The New Republic Online


Out of Depth
by Noam Scheiber

Post date: 04.08.04
Issue date: 04.12.04

Greg Mankiw is a nerd. The current chairman of the White House Council of Economic Advisers (CEA), Mankiw is tall and lanky with hunched nerd shoulders. He has a round nerd face, with a big nerd nose and squinty nerd eyes. He does wear sleek, metal-framed glasses. But, as they sit atop a perpetually pinched, nerd expression, the effect is less to mask his overall nerdiness than to draw attention to it. Occasionally, Mankiw lets slip that he, too, considers himself a nerd. Asked about the recent trend in productivity growth at a conference of the National Association for Business Economics (nabe), he begins by observing that most people are bored silly by such discussions. But, he says, surveying the room, "Nerds like this love that kind of stuff." 

For those (like myself) who find such earnest dweebiness endearing, Mankiw (pronounced "Man-cue") is a highly sympathetic character. He also happens to be one of the most talented and respected macroeconomists in the world. "Greg is good and honest," Jeffrey Frankel, a former Clinton administration CEA member and a fellow Harvard economist, says succinctly. The combination of the two makes it particularly painful to watch Mankiw operate in an administration that so actively disdains intellectual give-and-take and where political considerations so obviously trump economic ones. 

At times, you can practically see the dissonance spelled out on Mankiw's face. He appears to wince when he gets a question from the generally anodyne nabe crowd about the administration's dubious promise to cut the deficit in half in five years. His hurried delivery suggests a man who clearly prefers musing on the finer points of investment spending to reciting administration talking points. "Spending restraint is the big challenge," he mutters half-heartedly, before explaining that the administration plans to achieve its goal through a mixture of spending restraint and entitlement reform. He cites the recent Medicare reform bill as an example. "The easy thing to do would have been to take the existing system and add a prescription-drug benefit on top of it." But, instead, he continues--utterly unconvincingly--the president demanded changes that will save real money over the long term. (This, describing a bill recently estimated to cost $534 billion over ten years.) "So there's--there's a fundamental rethinking" going on, he concludes. 


Given such performances, it's not hard to see why Mankiw gets into trouble from time to time. Though the administration's economic agenda has become no more irresponsible in the year or so since Mankiw took over as CEA chair (and possibly less so, since there have been no new budget-busting tax cuts and steel tariffs have been rescinded), the administration increasingly finds itself on the defensive on the economy. In recent weeks, critics have accused it of everything from ignoring the plight of the unemployed to grossly optimistic economic forecasting to Soviet-style historical revisionism about the recent recession. In part, this is due to the heightened scrutiny that inevitably accompanies a presidential campaign. In part, it's due to the continued inability of the economy to produce jobs. But a final factor is a recent series of wounds inflicted by Mankiw--the academic nerd thrust into an unexpectedly political role. 


Mankiw's political ham-handedness is particularly glaring when compared with the bureaucratic savvy of his immediate predecessor, Columbia University economist Glenn Hubbard. Hubbard is, by all accounts, a political animal. He served as a deputy assistant treasury secretary during the first Bush administration and coordinated economic policy for the Bush campaign in 2000. He reportedly lobbied for the job of deputy treasury secretary once George W. Bush won the election but ended up with the CEA post as a consolation prize. The move turned out to be a blessing. Though the CEA has traditionally been thought of as an administration's in-house economic think tank--sizing up the relative merits of various policy options but rarely proposing policy initiatives itself--Hubbard, aided by the bureaucratic ineptitude of then-Treasury Secretary Paul O'Neill, molded it into a major policy force. Last year's dividend tax cut, for example, was Hubbard's brainchild--one he pushed in part by using his CEA perch to bully Treasury officials into lowballing their estimates of how much it would cost, according to these officials. (Hubbard responds, "I have enormous respect for the [Treasury] staff, but the sort of conversations you mentioned did not happen.") In internal deliberations, as Ron Suskind reports in his recent book, The Price of Loyalty, Hubbard also dramatically underplayed the effects that the deficits created by this tax cut would have on interest rates--and, therefore, long-term growth. 

Mankiw, by contrast, is hardly what you'd consider a politico. "He is very much rooted in Boston," says Jeffrey Miron, an economics professor at Boston University who knows Mankiw from their grad-school days. Mankiw's only experience in Washington prior to his current job was a brief stint as a CEA staff economist during the early '80s. There he worked under Harvard economist Marty Feldstein, who famously (and publicly) clashed with supply-siders in the Reagan administration over the dangers of running large budget deficits. 

Back in Massachusetts, where in 1987 he became Harvard's youngest-ever tenured professor at the age of 29, Mankiw was preoccupied with two things. The first was building a world-class reputation as a macroeconomist. "His academic reputation is indeed first-rate," says columnist (and Princeton economist) Paul Krugman. Then, his academic credentials established, Mankiw set about making himself one of the best-compensated college professors on the planet by writing the gold standard of undergraduate economics textbooks, Principles of Economics. The book, widely hailed as the most lucid and engaging of its kind, earned Mankiw an unprecedented $1.4 million advance prior to its publication in 1997. It also offers evidence that Mankiw never harbored aspirations for a top-level political appointment in a GOP administration. On pages 29 and 30 of the first edition, Mankiw writes, "An example of fad economics occurred in 1980, when a small group of economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise revenue. ... When politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate." This, needless to say, did not much endear him to the various supply-siders in and around the second Bush administration. 

Still, by the time Hubbard left the administration in February 2003, Mankiw seemed to fit the profile of the White House's ideal CEA chairman. His academic reputation would lend credibility to the administration's economic pronouncements. Meanwhile, his textbook and a several-year stint as a Fortune magazine columnist had established him as a gifted explicator of economic ideas. (The latter also marked him as clearly right of center ideologically: Among other topics, his Fortune columns advocated Social Security privatization and an elimination of the estate tax.) But perhaps most important was that the White House wanted to replace Hubbard with a CEA chairman who was less of a political operator, in hopes of restoring some of the historical balance between Treasury and CEA. "Greg came into an environment where [the White House] was much more interested in Treasury playing a larger role [and] doing the heavy lifting on tax policy," says one former CEA economist present for the transition. Mankiw would be left to do what CEA chairmen had done for decades: Give objective economic advice. 

This is more or less what he has done. "Hubbard ... had a good feel for how the Hill works," says one Republican congressional aide. "I saw him a lot [during the negotiations over the 2003 tax cut]. He was a major player in that." Mankiw, by contrast, remains a virtual unknown in Congress. "I haven't seen him on the Hill at all," says the aide. According to Bob Collender, a former CEA economist who worked under both Mankiw and Hubbard, "When I came in, Glenn had been chairman for a while; Glenn knew what he wanted to accomplish. When Greg came in, he was coming in cold." 


But giving advice behind the scenes is only half of a CEA chairman's job. The other half is making the case publicly for the administration's economic policies--no easy task at a time of historically high deficits and historically low job growth. And it's in this role that Mankiw's lack of political experience has become a liability. Any appointee can make the case for economic policies that are either honest or successful. But making the case for policies that are neither--recall that last year's tax cut was sold as a "jobs and growth" package--requires a skill Mankiw's academic background has not equipped him with. 

Mankiw's troubles began in early February, when, while announcing the release of the annual Economic Report of the President, he lauded offshore outsourcing as a "good thing" and "just a new way to do international trade." From an academic standpoint, Mankiw was entirely right: Trade in goods is theoretically indistinguishable from trade in labor (i.e., outsourcing), and both increase the amount of output an economy can produce. But, at a time when outsourcing ranks among Americans' chief economic anxieties, the comment was a political disaster, opening the administration to ridicule from Democrats and Republicans alike. House Speaker Dennis Hastert went so far as to issue a press release headlined "hastert disagrees with president's economic advisor on outsourcing," which chided Mankiw for failing "a basic test of real economics." 

The outsourcing flap was only the beginning. In a speech in Washington a little over a week later, Mankiw picked up on another theme he'd highlighted in the Economic Report: whether fast-food restaurants like McDonald's should be considered part of the manufacturing sector or the service sector. "[W]hen a fast-food restaurant sells a hamburger," he asked in a speech before the National Economists Club, "is it providing a service or combining inputs to manufacture a product?" His point was to suggest that such seemingly academic classification issues have important policy consequences--such as whether or not a particular firm is eligible for a tax cut. But Democrats and late-night comedians quickly lampooned the comments as a suggestion that fast-food jobs might be the solution to the nation's manufacturing crisis. Michigan Representative John Dingell went so far as to write the administration a letter recommending that Mayor McCheese be nominated to fill the still-vacant position of American manufacturing czar. 

But, from the perspective of both his personal reputation and the Bush administration's credibility on economic matters, Mankiw's costliest mistakes were buried deeper in the text of the Economic Report. The report put the average level of employment in 2003 at about 130.1 million and projected that number would rise to 132.7 million in 2004. On its face, this seemed to suggest that the administration was anticipating 2.6 million new jobs in 2004--which was unlikely given that the economy had only created some 300,000 jobs in the entire second half of last year (itself an improvement from the first half). In fact, the projection was even more ambitious than it appeared. That's because, given the level of employment at which the United States started the year (around 130 million), achieving an average of 132.7 million jobs in 2004 would have required adding over four million jobs by the end of the year--a virtual impossibility given the current high rate of productivity growth. (High productivity makes it less necessary to hire more employees.) 

The administration backpedaled from Mankiw's obviously unrealistic figure like mad. "I'm not going to get hung up on any particular number," Treasury Secretary John Snow said in response to persistent hectoring from reporters in mid-February. (This was odd, since Snow would have personally approved the particular number in question.) The president also declined to endorse the estimate, saying only that "I think the economy is growing, and I think it's going to get stronger." These developments prompted no small amount of glee from John Kerry. "They don't know what they're talking about in their own economic policy," the presumptive Democratic nominee announced. 

At almost the same time, yet another passage in the Economic Report was creating yet another controversy, this one over whether the 2001 recession actually began on Bill Clinton's watch. In the Economic Report, Mankiw noted that the data used by the National Bureau of Economic Research (nber) to "date" the start of the recession had been revised backward; he argued that the March 2001 start date should therefore be revised as well, to late 2000. "For these reasons," the Economic Report explains, "the analyses throughout this chapter (including the charts that compare this recession to past recessions) use the fourth quarter of 2000 as the peak of economic activity and the start of the recession." The problem, according to Jeffrey Frankel, a member of the nber's recession-dating committee, was that only a small minority on the nber committee favored moving the start date back more than a month. The CEA's analysis had ignored the fact that the nber weights different pieces of data differently--and that the pieces given the most weight in the original decision still supported a 2001 date. Worse, the discussion flouted the precedent of government agencies deferring to the nber on the matter. Once again, administration officials found themselves facing allegations of political tinkering, forcing White House spokesman Scott McClellan to retreat from the position at a mid-February press conference. 


The irony of these controversies is that, unlike Hubbard, who repeatedly got away with big evasions with important policy implications, Mankiw has run into trouble either for claims that are utterly uncontroversial among economists or for modest fudges that hardly matter at all. 

The jobs estimate, for example, actually relied on a very cautious 2004 gross-domestic-product (GDP) forecast of about 4 percent. But it's the latter number that has far more serious policy implications, since it's the most important factor in projecting how much money the administration will have to spend from year to year. Had Mankiw wanted to massage the numbers to benefit the administration, he could have killed two birds with one stone by inflating his estimate of GDP growth to a level consistent with most private forecasts, which would have brought up his jobs number as well. (Instead, the high jobs estimate hinged on a conservative assumption about productivity growth--one far out of line with the experience of the last few years, but not so outrageous given that no one expects that performance to continue.) Moreover, the jobs forecast didn't look nearly as optimistic on December 1, when it was finalized, as it did following the Economic Report's release in February, after three months' worth of lousy job data. 

Likewise, to anyone other than a handful of academic economists plugging data into their regressions, the question of whether the recession began in late 2000 or early 2001 is of zero economic or policy significance: No tax revenue depend on it; no spending decisions are based on it. And any suspicion that Mankiw's argument on the recession was politically motivated is allayed by the fact that it is both carefully reasoned and extremely obtrusive--sitting as it does in a box on page 30 of the Economic Report with the headline, "when did the recent recession begin?" If Mankiw had been trying to get away with outright hackery, then he would have been much better served by simply asserting the change in passing. (CEA documents during the Hubbard era tended to rely much more heavily on such assertions.) Instead, "the report reads like academics debating in the coffee room," says Krugman. 

Of course, given the administration's history of economic dishonesty--and the fact that Bush officials have spent years trying to sell tax cuts for the wealthy as job-creation programs and making the case that they inherited a recession from Bill Clinton--it was inevitable that Mankiw's assertions would be widely viewed as politically motivated. Which is why, even if he had no bad intentions, Mankiw's story has to be viewed as a cautionary tale for academics considering serving an administration that puts such a low priority on intellectual integrity. If you take a job that makes you look like you're fudging the facts, at the very least, make sure you learn how to do it well.


Noam Scheiber is an associate editor at TNR.


Split Decision
Why Europe needs to buckle under to America's antitrust philosophy.

Further evidence that Republicans don't care about restraining spending.

Trade Off
Conservatives are once again touting the benefits of insider trading. But their arguments don't hold up.

Bull Run
Democrats don't need to restrain the free market; they need to unleash it. And the Bush administration's preference for crony capitalism over real competition gives them a perfect opportunity. A Democratic vision for the New Economy.

Whose Loss?
President Bush deserves blame for a lot of problems. Bot not for the problem Kerry talks about most: job loss.

Whack Job
Kerry keeps bashing Bush on job loss. But it's one of the few lousy statistics that isn't Bush's fault.


Copyright 2003, The New Republic