Freakonomics Radio - 331. Why the Trump Tax Cuts are Awesome/Terrible (Part 1)

Episode Date: April 12, 2018

Kevin Hassett, chairman of the Council of Economic Advisers, explains the thinking behind the controversial new Republican tax package — and why its critics are wrong. (Next week, we'll hear from the critics.)

Before we get on with today's episode, here's a chance for you to participate in something you've heard about in earlier episodes. We've been following a project called Behavior Change for Good, in which an all-star team of social scientists is running experiments to find the best ways to improve outcomes in health, education, and personal finance. Their first big experiment is called Step Up. It's meant to help people kickstart an exercise habit. It lasts one month. Participants will be nudged with text messages and incentivized with Amazon Cash. The researchers are hoping to sign up a few hundred thousand participants. Their partner in this is 24 Hour Fitness, which has more than 400 gyms in 13 states. If you are a 24 Hour Fitness member and you want to sign up, we've got a special link for

you. It's 24go.co slash freak. Again, that's 24go.co slash freak. If you participate in the experiment via that link, the researchers will be able to separate their data into freaks and non-freaks, and then we can report their findings. If you want to check out the Behavior Change for Good project to make sure they're legit, you can listen to our earlier episodes. They're called How to Launch a Behavior Change Revolution and Could Solving This One Problem Solve All the Others? Okay, thanks. Now on to today's episode. Back in early January, on a brutally cold weekend in Philadelphia,

I attended the annual conference of the American Economic Association, which brings together more than 10,000 economists from around the world. It's always held in early January, often in a cold-weather city. Why? One theory is that they're economists, and that's when hotels and convention centers are cheap. The purpose of the AEA conference is for economists to present new research, to soak up the wisdom of their elders and encourage the ambitions of their juniors, also to drink, flirt, gossip, and hunt for better jobs. Economists, as you likely know from listening to the show, are a particular breed. For one thing, many of them are devoutly apolitical. But every now and again, especially when the political climate is as heated as it

is these days, their apolitical tone is ruptured. That's what happened during one panel discussion. It was titled, quite benignly, tax reform. But it fell barely two weeks after President Trump signed into law one of the most sweeping and controversial tax laws in modern history. And the lead speaker on the panel was one of the chief architects of the new tax plan, the economist Kevin Hassett, who's chairman of the President's Council of Economic Advisors. Also on the panel were three former CEA chairs, one Republican, Glenn Hubbard, who served under George W. Bush, and two Democrats, Austin Goolsbee and Jason Furman, both of whom chaired the CEA under Barack Obama. So things got pretty political pretty fast.

There were a lot of eye rolls, a lot of exasperated groans. The new tax law has many changes, but the most prominent is a huge reduction in the corporate tax rate from 35% to 21%. President Obama had also wanted to cut the corporate tax rate, but he never pulled it off. So you might think the Democratic economists would have been pleased with at least that part of the new Trump tax law. But you'd be wrong. They had specific arguments as to why.

But also, let's face it, everything with Trump's name on it is inherently contentious. I am guessing that tax policy is not your most favorite topic in the world, but in honor of our upcoming tax day, we thought we'd give the new law, the Freakonomics Radio Treatment, track down all four of the CEA chairmen from that panel for a robust debate. This will require two episodes. Today, we focus on sitting CEA chair Kevin Hassett. We'll hear why he thought such a drastic tax law was needed in the first place. So he had really kind of like a raging problem that required antibiotics of a tax reform. We'll hear some hardcore economic wonk speak. There's this thing called the capital deepening contribution to productivity growth.

And Hassett tells us what it's like to work for President Trump. He will challenge you in ways that economists often are not ready for. And then next week, we will dissect the tax law with the former CEA chairman, Glenn Hubbard. To say it's a disaster seems over the top. Jason Furman. The core arguments the administration made over and over again were completely false. And Austin Goolsbee. The entire stimulus that some people said, oh, this is unbelievably large,

and how can we do something that would increase the deficit by $780 billion? I mean, come on, this is four times bigger than that. So put on your tax hat. That is all coming up right after this. From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. This is where it all happens, huh? The February day I visited Kevin Hassett in Washington, D.C. turned out to be as sunny and warm as Philadelphia had been gray and cold.

Hassett works in the Eisenhower Executive Office Building next door to the White House. I was escorted down a long hallway. It's a beautiful library. Oh, this building is amazing. And into Hassett's quite grand office, he was wearing a cardigan that might best be described as avuncular. So if you would just first say your name and what you do. Sure. I'm Kevin Hassett. I'm the 29th chairman of the President's Council of Economic Advisors. Very good. You still enjoy getting to say that? Yeah, yeah.

Especially the number. There's something beautiful about the number 29. Hassett was a bit bleary-eyed as this was the day before the publication of an important book. There's two things really coming out in one book. It's the economic report of the president, which is a letter written by President Trump or, you know, President whoever in the past that lays out his vision for how the economy is doing and how it could do better if we were to pursue his policies. And then there's the Annual Report of the Council of Economic Advisors, which is, for us, I guess, eight chapters that are substantive and go into, you know, what we know about, say, infrastructure investment or tax reform. The Trump White House, the most volatile and unusual White House in many generations, was relatively stable when I visited. This was a few weeks before the departure of Gary Cohn, head of the National Economic Council, reportedly over his objection to new tariffs on steel and aluminum. And those tariffs, it turned out, were just the beginning. This was also before Secretary

of State Rex Tillerson was let go. Kevin Hassett, for his part, says he never had any designs on actually working in government. I became interested in doing campaigns, but not governing, because I didn't feel like I had the patience for government work. So how did he get here? Let's go back to the 2016 election when candidate Trump was promising big changes in Washington. It begins with bold new tax reform. Don't worry, they're going down, not up. They're going down. The idea was that lowering taxes, especially the corporate rate, would help job and wage growth. One of our greatest job creation measures is going to be our 15% business tax rate,

down from the current 35% rate, a reduction of more than 40%. Campaigns are interesting. I think campaigns are when policy happens more than anything else. Because in a campaign, a candidate goes to America and says, here's what I'm going to do. Elect me and I'll do this. And it's all viable at that point. Well, then if he or she gets elected, then they try to do that.

Right. And so most of the time, if you look at governing, it doesn't really get anywhere. But if you study the history of major policy changes, very often they happen right around a presidential election when somebody wins promising to do something and then they deliver because, you know, they have coattails. But Hassett hadn't worked on the Trump campaign or any campaign during the 2016 election. He was, however, a fixture in Republican economic circles. He got his Ph.D. in 1990 at the University of Pennsylvania. He went on to teach at Columbia, work at the Fed, do some consulting for Treasury, and take up residence at the American Enterprise

Institute, a conservative think tank. Sort of like a university without having to teach, which was sort of optimal for my utility function at that time. Hassett, for the most part, held standard free market views in support of free trade, fiscal responsibility, and immigration, some of which ostensibly puts him in conflict with his current boss. He didn't have much of a public profile, except for having co-authored a book in 1999 called Dow 36,000. It suggested that the stock market, which was on a tear during the dot-com boom, would more than triple over the coming years. It didn't, not by a long shot. Even today, after a long and remarkable bull run, the Dow Jones Index is only at around 25,000.

The book's bold prediction followed Hassett all the way to his Senate confirmation hearing for the CEA job. You wrote a book in 1999 about Dow 36,000. What happened? Sir, I think that one critic of mine once looked at that book and called it a youthful indiscretion. And I think as youthful indiscretions go, it wasn't such a bad one. I think that the motivation of the book then was to make sure that people understood how important it was, if you can be a long-run investor, to invest in equities because they're a good

investment. But Hassett has also had, throughout his career, a deep interest in tax policy, the relationship between tax policy and investment, how taxes affect low-income workers, the distributional impact of policies like carbon taxes and cap-and-trade, and a host of other questions that go directly to Washington policy debates. All this made him a valuable resource for Republicans running for high office. What happened was that Glenn Hubbard and Larry Lindsey

were organizing a campaign team for President Bush, who was Governor Bush at the time, and they were going down to Austin and helping him put together a platform. And since all my friends were doing it, I decided to help them out. And so I was- Now, were you friends with any Democratic-aligned economists? Oh, lots. Yeah, sure.

I mean, in fact, most economists are probably Democratic-aligned. And so the majority of my economist friends are Democrats, for sure. But you were- But my most frequent co-author, Alan Auerbach, is a well-known Democrat. Austin Goolsbee, I helped with his dissertation when he was still in grad school at MIT.

Oh, is that right? So there were a whole bunch of us who had known each other for a very long time. But I helped them. But then John McCain asked to meet with me. And basically no one would work for McCain or anybody else because everyone was so sure that President Bush was going to win. And I guess everybody wants to work for a winner so they can get the job they want. But, well, the point is that my utility function is quite a bit different from that of many people. And so the fact that if I worked for McCain and he lost, the fact that that meant that I wouldn't get a government job had no value to me because I didn't want a government job.

And so I was honored to be policy director for McCain. And I didn't think that I would ever work for the Bush administration if they won. And so I didn't seem that there would be any personal cost from the blackballing everybody talked about back then if you worked for somebody else. But I worked with McCain. It was lots of fun. And so I did five presidential campaigns, but I didn't work on the last one because I was focused wholly on this project we had at the American Enterprise Institute called the Open Source Policy Center. And I decided to stay out of politics and just be a resource for every campaign, left or right.

The Open Source Policy Center, you can look it up at ospc.org, offers analytical tools to assess the impact of public policy proposals, including tax proposals. Anybody who wanted to figure out how to score their tax plan could send us an email, and then we would help them use the interface online to score it. And that's, yeah. So I had exited politics, but then the Trump team used our open source stuff quite a lot. And then after President Trump was elected,

then they approached me to do this job. Now, this job was unfilled, as I understand it, for about eight months. You didn't come on at the beginning of the administration, right? So I spoke with most everybody, including the president, about taking the job pretty early in the process. But then once you do that, if you're not in the first group of people that they rush through right at inauguration, then you get put into the normal Senate process, and the normal Senate process

has been historically obstructionist because the Democrats have clotured everybody and made it down to one or two people a week get confirmed, and I have all these friends who've been appointed to really senior positions that still haven't had a confirmation vote or anything. Were you doing some CEA work? Yeah.

So, in fact, I think Jason Furman and Austin Goolsbee and some of my other friends who've been in this position before told me that once someone's voted out of committee, that it's standard practice for the CEA chair to work as a consultant at the White House, but not to do any of the, like, not sit in this fancy office or go give speeches as CEA chair. Hassett's nomination was supported by, among many others, both Austin Goolsbee and Jason Furman, the former Obama CEA chairs. The choice did rankle some populist elements of Trump's coalition, but the appointment finally went forward. This hearing will come to order. We will begin today's hearing. On June 6, 2017, Hassett sat before the U.S. Senate Committee on Banking,

Housing, and Urban Affairs for his confirmation hearing. Mr. Hassett has had a distinguished career in economics that includes positions in academia, government, and policy. By a vote of 81 to 16, Kevin Hassett was confirmed as the 29th chair of the Council of Economic Advisers, which had been established by the Employment Act of 1946. The act required the White House to submit to Congress every year a full economic report. The CEA was set up to assist

and advise the president in that process. And what made you decide that the time was right to finally try governance? I don't know. I did not seek the position when asked, I was honored and decided maybe at this point in my career,

it's something to do. Now, some people were wondering if there would indeed, so first of all, the chairman of the CEA, your position was, I don't know if demoted is the right word, but lowered out of the cabinet. So it's no longer a cabinet position. Historically, it hasn't always been. It was only fairly recently. And i don't think uh i don't think it should be in the cabinet uh and here's why uh what so so i think that what the 46 employment act that created the council of economic advisors what it intended was that there was a place in the white house where there are professional economists who understand how economics work who want to see the evidence the evidence before they have an opinion about whether this or that works.

Now, it is a political appointment. But if you're a political member of a cabinet, then part of your job is probably just whatever the team decides, then you become an advocate of that position. And I think that if you go back and look historically at the way CEA chairs have acted, then they've tended to talk about the objective economics of this or that and do so without hindrance of politics often. Not always, but often.

So anyway, so if I were to redesign the CEA, I wouldn't. I'd just leave it the way it was originally designed in 46. And I would try to keep the CEA, I wouldn't. I'd just leave it the way it was originally designed in 46. And I would try to keep the CEA chair out of the cabinet. That said, the CEA chairperson's views on the economy rarely digress from the president's views, which makes sense since it's the president who picks the CEA chair.

But that said, Hassett argues that the annual economic report provides a rare opportunity for economics to take center stage, if only briefly, in the political arena. I think that if you go back and look at the economic reports, that there have been a number of them that are very serious historic documents. I would think that the first one for President Kennedy comes to mind. In short, the American economy is in trouble. The most resourceful industrialized country on earth ranks among the last in the rate of economic growth. For President Kennedy, we were coming off of the sort of hangover from the post-World War II boom

and then wondering where are we going to go next. And then for President Reagan, we had been, as really President Trump did, we had been through a number of years where we weren't in crisis anymore, but it seemed like we weren't growing so hot. My fellow Americans, in recent days, all of us have been swamped by a sea of economic statistics, some good, some bad, and some just plain confusing. There are times when I think that the paper traffic that crosses my desk in a week could fill a big city phone book, and then some. The first one for President Obama comes to mind. We start 2009 in the midst of a crisis unlike any we have seen in our lifetime.

You think about the terrible financial crisis President Obama's team came in during, and I think that each of those economic reports of the president had a lot of vision that ended up, I think, being very useful for thinking about the trajectory of the economy. But also, if I were a historian, I, the first copies of this year's economic report, the report to be released the very next day, were being delivered to his assistant. Later on, I took a look. President Trump, in his opening letter, was characteristically boosterish. The primary components driving my administration's pro-growth policy agenda, he wrote, tax cuts, tax reform, and smart deregulation have inspired enormous confidence in the economy and optimism that it will continue thriving.

But the best is yet to come. How often do you see or meet with President Trump now in your role? I'm not supposed to talk about that, but I am seeing him tomorrow for the economic report of the president. Right, yeah. I'll just say it this way, that when I surveyed previous CEA chairs about the job, and it's a very complicated job. There's not an instruction list. Then I basically ended up with a list of things that I should demand to be confident that the CEA is in its normal place at the White House. There's a list of things.

Like being a part of the senior staff meeting with General Kelly and everybody in the mornings. So I had that list. So when I came in my first day of work, I sat down with Kerry Cohn, who runs NEC, to talk about day-to-day life. And before I even said anything, he said, well, I've been thinking about your job, and here's the eight things I expect of you. And it was everything on my list. So he had probably talked to similar people. But there was never any dispute or fighting or anything or redefinition. So I think that the demotion from the cabinet thing is a sensible move

and it hasn't influenced our day-to-day life here at all so we should infer that you have a lot of access to and that your voice is heard in economic policy regularly which is what one would expect of the head of the CEA let me ask you this this president is obviously unusual in a lot of ways and one way in which he was deemed unusual among academic economists, or at least the perception that I gathered, was that academic economists felt that he was not an empiricist in the way that some presidents are.

President Obama was famous for enjoying economic analysis and dissecting it with the economists on his staff. This president, the perception is, at least, that he's more of an intuitionist, that he comes from a business background and therefore is probably more likely to engage with a kind of idea of what success is as opposed to base something on purely empirical research. So I'd love for you to talk about that gap.

Maybe the gap is much smaller than I've just described it, but I'm really curious to know the president's appetite for, interest in, and ability to act on, especially change his mind in response to academic and empirical research that you've presented him with? Yeah, the president loves to see data charts. He likes to participate in debate. He will challenge you

in ways that economists often are not ready for. One example was that we were making a chart at one point of how home prices are doing around the country. And the president was sure that our data must be wrong because we had a different number for each state and with color for hot and cold markets or something like that. And he said that Florida is way hotter than our data implies, so our data must be wrong.

And so then he went into the nuances of how the data are constructed. Was he right or wrong on that count? Oh, we, well, I mean. You were right? We were right on that one. And did he accept your rightness ultimately? Yeah, yeah, yeah.

But it's an example of that you're using an accepted source and wait a minute, that's so different from what I think. That must be wrong. And often that kind of challenge leads to an insight that's really useful. The way they construct this is imputed rent on owner-occupied housing or something.

That imputed rent is something they haven't changed in 20 years, the formula for. So anyway, we interact with him. He sees slides. He responds to them. He likes slides. He responds to them. He likes debate. He changes his mind. And he likes to have lots of opinions.

I think sometimes when I watch him operate, I think he might be one of the first people who really understood the genius of the wisdom of crowds idea that he kept. So ask a bunch of people what they think about something and then why. Because if you and I were making a decision about just about anything,

then we might very much like to know what the other people in the office think about it because they might think of something that we didn't think of or so on. But yes, he likes lively debate. He likes to talk. And he is really a voracious consumer of charts. So I am very curious about the Tax Act

because it's a big deal. It's so far the signature legislation of the Trump administration. So I'd love you to really just begin with your involvement. When you came in, how early was this a priority of the Trump administration, and how did the work begin to figure out what it was going to be? Then we'll get into what it is

and what's in it and what's not. The Trump team was all over taxes during the campaign. Our tax plan will greatly simplify the code and reduce the number of brackets from seven to three. And it's really how I got to know them. In addition, because we have strongly capped deductions for the wealthy and closed special interest loopholes, the tax relief will be concentrated on the working and middle class class taxpayer. And so, you know, really the bones of this plan were, you know, laid out during the campaign. They will receive the biggest benefit and it won't even be close. This is a working, thank you. This is a working and middle class tax relief proposal. The tax bill that ultimately passed, with zero Democratic votes, by the way, was not exactly what Trump had pitched on the campaign trail.

So, coming up after the break, what is in it, what's not, and why? And that's exactly the kind of thing that we do, and the kind of gory detail that I know that you and your fans like so much. When Kevin Hassett discussed the Trump administration's new tax act back at the American Economic Association conference in Philadelphia, he admitted that the final result wasn't exactly what he or the White House had wanted. This was mostly due to the horse trading necessary to get it through Congress, an especially narrow alley since not a single Democrat in the House or Senate voted for it. There was, before and after the vote, a great deal of debate and vitriol. The Democratic line was that the new tax law rewarded the wealthy at the expense of everyone else and couldn't come close to paying for all

the cuts. The Republicans argued that their tax bill would benefit nearly everyone. It increased the standard deduction, which made tax filing simpler for many and lower for most, although it raised taxes and complicated the process for some. It did not reduce the number of brackets, as Trump had promised during the election, nor did it lower the corporate rate from 35% all the way to 15%, as he'd promised. But it was lowered drastically to 21%. The corporate tax cut was the centerpiece of the plan, both economically and psychically. And at least according to Kevin Hassett, its effect is already being felt. Because exactly the things that we said would happen if this bill passed are happening, right?

Like the people are moving the plants back, the wages are going up, we've got more than 4 million people that have already seen a big pay raise. Critics argue it's way too early to say whether the corporate rate cut will truly accomplish its desired goals. And they say that a lot of the recent headlines about American firms repatriating foreign cash or giving workers raises or bonuses are mostly window dressing or PR stunts. So, okay, let's drill down into why Hassett thinks his plan will work. Let's start with his headline. Yeah, I think that the headline is we think that that path to low productivity and low economic growth that we experienced over the last few years is not something that signals a radical departure from the trajectory that we've grown to know and love.

And I think that the headline really is that we're not heading for a new normal. We're just heading for normal. In other words, the new normal. We're just heading for normal. In other words, the new normal of low growth isn't a foregone conclusion. Or is it? This is a major debate in economics at the moment. On one side are those who think we are in a new normal or a new mediocre, or in econo-speak, a state of secular stagnation. It's the idea that a range of factors, from low productivity growth to an aging population, have conspired to depress growth.

You know, I think there's a lot of evidence that that view is incorrect and that it's like a convenient political view, but not an economically sound one. Why does Hassett believe he's right and the doomsayers are wrong? Because, he argues, the old corporate tax rate, and complicated tax rules generally, gave American firms a strong incentive to move their capital abroad. So they did. Lowering the rate and persuading companies to bring their resources home, he argues, will result in a greater capital deepening,

as economists call it. It's just the idea that if you got more machines, then you're more productive because the machines increase your productivity. And that, he argues, will lead to higher wages. If you think about it, the second Obama term was a time when you would think that we're kind of returning to normal. We're recovering from this terrible financial crisis. Things would be getting back to the way they were. Instead, we had this pretty radical anomaly of capital deepening, contributing negatively to productivity growth for the first time since the Second World War. And so what that means is that the sort of depreciation of machines in society

was bigger than the investment into machines that people were making. So by your reckoning and in your view, how much of that anomalous and bad scenario was driven by this version of global manufacturing that the U.S. embraced 30, 40 years ago? Well, I think that it's the best explanation for what we're seeing and that if you want to think about the economics debate, embraced 30, 40 years ago? I think that it's the best explanation for what we're seeing. And if you want to think about the economics debate,

the academic debate or the political debate, because they both kind of were interlaced while the tax bill was hot, then there's one school of thought that thinks that capital's highly mobile. If you try to tax the highly mobile thing, it moves. And you don't get much revenue from that. And when you do that, the immobile factor ends up bearing the cost. And so in that view, we've had this unprecedented slow wage growth and slow economic growth because we tried to tax the mobile thing.

The mobile thing ran away. And then the immobile thing, which in this case would be workers, ended up holding the bag. And so the workers saw their wages not go up because the firms were locating the jobs over there and moving the capital that could have driven their productivity up over there. And so they were stuck basically holding the bag. And then the other school of thought is, well, marginal incentives don't really matter that much.

Investment's not that responsive to these things. People are going to locate where they're going to locate, but taxes are a small part of that puzzle. And the reason that we're growing slowly is not because the Obama team enacted unwise policies, but just because the whole world is slowing down. So you've just stated the Democratic position, essentially. The latter position is the Democratic position.

Right, it's not our fault. The Martians gave us slow growth, and it stated the democratic position, essentially. The latter position is the democratic position. Right, it's not our fault. You know, the Martians gave us slow growth, and it's the new normal, and there's nothing we can do about it. Now, I think that if you go back and look at, say, my papers on that since graduate school, and I have watched the literature evolve, and I have a very strong idea how this corporate tax bill will work and why it will be good for the economy. And that belief about what the literature says was not a partisan thing. It wasn't that if President Clinton had – if it was a President Clinton and she had asked me to go on TV and talk about the tax bill, then I would have said the same things. And for that matter, President Obama said for years that he wanted to. Wanted a 28% rate. And Luigi Zingales actually, it was an off-the-record lunch,

and so I've never spoken about it. But Luigi Zingales, I guess, blogged about the time that he saw me have lunch with President Obama. And I had Obama convinced to be pretty aggressive about corporate tax policy based on the science, based on the fact that it's the right thing. And he was contrasting President Obama's response to my analysis to that of some of the economists that served him, who were vocal critics of the tax bill. But I think that it's working the way we expect it. You mean vocal critics now? Or vocal critics during the debate, at least. I think that the vocal critics are going to probably be harder and harder to find, assuming that the thing works according to plan. How strong a prediction are you willing to make, whether it's on a GDP dimension, whether it's on employment and wage. I guess employment we're not so concerned

about right now. It's pretty good. But wage dimension and so on. There's an easy short answer, which is that we're not in the new normal. It's my belief we're just back to normal. And the growth rate, so our growth rate forecast for the next 10 years is below the median economic report the president forecast, but significantly above the low-growth, pessimistic outlook of the Obama administration in their last four years. You know, their economists are arguing that, you know, we're on pretty weak ground. They must believe that because that was the ground that they sort of established. I think they genuinely believe it, but, you know, we're hoping to prove them wrong.

And I think that the data so far are doing that. Even though the new tax bill lowers taxes for most Americans, it hasn't resonated very broadly. Why? One reason, to be sure, is that the president himself isn't very popular, but also many of the bill's intended benefits are necessarily long-term. A lot of the near-term changes that were up for discussion, changes that Trump had promised on the campaign trail, didn't come through. A plan to deduct child care expenses. An expansion of the earned income tax credit. A plan to increase taxes on carried interest, the money earned by private equity firms and hedge funds.

The Republican tax law wound up including none of these. Moreover, the corporate rate cut has been widely seen as better for firms and shareholders than actual workers. Kevin Hassett disagrees, and he comes from the very kind of place with wage stagnation and job loss that powered Trump's election. We were growing up in a town called Greenfield, Massachusetts, a wonderful town, people should go visit it, that was experiencing at the time, you know, a kind of depression because the Greenfield tap and die, which had previously employed thousands of people, was down to

almost nobody. There were paper mills along the Connecticut River on either side of town that were shutting down. And, you know, most of the kids that I grew up with were pretty pessimistic about, well, what am I going to do with myself? And most people ended up leaving town. And so I can remember going back, you know, a few years after I graduated from college and wandering around town. And half the stores were closed. And there's this video game called Fallout. Do you know this video game?

I don't. Friends, your future may not be as secure as you think. Where will you be when the atomic bombs fall? It's basically a post-apocalyptic game where you wander around and explore a world and and and that's what it looked like and it won't know what was but it's post-apocalyptic but they but even at some point i remember reading a news story that the producers of fallout like maybe the third version of it um were using the paper mill that's right across the river from my dad's house as a set. So they went there and they had taken all these photos so that, like,

when people explore the Turner's Falls paper mill in that video game, if they do, I'm sure your listeners of all people are probably, you know, fall out. But anyway, so they would be at that place, and I still go home. My dad's still there, and we walk around. And, you know the town's on a better trajectory now but but i think that as i went to uh college that one of the things that sort of i was focused on in my own studies was you know why is it that places filled with talented folks you smart, talented folks,

like Greenfield, Massachusetts, can suddenly just sort of hit this equilibrium where most everybody's leaving, no businesses want to be there? Why did Greenfield fall off the map? Now, is the short answer to that, whether it's textiles, whether it's plastic, is it just about offshoring and manufacturing elsewhere? Is that not really the big component of Greenfield? I think that basically for places that there are two possible Nash equilibria. A Nash equilibrium, named after mathematician John Nash of A Beautiful Mind fame, is a concept from game theory.

It describes a situation whereby multiple participants have reached a stable equilibrium and conclude, given the choices of the other participants, that there's no rational reason to do anything different. To Hassett, it's a helpful framework for thinking about the economic vitality of different communities, like Silicon Valley at the moment. One Nash equilibrium is that everybody goes there because everybody else is going. Or like Greenfield, Massachusetts. And the other is nobody goes there because nobody else is going. And that you can flip from one to the other.

And so the question is, what makes those flips happen? And that's something that I've done a lot of work on over the years. Which is why one of Hassett's favorite parts of the tax bill, something that hasn't gotten much attention, is financial support for what are called opportunity zones. I think it's one of the things that in the end we'll look back on as the biggest deals in the in the tax bill because what it's done is it's it's set up a vehicle that people can use to make a difference in distressed

communities it's made it so that there's a new and innovative organizational form which will which could be set up by mutual fund company or a private equity firm, or you and I could set one up. And it becomes a pool of resources that can invest in distressed communities and not pay taxes until you take the money out of the distressed community. And the sort of key insight is that you could take your unrealized capital gain and roll it into a distressed community fund. And then when you take the money out, you'll pay full capital gain.

But you can start to try to make a difference right now without having a big tax consequence. And I talked about how I think that distressed communities are a bad Nash equilibrium where nobody goes because nobody thinks anyone else is going to go. And I think that everybody really wants to make a difference. And so I think that the opportunity zone could become a kind of social norm where people feel like some share of their wealth needs to give back. And that if that happens,

then you get the new Nash equilibrium where everyone's racing to get there before everybody else does. So I'm very optimistic about this. Now, granted, it's something of an experiment, but I think that there's a lot of smart thinking behind it. That's what economists are always preaching and other social scientists is let's use tax code

and different law to start small experiments and try to scale them up. So in the Tax Act, is that a Kevin Hassett special? Is that there because of you? Oh, you should never claim credit or take blame. And so, but I think that if anyone asked me about how that would work, then I would have said, you know, here's how it works. And here's why I think that it might have a positive effect on those communities. The Opportunity Zone experiment is projected to cost the federal government about $1.6 billion over 10 years, which may sound like a lot.

But keep in mind, the overall tax bill, with that huge cut in corporate rates, is estimated to cost the federal government at least a trillion dollars over 10 years. And the Trump administration has already spent and plans to spend many more billions in areas like defense and infrastructure. Increasing the deficit like this, critics argue, during a time of high corporate profits and nearly full employment, is irresponsible and hypocritical. Republicans, after all, spent eight years blasting the Obama administration for its deficit spending, much of which went into recovery from the Great Recession. Trump himself routinely criticized President Obama on those grounds, and he promised his own economic plans would be deficit neutral.

Between the Tax Act and the new budget, there's a lot of spending going on. I'm curious, what happened to the old GOP fiscal conservative reputation? Well, I think that the president rightly prioritized a couple of major problems in his first year. And I think if you look at what's happened to the Defense Department, that you could argue that it's in a similar difficult state and requires a lot of spending if you look at the percentage of airplanes that can't fly because they don't have the parts and so on. And so I think that in the first year, it makes sense to prioritize, given that there's only so much time on the legislative calendar to get things done and so on.

But, you know, I've written extensively over my career on the positive economic effects of fiscal consolidation. And that means that in the end, you know, in the medium and long term, that deficits do matter a lot. And to the extent that growth disappoints, then, you know, having, pursuing some kind of long run consolidation is something that will be inevitable, just to be a question of which administration will have to do it. Okay. Today, we got to hear Kevin Hassett's defense of the new Republican tax bill. Coming up next time on Freakonomics Radio, as promised, the view from the other side of the aisle.

The overwhelming evidence is that the trickle-down magic beanstalk beans argument is just nonsense. I was in the White House for all eight years of the Obama administration for most of the second half as chair of the Council of Economic Advisors. Gotcha. Okay, so when Donald Trump talks about the swamp, you are the swamp, Jason. If this is a once-in-a-generation opportunity to change the tax code, all we did is just go pile on to a problem that we already knew existed. And what a fellow Republican would have done differently with the new tax law. The worst thing is something that isn't in it.

The battle of the CEA chairs. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rozalski. Our staff also includes Allison Hockenberry, Merritt Jacob, Stephanie Tam, Max Miller, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts or wherever you get your podcasts.

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