Part One of Two Parts
Historical Real Data, Politically Influenced Projections and Econometric Magic
When a macroeconomic model substantially under projects the impact of a specific variable on economic growth (in this case tax rates), underlying biased assumptions are typically the culprits. One or more substantial misspecification errors not attributable to theoretical bias could also a factor. A glaring example of this is the projection made by Mark Zandy of Moody Analytics, prior to the 2016 presidential elections, that Trump’s tax policy would significantly harm the economy. It is possible that Mark Zandy’s projections are not the product of macroeconomic modeling, but that is not likely for Moody’s Analytics. Prior to having a closer look at Mark Zandy’s projections prior to the 2016 and 2020 elections, let’s first review some relevant data.
Steven Moore of the Heritage Foundation recently noted that real family income for Americans rose by more than $6,400 during the first three years of the Trump Administration in contrast to an approximate figure of $4,000 for the entire eight years of the Obama-Biden Administration. He also reports that minorities experienced greater income increases during Trump’s three years of Trump than eight years of Obama. The stated intention of the Biden platform (approved by Bernie Sanders) is to increase taxes on virtually all corporations and every form of returns to capital (in addition to high income individuals and inevitably the middle class when the Green New Deal swamps the economy) to fund redistribution goals and a return to an onerous regulatory environment. Given these income data and the stated tax and regularity directives of the Biden Platform, it is intuitive, as observed by Moore, that Biden’s pronouncement that the economy will be strong, if he wins, is more than questionable. It should be noted, however, that Moore’s critique of the economic well being of Americans under Obama-Biden compared to Trump is relatively short run in scope with his observation based on three years of Trump compared to eight years of Obama.
When extending this avenue of analysis to the longer horizon associated with capital expenditure decision making, the tax and regulatory policies proposed by Biden will not be a success (remember the new normal which assumed dismal growth during the Obama years). Keep in mind that in order for the economy to grow steadily productive capital must grow, and for healthy wage growth to be sustainable over time capital growth must also be sustainable. What Biden is proposing will not promote balanced growth and, therefore, will result in sub-optimal outcomes for labor as well as capital. The relatively short run substantial real income growth disparity between the Trump and Obama economies will be dwarfed by the slow growth economic outcome that will result if Biden and Bernie’s tax, regulatory policies and New Green Deal agenda are carried out over an extended period of time. The greatest impact on the overall economy can be expected to result from the contraction (or slow growth) of small business income and investment, because virtually small businesses report company earnings as personal income on a pass through basis.
The Marxist distorters of Keynesian theory will insist that the increase in demand attributable to increased government outlays will drive the economy as well if not better, over time, than a rational monetary and fiscal policy format that drives supply and demand in a balanced manner. Hard core Keynesians recognize supply side functions but tend to overweight their analysis towards demand oriented drivers. It is well known, however, that overall economic growth and personal income outcomes resulting from government spending and government subsidized activity substantially lag the outcomes of free market activity. Mark Zandy of Moody’s Analytics, a hard core Keynesian and Democrat (not a Marxist), has projected that Biden’s fiscal proposals coupled with Democrat control of both the Senate and House of Representatives would be better for the economy than a Trump win given a four year time horizon.
Given his political bias, in addition to his Keynesian demand driven dogma, he has probably attributed a lot of growth to the infrastructure aspect of Biden’s fiscal policy while erroneously minimizing the negative aspects of increased taxes in both the short and long run. Remember all of the “shovel ready” infrastructure projects of the Obama-Biden Administration that produced nothing. Also, Zandy has likely also attributed much of his projected short run economic growth to Biden”s soft position on China trade, regardless of the long run consequences. He references the tariffs implemented by Trump and Biden’s plan to take a different approach. I personally dislike tariffs from a theoretical standpoint, but the approach followed by Obama-Biden was pathetic and was to a great extent contributory to the position we now find ourselves with China. The consequences of Biden’s soft policies relating to trade, theft of intellectual property and a myriad of other unfair trade policies may be beneficial in the short run, but disastrous in the long run. Finally, looking at Mr. Zandy’s track record, note that leading up to the 2016 presidential election he stated that “If Mr. Trump gets precisely what he’s proposed, then the US. economy will suffer meaningfully.” The results were diametrically opposite to his prognostications. By far, the most dominant impact of the Trump Administration’s policy on the economy (prior to the Chinese Virus Pandemic) is unquestionably attributable to the tax cuts which were implemented in 2017. The substantial actual economic growth (including real family income) associated with the Trump tax cuts exposes the likelihood of skewed demand side assumptions buried in Zandy’s modeling that tend to underestimate the impact of changes in marginal tax rates on his projections of economic well being. It appears as though Zandy’s 2016 methodology has been carried over in his current negative assessment of Trump’s fiscal policy.
My background in econometrics affords me an awareness of the use and misuse of underlying assumptions and overall design in macroeconomic modeling. Even very small adjustments in the specification of variables and treatment of data issues, for a myriad of ‘theoretically acceptable reasons’, can have a substantial impact on the resulting projections. Given that Mr. Moore’s real family income figures are accurate, Mr. Zandy’s massive miss in 2016 and his more recent similar projections, suggests that he may have a bit of a political bias which, when coupled with his hard core Keynesian “theology”, creates a negative bias toward non Keynesian fiscal policies in his analytical methodology. Before I lend any credibility to Mr. Zandy’s more recent analysis I would have to observe the modifications of his 2016 analytical model that account for and correct the massive error resulting from that analytic structure. Many times I have heard and repeated the euphemism that, based upon the assumption of linearity, an economist can surely prove that the world is round. If Mr. Zandy’s support of Biden helps him win the presidential election young people should start learning Chinese and find a way to copy Hunter Biden’s method of extracting money from the Communist government in China (ie petition for adoption into the Biden family).
As a final thought, the statistical reality that even small adjustments in the specification of variables and the treatment of data issues can have a substantial impact on the resulting projections, applies equally to all of the China Virus analysis undertaken by biased individuals and institutions with theoretical and /or political ideologies that inevitably lead them to skew their treatment of underlying assumptions and methodology.