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I had planned to do a follow-up post to my recent interaction with Fable on market monetarism, then decided that before doing so I first need to discuss why Fable and I approach macroeconomics from different perspectives. I am not a monetarist in the strict sense of favoring money supply targeting, but I do use a broadly monetarist approach to macro. Fable uses a broadly Keynesian approach, perhaps better described as New Keynesian.

Because advanced AIs train on vast range of economic research, you’d expect them to use an approach that is similar to the consensus view of economists. So it is no surprise that Fable is Keynesian, as that basic approach is much more popular than monetarism. I will try to explain why Fable is mostly Keynesian by showing how the economics profession came to adopt the Keynesian approach.

Part 1: The Monetarist and Keynesian approaches

I keep using the term “approach”, which is rather vague, so let me be a bit more specific. Monetarists try to explain movements in nominal aggregates such as the price level and NGDP by looking at changes in the supply and demand for money:

price level = (nominal money supply)/(real money demand) = Ms/md

NGDP = (nominal money supply) x (velocity) = Ms/(1/V) = Ms/k

where “k” is the share of NGDP held as money balances. Thus md and k are two ways of defining money demand. Think of md as the total purchasing power of the public’s money holdings, and k as the share of gross income the public chooses to hold as money.

In plain English, the rate of inflation is the percentage change in the money supply minus the percentage change in real money demand. If they change at exactly the same rate, the price level is stable.

The percentage change in NGDP is the percentage change in the money supply minus the percentage change in the share of NGDP that the public holds as money. If the money supply grows 4% faster than the k ratio changes, then NGDP grows at 4%.

To be clear, neither of these claims are theories; both are identities, true by definition. That’s why I call this the monetarist approach, not the monetarist model.

The Keynesian approach can also be explained with an identity:

GDP = Consumption + Investment + Gov. Output + Net Exports = C + I + G + NX

Note that I say “GDP”, not NGDP, as simpler Keynesian models often don’t discriminate between real and nominal GDP, treating the price level as fixed in the short run. Then the price level gets explained separately with some sort of Phillips Curve model.

To summarize, people using the monetarist approach try to explain movements in NGDP by looking at changes in money supply and demand, whereas people using the Keynesian approach try to explain movements in GDP by looking at factors that influence consumption, investment, government output and net exports.

Again, all of the equations above are identities, true by definition. It is purely a question of convenience—which approach provides a more coherent and useful model of NGDP determination? In section 2, I’ll explain why I find the monetarist approach to be more useful. In section 3, I’ll explain why back in 1936 the Keynesian approach seemed like the more sensible way of looking at things. Perhaps it was.

In section 4, I’ll show how the economics profession became locked into the Keynesian approach, and continued to use this model even after it was no longer appropriate. Instead of reverting to a superior monetarist approach, they kept adding epicycles to the Keynesian model, eventually ending up with what is now called New Keynesianism. Monetarists are partly to blame, as they did a poor job of adapting their model to the policy needs of a modern fiat money economy. They failed to offer an attractive alternative to Keynesianism.

I feel like market monetarism does offer an attractive alternative to Keynesianism, but I worry that it is now too late to change. The Keynesian approach is like the QWERTY keyboard or Microsoft Windows—perhaps non-optimal, but hard to displace with something better.

Part 2: Monetarism and high inflation

In principle, the monetarist approach has no ideological implications, as it treats changes in money supply and demand symmetrically, each being equally important. Real world monetarists, however, treated money supply changes as being more important. It became associated with right wing economics, where undesirable movements in prices and NGDP could be “blamed” on changes in the money supply, i.e., blamed on mistakes made by government policymakers. This was probably a mistake, a turn-off for idealistic young reformers, who lean to the left.

As a practical matter, the focus on the money supply works best in an environment of very high inflation and NGDP growth rates. Interestingly, this view seems to be accepted by both monetarists and Keynesians. Here’s Milton Friedman in 1975:

Double-digit inflation and double-digit interest rates, not the elegance of theoretical reasoning or the overwhelming persuasiveness of serried masses of statistics massaged through modern computers, explain the rediscovery of money.

Most economics textbooks are written by Keynesians, and most use the Keynesian approach (C+I+G+NX) in their core macro chapters. But most of these books also include a brief discussion of the monetarist approach, and almost always in the context of high inflation countries. Some have graphs showing a correlation of money and prices during hyperinflation in Germany. Others contain a graph showing the cross sectional correlation of money and prices for perhaps a dozen high inflation countries.

So why are high inflation countries the ones where monetarism looks best? It turns out that changes in money demand are usually relatively small, typically in single digits. Thus when the change in the money supply is extremely large, it dominates shifts in money demand. Look at the long run correlation between money supply growth (the base) and both inflation and NGDP growth, taken from an old textbook by Robert Barro, which used annual averages (mostly from the 1960-1990 period):

Notice a fairly strong positive correlation for the high inflation countries. But the correlation for the lower inflation countries is much weaker (albeit still positive):

Here I’ll use the example of a stock split to provide the intuition. If Boeing does a two for one stock split, doubling the number of shares, you might expect that change to have little or no impact on Boeing’s market cap, particularly if the split had been previously announced. If so, you might expect the value of individual shares to fall from say $100 to $50 dollars on the day of the split. But it is also possible that other factors influenced the demand for Boeing’s shares on the same day that the number of shares doubled. Perhaps they received a big new order for jets, which boosted their market cap by 2%. In that case, the price of a single share might not fall exactly from $100 to $50, rather the price might fall to $51/share.

Similarly, if you double the money supply overnight, you might expect the purchasing power of each dollar bill to fall in half. That would occur through a doubling of the price level for goods and services. But if at the same time the real demand for money rose by 2%, then instead of the price level doubling, it might rise by slightly less than two-fold.

Unfortunately, monetarists made the mistake of putting too much emphasis on the importance of money supply changes, and too little emphasis on the importance of changes in money demand, especially for low inflation economies. As a result, their approach lost favor when important changes in prices and NGDP seemed to be driven by “non-monetary” factors.

I put “non-monetary” in scare quotes because these cases still involved monetary factors—specifically changes in the demand for money. But by focusing so much on changes in the supply of money, monetarists gave the impression that their model had nothing to offer when the demand for money was unstable. And that is when Keynesianism appeared on the scene, ready to fill the gap created by flaws in monetarism.

[Here I’m cheating a bit, as monetarism is a post-WWII term for ideas created after Keynes wrote his General Theory. But monetarism builds on the work of early quantity theorists like Irving Fisher. Keynes was reacting against that sort of classical Quantity Theory model.]

Part 3. Keynesianism is a gold standard model (whereas monetarism is the gold standard of models)

In several previous papers, I argued that Keynesianism can be thought of in a number of ways:

A gold standard model
A monetary ineffectiveness model
A zero expected inflation model

These are not three separate views, rather they are three aspects of the same basic idea. Monetary policy is severely constrained under a gold standard regime, especially in the long run. The global price level tends to be determined by the marginal cost of producing gold, leaving very little room for central banks to engage in policies such as inflation targeting. Indeed, under the international gold standard, the long run average rate of inflation was roughly zero. For that reason, monetary policy can seem “ineffective” during a slump, although it is better described as being constrained by the gold price peg.

Under the gold standard, there were frequent increases and decreases in the price level, but these were largely unanticipated. With almost no expected inflation, there was little or no “Fisher effect” for nominal interest rates. Indeed, adding a Fisher effect to the New Keynesian model was one of the “epicycles” that I referred to above, but even today the Keynesian approach does a poor job of explaining interest rates, with an excessive focus on their use as a central bank policy tool. Too much reasoning from a price change.

Think about how different the world of 1936 was from the inflationary decades shown in the two tables above. Between 1929 and 1933, the US price level had fallen by more than 25% and NGDP fell nearly in half. And yet both the global stock of gold and the US monetary base had actually increased over that 4-year period. To be sure, postwar monetarists emphasized the decline in broader monetary aggregates such as M1 and M2. But this data wasn’t fully understood at the time, and even if it had been it is not clear whether central banks like the Fed had the ability to control those broader aggregates at a time when the public was pulling money out of banks and hoarding cash. Put simply, monetarist explanations focusing on the money supply did not appear to be very useful.

To be clear, I do believe the basic monetarist approach is highly useful for studying the Great Depression. Indeed my book entitled The Midas Paradox explains the deflation of 1929-33 in terms of changes in the global supply and demand for gold. I showed that the basic problem was that while the supply of gold rose modestly during that period, gold demand grew much more rapidly due to a combination of private and central bank gold hoarding. Gold was the medium of account, the thing in which all other prices were measured. So gold played the same role as money does in a fiat money model.

Thus, even in the case of the Great Depression, there is nothing wrong with using a model that looks at shifts in gold supply and demand, or the money supply and money demand. The actual problem is that monetarists were associated with the view that velocity is fairly stable and changes in the money supply are the key driver of nominal aggregates, a view that did not seem to be applicable to a world where prices and NGDP fell sharply despite a large increase in the monetary base.

It’s not enough to be correct, your model must also seem correct. During the 1920s, Hayek had argued that central banks should stabilize NGDP. But when NGDP plunged sharply after 1929, Hayek refused to support monetary stimulus. His underlying model was correct, but his policy advice was so misguided that people stopped listening to him.

Keynes produced an explanation for depressions that was consistent with most people’s common-sense intuition about the economy and was also able to account for movements in NGDP that the quantity theorists struggled to explain. Keynes suggested that “aggregate demand” was determined by factors such as deficit spending, business confidence, and the consumer propensity to save. Here is AI Overview listing 5 factors that shift the IS curve to the left in. an IS-LM model:

Decreased Government Spending (G): A reduction in public works, defense, or government services directly lowers aggregate demand.
Increased Taxes (T): Higher taxes lower consumers’ disposable income, which dampens both consumer spending and overall demand
Decreased Investment (I): A drop in business confidence or tighter credit conditions reduces business investment regardless of the interest rate.
Decreased Consumer Spending (C): If households decide to save more of their income and consume less, the IS curve shifts left.
Decreased Net Exports (NX): A drop in foreign demand for domestic goods (or an increase in domestic demand for foreign imports) reduces the net export component of aggregate demand.

These are factors that the Keynesian model views as contractionary—fiscal austerity, lower confidence among businessmen, the paradox of thrift, trade deficits, etc. And when I read the output from Fable, it is quite clear that this is the framework it uses to evaluate macroeconomic debates. But this approach only makes sense in a world where monetary policy is somehow constrained, that is, where central banks are unable to control inflation and/or NGDP. In an unconstrained fiat money world, a central bank could and should offset any of these expenditure shocks in such a way as to prevent them from causing macroeconomic instability.

Here is the famous Keynesian IS-LM diagram, showing the effect of a negative shock such as increased business pessimism (less I), a higher propensity to save (less C), and/or fiscal austerity (less G):

Let me be clear: I hate IS-LM more than almost anything in the world, with the possible exception of MMT. But if I’m going to explain how Fable became Keynesian, I need to give the model the benefit of the doubt, at least for the moment. In addition, I need to make a few simplifying assumptions that are not strictly true but are reasonable approximations of the model’s implications.

The first approximation is to view the LM curve as representing monetary policy. Thus, an increase in the money supply (in the Keynesian model) causes the LM curve to shift right, leading to lower interest rates and higher output. Does it work this way in the real world? Probably not, and least not usually. But this is a widely held way of thinking about macro so let’s accept it for the moment.

If the LM curve is in some sense ”monetary policy”, then a world where monetary policy is constrained by the gold standard can be viewed as a world where the LM curve is stable and the business cycle is caused by left and right shifts in the IS curve. And that’s basically the world described by Keynes in the General Theory. Recessions occurred when businessmen lacked “animal spirits”, when consumers tried to save too much, when foreigners stole our jobs through trade deficits. And the solution was to shift the IS curve back to the right with expansionary fiscal policy (more G and/or lower taxes.)

Can this Keynesian view be reconciled with the monetarist approach? Since both are based on identities, there must be some way to reconcile the two views. Consider the case where the money supply is fixed—why would negative expenditure shocks affect NGDP? If Ms is fixed, a fall in NGDP would be caused by an increase in the demand for money (as a share of GDP). Or lower velocity, if you prefer that framing. And all of the bearish factors cited by Keynes do indeed tend to raise money demand and lower velocity, but not in the way that you might assume.

For instance, the “paradox of thrift” is actually the paradox of money hoarding. More saving by itself would not be contractionary, as saving equals investment. The actual problem is that an attempt to save more depresses interest rates, which increases the demand for money. Recall that interest rates are the opportunity cost of holding (non-interest bearing) cash. That increased demand for money is what causes NGDP to fall.

The logical solution to this problem would be to increase the money supply to match the rise in money demand, in which case an increased propensity to save would not have any contractionary effect. By the time I studied economics in the (inflationary) 1970s, people had mostly stopped worrying about the paradox of thrift, for exactly this reason.

From a monetarist perspective, you might say that Keynesians believe that recessions are caused by low interest rates. A contractionary shock impacts saving and investment in such a way as to reduce interest rates, which then increases real money demand. As people hoard more money, NGDP declines if the money supply doesn’t rise to match the increase in money demand.

Keynesians, however, would be horrified by the claim that their model implies that low interest rates cause recessions, because they don’t look at things using the monetarist (money supply/money demand) framework. They see these contractionary shocks in a very mechanical way, as directly impacting aggregate spending. In contrast, when Keynesians think about the causal impact of changes in interest rates, they think in terms of monetary policy. A Keynesian sees a fall in interest rates as an expansionary monetary policy, that is, a rightward shift in the LM curve, where you move down and to the right along a given IS curve.

And yet, the IS-LM model clearly suggests that we need to avoid this sort of “reasoning from a price change”. A fall in interest rates could be caused either by an expansionary monetary policy (LM shifts to the right) or a contractionary expenditure shock (IS shifts to the left.). And if we hold the money supply constant, then it is more likely that low interest rates would reflect a leftward shift in the IS curve, which would be contractionary. (Technically, it could also reflect money dishoarding.) I wish that Keynesians paid more attention to this possibility.

Part 4: Keynesianism is the QWERTY of macroeconomics

[Apparently, the inefficiency of QWERTY keyboards is a myth. But as they say, "When the legend becomes fact, print the legend,"]

After WWII, the US gradually evolved from a quasi-gold standard, where the price of gold was pegged at $35/ounce, to a 100% fiat money system (achieved in January 1968.) Under this new policy regime, the monetarist approach was far superior to the Keynesian approach. At that time, the Keynesian C+I+G+NX framework for aggregate expenditure should have been discarded and replaced with a monetarist approach where NGDP is determined by the monetary authority. The optimal policy was to adjust the money supply to accommodate any change in money demand, keeping M*V = NGDP growing at a steady rate of roughly 4 percent.

In this ideal world, there would be no worries about “animal spirits”, consumer pessimism and trade deficits. No call to run fiscal deficits to “create jobs”. Just keep NGDP growing at 4 percent by adjusting the money supply to accommodate shifts in money demand. After all, the Keynesian model was built to address a world where monetary policy was constrained by the gold standard, and that world no longer exists.

So why didn’t that happen? Why did the Keynesian model continue to dominate the profession, even at the highest level?

If you are a rational reader, your most sensible conclusion would probably be that “Sumner is wrong”. I have enough self-awareness to understand that. Indeed, that’s my “outside view”. But today, I’ll give you my inside view.

Like fish that don’t know they are wet, I believe the economists of the 1930s had no understanding of how much of their worldview implicitly reflected a commodity price peg for the monetary system. Many people know that Keynes opposed the gold standard. Far fewer know that he opposed a fiat money system even more strongly. Keynes favored what today might be called a quasi-gold standard, something like the Bretton Woods system (where the dollar was pegged to gold at $35/ounce and other currencies were pegged to the dollar.)

Keynes (on the right) participated at the 1944 conference that created the Bretton Woods System, although the final version was closer to the American proposal of Harry Dexter White (on the left). This picture was taken in 1946, and Keynes died a few weeks later.

If Keynes had favored fiat money, then presumably he would have advocated something like a 2% inflation target, or more likely an NGDP target. (In the General Theory, Keynes suggests that NGDP is more meaningful than inflation.). But Keynes was horrified by the thought of fiat money, and never envisioned an unconstrained fiat regime as a practical solution. This is why Keynes denied the existence of the Fisher effect, which is only important under a fiat money regime. And this is why he didn’t anticipate stagflation, which is much more likely to occur under a fiat money regime.

A second important factor explaining the durability of Keynesianism is the way that it matches the common sense of most people. To the average person (and even to Fable), it seems like common sense that if consumers try to save more and spend less, it would “hurt the economy”. This false intuition about the economy comes from inappropriately applying a true microeconomic concept to a macroeconomic environment where it is no longer true. If consumers wish to spend less on cars, it really does cost jobs in the auto industry. But if consumers wish to spend less on all goods, it does not cost jobs in the overall economy. Rather (assuming appropriate monetary offset) any loss of jobs in consumer goods industries is fully offset by gains in investment goods industries.

A third problem is that postwar monetarists started advocating money supply targeting, which only works during periods when money demand is stable. When money demand became unstable, the entire monetarist approach was (wrongly) seen as being discredited.

And finally, when countries like Japan (and later the US) hit the zero lower bound for interest rates, many economists wrongly assumed that central banks were “out of ammunition”, which made the Keynesian approach look more attractive. In Alternative Approaches to Monetary Policy I explain why this pessimistic view is incorrect. No fiat money central bank is ever out of ammunition, unless they run out of paper and green ink.

So instead of discarding the Keynesian model and replacing it with a better monetarist model, the profession stuck with the basic Keynesian framework, but kept adding epicycles to address the flaws that people like Milton Friedman kept discovering. The Phillips Curve shifts? Fine, we’ll add inflation expectations. Fisher effect? Fine, we’ll account for that. Rational expectations? Fine, we’ll add that to New Keynesian models.

All these fixes were appropriate, and New Keynesianism was clearly an advance over the older “vulgar” Keynesianism. But these fixes were attached to a decaying carcass. No matter how many epicycles were attached, the Keynesian approach was rotten at its core. This is why the mainstream did such a poor job during 2008, when a few market monetarists saw the underlying problem before the rest of the profession. Money may not have looked “tight” in 2008, but if NGDP is falling then it is tight.

If I knew nothing about a particular field of science, it would be rational for me to put more weight on the consensus view of experts, rather than the views of a tiny minority of heterodox thinkers. Thus, it is completely rational for Fable (and other AIs?) to prefer the Keynesian approach over the monetarist approach. In some ways I’d be frightened if they adopted market monetarism, as that would suggest they were open to be influenced by fringe theorists, which might be dangerous. If they like monetarism, what’s to stop them from being influenced by MMTers? The mainstream isn’t always correct, but it is the safest position in a world of great uncertainty.

Going forward, it is possible that AIs will become smart enough to adjudicate the dispute between Keynesians and monetarists and produce a verdict that is so intelligent that it is convincing to both sides. If and when that occurs, we will have achieved what I view as artificial super intelligence. I doubt I’ll live that long.

In the next post, I will refer to this post when explaining why I disagree with the Keynesian framing used in some responses by Fable.

PS. Because I hate IS-LM, I am not good at using the model. I never taught it. Please correct any mistakes in the comment section.

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Prosperity for whomst? Why it is really the “Oregon Regressivity Council”

Synopsis

Shifting the Tax Burden: The business-dominated Prosperity Council predictably recommends cutting taxes for the wealthy and big businesses. Their recommendations systematically shift the state and local tax burden away from high-income households and onto ordinary Oregonians.
Flawed Evidence: The Council lower income households higher taxes in Oregon than in Washington. Objective data from the authoritative Institute for Taxation and Economic Policy shows Oregon’s lowest-income households actually face a lower overall tax rate than those in Washington when including all significant taxes.
Skewed Immediate Cuts: Despite feigning concern for low and moderate-income families, the Council proposes zero tax relief for them. Instead, all immediate actions exclusively cut taxes for the top 5 percent of estates, the largest 5 percent of businesses, and millionaires.
Regressive Models as Best Practices: The entire report frames competitiveness around states with vastly more regressive tax systems that shift government costs to those least able to pay, specifically targeting Washington, Pennsylvania, and Arizona as models.
Inherently Regressive Long-Term Strategy: The long-term plan uses code words like a balanced three-legged stool to slash progressive income taxes and tax consumption instead. Shifting toward consumption and property taxes automatically harms average citizens because lower-income families spend a much larger fraction of their income on basic consumption and rent.

The business-dominated Prosperity Council appointed by Governor Tina Kotek has produced a report, that predictably and unfortunately offers a series of discredited and largely self-serving recommendations. Whose prosperity are they concerned about? Despite claims to care about low and middle income households, the Council’s real concern, as demonstrated by its recommendations, is cutting taxes for the wealthy and big businesses.

What the council really recommends is: Let’s shift the burden of paying state and local taxes from high income households and big businesses to ordinary Oregonians.

A better name for the “Prosperity Council” would be the “Regressivity Council,” because the likely effect of their recommendations is to make the Oregon tax system decidedly more punitive for average Oregonians,

Despite carefully crafted concern expressed for ordinary Oregonians, low and moderate income families and small businesses, there’s nothing in the Council’s recommendation that directly benefits any of average Oregonians. Read between the lines, and focus on specific, immediate actions the Council is endorsing, and you’ll see that their primary aim is to make the Oregon tax system more regressive. The report has a number of “tells”

First, all of its short term recommendations are cuts to taxes that benefit only the 5% wealthiest Oregonians, and the 10% largest businesses, or millionaires.
Second, they use a set of code words that call for cutting income taxes–which are essentially the only progressive part of the Oregon tax system. When you read calls for a “three legged stool” or a “balanced” tax system, or “reducing income taxes” they’re not talking about cutting taxes for the single person earning $40,000 per year.
Third, every state the council cites as a model has a more regressive tax system than Oregon; One of their favorites (Washington) ranks second (behind Florida) for the most regressive tax system in the nation.

The chief evidence that Oregon has a structural problem is a claim that a single person with an income of $40,000 somehow pays about 2 percent more taxes that residents of Washington or California. The Oregonian Editorial Board uses this anecdote to claim that :

. . . Oregon’s tax policies are broadly punitive, including for lower- and middle income Oregonians. Those making just $40,000 a year pay a higher effective income tax rate than their counterparts in Washington and California,

There are six major problems with this claim:

First, it isn’t true. The claim is based on a set of calculations made by ECONW, a consultant to the Port of Portland, which also has a long-standing relationship with the Portland Metro Chamber–and which has been paid to document the chamber’s view of tax problems. ECONW’s calculations, which are presented in conclusory form, and aren’t documented. The ECONW example is also for a single person, living alone, with an income of $40,000. Families with $40,000 don’t pay higher rates than Washington (and the Oregonian editors conveniently obscure this point by omitting this key fact). In addition, the comparison is based only on income and sales taxes and omits property taxes. Property taxes are shifted to renters in rent, and obviously matter a lot for this kind of comparison).

Fortunately, there are more objective measures of state tax system fairness. The Institute for Taxation and Economic Policy (ITEP) has produced a series of seven reports over the past 20 years documenting the incidence of state and local taxes by income for all 50 states. It is widely regarded as the most authoritative and objective source of data about who pays state and local taxes. It clearly shows which state has a fair system of taxation, and which penalizes the poor. The contrast between Oregon and Washington shows what Paul Krugman has called the “picket fence and the staircase.” Oregon’s tax burden by income looks like a picket fence, with every income group paying about 10.5 percent (plus or minus 1.5 percent) of their income in state and local taxes. Washington is a staircase, with tax rates steadily declining as income rises. The top 1 percent pay less than a third as much of their income in state and local taxes as the bottom 20 percent (4.1 percent vs. 13.8 percent).

Oregon’s tax system is roughly proportional; everyone pays about the same share of income. Washington’s is the nation’s second most regressive.

Importantly, the ITEP methodology includes estimates for all significant state and local taxes, including property taxes. ITEP’s analysis shows that Oregon households in the bottom 20 percent of the income distribution pay less of their income in state and local taxes in Oregon than similar households in Washington. Those in the bottom fifth of the Oregon population pay about 12.0 percent of their income in state and local taxes; the bottom fifth of Washington households pay about 13.8 percent. More broadly, the bottom sixty percent of households in Oregon pay lower tax rates than the bottom sixty percent of households in Washington.

Second, small differences in tax rates among states don’t matter economically. There’s no evidence that very small differences–about two percentage points of income, (if you believe the Prosperity Council). in state and local taxes make much difference to the health of a state economy or where households live, especially households with low and moderate incomes. For example, no one has cited evidence to show that households in the $40,000 income bracket are moving away from Oregon because of taxes.

Third, it masks who the Prosperity Council really cares about. The cherry-picked claim that Oregon’s tax system hits a $40,000 income single taxpayer harder than other states is really just a P.R- adjusted version of the the Council’s real concern: that Oregon charges higher taxes to higher income households than do other states. In Oregon, the top twenty percent of households pay about 12.2 percent of their income in state and local taxes, in Washington it is only 6.2 percent, according to ITEP. Materials submitted to the Council and its own staff presentations emphasized the tax burden of high income households. One of the Council’s slides presented at its January 22,, 2026 kickoff meeting emphasized Oregon’s high income tax rates for joint filers of $100,000, $250,000 and $500,000 and single filers with $100,000 and $200,000.

Mike Wilkerson, ECONW, January 22, 2026 Prosperity Council slide deck (obtained via public records request)

This slide was not included in the Council’s final report. Recognizing this wouldn’t get a sympathetic hearing from the broader public, the Council chose to use only a slide indicating the tax burden paid by a $40,000 single person as their example.

Fourth, nothing in the Council’s recommendations do anything to address the tax burden of the $40,000 income household. The Council has proposed four immediate tax cuts, all for businesses and wealthy households, and nothing for moderate or middle income households, and in fact, essentially nothing for anyone with incomes below $250,000 or so. The Council’s immediate recommendations are:

Estate Tax Cut: $400 million (benefiting the top five percent of Oregon estates)
Corporate Activity Tax: $100 million cut (benefiting the largest 6 percent of all Oregon businesses)
Extending Trump’s “QSBS” break to Oregon taxes: $56.6 million; 94 percent of this tax break goes to households with incomes over $1 million.
Reinstating an R&D tax credit: At a likely cost of $90 million, revive a sunsetted 15 percent tax credit for research and development, that chiefly benefits large corporations

While it purports to care about the plight of low income households, the Council proposes to do nothing to help them. It would be easy, if the Council were actually concerned about lower income households to increase the personal exemption credit, or Oregon Earned Income Credit or Oregon’s Kid’s Credit. All of these would provide focused relief to lower and middle income households facing rising costs. The fact that neither the Council, nor its cheerleaders on the Oregonian editorial board, mention such options shows they really don’t care about the plight of average families.

Fifth, the Council’s long term plan is to increase the burden of taxation of low and middle income Oregonians. While the Oregonian may consider the current tax burden “punitive” for persons making $40,000, the recommendations of the Prosperity Council’s report is make long term changes to Oregon’s tax system to systematically shift the burden of taxation away from the wealthy and to lower and middle income Oregonians.The report is replete with “tells.” They’re calling for a commission to make sweeping but vaguely described changes to Oregon’s tax system. But if you look closely, its clear what they have in mind: They want to slash income taxes (which are the most progressive part of Oregon’s tax system, and are paid mostly by high income households), and raise other taxes, by taxing consumption (through either a sales tax, a value-added tax, or a big increase in the commercial activity tax). Any shift away from taxing income and toward taxing consumption automatically shifts the burden of taxation to lower income households because lower and middle income households spend a much larger share of their income on consumption than higher income households. Of course the Council doesn’t come right out and say this. But reading between the lines, though, there are code words: they want a more “balanced” tax system. They want Oregon to have a “three-legged stool.” “Balanced” to them means lower income taxes and higher property and sales taxes. The missing “third-leg” of the proverbial stool is a sales tax. And at one point, on page 18, the Council actually concedes that they want to make the tax system more regressive.

Achieving a more balanced and competitive tax system may require broader-based revenue tools that can be more regressive in isolation.

(They go on to claim that because the more regressive tax system would fund public services like education, it wouldn’t really be that regressive, but that begs the questions that tehe tax system itself would be more regressive than the current system which relies heavily on progressive income taxes to fund these same services).

Sixth, the real plan is to compete by being more regressive. The entire framing of the report is about “competing” with other states based on tax levels, especially for higher income households. Every one of the states that they compare Oregon with has a much more regressive tax system. Washington has the second most regressive tax system in the nation, Oregon has the 42nd most regressive. The other states they say are “best practices” all shift a higher share of the cost of government to those least able to pay: Pennsylvania (4th), Arizona (13th), Indiana (14th), and Virginia (37th). The reason the Council thinks Oregon can’t compete is that our tax system isn’t as regressive as these other states–which, by the way, all have weaker economic fundamentals than odes Oregon.

Why it is really the Regressivity Council, not the Prosperity Council.

The way we measure the fairness of a tax system, and how much the burden of paying for public services is distributed across the population is whether the tax system is regressive or progressive. Regressive has a very specific meaning in public finance. It means that low and middle income households pay a larger fraction of their income in taxes than upper income households. Currently, Oregon has one of the least regressive tax systems of any state, ranking 42nd in regressivity. What that means–and what really irks the members of the Prosperity Council–is that higher income households pay a larger fraction of their income in taxes than lower and moderate income residents. They’re plainly jealous of the high income households in other states, where the well-off arepay much less in state and local taxes. Washington, with the second most regressive tax system in the nation, seems to be their preferred model. And keep in mind, in Washington, high income families pay less than half as much of their income (6.2 percent) in state and local taxes as those in the bottom 20 percent of the population (13.8 percent).

When they say Oregon’s tax system isn’t “competitive” with other states, they don’t mean for low and moderate income households. What they really mean is the wealthy have to pay higher taxes in Oregon. That’s the real “problem” that the Prosperity Council is aiming to solve. There only way to achieve that objective is to shift the burden of taxes from higher income households and big businesses to everyone else.

They shed great crocodile tears for a taxpayer with $40,000. That’s funny because all the deliberations before the Council seemed to be concerned chiefly with the loss of high income households, moving in response to a regional tax to pay for housing programs and a Multnomah County tax to support universal pre-K education. There’s no evidence that a 2 percentage point difference in tax rates is motivating people to move, or that migration of those in the under $50,000 bracket is a an imminent threat, But obviously the teams PR handler s said it was bad optics to talk about the plight of those who have vastly higher incomes than the average Oregonian.

They disappeared examples from earlier drafts that showed the impact for families with higher incomes.

The most important step the Governor and Legislators can take to address Oregon’s uneven tax structure is to support moving Oregon beyond its current “one-and-a-half-legged stool” model, which relies heavily on personal income tax and constrained property tax revenues. Reform should aim to strengthen long-term revenue stability, diversify the tax base, reduce volatility, and increase contributions from nonresidents. Achieving a more balanced and competitive tax system may require broader-based revenue tools that can be more regressive in isolation. (Page 18.)

The Council recommends yet another advisory group be empaneled to figure out how to improve Oregon’s tax system. Lowering rates for everyone, providing stable revenue and somehow maintaining progressivity of the personal income tax. They don’t explain how this will be done, leaving the difficult work to others.

The group should consider how to restructure the Corporate Activity Tax, enable local governments to evaluate options to increase stability with common sense property tax funding, and rebalance the personal income tax structure to maintain progressivity and reduce effective rates for all income brackets.

The centerpiece of the report is a series of recommended tax cuts for immediate action. They benefit the wealthiest households and the biggest businesses. Despite the urgency of the economic situation, there’s nothing here that directly benefits the state’s low and moderate income households. This large scale tax reform is left to some vague future action by yet another group to be appointed to deliver recommendations in 2029 or so.

Feigning concern for low and middle income households, giving tax breaks to the wealthy and big businesses

It’s clear from the Prosperity Council’s carefully scripted media blitz that they want everyone to believe that they are deeply concerned about low and moderate income families. C0-Chairs Curtis Robinhold and Renee James both took pains to mention inflation and the burden it causes for low and moderate income households. They

Here’s what to Co-Chairs told KGW-TV’s “Straight Talk” in June:

Robinhold: “. . . how do we get more prosperity, and really focusing on low and middle income Oregonians. How do we help them lift up their situation in a, in an era where inflation is really high.”

James: “. . . medium to lower income wage earners. How are they doing in our state? Are you know, is it working for them? And I think the answer is no.”

The key point here is that despite mouthing concern for low and middle income families, and complaining that a $40,000 single wage earner paid slightly more than someone in a neighboring state, none of the Council’s recommendations do anything to lower taxes for these households.

Robinhold told KGW that the four tax breaks they recommended were for family-owned businesses and entrepreneurs.

The recommendations that we made, and you can find these on the governor’s website, but the, the even the near-in ones are all about entrepreneurial, family-owned businesses, small, medium businesses

The reality is the Council’s short term recommendations benefit only the ten percent of largest businesses in the state that pay the Commercial Activity Tax, the 5 percent of wealthiest households that pay any Estate Tax, and millionaires who can claim the “Qualified Small Business Stock” tax break. The Council leaves to the long term (2029, or after) for a larger tax reform, but then they call for increasing taxes that bear more heavily on low and moderate income households, especially by shifting away from income taxes to sales and property taxes. The clear implication here is that the Prosperity Council is offering the same discredited “trickle-down” view of prosperity: that cutting taxes for businesses and the wealthy will ultimately benefit lower income people. This is what economist John Kenneth Galbraith famously called “horse and sparrow” economics: if you feed enough oats to the horses, eventually some will trickle down to the sparrows.

Their models are regressive states

A central claim of the Council’s report is that Oregon is in “compeitition” with other states, and needs to change its tax system to better compete against them. The Council lists several states as best practices: Pennsylvania, Arizona, Indiana, and Virginia, and repeatedly compares Oregon to Washington State. Each of of these comparison states has a tax system that is vastly more regressive that Oregon’s.

If these are our competitors, and they are perceived to be “more competitive” based on their tax systems, the only way to improve Oregon’s position–according to the Council’s logic, is to make Oregon’s system more regressive.

Shifting taxation away from wealth and income is inherently regressive

The proposal to shift to a consumption tax, and to cut income taxes and inheritance taxes, is inherently regressive. The published economic research confirms that both consumption taxes and property taxes are regressive. Consumption expenditures make up a much larger share of income for lower income households than they do for upper income households. Consumption taxes, including both sales taxes and a value added tax, bear far more heavily on lower income households than upper income households. Similarly, because property taxes are largely passed on to renters in rent, and because renters tend to have lower incomes, property taxes are also regressive.

Economists Kimberly Clausing and Mary Lovely present BLS data on consumption spending by income decile in the US. The lowest income households spend about 80 percent or more of their income on consumption, the highest income households spend less than half of their income on consumption, and the highest decile spends only about one-third. Consumption taxes bear about twice as heavily on the bottom three deciles as they do on the top two deciles. This is vastly more regressive that Oregon’s existing tax system.

Another study, by Federal Reserve Bank economists, finds the same result: that consumption taxes are inherently regressive because lower income families spend a much larger fraction of their income on consumption. The study also finds that a larger proportion of lower income consumption tends to be taxable, which further amplifies the regressivity. Here’s their conclusion:

These [consumption] taxes are clearly regressive: low income households face much higher effective rates than richer ones. There are two reasons why sales and excise taxes are regressive. First, consumer spending rises less than proportionately with income. Second, households with lower incomes consume consumption bundles that are different from, and more heavily taxed than, the ones richer households consume. (Fleck, et al, p. 13)

The same study also looks at the incidence of property taxes. It finds that much of the burden of property taxes is shifted to renters, and because housing costs tend to be higher for lower income households, that property taxes are also regressive.

It is clear that property taxes are regressive. Effective tax rates decline strongly with income; while property taxes claim at least two percent of income for the poorest 80 percent of households, they account for only one percent of income for the richest one percent. (Fleck, et al, p. 17)

Changing Oregon’s tax system to reduce the share of revenues from the most progressive form of taxation (income), to the most regressive forms of taxation (consumption, property), are calculated to make Oregon’s tax system more regressive–shifting the burden of paying public services to low and moderate income Oregonians. That’s what masquerades as “balance” for the Prosperity Council.

References:

Clausing, Kimberly A. and Lovely, Mary E., Why Trump’s Tariff Proposals Would Harm Working Americans (May 20, 2024). Peterson Institute for International Economics Policy Brief 24-1, Available at SSRN: https://ssrn.com/abstract=4834397 or http://dx.doi.org/10.2139/ssrn.4834397

Davis, Carl, et al, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States 7th edition, (Institute for Taxation and Economic Research, January 2024, https://itep.org/whopays-7th-edition/

Fleck, Johannes, Jonathan Heathcote, Kjetil Storesletten, and Giovanni L. Violante, Fiscal Progressivity of the U.S. Federal and State Governments, Federal Reserve Bank of Minneapolis, January 14, 2025, https://www.minneapolisfed.org/research/staff-reports/fiscal-progressivity-of-the-us-federal-and-state-governments

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