Larry Summers On Gary Cohn’s ‘Bad Day With Facts’

This was published on Tuesday. 

It’s even more relevant now than it was 48 hours ago for obvious reasons and ironically, for those same reasons, the last point Larry makes is no longer an issue.

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By Larry Summers from his FT blog

Given recent controversies, I was interested to read national economic council chairman Gary Cohn’s answer to a “why are you staying?” question put by Stuart Varney of Fox Business Network last week. To his credit, Mr Cohn did not back away from his reservations about the president’s response to Charlottesville. He said “Look, tax cuts are really important to me. I think it’s a once-in-a-lifetime opportunity. We haven’t done tax cuts in 31 years. So, to be a part of an administration that gets something done that hasn’t been done for 31 years is enormously challenging, enormously interesting to me.”

The problem with this statement is how utterly wrong it is. Taxes were not cut 31 years ago. A central point of the 1986 Tax Reform Act was that it was revenue neutral. And since that time, taxes have been cut in 1997, 2001, 2003, 2009 and 2015.

Now perhaps Mr Cohn misspoke in invoking tax cuts three times and meant to convey with his references to 31 years ago that in his view there was a chance for another major tax reform achievement like that act. Fair enough. The trouble is that as best as one can glean from what is out there, the tax legislation the Trump administration is working towards is more opposed to, than in line with, the spirit of the 1986 act.

The Tax Reform Act of 1986 was all reform, with no net cut. The current effort is mostly cuts, with very little structural reform. The 1986 measure was about raising taxes on companies. The current effort is about reducing business taxes. TRA 1986 was about facing down well-heeled lobbyists; these groups seem centrally involved in the current effort. TRA 1986 was all about bipartisanship as Ronald Reagan worked closely with Democratic leaders. There is nothing bipartisan about the “Big 6” (Mr Cohn, Paul Ryan, Mitch McConnell, Steven Mnuchin, Orrin Hatch and Kevin Brady) driving the current effort.

And, given the increase in debt/gross domestic product ratios and rising income inequality, there is a stronger case to be made today than even three decades before for not moving in the costly, regressive direction the Trump administration appears headed.

Mr Cohn had a bad day with facts last Friday. In addition to his erroneous statements about the history of tax cuts, he asserted on CNBC that: “The biggest public pension funds are the biggest owners of equity in the world. They’re the policemen, they’re the firemen, they’re the teachers, they’re the civil servants of America today who have their money in public pension funds being managed in the U.S. equity market. We’re helping Americans by delivering returns back to them.”

There are two problems here. First, as CNBC noted while pension funds do hold stocks, most are held by the wealthy. Second, the vast majority of the pension funds to which Mr Cohn refers are defined benefit plans, with employers liable for a benefit tied to a worker’s salary path. This means, of course, that workers themselves do not have a wealth interest in how the stock market performs.

Press reports suggest a Gary Cohn may be the next chairman of the Federal Reserve. Certainly his extensive financial experience prepares him well for key parts of the job. But credibility is a crucial attribute in a Fed chair and that requires developing the habit of accuracy on matters of verifiable fact. It also requires the ability to stand up to misguided presidents.