Friday, August 10, 2012

Taking Apart ‘The Romney Program for Economic Recovery, Growth, and Jobs’

August 10th, 2012 12:00 amBrad DeLong
A point-by-point response to Romney economic advisors Kevin Hassett, Glenn Hubbard, Gregory Mankiw, and John Taylor, authors of  “The Romney Program for Economic Recovery, Growth, and Jobs” – also known as HHMT (abridged from the blog of J. Bradford deLong, Berkeley economics professor and former Deputy Assistant Treasury Secretary for Economic Policy).

HHMT: We are presently in the most anemic economic recovery in the memory of most Americans, with significant joblessness and long-term unemployment, as well as lost income and savings.

WRONG: We are in the worst downturn, but we are not in the “most anemic” recovery–the recovery of 2001-2004 was more anemic. HHMT should know:  Three of them held high federal office in the George W. Bush administration that managed that recovery, and back then all four attempted (unconvincingly, in my humble opinion) to rebut claims from people (like me) that the early 2000s recovery was anemic and that more stimulative policies were then needed.
Why don’t HHMT make the true claim that we are in the worst downturn? Why do they make the wrong claim that we are in the most anemic recovery? Because they do not want to talk about how back when they were in office, they played their role in failing to use their leverage to argue for more expansionary fiscal and monetary policies to speed the then-recovery.
Why weren’t HHMT arguing, back in 2001-2004, either inside or outside the government, for more expansionary fiscal and monetary policies to speed the then-recovery? I don’t know.
Those of us who were so arguing would have found their help most welcome.

HHMT: The Obama administration says that the economy’s awful performance reflects the reality of the aftermath of a financial crisis and that the administration’s policies generated what little recovery we have seen from the severe 2007-2009 recession – Americans should stay the course. But the historical record is clear: Our economy usually recovers quickly from recessions, and the more severe the recession, the faster the subsequent catch-up growth…

DOES NOT FOLLOW: The argument that recovery is highly likely to be slow in the aftermath of a financial crisis is a powerful one—made by many who are not Obama administrationflunkies, including the well-respected Reinhart and Rogoff (2010) and the International Monetary Fund (2011). Their “But” sentence does not rebut this powerful argument—although HHMT mean for their readers to think that it does.

HHMT: The Romney economic program will change the direction of policy to focus on economic growth. Its pro-growth effects will work in two basic ways: It will speed up the recovery in the short run, and it will create stronger sustainable growth in the long run.

WRONG: There is no Romney program—a program is complete, coherent, and scoreable; Romney has repeatedly said that his statements are not scoreable. In order to estimate the economic effect of any program, you have to know what its pieces will do–you need to have it scored. Until Romney presents a complete and coherent program with scoreable pieces, HHMT have no basis for asserting anything about its economic impact.
One of the most annoying things here is the partisan asymmetry: the rules of the game seem to be that Democratic proposals have to be scoreable and coherent, while Republican proposals don’t.
It would have been very nice if HHMT had done what we Democratic economists do–told their political masters that they could not estimate economic impacts until they were given a coherent, complete, and scoreable plan.
Why they did not do this I do not claim to know.

HHMT: Declines in business investment and employment were particularly sharp in this recession. Far from being a lightning bolt hitting a smoothly running economy, the crisis was exacerbated by structural biases against business investment (from the tax code and regulation), financial imbalances (particularly fueled by biases against private saving and by the need to borrow abroad to finance our government deficits), and regulatory choices (excessive promotion of housing investment and inadequate attention to existing financial regulations and the rise of and consequences of shadow banking). No single party or administration is responsible for structural headwinds to growth, but the Obama administration’s errors and choices exacerbated the economy’s structural problems and weakened the recovery.
FRED Graph  St Louis Fed 1

DOES NOT FOLLOW: The argument that America has over the last two decades suffered from structural biases against business investment in categories like equipment and software simply does not follow at all. Business investment grew at a very healthy pace during the Clinton administration—and has grown twice as fast under Obama as it did in the years of what National Review used to call the “Bush Boom”.

The pieces of autonomous spending that are right now far below the values seen before the crisis and the downturn are (i) primarily residential construction, and (ii) secondarily government purchases–these are the results of a broken housing finance system and of Republican austerity programs, not of an anti-business climate.
The pieces of autonomous spending that are responsive to the business climate–the willingness of businesses to purchase equipment and the confidence of businesses that make them willing to export–are doing just fine right now. If residential construction and government purchases were doing as well, we would be out of this current mess.

HHMT: Rather than focusing on the structural problems revealed by the financial crisis and the ensuing recession, the Obama administration focused on short-term fiscal ‘stimulus.’

FALSE: I am sorry, but here I just have to escalate from “WRONG” to “FALSE”, because this is not just wrong, this is false–and knowingly false.
Obama administration attempts to focus on the structural problems revealed by the financial crisis were hobbled by Republican obstruction to the reform effort that eventually yielded the Dodd-Frank banking reform bill.
HHMT were conspicuous by their absence in the lobbying for reforms to deal with the defects of existing financial regulations and with the rise and consequences of shadow banking.
Why they were conspicuous by their absence I do not claim to know.

HHMT: The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies. Research by Atif Mian of the University of California, Berkeley, and Amir Sufi of the University of Chicago showed that the cash-for-clunkers program merely moved new car purchases ahead a few months with no lasting effect.

DOES NOT FOLLOW: Such policies are supposed to shift demand forward in time into periods where the crisis is acute from future periods in which, it is hoped, demand is less slack. When Mian and Sufi present their work, they characterize it not as showing the failure but rather the success of programs like cash-for-clunkers.

HHMT: The Obama administration chose to emphasize short-term fixes – ineffective stimulus, cash-for-clunkers, myriad housing programs that went nowhere, and a rush to invest in ‘green’ companies irrespective of cost – rather than restoring long-term growth and productive private-sector job creation.

FALSE: The Obama administration from December 2009 on focused on the long run—on rebalancing the long-run financing of America’s social insurance state. Their attempts to strike a bipartisan deal to match future spending with future taxes were blocked by obstructionist Republicans, who believed that Obama must on no account be allowed to accomplish anything.
It was my view—and the view of others—that this pivot to the long-term structural was a mistake and was premature.
But for HHMT to claim that Obama did not so pivot is false, and knowingly false.

HHMT: As a consequence of [Obama's] short-termism, uncertainty over policy – particularly over tax and regulatory policy – limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 18 months.

LIE: I am sorry, but I have to escalate from “FALSE” to “LIE”.  The phrase “particularly over tax and regulatory policy” makes this a lie.
As Simon van Norden writes:
Note the phrase ‘this uncertainty’: [HHMT] is talking about uncertainty ‘particularly over tax and regulatory policy’.  Now read the analysis by Baker, Bloom and Davis – or consider this from their abstract: ‘The index [of uncertainty] spikes around presidential elections and major events such as the Gulf wars and the 9/11 attack. Index values are high in recent years and show clear jumps associated with the Lehman bankruptcy, the 2010 midterm elections, the Euro crisis and the U.S. debt-ceiling dispute.’ Uncertainty over regulatory policy? No mention. Uncertainty over tax policy? No mention…

HHMT: The Obama administration has made choices to bypass reforms that would jumpstart long-term growth and job creation. Such reforms would address our anti-competitive tax code and unsustainable trajectory of federal debt – but the president ignored his own deficit commission and submitted no plan for entitlement reform.

FALSE: The Affordable Care Act—ObamaCare—is by itself a major, major entitlement reform, scored by CBO in its current-law fiscal scenario as removing two-thirds of the long-run fiscal gap. Other Obama proposals—many other Obama administration proposals—have been rejected by Republicans in Congress for no reason other than their political decision to make sure Obama accomplishes as little as possible.

HHMT: The president’s choices cannot be ascribed to a political tug of war with Republicans in Congress. President Obama and Democratic congressional majorities had two years to tackle any priority they chose.

LIE: I am sorry. I think we have to escalate from “FALSE” here.
There were at least seven Democratic senators in 2009-2010 — Baucus, Landrieu, Lincoln, Bayh, Nelson, Pryor, Spector, Webb — who were “professionally bipartisan” in that they would not vote for cloture in any but the most extraordinary circumstances without Republicans voting by their side. Unless the Democrats could peel off a Collins, a Snowe, or a Voinovich, they had not a filibuster-proof working majority of 60 but rather a filibuster-vulnerable working majority of 53.

HHMT: The epitome of the deviations from basic principles is the self-inflicted fiscal cliff where many important provisions of the tax code change at the end of 2012.

DOES NOT FOLLOW: HHMT were conspicuously absent in 2010 and 2011 from the ranks of those of us arguing that the economy was being harmed by the debt-ceiling debate, the debate that produced the “fiscal cliff” as the only outcome congressional Republicans could be induced to accept.
Those of us who were arguing then for consistent and coherent long-run fiscal policies would have found their help most welcome.

HHMT: Policy responses in the early 1980s aimed not just at overcoming the 1981-1982 recession, but at overcoming the structural problems of the 1970s. By reducing domestic discretionary spending, setting out a three-year program to reduce tax rates, and alleviating the regulatory burden, policymakers sought to make it profitable to invest in America again. These principles match those in the Romney plan. Governor Romney would reduce the size and cost of the federal government. He champions a reduction in marginal tax rates in the context of a general tax reform. Particularly powerful are his proposals to reduce marginal tax rates on business income earned by corporate and unincorporated businesses alike.

DOES NOT FOLLOW: As noted above, there is no business unwillingness to invest in America. Our problems are insufficient investment by government—the results of austerity programs—and insufficient investment in residential construction—the results of a broken and unfixed housing-finance system.
And the embarrassing reality underlying the Reagan years 1981-1989 is that the rate of growth of America’s productive potential, as estimated by the Congressional Budget Office, was no faster over 1981-1989 than it had been over 1973-1981. If Reagan administration policies were truly aimed at boosting American growth, they failed—in large part because of the drag placed on investment by the high real interest rates that businesses had to pay in the Reagan years, as they competed for scarce pools of capital left over after the U.S. government had financed the Reagan deficits.

If you want to make it more attractive to invest in America, you simply do not take Ronald Reagan’s economic policies as your model.**

HHMT: The Romney plan will achieve these objectives with four main economic pillars…. reduce federal spending as a share of GDP to 20 percent – its pre-crisis average – by 2016; reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains… [r]educe the corporate income tax rate… to 25 percent… broaden the tax base to ensure that tax reform is revenue-neutral;… reduce growth in Social Security and Medicare benefits… block grant the Medicaid program to states; remove regulatory impediments to energy production and innovation… repeal and replace the Dodd-Frank Act and the Patient Protection and Affordable Care Act…

DOES NOT FOLLOW: Repealing Dodd-Frank — with not a hint as to what will replace it — does not decrease but increases regulatory uncertainty. Repealing ObamaCare — also with not a hint as to what will replace it — does not decrease but increases regulatory uncertainty, especially as up through the middle of 2009 what we now call ObamaCare was then calledRomneyCare, and its biggest booster was Mitt Romney. How can uncertainty fail to be generated by would-be President Romney’s declaration that he opposes RomneyCare and seeks to replace it with something else that he will not reveal?
Similarly, Romney has not even the outlines of a plan for how to reduce federal spending to 20 percent of GDP, or how he could possibly broaden the tax base to keep his tax cuts for the rich revenue-neutral.
If you do indeed fear uncertainty about tax and regulatory policy, you need to vote against Romney as you would vote against the plague—and urge everybody you know to vote against Romney, and urge them in the strongest possible terms.

No comments:

Post a Comment