure investors should lead to caution. It would be unfortunate if, in an effort to avoid deficits, large subsidies were given to private financial operators. Only when private-sector performance in building and operating infrastructure is likely to be better than what the public sector can do is there a compelling argument for privatisation.

Anytime someone uses a passive locution so convoluted as "experimenting with mobilising private capital," I suggest you react as you would to "Ladies and Gentlemen, a band of pickpockets has been discovered working the room." Precisely for the reasons laid out in Larry's last sentence: "Public-Private partnerships" usually mean public protection, private profits, and a piñata for politicians.

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