Andrew Leigh

REAGAN'S TOP ECONOMIC ADVISER DIES

Australian Financial Review, 12 June 2019

A mark of a great policy economist is their willingness to stick to good science, even where it disagrees with their preferred side of politics. American economist Martin Feldstein, who died this week at the age of 79, was such a person.

From 1982 to 1984, Feldstein served as the chairman of the Council of Economic Advisers, which effectively made him Ronald Reagan’s top economic adviser. While Reagan oversaw a massive increase in government debt, Feldstein urged balanced budgets. At a time when many in the Reagan administration were willing to let deficits balloon, Feldstein recognised that there are only two ways to pay for government spending: taxes now or taxes later.

I first met Marty, as he was generally known, as a student in a small graduate class on public finance in the early-2000s. His love of teaching was legendary, and he had for many years taught Economics 10, Harvard’s signature undergraduate class on economics. Among graduate students, Marty focused special attention on areas where he had published journal articles (he wrote more than 300) or op-eds (which he produced prolifically).

Sometimes I’d find myself disagreeing with Marty, but more often his sharp mind caused me to delve deeper into the data. In 1998, he had published a paper arguing that progressive state income taxes couldn’t affect inequality, because high-income earners would simply dodge the tax by moving interstate. In 2008, I crunched the numbers a different way, and arrived at the opposite conclusion. What matters isn’t who was right, but that he was willing to discuss the ideas, with a focus on the best econometric techniques to uncover the truth.

In macroeconomics, one of Feldstein’s major contributions was to debunk the theory that there was a perfect world market for savings, with investors looking across the globe for the best returns. In a 1980 paper with Charles Horioka, Feldstein showed that investors had a strong home bias. As a result, when savings rates rose, investment rates rose too. Standard arguments for home savings bias, such as exchange rate risks, differential taxation and regulatory risk, didn’t explain the full extent of home bias. The ‘Feldstein-Horioka Puzzle’ remains one of the central puzzles in modern macroeconomics.

One example of Feldstein’s willingness to pursue the evidence was his passion for getting rid of ‘tax expenditures’: tax concessions such as the US mortgage interest deduction. Scrapping such tax loopholes, he argued, was a more efficient form of revenue-raising than increasing tax rates. But because the benefits of tax expenditures tended to be skewed towards higher income earners, it was also a more equitable reform than cutting government expenditure. He loved to tell the story – perhaps a mite exaggerated – of how Reagan had worked with a Democratic-controlled Congress in the mid-1980s to remove tax expenditures in exchange for lowering tax rates. If you broaden the base, you can lower the rate.

In 2017, Feldstein joined with a handful of other conservative economists to argue for a simple approach to combatting climate change: a $40 per tonne carbon charge, with the revenue rebated directly to households. The typical family of four, the economists estimated, would receive an annual cheque for $2000. It would be, he argued, ‘pro-growth, pro-competitiveness and pro-working class’. Needless to say, the Trump administration did not agree.

Alongside his Harvard appointment, Feldstein’s home was the National Bureau of Economic Research in Cambridge, MA, which he ran from 1977 to 2008, with a brief break during his time working for Reagan. Because economics articles typically take years to work their way through the refereeing and publication process, the first time many journalists see a top study is when it is published as an NBER working paper. To be an NBER fellow is one of the top accolades in the US profession, and its conferences, software and datasets have underpinned massive advances in the field. All this owed much to Feldstein.

Ironically, although he largely dismissed concerns over inequality, Feldstein helped train many of the best scholars in the field, including Jeffrey Sachs, David Ellwood, Jeff Liebman and Raj Chetty. Larry Summers, who served as Treasury Secretary under Democratic President Bill Clinton, was a former Feldstein student.

Architects like to say that to see their legacy, one must only look around. Similarly, to see Feldstein’s legacy, we need only look around economics, which is a stronger discipline for his life’s work.

Andrew Leigh is the Federal Member for Fenner and a former professor of economics at the Australian National University.

ENDS

Authorised by Noah Carroll ALP Canberra.