Wednesday, February 17, 2010

Bill Jaeger: Which Economic Analyses Can Oregonians Trust?

NOTE: William K. Jaeger, Professor, Graduate Program in Applied Economics, Oregon State University asked for space in this blog to post his essay on competing economic analyses.  Here it is:

Now is a good time to reflect on the just-concluded debate over Measures 66 & 67; issues of taxes and public services, kickers and rainy day funds, are unlikely to remain on the back burner in Oregon for long.

In the run-up to the vote last month, there was a wealth of useful information, opinion and passionate testimonials that helped to inform the debate. Oregonians also heard from a number of economists who conveyed what economic research tells us about the effects of changes in taxes or public services on jobs and economic growth.

For every economist saying one thing, however, there appeared to be another economist saying pretty much the opposite. And while economists often disagree on matters of interpretation and policy, what Oregonians saw recently reflected much more than the usual differences of opinion among well-informed economists. Indeed, what occurred in Oregon recently included efforts by a small number of economists that misled Oregonians by: a) misrepresenting what scholarly economic research tells us about state and local taxes and public services, and b) portraying their own estimates as having the same credibility as published, peer-reviewed research.

These efforts represent an extraordinary break with established professional standards in economics – or in any other scholarly field – whether those economists are affiliated with universities, research institutes, or respected consulting firms. Moreover, these efforts make it difficult for the general public to distinguish between the valid insights from scholarly economic research, versus the often-contradictory claims made by three economists supported by the Portland-based libertarian Cascade Policy Institute (CPI).

It is important to be clear on what these three economists (Randy Pozdena, Eric Fruits and Bill Conerly) wrote and said, and how their words and analysis compare to established economic research and established professional conduct. First, they referred to peer-reviewed scholarly research, but repeatedly misrepresented the findings of that research. Here are a few examples:



  • Pozdena and Conerly, in the official Oregon Voters’ Pamphlet, wrote that their studies estimate the impact of Measures 66 and 67 to be a loss of 70,000 jobs in Oregon. They added: “You will find that our views are shared by the OECD, a 30-country organization that studies factors affecting economic development.” This claim is simply not true. First, the OECD has not expressed an opinion about the effects of taxes in Oregon. Second, Pozdena and Conerly are referring to a research study by OECD economists (Johansson et al., 2008) that used cross-country data to examine how different tax structures (the composition of different types of taxes) affect growth, not the effects of tax levels on growth. In fact, the OECD authors state explicitly that an analysis of changes in tax levels was an issue “beyond the scope” of their study. Moreover, if Pozdena and Conerly were to apply the main results from this study to Oregon, they would conclude that Oregon should have a sales tax. A different OECD study, however, did look at the effects of tax levels on growth across OECD (industrialized) countries (Myles 2009). That study concluded that “empirical evidence for the hypothesis that the level of taxation affects economic growth is very weak.” Pozdena and Conerly make no mention of this study, or the fact that many other studies have come to similar conclusions.
  • Fruits and Pozdena (2009) claim that the research by two of the best-known economists on state and local taxation, Michael Wasylenko and Timothy Bartik, “ties increased state and local personal and business income taxes to lower employment and lower economic output and other effects.” This is highly misleading. Indeed, Wasylenko (1990) states that “(t)axes do not appear to have a substantial effect on economic activity among states.” He also concludes that despite the belief in state governments that low taxes are needed to create jobs, “firms may favor a stable business tax system that efficiently funds the services demanded by businesses and citizens of the state.” Wasylenko also makes clear that the estimates of negative effects of tax increases will be influenced by the positive “effects of public services on growth to the degree that public-service levels and taxes are positively correlated (as they typically are since higher taxes finance more services)”(Wasylenko 1997, p.46). However, Pozdena and Fruits do not mention these conclusions.
  • Fruits and Pozdena (2009) claim that taxing the incomes of the wealthy will cause entrepreneurial households to leave the state. To support these claims they cite a California study (Kolko 2009). However, that study actually arrives at the opposite conclusion: Kolko concluded that high income households are less likely to move, and low income households are more likely to move, to states with low or no income taxes than are high income households.
  • In the Salem Statesman-Journal, January 17th 2010, Fruits and Pozdena state that “(t)he literature confirms that raising marginal tax rates slows economic and employment growth and drives taxpayers to other jurisdictions. This is true even if the increase in taxes goes to preserve or increase education and health care spending.” The last part of this statement is, once again, contrary to the literature they are referring to. Tim Bartik (one of the leading authorities on state and local taxes), concludes that “(t)ax increases would have a less negative effect on an area’s business activity—or even a positive effect —if public services were simultaneously changed in the same direction” (Bartik 1991, p. 43-4). In fact, Bartik has estimated the positive effects from public services, for a typical state, to be similar in magnitude to the negative effects from taxation.
Fruits and Pozdena look only at the costs (taxes) while ignoring the benefits (public services), and as a result they ignore half the central question. If this same approach were used to advise farmers, they would presumably advise them to stop buying fertilizer because it raises costs; same advice for seeds.


The second issue is that these economists disseminated their own analysis without following professional standards for transparency and peer-review:

  • The original estimates by Pozdena and Conerly of 70,000 lost jobs from passage of Measures 66 & 67 were based on rough calculations done in the summer of 2009. These estimates were not based on the large literature on the topic – the dozens of peer-reviewed studies of state and local taxes and public services published over the past 30 years. Instead, one part of their estimate was based entirely on a pre-existing unpublished statistical analysis by Conerly that was never subjected to peer-review. The other part of the estimate was based, surprisingly, on two international studies comparing national tax programs across many countries (including the OECD study mentioned above). One of the studies examined the composition of national tax systems (not the tax levels), and the other cross-country study included both industrialized and poor, developing countries (Lee and Gordon). Most economists would see these as inappropriate studies on which to estimate how Oregon’s economy would be affected by a tax increase. Indeed, the Pozdena and Conerly analysis was examined by a nationally-recognized expert in state public finance, co-director of the non-partisan Tax Policy Center and former editor of the National Tax Journal, Roseanne Altshuler. Altshuler had previously headed up President Bush’s Advisory Panel on Federal Tax Reform in 2005. She (and co-author Kim Rueben) reviewed the Pozdena-Conerly estimates and found these and other flaws; their overall assessment was that these estimates were “without merit.” This amounts to a peer-review rejection. In other words, Altshuler found the estimates to be invalid and un-publishable.
Pozdena and Conerly responded on the CPI website to the Altshuler and Rueben peer-review by misrepresenting the statements made by Altshuler and Rueben. Pozdena claimed that the OECD study he used included only OECD (industrialized) countries and that those results supported his conclusions. Altshuler and Rueben, however, had debunked this claim in detail in their written review, including pointing out that the other study Pozdena used (Lee and Gordon 2005) “report that the tax effect is near zero for OECD countries which are, presumably, the ones that are most directly comparable to the U.S. states.” Altshuler and Rueben also pointed to a similar study (Garrison and Lee 1992) that found the corporate tax rate to be significant only for non-industrialized countries.
Conerly responded by claiming “nothing in the Center’s report dealt with his current analysis, which found that some 30,000 jobs will be lost if Measure 66, the personal income tax increase, goes into effect.” This is untrue. Altshuler and Rueben conclude “we are not at all confident in the model (Conerly) used to derive his estimates. Understanding the attractiveness of a state to both individuals and businesses needs to take into consideration all of the factors that affect individuals’ choice of location, including quality of life and public services (e.g. schools, roads and public safety).” Conerly ignored the benefits and looked only at costs.
In their “new” report made available on the CPI website in December 2009, Fruits and Pozdena assert that the “job loss estimates in this study are a bit lower than earlier estimates that drew on general literature.” Here “earlier estimates” refers to the Pozdena-Conerly estimates of 70,000 jobs lost. As discussed above, these estimates did not draw “on general literature.”
So, what would justify ignoring the entire relevant published peer-reviewed literature? In comparison, Pozdena and Conerly came up with estimates that, looking only at the tax side of the question, were at least 5 times larger than most estimates in the general literature. Moreover, the general literature recognizes that to estimate the net effect of these tax increases one would need to include an estimate of the positive effect of the public services provided. Pozdena and his colleagues do not include this, even though they claim to have done so. Indeed, with estimates of the negative effects of raising taxes that are five-times larger than what the published literature suggests, any serious research economist would first ask themselves why there results were so different from the peer-reviewed literature on this topic.
The Fruits and Pozdena study (2009) was prepared following the criticism of their initial estimates by Altshuler and Rueben. The author’s explain that their new study uses new data and different methods, but came to very similar conclusions about job losses with Measures 66 & 67. The new report looks more substantial (15 pages), and includes a long list of references to published economic research. But it contains few details about their data, methods, and the nature of the statistical models and results on which their conclusions are based. When asked, the authors refused to provide the underlying details of their methods and analysis. Transparency and peer review are the cornerstones of quality control in professional research, but these economists sidestepped both while continuing to present their findings as being credible and appropriate for public distribution. This is inconsistent with the professional standards in economics or any other scholarly field.


In contrast to this work tied to CPI, other advocacy groups promote their agendas in ways that follow standard practices. For example, the Oregon Center for Public Policy is a progressive public analysis organization, frequently described as having a liberal-leaning agenda. However, the OCPP frequently draws on, and accurately utilizes, peer-reviewed economic research, and findings of studies by reputable consulting firms. For example, they cite an Ernst and Young study (conducted for the Council on State Taxation) that ranks business taxes by state. They draw on analyses from the Institute on Taxation and Economic Policy which produces estimates of tax levels by income group across states. Moreover, when they had misgivings about the estimate of 70,000 jobs lost with Measures 66 & 67, OCPP solicited an expert peer-review from an unbiased source (the Tax Policy Center’s review by Roseanne Altshuler discussed above).

Conversely, Pozdena, Conerly and Fruits appear to want to have it both ways: they want to claim the credibility of the peer-reviewed economics research, but they don't want to be limited to the conclusions that the economics research can support. While they can add a long list of published economic studies at the end of their report to give the impression of scholarship, on closer examination we can see that their conclusions are not based on that literature, and in fact contradict it.

By misrepresenting published economic research, making public claims about findings that have not been peer-reviewed, are not based on methods and analysis that are transparent and available to the public and to other economists for inspection, this work has misled the public.

Oregonians will again face difficult choices involving taxes and public services in the future, and they will want to weigh many considerations in deciding what path to follow. Economics can provide important insights for some of those considerations, and it would be unfortunate if these kinds of misleading statements about economics continue to confuse the public. The CPI and the economic consultants they have supported in this work do a disservice to Oregonians.


References

Altshuler, R. and K. Rueben, “Examination of Oregon’s Proposal to Raise the Top Corporate Tax Rate and Top Personal Income Tax Rates,” Urban Institute Brookings Institution/ Tax Policy Center, November 23, 2009. http://www.ocpp.org/2009/20091123_TPC_Oregon_Memo_final.pdf

Bartik, T. J., 1991. Who Benefits From State and Local Economic Development Policies? Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Bartik, T. J. (1995). Economic development strategies. Working Paper 95-33, W. E. Upjohn Institute for Employment Research.

Fruits, E. and R. Pozdena, 2009. Tax Policy and the Oregon Economy: The Effects of Measures 66 and 67. Cascade Policy Institute, December. http://www.cascadepolicy.org/pdf/Measures66and67-web.pdf

Garrison, C.B., Lee, F. Y., 1992. Taxation, aggregate activity and economic growth: further cross country evidence on some supply side hypotheses. Economic Inquiry, Vol. 30:172-176.

Johansson, A., C. Heady, J. Arnold, B. Brys and L. Vartia “Tax and economic growth,” OECD Economics Department Working paper No. 620, 11 July 2008. http://www.oecd.org/dataoecd/58/3/41000592.pdf

Kolko, Jed, “Are the Rich Leaving California.” Public Policy Institute of California, July 2009.

Lee, Y. and R. Gordon, 2005. Tax structure and economic growth, Journal of Public Economics, vol. 89(5-6): 1027-1043.

Myles, Gareth D. 2009. Economic Growth and the Role of Taxation: Aggregate Data. OECD Economics Department Working Paper no 714. http://www.olis.oecd.org/olis/2009doc.nsf/LinkTo/NT00004A66/$FILE/JT03267986.PDF

Oregon Voters Pamphlet, 2010. Measures: Oregon Special Election, January 26, 2010. http://www.sos.state.or.us/elections/jan262010/guide/cover.html

Wasylenko, Michael, 1997. Taxation and economic development: The state of the Literature, New England Economic Review, March-April: p. 37-52.

5 comments:

ericfruits said...

Professors Emerson & Jaeger: Typically one enters campaign mode BEFORE the ballots have been cast and the vote has been settled. It particularly unseemly when the position you are advocating prevailed. Remember: You always punch up, not down.

Patrick Emerson said...

From my POV the point was precisely to get away from the politics of the debate and into the academics of it now that the political overlay has been removed. I am happy to post a rebuttal should you so desire - I am not interested in this blog becoming partisan. I thought Bill's viewpoint was worth discussing openly and so I agreed to post it.

ericfruits said...

Thanks for the offer. Dr. Pozdena and I have already responded to Professor Jaeger's screed in an earlier op-ed. Any further discussion with him on this matter would be a case of camelum saltare doces.

We have hit the point now where we need to wait to see how this plays out empirically in Oregon. George Stigler once pointed out that you cannot debate an empirical point with theory alone.

Patrick Emerson said...

Fair enough, though I doubt that the debate will ever be settled as we will never have the true counter-factual.

Chuck Sheketoff said...

I love it when Eric speaks Latin, but that doesn't make his (or his colleagues') work any more trustworthy. Falsum in uno, falsum in toto. See, for example this and this.