When people ask me how the Romney economic program works, I focus on three points.
First, the American economy is in bad shape. Persistently high unemployment and slow economic growth are causing pain for many Americans. Economic growth so far this year has averaged only 1.7 percent, which is even lower than the paltry 2 percent last year and the 2.4 percent the year before that. Median household income is declining sharply and the federal debt, which burdens both current and future generations, is exploding.
While we had a financial crisis and a recession four years ago, the recovery from that recession has been far weaker than recoveries from similar recessions in American history. Some say the deep recession is the reason for the slow recovery but that is not what American history shows. Historians of the American business cycle from Milton Friedman writing in the 1960s to Michael Bordo writing today have demonstrated that deeper recessions, even those with financial crises, are typically followed by faster recoveries. The following chart shows that the 6 percent average pace of recovery from the eight previous recessions associated with financial crises has been three times faster than the 2 percent pace of this weak recovery.
Of course, the Administration and its supporters counter with a rosier view. The Administration’s new 20-page booklet released last week doesn’t even contain the word “unemployment,” let alone tell how it will be reduced. Some brag that employment has increased, but it has not even increased enough to keep pace with the growing population. For example, since the recession ended in June 2009 employment increased by 2.7 million jobs. That may sound good, but it isn’t: Over that same period the working age population increased by 8.3 million people. In fact, the percentage of the working-age population with jobs has declined since the recent recession ended as shown in the next chart.
Hence, the American economy is getting worse, not better. This is in stark contrast to the sharp increase in the jobs as a percent of the population during the recovery from the severe recession in the early 1980s—also shown in the chart.
Second, current economic policy is the reason the economy is in such bad shape. Unfortunately economic policy has consisted mainly of a series of short-term interventions—the stimulus packages, cash for clunkers, temporary payments to state governments and individuals—that have not led to a strong sustainable recovery. At best they produced small short-term economic blips which did not last. Basic economics tells us that such temporary policies do little to stimulate spending. You need more lasting reforms as shown in the recent book Government Policies and the Delayed Economic Recovery (Hoover Institution Press) edited by Lee Ohanian, Ian Wright, and me.
These short-term policies increase uncertainty, which is a significant drag on growth as research by Scott Baker and Nick Bloom of Stanford University and Steve Davis of the University of Chicago have shown. The number of provisions in the tax code expiring each year has skyrocketed, and we risk running off a government-created fiscal cliff. The policies also leave the country deeper in debt risking much higher taxes or another financial crisis.
Federal government regulations have also sharply increased. These create an economic drag made worse by the reluctance of regulatory agencies to use the basic economic concept of cost-benefit analysis. The number of federal regulatory workers, excluding those in the Transportation Security Administration (TSA), has increased sharply since 2007. In contrast when the economy grew strongly in the early 1980s the number of federal regulatory workers decreased, as shown in the next chart.
Here too the defenders of the policies counter with a rosier view. Some say that the fiscal stimulus packages stopped the economic free fall. But this is not what the data show: The American Recovery and Reinvestment Act passed in February 2009, while retail sales, exports and new investment orders ended their sharp free fall in December 2008 or January 2009. The view that the stimulus worked mainly comes from economists who predicted that the stimulus would work before it was passed, and they simply used the same models over again to claim it worked.
The view that the stimulus packages failed is frequently attacked as partisan. But for many years in the 1980s and 1990s, there was a near consensus among economists that these short-run stimulus packages did not work, based on the terrible experience with such policies in the 1970s.
Third, the Romney economic program delivers the needed change in policy. The Romney plan moves away from the harmful policies—away from short-run stimulus packages, away from proposals to raise tax rates, away from the regulatory expansion and the spending binge, and away from the exploding federal debt. Ending the policies will help put the economy on a strong recovery path, like we saw in the 1980s and many other times in the past. But the Romney plan does more to raise growth, focusing on five strategic areas: energy, education, trade, debt reduction, and small business job creation.
Energy economists point to enormous opportunities for sustainable growth in the energy sector, but the federal government needs to approve the necessary pipelines—such as the Keystone XL pipeline—and allow states to manage energy development on federal lands within their borders, as in the Romney plan.
Our lagging education system is a drag on long-term growth and a source of income inequality. Economics of education expert, Eric Hanushek, of the Hoover Institution shows that bringing the system back to top international standards would over the long term raise GDP by $70 trillion measured in discounted present value and eventually increases incomes by 20 percent. To improve education, the Romney program will allow students in poor performing schools to use existing federal funds to learn at other public schools, charter schools, private schools if the state allows it, and online education programs.
A more aggressive program for negotiating trade agreements to open markets for U.S goods and reduce costs for American producers and consumers will raise real income, as basic economics tells us. This part of the economic plan also represents a big change: The current administration has not started and brought to completion even one trade agreement.
Because the exploding debt slows economic growth, a high priority for the Romney plan is to bring debt down as a share of GDP. The specific plan is to reduce the deficit by bringing spending as a share of GDP to what it was just prior to the crisis—20 percent of GDP—in 2007. Since 2007 was not an austere year for federal agencies, this gradual spending plan is not austerity. It is what any responsible family or business would do if they were borrowing at an unsustainable pace. The following chart illustrates the broad outlines of this type of pro-growth budget strategy and compares it with history and the Administration’s budget submitted last year.
The tax reform proposals to lower marginal tax rates by 20 percent and broaden the base will give small businesses the incentive to expand, hire workers and become large businesses. Cutting the corporate tax rate from 35 percent to 25 percent and insisting on a cost-benefit approach to regulation—both part of the Romney plan—are designed to make American firms more competitive. We have not had a major tax reform since 1986 and the tax code has become notoriously cumbersome and a drag on growth.
Of course, defenders of current policy raise counterpoints. Former President Clinton said at the Democratic National Convention that the Romney plan is a return to “the same old policies that got us in trouble in the first place.” No, the Romney plan rejects such policies, including perpetual support of poorly regulated housing finance agencies, such as Fannie Mae and Freddie Mac, which got us into the mess. And Governor Romney argues against the interventionist easy money policy that helped lead to the crisis and is delaying the recovery.
Another claim is that the Romney plan will “cut taxes for high-income Americans,” but, on the contrary, the plan reforms the tax system and takes away special provisions from high income Americans in exchange for lower marginal tax rates in order to provide incentives to job creation and investment. And the plan does not, as President Clinton claims, “get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts.” Rather the plan bolsters capital requirements, repeals debilitating regulations in Dodd-Frank that had nothing to do with the crisis, and follows the rule of law, including the bankruptcy code, without giving favors to special interests. It hereby avoids both crises and bailouts.
In sum by ending the policies that have caused the poor economic performance and replacing these with policies that have been proven to work, the Romney economic plan will increase economic growth and reduce unemployment. This is good news for the future of the American economy.
John B. Taylor is the George P. Shultz Senior Fellow in Economics at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. He was previously the director of the Stanford Institute for Economic Policy Research and was founding director of Stanford's Introductory Economics Center. He has a long and distinguished record of public service. Among other roles, he served as a member of the President’s Council of Economic Advisors from 1989 to 1991 and as Under Secretary of the Treasury for International Affairs from 2001 to 2005.