Harmful Economic Policy and its Apologists (and a Dow Jones target number)

Suddenly, knowing some things about the Federal Reserve is very important.  The latest gyrations in the financial markets were caused by Donald Trump's rediscovery of Fed Chair Jerome Powell as a political target.  Trump's previous Fed-related rhetoric had generally followed the timeworn pattern set by most presidents: Blame the Fed for whatever bad thing was happening, make noises about how the Fed should stop being so obtuse, and then move on.

Not this time.  Now, Trump is openly talking about firing Powell, which is plainly illegal and is terrible in every substantive way as well.  At some point, I will write at length about those substantive matters, but today's discussion is about a narrow slice of this story, which is how Trump's top economist is aiding and abetting Trump's economically destructive impulses.  I wrote on April 10 about Trump's two highest profile economists, Peter Navarro (the anti-trade trade advisor) and Kevin Hassett.  Hassett's job title is not interesting, but his willingness to say seemingly anything to prop up his boss has made him a growing presence in interviews on TV and in the papers.

In that earlier column, I pointed out that both Navarro and Hassett have very respectable academic pedigrees, with Ph.D.'s in economics and very standard-issue early resumes as young professors.  I am not aware of anyone who has a theory about what happened to turn Navarro into a guy who was willing to go to prison for Trump (after helping to plan a coup in late 2020 and early 2021).  Hassett has been nowhere near as extreme as Navarro, but I noted that his eagerness to turn cartwheels for Trump included arguing (while contradicting his own work) that, under Trump, economic "uncertainty is actually creating jobs in the U.S."

Demonstrating his limbo skills once again, Hassett is now arguing that Trump can and should fire Powell. According to a Reuters story this past Friday, "Hassett appeared to distance himself from a 2021 book in which he argued that firing Powell during Trump's first term would have harmed the reputation of the Fed as an objective and independent manager of the U.S. money supply, potentially compromising the credibility of the dollar and crashing the stock market."

How did he sashay away from his own words?  "I think that at that time, the market was a completely different place. And, you know, I was referring to legal analysis that we had back then. And if there's new legal analysis that says something different, then we need to rethink our response."  The Reuters reporter then helpfully offered this: "It was not immediately clear what new legal analysis he was referencing," adding that Powell has said that a pending court case about a different firing would not apply to the Fed in any event.

But again, my focus here is on Hassett's rationalizations, not the underlying legal issue.  Here is the remainder of the relevant comments in the Reuters piece:

Hassett said he was focused on the Fed's policy actions, not the personalities, and took issue with the central bank's decision to raise interest rates during Trump's first term and to characterize tax cuts as inflationary, but to not take issue with "runaway spending" by former President Joe Biden, which Hassett said was "textbook inflationary."

"And so if you think that it's unacceptable for President Trump to be frustrated with the policy history of the Fed, then I think that you've got some explaining to do," he said. Hassett said Trump's policies were boosting capital spending and job creation was increasing, while inflation was declining.

"And so against that backdrop to have everybody who refused to warn about the runaway spending, you know, out there saying, 'Oh, this is going to be a catastrophe for inflation because of tariffs,' means that people need to, like, improve their models and improve their messaging."

So Trump is merely "frustrated with the policy history of the Fed," and the people who are freaking out that he might try to illegally fire Powell are somehow saying that Trump is not allowed to be frustrated?  Got it.  I will not bother going through all of the other (at best fatuous) assertions in that block quote, but the point is that a trained economist who himself is on the record -- in his own book! -- as saying that firing Powell would "potentially compromis[e] the credibility of the dollar and crash[] the stock market" is now saying, in essence, that Trump can do it because Trump wants to do it, and things are different now, and besides, the world has treated Trump so, so, SO unfairly.

As I noted in my April 10 column, Hassett is no mere cheerleader for conservative economic policies.  (And to be clear, firing the Fed Chair would not be a conservative move under any definition of that word.)  It is one thing to argue that, say, corporate tax rates are too high, but quite another to red-bait a prominent left-leaning economist or to liken Elizabeth Warren and Bernie Sanders to Stalin and Castro.  That is how low Hassett has been willing to go, so this latest attack on Powell is hardly a surprise.

And speaking of corporate tax rates, even when Hassett sticks to his original policy area, he is willing to say nearly anything.  Back in 2007, the (extremely conservative) editorial page of The Wall Street Journal wrote an anti-tax piece that used this graph to make its point.

 

There have, of course, been take-downs of this hack work, including a good blog post at the time from Brendan Nyhan of Dartmouth's PoliSci Department. But the friend who first forwarded that graph to me nailed it with this: "Kevin Hassett made this graph that I have been using for years to show people about shitty graphs! This is the worst possible graph."  And indeed it is.  Even a C+ student in a basic statistics course could see that the most natural fitted line has an upward slope, which is the opposite of the Laffer Curve effect.

But even if one wanted to pick specific comparisons, we can look at two very similar economies -- Canada and Australia -- and demonstrate the you can have a higher corporate tax rate and collect more revenues.  Or Germany and France.  Or Iceland and Luxembourg.  Note also that Hassett's curve suggests that the US could have nearly quintupled its tax revenues by reducing its corporate tax rate from 35 to 30%.  Yeesh.

I will close with another useful example of what unprincipled economics for fun and profit can look like.  Back in the late 1990's, Hassett co-authored a click-baity book called Dow 36,000.  The Wikipedia page for that instantly ridiculed book includes this helpful information:

On the date of publication, October 1, 1999, the DJIA traded at a level of 10,273. Although the DJIA reached a record high of 11,750.28 in January 2000, it fell steadily after the bursting of the dot-com bubble. Following the September 11 attacks of 2001, the DJIA fell further, reaching a low of 7,286.27 in October 2002. Although the DJIA recovered to a new record high of 14,164.53 in October 2007, it crashed back to the vicinity of 6,500 by the early months of 2009, amidst a global recession.

So the authors of that book were arguing that the Dow would soon more than triple in value, but it did not.  One nerdish joke during the worst of the Dow's series of crashes went like this: So Dow 36,000 was wrong, but the question is whether to take off the first digit or the last.  That is, would the index drop to 3600 (drop the last digit) or only to 6000 (drop the first)?  In the mid 2000's, I happened to be sitting near Hassett at an event, and I decided to gently tease him about his prediction.  He seemed sincerely hurt, insisting that he and his co-author were only saying that some market fundamentals seemed off to them, and they simply followed the data in making their prediction.  But this is exactly how he came up with his Laffer Curve graph above: he was only saying that you can put a curved line through the data and show that US tax rates were "too high."

In short, this is a study in opportunistic raw politics by an economist who has evidently decided that anything goes.  People should not imagine that the boring economics stuff coming from such a source is in any way objective or neutral.  As I also pointed out in the earlier column about Navarro and Hassett, none of Hassett's former crew of elite-level conservative economists have been willing to say night is day or up is down, and they are not Trumpists.  Hassett most definitely is.

As a final thought, I will note that the Dow did in fact finally pass 36,000.  That was sure to happen at some point, both because the US economy has grown over time and because stock indices like the Dow are not adjusted for inflation.  So waiting long enough would "vindicate" the prediction, one supposes.  In any event, that first happened early in 2022, and after a two-year lull, the index hit 40,000 in mid-2024 and then topped out at a bit less than 45,000 earlier this year.

But as of this moment (1:13pm on April 22), the Dow is at 39,054.31.  Having given up one-eighth of its value in the last two-plus months, the only question is whether we will see Dow 36,000 again, but this time on the way down.  Maybe talking about firing Powell is designed to make that number great again?

-- Neil H. Buchanan