October 28, 2012
The final full week of the US presidential campaign will see both candidates intensely debate the future of economic policy. But despite the rhetoric about its means, most experts agree on its ends. First, re-establishing economic growth at a rate that makes real reductions in unemployment possible; second, placing the nation’s finances on a stable footing by putting in place measures to ensure that the nation’s sovereign debt is declining relative to its wealth; and third, renewing the economy’s foundation in a way that can support steady growth in middle-class incomes over the next generation as well as work for all those who want it.
Where are the candidates on these three issues? Barack Obama has recognised the inadequacy of demand as the main barrier to growth and sought to bolster both public and private sector demand since becoming president. Recent work by the International Monetary Fund has confirmed the premise of his policies, namely that at a time when short-term interest rates are at zero, fiscal policies are especially potent as multipliers are larger than normal. The president has also respected the independence of the Federal Reserve as it has sought to respond creatively to the challenge of increasing demand. And he has put the economy on track to almost doubling exports over five years through a series of measures such as increasing government support for exporters. He has made clear his commitment to taking advantage of low interest rates to finance public investment and protect public sector jobs, to respect the independence of the Fed and to continue to promote exports.
Mitt Romney, in contrast, supports immediate efforts to sharply reduce government spending even as economic slack remains and Congress at the president’s behest has already legislated the most draconian cuts ever in domestic discretionary spending. 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. He also seems comfortable involving himself in monetary policy discussion on the side of reducing the supply of credit relative to current Fed policy. And his insistence that he will name China a currency manipulator on day one of his term even before his appointees have moved into their offices surely increases uncertainty by making a trade war possible.
President Obama has embraced the principles though not all the details embodied in the Simpson-Bowles commission report on budget deficits. Like the group of chief executives who made a major statement on deficit reduction last week he insists that achieving sustainable finances means both containing spending especially on entitlements and raising revenue. The budget he has put forward has been thoroughly audited by the Congressional Budget Office and puts the US debt to gross domestic product ratio on a declining path within this decade. And he has made clear that in talks with willing partners to conclude a deal, he is prepared to go beyond his budget proposals to ensure that debt accumulation is contained.
Mr Romney, meanwhile, has not suggested even a partial approach to the budget that has enough detail to be fully evaluated by independent experts. He has, however, insisted on the need for military spending of at least a trillion dollars more than recommended by Robert Gates, George W. Bush’s defence secretary, and for 20 per cent across the board tax cuts which independent estimates suggest would cost close to $5tn over the next decade. To offset these measures, he has spoken of “closing loopholes” without naming any specific items and in the face of repeated demonstrations that even the elimination of every tax benefit for those with incomes over $200,000 would raise far less than the totality of his proposals would cost.
From the Lewis and Clark expedition to the land grant colleges, to the transcontinental railway, to the interstate highway system, to the original research and development that led to the internet, the federal government led by either political party has always sought to lay a foundation for future prosperity. President Obama has continued this tradition while recognising the inevitability that in an uncertain world some investments will work out better than others. While audits have found many fewer problems with public investments than most expected over the past few years, much has been accomplished. Major efforts to measure and act on student achievement results are now in place in most states. Medical records are being systematically computerised. Domestic fossil fuels and renewable energy sources are meeting more and more of our energy needs. New financial protections are in place for consumers even as the capital reserves required of financial institutions have been substantially increased and student lending has been streamlined. These steps illustrate the kinds of progress that a second Obama administration would strive towards.
Mr Romney, on the other hand, has made clear a preference for using any available resources to reduce tax rates below their current level – in the hope that there are great investments companies are not already undertaking even in the face of sub 2 per cent interest rates and the lowest effective tax rates in generations. If this represents a foundation for prosperity it will be a very different one than America has enjoyed historically.
The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary