– April 1, 2020
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“Never let a crisis go to waste,” the old adage goes. Unfortunately, political activists and public officials from across the spectrum are now taking this advice to heart amid the ongoing coronavirus pandemic. While many policy responses to the current crisis are well-meaning, even if misguided, be vigilant of those who would cynically weaponize it to advance their pre-COVID ideological goals.

We may see this latter tendency in a new proposal by Berkeley economists Emmanuel Saez and Gabriel Zucman, the data-massaging duo behind a flurry of misleading and false empirical claims about taxation and inequality in the United States. 

Writing for the New York Times, Saez and Zucman use the occasion of the coronavirus’s economic disruptions to argue for the immediate adoption of a massive public jobs security program, accompanied by sweeping and punitive forms of taxation upon corporations and the wealthy. If you think this sounds suspiciously similar to the economic policy agenda that this same pair was advocating long before the COVID outbreak, you are not mistaken.

The proposal, which they also outline in an accompanying white paper, amounts to a bizarre spectacle of trying to shoehorn a sweeping progressive economic agenda into a COVID relief measure. They nonchalantly repackage Medicare for All as “Covidcare for All,” demanding its adoption with the sort of urgency that usually accompanies natural disaster relief. 

Given that such a program would entail unprecedented multi-trillion-dollar spending commitments and the complete reordering of one of the largest sectors of the economy, a rushed and haphazardly executed drive to implement it during the present pandemic borders on recklessness.

Nor can Saez and Zucman resist appending their favorite pet cause to the COVID response: taxes, taxes, and more taxes. They call for an “excess profits tax” reminiscent of U.S. policy during World War II and ostensibly designed to prevent war profiteering by firms with military contracts. Instead, the Berkeley duo wants to apply a similar policy to companies like Amazon that have seen their online sales model surge as a result of stay-at-home orders and the forced closure of most retail stores. 

In addition to its hubristic assumption that the “proper” level of profits may and should be politically determined by centralized government planning, the scheme would also penalize firms that are providing essential delivery services of consumer goods amid a time of growing economic hardship and limited options for obtaining household necessities. The revenue generated by this tax may partially offset the price tag of the progressive spending extravaganza that the pair seeks, but as an economic recovery policy it is similarly reckless.

Underpinning the two economists’ argument is an equally bizarre assertion that a “liquidationist ideology seems to have infected minds on both the left and the right.” One immediately wonders how they missed the pork-laden free-for-all from both sides of the aisle during the recent COVID relief-bill debates, until the reason for this claim becomes apparent. They don’t believe the $2 trillion spending package went far enough. In this usage, “liquidationist ideology” actually means anything that falls short of implementing the entire economic policy agenda of Elizabeth Warren’s late presidential campaign.

But the economists’ sweeping tax and spend proposal also suffers from a misleading evidentiary claim, which their Times op-ed uses to frame the case. At the center of their argument is an alleged disparity in the economic-relief approaches taken by the United States and other countries, particularly European powers with social democratic political inclinations. Saez and Zucman accordingly denounce the U.S. approach of beefing up unemployment benefits during the crisis, and propose instead that the government itself step in as a direct jobs guarantor by imposing rigid restrictions on companies and assuming the wages for affected workers for until the end of the economic shutdown. As per their boasting assessment of this alternative approach, “wages are, in effect, socialized for the duration of the crisis.”

They justify this call for socialization by pointing to the severe spike in U.S. unemployment claims over the last two weeks, almost all of it stemming from the forcible closure of “non-essential” businesses during the pandemic. They contrast this with an idealized portrayal of what they dub the European approach of having the state step in directly as a wage and job-security guarantor. Yet two pertinent facts go unmentioned in their comparative analysis.

First, unemployment numbers in the European Union were already significantly worse than the United States long before the COVID-induced economic shutdown. As of January 2020, EU unemployment hovered north of 6 percent – almost twice the 3.6 percent of the United States. Many individual EU countries were also significantly higher. Italy, which the pair praises for emulating their approach, has maintained a pre-COVID unemployment rate of about 10 percent since the early 2010s. Even a healthier scenario like Denmark, which moved to implement a Saez-Zucman style policy, started from a pre-COVID unemployment rate of 5 percent.

What this means is that many of the countries that the pair are promoting as models were already facing moderate to severe unemployment crises prior to the pandemic, whereas the United States was not. This put them on different economic footings to begin with, which constrains what we can infer about cross-country comparisons of their respective unemployment policies.

Second, Saez and Zucman appear to paint an overly rosy picture of the lockdown’s unemployment effects in countries that have pursued the course they advise. While new numbers are still trickling in, the early signs suggest that the COVID-related spike in joblessness is not an “American peculiarity,” as the pair claim. 

The United Kingdom, which Saez and Zucman place among their model policies, reported 477,000 new applicants to their Universal Credit system (a safety net program that mostly services persons who are out of work) in the first nine days of the lockdown. When the population of the two countries is taken into consideration, this pattern suggests a similar-sized hit to the workforce.

The numbers are similarly grim in other countries that Saez and Zucman identify as following their suggested course. A team of economists in Ireland are projecting an unemployment surge from 4.8 percent to over 18 percent if the COVID lockdown persists into the next quarter. France, which already had a pre-COVID unemployment rate of over 8 percent, reported that over 100,000 companies have applied for a government payroll-reimbursement program. This translates to about 1.2 million French workers on either reduced or zero hours. 

While Saez and Zucman tout this program among their preferred alternatives to the U.S. on account of keeping workers attached to their existing employers, its numbers illustrate that the employment contraction itself is playing out similarly around the world. The economists’ depiction of the U.S. unemployment numbers as atypically severe is therefore misleading. They’re really comparing policies, almost all of which show similar job contractions filtering through slightly different safety net structures.

Saez and Zucman, of course, favor something closer to the French program of direct payroll guarantees by the government, touting its preservation of job security within existing companies even as hours are reduced to zero. But this guarantee comes with trade-offs that they do not acknowledge, including greater labor-market rigidity. These regulatory obstacles have long made it more difficult to fire existing workers, which in turn also makes companies more risk averse in hiring decisions. As a result of this rigidity, France was already plagued by persistently high unemployment rates long before the COVID outbreak. Attempts to even moderately ease this labor-market protectionism set off a wave of protests and strikes that crippled the nation’s infrastructure last year.

The political quagmire of European-style labor market regulations should serve as a reminder that policy does not take place in a vacuum. Interest groups coalesce around programs and policies that benefit themselves, impeding reform and repeal of the same policies – even when faced with overwhelming evidence that they are inefficient, ineffectual, or failing.

Before we “socialize wages” for the duration of the COVID crisis as Saez and Zucman desire, we must ask whether that draconian step is likely to persist beyond the crisis, with interest group politics making it politically impossible to retreat from its regulatory impositions. 

The experience with peacetime regulations of this sort in other countries suggests this has a high probability, carrying with it a labor-market rigidity that translates into persistently high unemployment. Sadly, one also gets the sense that Saez and Zucman would be willing to accept that outcome in exchange for getting their broader economic agenda passed under the cover provided by the pandemic.

Phillip W. Magness

Phil Magness

Phil Magness is a Senior Research Fellow at the American Institute for Economic Research. He is the author of numerous works on economic history, taxation, economic inequality, the history of slavery, and education policy in the United States.

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