With the final few days of election campaigning approaching, the question on everyone’s minds is who has the right medicine for the US economy? As with any election, candidates always play up the economic incentives they can offer, from lower taxes to higher social welfare. I don’t think this election is one of hard politics, but rather who can sort the economy and get some 12.1 million people back to work. The big board issues are re-establishing growth, fixing the exchequer finances and dealing with the issue of rising inequality.
Both candidates have laid out ambitious agendas for the coming four years: Obama promises one million more manufacturing jobs; Romney 12 million new jobs in total. Obama has predicted an average annual growth rate of 3.2% over the next decade; Romney counters this with a forecast of 3.5-4% every year under his plan. The Economist advises that such ‘guesstimates’ be taken with a pinch of salt: “The influence of presidents over economic growth is slight compared with the natural recuperative powers of the economy, the international climate and the unpredictable pace of innovation.”
Obama is a keen supporter of fiscal stimulus and the problem of trying to solve waning public and private sector demand in the economy. He has supported exporting through government initiatives to support exporters and committed to exploiting low interest rates to finance public investment and protect public sector jobs. Last year, he ploughed $447 billion into stimulus initiatives such as hiring teachers, refurbishing schools, and overhauling railways; should he regain the title next month, Republicans, who will likely retain one chamber of Congress, would only pass parts of a similar package of it is part of a larger deal on taxes and entitlements. Obama has also presented budget proposals for next year, which includes initiatives to put public finances on a sustainable footing through reduced entitlements/welfare and put the debt to GDP ratio on declining path within this decade. Policies over his four year term such as health care reform, which does not rest well with conservatives, have served to increase his opponents. This is one of the reasons Ohio could be a pivotal determinant of the election.
Romney is a ‘balance the budget at all costs’ man, supporting all efforts to sharply cut government spending, even despite current weak conditions. This economic philosophy is underpinned by right wing politics: government should play a minimal role in the functioning of the economy, and allow the free market to work its magic. ‘Laissez-faire’ politics is another day’s debate, but at the present time, shrinking the expenditure of just about the only institution still in business, is not the way. As Lawrence Summers writes: “Through some set of intellectual gymnastics he concludes that spending on new weapons systems by the government, or on luxury goods by the recipients of tax cuts, will create jobs but spending on fixing schools and highways do not.”
Romney’s 20% across the board tax cuts have been independently estimated to cost $5 trillion plus over the next decade. He would eliminate taxes altogether for the middle class and has promised that his plan would be revenue-neutral, by reducing tax breaks and boosting economic growth. He has also promised that it would be neutral in terms of distribution: the relative positions of the rich, poor and middle class would not change. Romney likes to indulge in the use of political rhetoric, hoping to beguile the electorate with idealistic economic reform that would be good for the individual but perilous for the economy as a whole. On the cost of the 20% tax cuts, he consistently refers to ‘closing loopholes’ without any explicit description of this ambiguous phrase. Romney trusts that the confidence building impact of his proposals will be good enough.
At the end of this year, George H.W. Bush’s tax cuts, implemented during his tenure, expire. An automatic mass budget cut will then come into place that can take as much as 5% of GDP out of the economy. Both candidates have plans that would avert this fiscal cliff, but even if the Bush tax cuts were extended and cuts delayed, fiscal tightening of up to 1.5% of GDP is still on the cards. Obama inherited a deficit of over 10% of GDP from Bush, which still stands at 7.8% of GDP. His appointed debt commission advised cuts that would bring it below 2% of GDP by 2020, but he declined to endorse such cuts. Romney says he will work to balance the budget in eight to ten years without raising any taxes. Extending the Bush tax cuts and averting the fiscal cliff, Obama’s budget would hit 22-24% of GDP by 2022, whereas Romney says he could shrink it to 20% by 2017. To meet this, Romney would have to repeal Obamacare and cut all other spending, including Medicaid, food stamps, welfare, ex-servicemen’s benefits, civilian and military retirement benefits, farm subsidies, research, policing and parks, to 3% of GDP by 2022, half the figure it is now heading for.
Curtailing public expenditure is greatly dependent on control of entitlements; Obama proposes no change to social welfare, while Romney argues for raising the retirement age and indexing benefits for richer recipients. Welfare must pass the critical Romney test, that is, one must consider ‘is it so important that it’s worth borrowing from China to pay for it?’ On health, both candidates are sharply divided: Obama aims to expand Medicaid and provide subsidies for those who cannot afford private insurance, while Romney would sweep all of this away, cutting Medicaid sharply and turning Medicare into a voucher type system.
The issue of dealing with the deficit is one of the overarching issues of this election. Romney takes a moral stand, arguing that it is immoral for his generation to keep spending more than it takes in, shifting the burden of repaying this debt and interest to future generations. Romney is subscribes to the Theory of Ricardian Equivalence: that is, no matter how the government finances a stimulus, people know that in the future, taxes must rise to repay the cost of today’s expansion, and so people start saving today and there is no impact of a stimulus on demand. In addition, people will leave their children bequests, knowing that they will face the burden of today’s debt. It is related in some ways to the idea that economic interactions are not a one period game, but have an intertemporal element.
Obama recognises that some investments will turn out more fruitful than others, but has made solid progress on local government issues like medical records, domestic fossil fuels, measuring student achievement results, financial protection of mortgage burdened citizens and student loan facilities. These steps illustrate the kind of progress that a second Obama administration could strive towards. Romney, on the other hand, is the new kid on the block, and without a reputation behind him, his proposals are inevitably subject to greater scrutiny. For that reason, his economic proposals should be more transparent and ascertainable to build his credibility. The idea that a free market, when left to its own devices without the meddling of the visible hand of government, can create prosperity is not the point of dispute. Of dispute however, is how you can rejuvenate the Leviathan and get it accelerating again. A deep recession is not the time to throw an ailing economy into the deep end. I think ex ante, Romney’s plans sound idealistic but ex post would be apocalyptic. When you look at it that way, it has to be Obama all the way.