http://www.newyorker.com/online/blogs/johncassidy/2012/08/romneys-recovery-plan-could-bring-on-another-recession.html
In today’s Wall Street Journal, the Columbia economist Glenn Hubbard, who is one of Mitt Romney’s top economic advisers, has an op-ed piece entitled “The Romney Plan for Economic Recovery.” When I saw the headline, I felt a rush of anticipation: at last, I thought, here is the big new jobs initiative that the G.O.P. campaign is relying on to turn things in its favor.
I was mistaken. The first two thirds of Hubbard’s piece is taken up with an attack on the Obama Administration’s economic record: ineffective stimulus, too much regulation, failure to tackle the housing market—all very familiar stuff. When Hubbard eventually gets to laying out Romney’s alternative, there is nothing new either, just a reiteration of the existing policy plaform: a vague promise to cut federal spending and reduce the budget deficit, an even vaguer plan to cut taxes but in a “revenue-neutral fashion,” and a commitment to repeal Obamacare and Dodd-Frank. Judging by this piece, and by recent statements from Romney himself, the G.O.P. campaign still doesn’t have a recovery program worth the name. Indeed, if we are to believe the evidence of our eyes and ears, he remains committed to immediate spending cuts that could well bring on another recession.
If this really is all there is to Romney’s economic platform, it amounts to a modest fiscal contraction accompanied by tax and regulatory changes designed to improve the economy’s long-term growth potential. We can debate the likely impact of the latter policies. I would suggest that the tax changes Romney proposes—reducing tax rates by ten per cent and eliminating some loopholes and credits—won’t make much difference to how the economy performs, and that softening regulation would be positively harmful. Conservative economists would disagree.
But the issue here isn’t the economy’s long-term growth potential. It is how to gee it up now and prevent a lost five years from turning into a lost decade. None of the policies that Hubbard mentions involve direct measures to boost demand. And yet, he invites us to believe that Romney’s plan would increase business confidence and create twelve million jobs over four years.
Is this credible? As far as the immediate future goes, Romney is promising austerity. Hubbard reiterates that he would aim to reduce federal spending from roughly twenty-four per cent of G.D.P. in fiscal 2012 to twenty per cent by 2016. Romney hasn’t spelled out how he would reach this target, but simple arithmetic suggests he would need to impose about five hundred billion dollars in annual spending cuts, which is equivalent to more than three per cent of G.D.P.
Spending cuts on this scale would be a big shock to an economy that is already sputtering badly. As we’ve seen in other developed countries over the past few years, the imposition of austerity policies can easily turn modest recoveries into renewed recessions. It has happened in the United Kingdom, Spain, and Italy. Romney is asking the American voters to believe things would be different here. The obvious question to ask is: Why? Like the U.K. and Spain, the United States economy is still suffering the after-effects of a big housing bust. Rather than going out and spending, households and businesses are husbanding their resources and rebuilding their savings. In economies such as these, there is a heavy reliance on the government to maintain demand. If fiscal policy is tightened prematurely, a recession is a very likely result. Japan in the nineteen-nineties provides another pertinent example.
One possibility is that Romney isn’t really serious about reducing federal expenditures, at least in the short term. Earlier this year, he said that cuts in spending would have to take account of the state of the economy, thereby seemingly acknowledging the Keynesian argument that austerity policies can lead to disaster. But his campaign Web site and his commercials continue to insist that upon his Inauguration he would take immediate action to tackle the deficit, including cutting discretionary spending by five per cent.
Another possibility is that Romney is hoping that his fellow Republican Ben Bernanke will bail him out. “When bolstered by sound trade, education, energy and monetary policy, the Romney reform program is expected by the governor’s economic advisers to increase GDP growth by between 0.5% and 1% per year over the next decade,” Hubbard writes. You can overlook the references to trade, education, and energy: such policies impact the long-term performance of the economy rather than what happens this year or next. Monetary policy matters now.
But with short-term interest rates already approaching zero, the Federal Reserve is almost out of ammo. Even if it introduces another round of quantitative easing, pumping, say, another trillion dollars into the financial markets via a series of bond purchases, there is no guarantee that this would be enough to offset a Romney-imposed fiscal contraction. Cuts in government spending affect the economy directly and immediately. The effects of quantitative easing are indirect and diffuse. Many economists are skeptical about whether it does much good.
A final possibility is that Romney isn’t serious about making his tax cuts revenue-neutral. In order to prevent a big fall in revenues, he would have to eliminate or scale back some very popular loopholes, such as the deductions for mortgage interest payments and employer-provided health insurance. Congress might well balk at tackling these things, but it would almost certainly go along with the tax cuts, which would offset the impact on demand of his spending cuts. If the tax cuts were big enough and the action on loopholes was small enough, Romney’s policies could even amount to a stimulus program by another name: Reaganomics redux. But that would make a mockery of his claim to be tackling the deficit.
In short, there is no easy way to square the circle. Far from putting forward a “recovery plan,” Romney remains tied to a grab bag of proposals that won’t do anything to promote spending and job creation if they are fully enacted, and which could well tip the economy into another outright slump. Is it any wonder that he is failing to capitalize on lacklustre growth and eight-per-cent unemployment?
But the issue here isn’t the economy’s long-term growth potential. It is how to gee it up now and prevent a lost five years from turning into a lost decade. None of the policies that Hubbard mentions involve direct measures to boost demand. And yet, he invites us to believe that Romney’s plan would increase business confidence and create twelve million jobs over four years.
Is this credible? As far as the immediate future goes, Romney is promising austerity. Hubbard reiterates that he would aim to reduce federal spending from roughly twenty-four per cent of G.D.P. in fiscal 2012 to twenty per cent by 2016. Romney hasn’t spelled out how he would reach this target, but simple arithmetic suggests he would need to impose about five hundred billion dollars in annual spending cuts, which is equivalent to more than three per cent of G.D.P.
Spending cuts on this scale would be a big shock to an economy that is already sputtering badly. As we’ve seen in other developed countries over the past few years, the imposition of austerity policies can easily turn modest recoveries into renewed recessions. It has happened in the United Kingdom, Spain, and Italy. Romney is asking the American voters to believe things would be different here. The obvious question to ask is: Why? Like the U.K. and Spain, the United States economy is still suffering the after-effects of a big housing bust. Rather than going out and spending, households and businesses are husbanding their resources and rebuilding their savings. In economies such as these, there is a heavy reliance on the government to maintain demand. If fiscal policy is tightened prematurely, a recession is a very likely result. Japan in the nineteen-nineties provides another pertinent example.
One possibility is that Romney isn’t really serious about reducing federal expenditures, at least in the short term. Earlier this year, he said that cuts in spending would have to take account of the state of the economy, thereby seemingly acknowledging the Keynesian argument that austerity policies can lead to disaster. But his campaign Web site and his commercials continue to insist that upon his Inauguration he would take immediate action to tackle the deficit, including cutting discretionary spending by five per cent.
Another possibility is that Romney is hoping that his fellow Republican Ben Bernanke will bail him out. “When bolstered by sound trade, education, energy and monetary policy, the Romney reform program is expected by the governor’s economic advisers to increase GDP growth by between 0.5% and 1% per year over the next decade,” Hubbard writes. You can overlook the references to trade, education, and energy: such policies impact the long-term performance of the economy rather than what happens this year or next. Monetary policy matters now.
But with short-term interest rates already approaching zero, the Federal Reserve is almost out of ammo. Even if it introduces another round of quantitative easing, pumping, say, another trillion dollars into the financial markets via a series of bond purchases, there is no guarantee that this would be enough to offset a Romney-imposed fiscal contraction. Cuts in government spending affect the economy directly and immediately. The effects of quantitative easing are indirect and diffuse. Many economists are skeptical about whether it does much good.
A final possibility is that Romney isn’t serious about making his tax cuts revenue-neutral. In order to prevent a big fall in revenues, he would have to eliminate or scale back some very popular loopholes, such as the deductions for mortgage interest payments and employer-provided health insurance. Congress might well balk at tackling these things, but it would almost certainly go along with the tax cuts, which would offset the impact on demand of his spending cuts. If the tax cuts were big enough and the action on loopholes was small enough, Romney’s policies could even amount to a stimulus program by another name: Reaganomics redux. But that would make a mockery of his claim to be tackling the deficit.
In short, there is no easy way to square the circle. Far from putting forward a “recovery plan,” Romney remains tied to a grab bag of proposals that won’t do anything to promote spending and job creation if they are fully enacted, and which could well tip the economy into another outright slump. Is it any wonder that he is failing to capitalize on lacklustre growth and eight-per-cent unemployment?
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