Economic Savvy In The White House

Thursday, October 8, 2020
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A sharply dressed bearded man stood up near the door of the White House meeting room and bellowed, “HHS, you need to hear the OMB loud and clear: your AKS RIA is DOA!” and exited the meeting. As several others filed out of the room behind him, I leaned toward CEA’s General Counsel Joel Zinberg and whispered, “That must be a world record for number of acronyms in one sentence. What the hell does it mean?” Joel chuckled and said, “I have no idea, except that we’re going to enjoy working with that guy.”

“That guy” was Joe Grogan, a high-level Trump appointee in the Office of Management and Budget (OMB). The quote is from You’re Hired: Untold Successes and Failures of a Populist President, by University of Chicago economist Casey B. Mulligan. It’s about his time as the chief economist at President Trump’s Council of Economic Advisers (CEA) for the 2018–19 academic year. Oh, and Mulligan did enjoy working with Grogan. I’ll tell why later.

I’ve respected Mulligan’s work for about a decade. He’s a first-rate economist who, by relentlessly applying economic thinking to policy issues, reaches important conclusions.

But I was not a fan of his too-academic writing style. In a 2013 review, I wrote that his 2012 book, The Redistribution Recession: How Labor Market Distortions Contracted the Economy, “could have been one of the most important books of 2012.” Even I, a PhD economist, found it hard slogging. I don’t know what writing pill Mulligan took, but his latest book is profound, important, entertaining, economically solid, and easy to read. It will be one of the most important books of 2020.

A 2,000-word review can’t do the book justice. But I found it important for two reasons. First, I had, completely honestly, drunk the Kool-Aid about Donald Trump. I thought him an economic illiterate, and a destructive man both personally and in the presidency. I found his tweets to be both nasty and ill-informed. I now think I was wrong on much, if not most, of this. Except on foreign trade and immigration, Mulligan’s book has convinced me that Trump has a solid understanding of basic economics. And it turns out that many of the tweets on economics are strategically thought out.

The second reason I like the book so much is that it shows how much impact a first-rate economist can have if he anticipates policy issues, performs the hard work of doing the analysis in advance, and then writes up his findings clearly.

Consider the issue of socialism. In late October 2018, only a couple of months after Mulligan arrived at the CEA, the council issue a lengthy report titled The Opportunity Costs of Socialism. I wrote a very positive review of it on this site early the next month. It turns out that Mulligan wrote that report. In my review of the section on “Medicare for All,” I wrote, “Two such [Medicare for All] bills currently before Congress would make it illegal for a private business to sell health insurance and for a private employer to offer health insurance to his employees.” Mulligan tells the fascinating story behind this fact. He writes:

Lots of smart people pretend to know what’s in important bills in Congress and regulations in the executive branch, without reading them. The New York Times, Washington Post, and other news outlets publish interviews and statements from so-called experts, often economics professors, whose only knowledge of the bill or regulation comes from what they read in the New York Times, Washington Post, and other news outlets.

His solution was radical: he actually read the bills. Mulligan printed out the relevant section of one highly touted Medicare for All bill and carried it around so that he could disabuse fellow Trump administration officials who thought he exaggerated. One person who listened was Donald Trump. When Trump publicly claimed that Medicare for All would ban private insurance, CNN’s White House correspondent attacked him for lying. But Trump kept it up and by January 2019, CNN, without apologizing, acknowledged the fact. Indeed, notes Mulligan, CNN even asked candidates for the Democratic presidential nomination about the prohibition.

Behind the Tweets, Signs of Strategy

Like many people who have been appalled by some of Trump’s tweets, I had assumed that he was up in the wee hours carelessly knocking out his bombastic messages. I’m still not a fan of many of Trump’s tweets, but a chapter titled “I Wish That He Would Stay Off Twitter” tells two important things about the economics tweets. First, Trump’s economic advisers gave him a lot of input on the economics tweets. Second, whereas I had thought that Trump’s exaggerations undercut him, Mulligan argues, with evidence, that they were part of a strategy for getting good news covered. If Trump told the truth about good economic news, the media would often not cover it. But if he exaggerated, “the press might enjoy correcting him and unwittingly disseminate the intended finding.” My Hoover colleague John Cochrane, in a recent post about the book, notes that Trump’s tweets are his version of Franklin D. Roosevelt’s Fireside Chats. Recall that, hard as it is to imagine today, FDR faced a largely hostile conservative press. Trump faces hostile left-wing media.

Trump isn’t the only one who’s strategic. Mulligan himself realized that he needed to “think like a Democratic Congress” to help Trump deal with hostile Democrats in Congress. Here’s how Mulligan characterizes the mindset of the twenty-first-century Democratic Congress: “that big government is likely to achieve big progress, that incentives are of second-order importance, that the title of a bill need not reflect its contents, and that profits are glorified theft by private business from workers and consumers.” Mulligan also regularly read economist Paul Krugman’s tweets. Why? They “proved helpful for predicting mistakes that would be made by the president’s opponents.”

One of the best parts of the book is about some major Trump triumphs on deregulation, along with some careful estimates of the gains to the US economy. They were huge. Consider generic drugs. Even though generic drugs are, well, generic, the Food and Drug Administration insists that it must approve them before they are sold. Trump, unfortunately, did not get rid of that restriction, but he did manage to speed up the approval process. Mulligan notes one indicator that the deregulation worked: the stock price of Teva Pharmaceutical, an Israeli pharmaceutical company that is the world’s leading producer of generics, crashed. The reason was that in the world’s largest market for generics, the United States, competition increased. Mulligan also notes another indicator: in 2018, drug prices, adjusted for the Consumer Price Index (CPI), fell by 3 percent. That had not happened in the previous forty-six years. The estimated gain to consumers during Trump’s first nineteen months, the CEA stated in its input to a Trump tweet, was a whopping $26 billion.

Not that Trump got credit. In the first few minutes after his tweet, the Associated Press’s headline was “Trump hails drug price decline not supported by the evidence.” Mulligan comments: “We had reached the point where the CPI is no longer evidence even though the CPI is trusted to set the federal poverty line, [adjust] Social Security benefits, and index thousands of private-sector contracts.”     

One area where President Obama’s regulations created a major hit on consumers is fuel economy standards. Mulligan calculates that the higher required fuel economy that Obama had written into the regulations would cause consumers to pay an extra $2,900 per car. Pressured by US car companies, Trump backed down somewhat, going one-third of the way to Obama’s standard, a measure that cost “only” about one-fourth of the $2,900. In short, a major partial victory.

The most enjoyable story about successful prevention of new regulation describes when Mulligan and his CEA boss, Chairman Kevin Hassett, shut down a proposal by Alex Azar, secretary of the Health and Human Services Department. Azar, who had been a highly paid executive at pharmaceutical company Eli Lilly, proposed a rebate rule that would cause insurance companies, and Medicare, to pay higher prices for drugs. When Mulligan, at his first meeting on regulations, pushed some of Azar’s aides to explain why they thought their cleverly worded “Anti-Kickback Scheme” (AKS) made sense, they stated that the president of Pfizer had thought it was excellent. It apparently hadn’t occurred to them that major drug companies might want to constrain insurance companies to pay higher prices.

After Azar’s own actuaries did a Regulatory Impact Analysis (RIA) that concluded that the AKS would cost taxpayers an additional $196 billion, Azar took the unusual step of hiring a consulting company to come up with different estimates. That’s what led Joe Grogan to state his acronym-filled line quoted at the start of this article. The CEA and OMB persuaded Trump to make it DOA.

Protectionism and Poor Policy

We often read about the opioid tragedy but it was the CEA, in some studies and in its February 2020 Economic Report of the President, that pointed out what no one else seems to have mentioned: that two major factors in the tragedy were ObamaCare and President George W. Bush’s Medicare Part D drug plan. Mulligan points out that ObamaCare requires health plans to cover “benzos,” which are prescription tranquilizers. Mulligan writes that benzos are “the other half of the opioid-benzo cocktail” favored by opioid abusers. Bush’s drug plan reduced the annual out-of-pocket cost for a daily 0.75-gram habit from $39,420 to $2,677. Mulligan also points to the “infamous ‘Holder Memo’ ” in which Obama’s Attorney General Eric Holder directed “federal lawyers to stop prosecuting nonviolent drug crimes.” Mulligan argues that this made the opioid crisis worse. He might be right. But elsewhere in the book, Mulligan rightly decries government paternalism. Wouldn’t an anti-paternalist favor letting people get opioids if they’re paying for them on their own dime? Granted that it often wasn’t on their own dime, as noted above. But then the solution would be not to crack down on the drug trade but to have taxpayers quit paying for the drugs. By referring to the Holder memo as “infamous,” Mulligan seems to favor paternalism. Wouldn’t a true non-paternalist advocate getting rid of the drug laws?

One of economists’ big beefs against President Trump is his belief in protectionism. Mulligan doesn’t like protectionism either, and he points out that CEA chairman Hassett decided that “the CEA would never waver from a free trade position.” Mulligan especially doesn’t like Trump administration protectionist Peter Navarro. Mulligan writes that “even the president was annoyed with Mr. Navarro’s boorishness and double dealing and barred him from running meetings.” He adds, “To the amusement of the White House staff, Mr. Navarro also flunked marketing in 2018 when he was promoting a ‘Fair and Reciprocal Tariff Act.’ So named, the ‘FART Act’ had no chance of passing.”

Mulligan also tells how he bested Navarro in a debate about the famous nineteenth-century free trade advocate David Ricardo. In a White House meeting, Navarro asserted: “If CEA would bother to familiarize itself with the Ricardian model of international trade, it might finally understand that trade deficits are usually the result of currency manipulation.” Mulligan responded, “Peter, could you spare a few moments after the meeting to show us how currency manipulation works in the Ricardian model? The last that CEA checked that model lacked anything about currencies.”

Although Mulligan doesn’t defend Trump’s protectionism, he argues that it was less bad than Ronald Reagan’s. He’s right, but, as I have noted, remember the context. Reagan, operating during a recession when the unemployment rate hit 10 percent, was dealing with tremendous pressure from domestic industries and Congress. Trump, by contrast, was operating during a boom (up to March 2020) when the unemployment rate was always less than 5 percent and Trump himself was an important source of the protectionist pressure.

Mulligan has a great chapter on one of the most protectionist measures the United States has: the century-old Jones Act, which requires goods shipped between US ports to be on US-built and US-crewed ships. He discusses much of the damage of that act and starts with a moving story about some deaths involving his relatives that were due to the act. The two major defenders of the act within the administration are Peter Navarro and Transportation Secretary Elaine Chao. Trump did arrange to meet with members of Congress to discuss the Jones Act. Key Republican senators defended it, and Trump decided not to pick a fight.

I finished the book with a somewhat more positive view of President Trump. But the player in the book who most impressed me was the author, Casey Mulligan. He is not just an insightful economist but also a strategist. I’m glad, and Americans who care about our economic well-being, should be glad, that he was there.