Saturday, June 27, 2015

Cochrane's 4% Growth Plan

The always-grumpy John Cochrane has his plan for economic growth. It's a predictably conservative and somewhat vague plan that consists of the following: 
  1. The tax code is thoroughly reformed to do nothing but raise revenue with minimal distortion -- a uniform consumption tax and no income, corporate, estate etc. taxes, or deductions.
  2. A dramatic regulatory reform. For example
    a. Simple equity-financed banking in place of Dodd-Frank. 
    b. Private health-status insurance (with, if needed, on-budget voucher subsidies) in place of Obamacare. 
    c. An end to the mess of energy subsidies and interference. No more fuel economy standards, HOV lanes, Tesla tax credits, windmill subsidies, and so on and so on. (If you want to control carbon, a uniform carbon tax and nothing else.) 
    d. Many agencies cease to exist. 
    e. No more endless waits for regulatory decisions. 
  3. No more witch hunts for multibillion dollar settlements.
  4. Thorough overhaul of social programs to remove disincentives. Most help comes via on-budget vouchers.
  5. No more agricultural subsidies.
  6. No more subsidies, period. Fannie and Freddie closed down.  
  7. Unilateral free trade. 
  8. Essentially open immigration -- anyone can work.  
  9. Much labor law rolled back. Uber drivers can be contractors, thank you. Most occupational licenses removed -- anyone can work.  
  10. Drug legalization.
  11. School vouchers. 
If you take a step back from the fact that the presentation is heavily conservative in tone, there is actually a lot to agree with here. But, of course the devil is in the details. For instance: 
1. Reforming the tax code is a great idea. There are too many off-budget subsidies (a.k.a. "revenue expenditures") in the tax code. Get rid of those (including the mortgage interest credit, which benefits me). But I don't think that a "uniform consumption tax" works so well. This comes from Cochrane's macro background that shows that consumption taxes distort less (and encourage more savings and investment) than income taxes. I would actually combine tax reform with points 2(c) and 4: Negative income tax (think EITC on steroids), and high carbon taxes to replace the current tax and welfare system. 
2(a) Dodd-Frank isn't a masterpiece, and I have no issue with equity financed banking, but add in Basel III capital requirements, etc, and I'm on board. 
2(b) Many of the regulations in Obamacare are senseless, and distortionary, but broad concept of direct subsidies cum mandate is good. That, or single-payer. 
2(d) and (e) Which agencies? Would Cochrane like shorter waits if it meant more government employees?  
3. Not sure. If we get rid health, environmental, and safety regulations, then you turn many externalities over to the courts. Can't do both. Problem with turning it to the courts is that now you give power over the outcomes to the guy with the best lawyers. Maybe not a great idea, so many of these regulations may need to stay (if they cannot be managed through Pigouvian taxes). 
5. Ag subsidies are a drag. Do it. 
6. Cochrane seems to think all of his "vouchers" aren't just subsidies in disguise. Problem is, they're actually worse than cold hard cash - vouchers are the government's way of telling you how you should spend the money it wants to give you. Is this conservatism? 
7. Free trade. Yes. 
8. There shall be open borders. Yes. 
9. "Much labor law." If by that he means "much occupational licensing" then great. Yea Uber. Yea, competitive hair braiding markets. But maybe my ophthalmologist should be formally licensed. Otherwise, see my comments on point #3.
10. Drug legalization. Go for it. Hard drugs too? Yes.
11. School vouchers. (Not "subsidies?") Public schooling ain't so bad. Teaching at a private university, I worry that "competition" for students leads us to make curriculum decisions that may not be in the long run interests of students. Cochrane teaches maybe 1-2 sections per semester at an elite school, so he probably spends less time ruminating on this than we do at smaller schools that capture more marginal students.