Global Perspectives: Douglas Holtz-Eakin on economic projections, deficits and climate change
December 12, 2019
Douglas Holtz-Eakin has had a distinguished career as an academic, a policy adviser and a strategist. He began his academic career at Columbia University in 1985 before moving to Syracuse University, where he became Trustee Professor of Economics at the Maxwell School, chairman of the department of economics and associate director of the Center for Policy Research. He is currently president of the American Action Forum, a Washington, D.C., think tank.
He began his government career at the Council of Economic Advisers as a senior staff economist and became a chief economist. He served as the sixth director of the nonpartisan Congressional Budget Office (CBO), from 2003 to 2005. During 2007 and 2008, he was director of domestic and economic policy for the John McCain presidential campaign.
Last month, the Federal Reserve Bank of Dallas hosted Holtz-Eakin as part of the Bank’s Global Perspectives speaker series. This series was launched at the beginning of 2016 with the objective of bringing leaders from the worlds of business, academia and policymaking to the Dallas Fed to share their insights on global, national and regional developments.Holtz-Eakin and Dallas Fed President Rob Kaplan discussed Holtz-Eakin’s career as an economist, the economy, deficits and climate change. The following are excerpts from their conversation, edited for clarity, and presented by topic.
On becoming an economist:
Holtz-Eakin: [Harvard economist] Greg Mankiw was born on Feb. 3, 1958, in Trenton, New Jersey. I was born on Feb. 3, 1958, in Pittsburgh, Pennsylvania. We have exactly the same birthday. I have been told Greg always wanted to be an economist. I find this shocking—I really do. I’m an economist because in my senior year in college, I had a good adviser who pulled me aside and said, “You’re not ready to have a job. You should go to graduate school.” I was a math and econ double major, so I applied to all the math schools I could, all the econ schools I could. I got into math schools. And I got into a couple of econ schools with a little bit of [financial] aid, but it wasn’t looking great. And then fairly late in the game, Princeton [University] admitted me with a full ride and a stipend. So, they paid me to go to graduate school. I firmly believe I became an economist because of a clerical error somewhere.
I graduated from Princeton. I got my PhD in 1985, and I started in Columbia University. Two things were true. I was publishing papers in places like Econometrica, which was actually what you’re supposed to do. But nobody outside of academia buys Econometrica and reads it. It seemed a little sterile. I was teaching classes, and the students were ignoring me because they already knew everything I had to say and were busy arranging their social lives. So, I had a crisis of confidence.
I went back to Princeton, and while I was there, Harvey Rosen, my advisor and longtime co-author and friend, and John Taylor [author of the Taylor rule that guides central bank interest rate policy], my other mentor, both went to work in the first Bush administration. I went with them with the firm intent to do something real and never go back to academia. I was done.
At the White House, I found out that two things were true. No. 1, I would go into these meetings and I found that I was really teaching economics to the people who were lawyers and strategists—people who were not economists. And I realized I liked to teach economics, that I had been right about that instinct. The second thing I found out was that the academic research was super important. You invest a lot in research because in the policy process, people can and will say anything to get what they want. The only thing that checks them is the large amount of professional research out there that says, “There are a lot of things that could happen; that’s not one of them.”
Congressional budget office projections:
The CBO was created by the Budget Act in 1974. Its purpose is to give the Congress the information it needs to make budgetary decisions. Think of the CBO as a consulting firm for Congress. It is nonpartisan by statute. There are two things that CBO directors cannot do: They cannot give policy advice, and they cannot pick sides.
In 2000, it appeared that the U.S. budget was actually in balance. There were projections of surpluses as far as the eye could see. I spent most of my time at CBO explaining why they were wrong.
At CBO, you have to do these 10-year budget projections, which is a fundamentally hopeless task, but Congress asks for them. They want a single number. They don’t want ranges. You have to give them a number—that’s your job. On the spending side, the tradition I inherited was to ask, “When we do the projection this year, what do we know that is different about year 10 for sure,” and if there is something, then we modify the projection. If not, then we figure out where we are and [how] we get to year 10. On the tax side, we asked, “Where are we, and what do we believe the growth rates are?”
We had a huge bubble in revenues in the late ’90s, due to taxation of options and bonus income out of the dot-com bubble. They had a revenue bubble and they extrapolated off the peak of it. That’s why it looked like there were surpluses as far as the eye could see. And then it went away, and I had to explain why it went away. One of my major innovations was to make sure that spending and tax projections were made the same way.
Then we got into a situation where we again had very large deficits. If you look at the size of the mess and you start decomposing it, about 50 percent of it was economic projection errors, essentially our estimation errors. Of the remaining 50 percent, the majority was on the spending side, not the tax cuts. That was driven in part by the wars and things like that. But for people who were unhappy with the 2001 and 2003 tax cuts, that was an unpleasant message. So, they weren’t happy with me. For people who thought the spending had value, they didn’t want me talking about the spending side either. It was one of the situations where I know I was doing my job because nobody liked me.
Addressing the deficit:
Right now, there’s no way around it. To my friends on the right, I say, “We’re going to have to raise revenue. I’m sorry, you can’t grow your way out of this. It won’t work. There’s no way.” Then the question is, how can you intelligently raise revenue? The discussion should be about the quality of tax policy, not taxes up or down.
And to my friends on the left, I say, “You’re going to have to deal with the Social Security system that we currently have before we do big expansions.” It is just wrong that the Social Security program is right now scheduled to exhaust the trust fund in about 12 years. And at that point, if nothing is done, there would be a 25 percent across-the-board cut to people’s benefits in their retirements. That’s wrong. That’s no way to run a pension program.
What’s worse is that Social Security was invented to alleviate income insecurity of seniors, but it is now the single-greatest source of income for seniors. That’s just terrible.
On climate, there is a lot of very solid work on the economics of climate change. There was an effort put together by [former Goldman Sachs CEO and Secretary of the Treasury] Hank Paulson and [businessman, former New York Mayor and presidential candidate] Mike Bloomberg called Risky Business that I worked on and produced some economic-impacts scenarios. They differ a lot regionally. It’s really easy to see that if you live on the coast and you get sea level rise, you’ll get some big impacts there.
One of my pet projects at the moment is to require publicly traded companies to make disclosures on financial risk from climate change, and climate change policies. If you’re a coal company, you should disclose the fact that you could be put out of business quickly. That’s a no-brainer. That would allow us, I think, to get a better handle on some of this. It would also stimulate action to actually deal with these problems in some sensible way.
Right now, there are some companies that do this. What they say is, “We’re going to do whatever is consistent with the IPCC [Intergovernmental Panel on Climate Change] having a 2½-degree temperature rise by 2050.” There’s an infinite number of ways to get to that.
There ought to be a standardized set of climate scenarios with climate policy scenarios, and everyone should disclose the financial risks against them. Then we will know a lot more about the impacts.
About the Author
Mark A. Wynne
Wynne is vice president and associate director of research in the Research Department at the Federal Reserve Bank of Dallas.
The views expressed are those of the author and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.