You over estimate the value of Romney's policies. He will likely be better than Obama, but not in a way that will create a very strong recovery. Even if Romney wins in an electoral landslide, the debt has not gone away and there are no easy answers to reforming our spending and social services programs. We will need a combination of tax increases and spending cuts to get out of our current situation, and that will be both slow in effectiveness and unpopular with the electorate.
I don’t think I’m overestimating the value of Romney’s policies. In the article, I pointed to a sharp contrast in the economy of the late 1970’s (under Carter) and the early 1980’s (under Reagan).
One of the more striking “sound bites” that came out of the first debate was Romney’s statement to the effect that the economy is growing more slowly this year than last year. And was growing more slowly last year than the year before. The most recent GDP number is growth at 1.7%. By contrast, GDP growth in 1983 was at 7% for the year.
The chart here shows the strength of the Reagan recovery in 1982 and 1983, compared with the level of growth during the Obama administration. This difference comes into sharper contrast when a comparison of Reagan’s policies is shown in contrast with Obama’s policies. It is noted that:
The Reaganites had it right: Rapid economic growth causes the deficit and debt to fall, not the other way around.
Without a sustained recovery in national output to 3% growth or more and without putting millions more Americans back to work, there is no politically feasible spending reduction or tax increase that could balance the budget even if Ron Paul ran Congress. Tax revenues have remained below 16% of GDP for the last four years because the economy is in a slow growth rut. The growth deficit, not the budget deficit, is the great issue of our time.
The authors write that “Reagan put pro-growth tax cuts and a rebuilt military ahead of his ambitions to balance the budget, and he was right. After his tax cuts fully kicked in on January 1, 1983, annual growth averaged some 4% over five years, while employment gains were swift and long-lasting. The deficit fell in half from a peak of 6% of GDP in 1983 to under 3% in 1989.”
By contrast:
Consider what would happen if economic growth increased today to what it would be in a normal economic expansion—about twice what Mr. Obama has delivered. That return to prosperity would raise far more revenue for Uncle Sam than the panoply of Mr. Obama's planned estate, capital gains, dividend and income tax hikes.
The Congressional Budget Office estimates that each increase of 1% in GDP means $2.78 trillion more in revenue over a decade. Nearly every problem known to man is more solvable with a larger economy—and what better gift to leave our heirs.
The chart nearby, from The Hoover Institute, shows what pro-growth policies will do to the national deficit. The U.S. is a still a large and prosperous nation, and a growing economy will outpace the debt burden. A reduced tax and regulatory burden on the small and medium-sized businesses that fuel the economy will enable increased business investment, increased hiring, and more rapid reduction of the debt-to-GDP ratio.
No, it’s not a slam-dunk. But we’ve seen it happen before. And that’s the path that Romney is promising to follow.
John,
ReplyDeleteThere are several problems with your post. The most fundamental error is that you think the Carter-Regan recession is analogous to our current recession. Honestly, if that is what the WSJ is telling you, you need to put the paper down and read some other sources. As I've said in private, the paper has lost quality since being taken over by Murdock.
This recession isn't like those of the past. We're in a financial recession caused by a debt bubble. (The disanalogy can be seen merely by seeing how ineffective our traditional government methods have been in addressing it.) Worse, we still need to deleverage, and this will take several years.
Sadly, Japan is a much better analogue. Twenty years ago they had a debt bubble. What did they do? Did they bite the bullet and let people and companies go bankrupt? No. They continued a series of ineffective, short-term policies that have caused anemic growth ever since. There was a time when the Japanese index was at 40,000. Now it's at 9,000. Nothing has changed because no politician in Japan has the political incentives to do what's necessary to turn the situation around.
Europe is the same way. And so is the United States.
If you do anything to quickly to reduce the deficit, you will ruin the economy. This is why immediate tax cuts across the board are foolish. There is no way to grow ourselves out of this situation. We need tax increases and spending cuts with an aim to reducing the debt. Only then, after a great deal of personal suffering, can the economy be fixed. Again, the deleveraging isn't over, and until it is, we will never get serious growth back.
Romney has proposed that we close certain loopholes and remove certain deductions so that we can increase revenue without increasing taxes. Is there any evidence this would be effective? Not that I'm aware of. And the unintended consequences would likely be severe (e.g., cutting the housing deduction).
Romney will not be like Regan simply because there is no analogue to Regan for a debt bubble. We need hard policies that cause suffering in the short-term so that long-term prosperity can occur, the kind of policies that get politicians evicted from office when it's time to vote. But Romney doesn't strike me as the kind of politician willing to lay down his political career for the good of the country.
Matthew, I know we’ve talked about the post-Murdoch WSJ, but I’ve been reading the WSJ since the early 1980’s, and while the editorial page there had seemed to become a mouthpiece for a neo-conservative foreign policy at some point, from an economic standpoint, they’ve been saying the same thing all along. Their message has been “pro-growth”.
DeleteFor example, they’ve been running a graphic of the debt-to-GDP ratio for years [I looked for this chart but couldn’t find it], which showed a massive spike around the year 1945. That 1945 debt is at a similar ratio today, at a debt-to-GDP ratio we have now, which, while the second of the two charts above is spending and not debt, the effect was still pretty much the same.
Keep in mind that “national debt” is not like having a sixteen trillion dollar lump-sum mortgage payment. We don’t owe the money to a mortgage company that’s going to try to “foreclose”. Generally, we are talking about owing the money to “the 1%” who own a lot of those treasury bonds, and foreign nations. You never really have to “pay down” that debt, but you do face interest payments. Many of these debt settlements they are talking about in Europe involve the forgiveness of some debt and merely the re-negotiation of other debt. In the US, we are nowhere near where Europe is. (For example, our deficit-to-GDP ratio is in the 50% to 70% range; in the US, we are at 24%).
True, there are structural costs (i.e., “entitlement” payments, etc.) and a demographic (“baby boom retirements”) that are a challenge at the moment. But the coming and going of that “age wave” is factored into something like the Paul Ryan plan, which looks out beyond the next 30-40 years.
Over that period of time, the plans that are being proposed all account for this “age wave” -- they provide ways to mitigate the effect of it, allowing some people to “opt out”, reducing the stress on the system, while NOT throwing anyone off a cliff. These plans are designed specifically to “deleverage” in a way that is going to minimize whatever “personal suffering” you seem to think is coming.
more
Meanwhile, on the topic of “growth”, I can speak to this at something like a more personal level. I work at a technology company, and the sales/revenue were growing comfortably all through the Bush years. In 2008, sales fell off the chart, the company had massive layoffs (“re-alignment of costs”), and for the last three years, sales have been positive but very difficult.
DeleteWe know that our customers aren’t buying what we sell, not because they don’t need it, but because they are trying to manage costs. What we sell amounts to increased capacity in their IT and network infrastructure. Let’s just say that our would-be customers at the present time “need it”, but because of the tax and regulatory uncertainty over the last two years, especially, they aren’t buying “it” because they are trying to hold down on some expenses. However, I can foresee a tsunami of purchasing if Romney is elected. No, it’s not going to double the size of the company overnight. But I can see a big increase in pent-up demand being released, which will give us a good final quarter of the year (1Q 2013), in the 10% range, rather than the 2% range, which will mean the meeting of bonus levels, the ability of our family (and thousands of families that depend on our company for their income) to use that extra money in whatever way we see fit, which will benefit the economy in a variety of different ways.
The kind of pent-up demand that I’ve described here is not just something that’s affecting my company. Such an effect is going to go into place immediately following a Romney election.
We’re not going to see “immediate tax cuts across the board”. What we are going to see is a reversal of some of the anti-growth regulations that are strangling businesses in different ways.
For example, I tell my sons, we’ll immediately see a lifting of the regulations that prevent drilling off-shore and an opening of leases on government-owned lands. This will greatly expand the production of energy, and a reduction in gasoline and diesel prices. Just about every item in every store today gets shipped there by truck -- using diesel fuel -- and if those costs drift down from $4,00 per gallon now, to say $3.00 per gallon (which is not unreasonable), that easing up will slack all through the economy. It’s not just the tax rates that are going to lead to “pro-growth” environment. But an easing of regulations of that kind will lead to a demand spike that is going to happen very quickly, as in the “Reagan” line above, and drift downward through eight (?) years of a Romney presidency.
Sure, there can and likely will be shocks -- terrorist attacks, potential wars, etc. But Romney has run a very cautious campaign; he is not an intellectual lightweight like Bush to listen to the loudest voices on his cabinet, and come up with some equivalent of a “Bush doctrine”. He’s going to much more reserved than that.
As the WSJ said in the article cited above, “Nearly every problem known to man is more solvable with a larger economy”-- that should be, “a growing economy”, an economy that can and will grow at a 4%-6% rate for at least the next couple of years. That is a much more positive scenario than four more years of 2% growth in an Obama presidency.
I’m also going to post this as a new post on the front page.
"If you do anything to quickly to reduce the deficit, you will ruin the economy. This is why immediate tax cuts across the board are foolish. There is no way to grow ourselves out of this situation. We need tax increases and spending cuts with an aim to reducing the debt. Only then, after a great deal of personal suffering, can the economy be fixed. Again, the deleveraging isn't over, and until it is, we will never get serious growth back."
DeleteUnfortunate, if true. To my knowledge, austerity policies are notoriously unpopular wherever they've been tried. Administrations which try to implement austerity policies are voted out of power. Candidates who promise to restore the gravy train are voted back in, which exacerbates the problem.
Actually Steve, I think just simply the notion that the business environment is not going to be imposed upon for the next four years (in the event of a Romney victory) will go a long way toward creating economic growth, especially in the kind of business-to-business environment that I work in. So, even apart from his policies, a Romney victory will do a lot of good for the GDP. But I think Ryan's policies, for example, are sound fiscal policies as well.
DeleteI'm suspect a lot of businesses are sitting on their investment capital, waiting to see who wins. If Romney wins, I'd expect business to take off.
DeleteSteve, I wish that were true. Businesses are sitting on capital because there is simply no demand, and this will hold true regardless of who holds office come Tuesday. (Yes, they are concerned about Obamacare and the fiscal cliff, but neither are sufficient deterrents from making investment.) This is another reason why John's post is unreasonable. Romney can't create demand, and eventually an increase in GDP, no matter what policies he enacts.
DeleteMatthew, one of the recurring news stories from several years ago was not that "businesses are sitting on capital because there is simply no demand". The demand is already out there, and Romney does not need to "create" it.
DeleteBusinesses are sitting on capital because there is uncertainty. Somewhere around here I've written about that situation with my own company. Technology is advancing mercilessly (especially with hand-held devices and the need to incorporate all types of devices into networks securely.) This is happening across many vertical markets, including retail, hospitality, restaurants, health care, industry, and others. Everywhere businesses are interfacing with the public and have the need to provide secure wi-fi networks. It's not just that expanded networks are needed. New apps are being created all the time.
You probably don't remember how Microsoft fostered a whole industry in the 1990's, of applications developers who created apps to run on the Microsoft platform. True, that led to the "bubble" situation of the 1990's, but before there was the bubble, there was the reality of it.
The same kind of thing is happening now: applications being developed for all of the various hand-held devices that are being introduced. One of the reasons that I'm not blogging as intensively as I had been is because I've picked up some freelance marketing work from one of these very kinds of companies. It's a company with five people, two of whom have PhDs from a very prestigious technology university, funded by venture capital, who are writing applications for the health care industry, riding on the wave of the need in health care for providers to standardize medical records on some kind of standard technology platform.
Maybe in three years an academic economist will write about this growing trend, but right now, I'm seeing it happen on the ground, it is an incredibly hopeful thing that I think will be encouraged by a Republican administration.
Is there a particular law or policy that I can point to now which will give an economist a slam-dunk premise-and-conclusion, "if X, then Y"? No. It involves smart people, working hard, taking risks, and trying to make something that will be profitable. Is it guaranteed? No. Can it succeed? You bet it can. This sort of thing has worked in the past. Has there been an economic study about it? Not yet. The future is being created now. Historians will write about it one way or another. I'm just not of a mind to be pessimistic about it right now.
The demand is already out there
DeleteWhere's the evidence? And, no, extrapolating from your company to the rest of the economy is nonsensical. We're talking about aggregate demand across the economy, not whatever one tiny slice of one sector sees. This is again another reason you need to put down the WSJ and pick up some economists.
There is no demand because individuals and households are saving. They are saving because they are worried about whether they will have enough to make ends meet. They are is worried about whether they will have enough because...individuals and households have unsustainable debt. Where is this supposed demand going to come from? More credit cards?
For all you wrote, you're not addressing the fundamental flaw of thinking our current crisis is analogous to the Carter-Regan era. That depression wasn't based on a credit bubble. You need to discuss like cases.
ReplyDeleteI addressed the "debt" issue at more length in the main post that I put up. In Carter's case, it was monetary as well. Inflation was up very high under Carter. And in that case, the response (by Reagan's Fed appointee Paul Volker) was to crank interest rates up high, which brought down the inflation but caused the double-dip recession. At that point, Reagan's pro-business policies kicked in. But the business cycle is going to be the business cycle.
DeleteI read your new post earlier this morning. My criticism remains the same. We have some historically relevant examples of deleveraging cycles--Japan being a prime example, although you could expand it to some European countries as well. What economists have you read suggesting the Carter-Regan recession counts as one?
DeleteIf all you've read on this are some WSJ columnists who have taken a liking to Paul Ryan's characterization of Obama as the economic reincarnation of Carter, then you need to put down the paper and stop the prognostications based only on the ideals of fiscal conservatism applied without an appreciation of our current financial context.
Matthew, My comparison isn't simply from "having read some WSJ columnists." I lived through the Carter/Reagan years and remember them.
DeleteAs for the Ryan plan being "deleveraging", that's very clear. It has to be:
http://roadmap.republicans.budget.house.gov/
As I noted in the blog post, they are two separate items. Related, but still separate things to look at. I'm very confident that an improving business cycle wwould go a long way toward helping the Ryan to work properly. A 4% growth rate will be a lot more helpful than a 2% growth rate. And I'm also looking at things "on the ground" as well (i.e., the reason why my company's sales are sluggish, and what I think will happen if Romney is elected.)
WSJ editorials plus anecdotal evidence are not sufficient to establish your position.
DeleteCan you name any economists who think the Carter-Regan recession is significantly more analogous to our situation than any other major deleveraging cycles in recent history? (You might know of some, and I would love to read them.) If not, you have a lot of work to do to demonstrate that merely cutting taxes and working to deregulate will be a reasonable course of action.
Matthew, I'm not arguing that the Carter/Reagan recession is "significantly analagous" to this one in terms of its cause. But I don't think the cause of the recession is nearly so important as you are making it out to be.
DeleteI can tell you that the national debt was perceived to be a significant problem in those days -- it was hundreds of billions of dollars if I recall, with deficits in the hundreds of billions of dollars. The inflation rate complicated things in a huge way. But in those days, economic growth made up for a lot.
An economic projection is not the same thing as a logical argument. Neither you nor I can predict the economic future with a logic-book style economic argument that says "if the cause of an economic recession is largely determined to be caused by national debt, then the solution is (x)".
The business cycle is the business cycle, and a 4% growth rate (which I believe we will see early on in a Romney presidency, and then some, for reasons I outlined) would be much more beneficial over the coming years than the Keynsian policies that have already been enacted.
Maybe, if Romney wins, you can pull out this set of blog posts and say "I told you so". But I don't think I'm wrong about this.
No one is arguing that economics is like that. But you do need to draw from analogous cases and other than gesturing at my point, you aren't doing the work to establish that it is analogous.
DeleteThis is also why I keep pressing you on which economists agree with your position. If you don't have any in mind, then I can't take your position seriously, since nothing (so far) that I've read or listened to by experts in the field agrees with your position. You need to deal with the kinds of problems the experts see with such a course of action.
As I've said elsewhere, I'd love to be wrong about this, not only for personal reasons, but also because of how much the electorate is likely to balk at the best solution to our current situation.
I have no interest in triumphalist blog posts on a theology blog about economic matters. If I'm right, then our country is unlikely to get better or see more prosperity than we've seen in the past. That's nothing to be terribly excited about.
Matthew, I'm not trying to be triumphalist. I originally brought up this comparison because I have personally seen parallels, and I do see cause for hope, which I could pass along in advance of an election, on a blog that tries to foster all sorts of cultural engagement on the part of Christians.
DeleteI'm not writing an academic paper here, and in this context, it doesn't seem necessary for me to cite too many top-level economists to say that hundreds of billions of dollars of debt (in 1980 dollars) and 16 trillion dollars of debt (2012) are "significantly analagous". The percentages of GDP of both debt and deficit are probably somewhat different, but overall, things just don't seem to have changed all that much.
According to this website:
Deletehttp://www.economywatch.com/economic-statistics/country/United-States/year-1980/
The "Total Government Gross Debt (% of GDP)" was about 42%. Today it is approaching 100%. So, while the debt ratios are not precisely the same, (and the article I linked to suggests that their use of the 100% marker was "arbitrary"), it does seem to suggest that more caution is required, likely in the form of addressing "borrowing costs" in such a way that puts investors at ease. But that doesn't seem to affect what actual policies that would need to be used to cause the economy to grow while at the same time reducing the deficit.
That is, the debt-to-GDP ratio was 42% in 1980, compared with about 100% this year.
DeleteJohn said:
DeleteI'm not writing an academic paper here, and in this context, it doesn't seem necessary for me to cite too many top-level economists to say that hundreds of billions of dollars of debt (in 1980 dollars) and 16 trillion dollars of debt (2012) are "significantly analagous".
I think you just played your hand. Do you know any economists who think these are analogous scenarios? Don't try and defend your position by characterizing my request as only appropriate for "an academic paper." Who have you read on this? Anyone at all?
The percentages of GDP of both debt and deficit are probably somewhat different, but overall, things just don't seem to have changed all that much.
Do you know what caused the Carter-Reagan recession? Do you know what caused our current recession? It's apples to oranges, John.
he "Total Government Gross Debt (% of GDP)" was about 42%. Today it is approaching 100%. So, while the debt ratios are not precisely the same
When you say "not precisely the same," you should be saying "drastically different." We're fast approaching the point where not even tax increases and spending cuts will be an option. Even assuming that you can compare economic scenarios only according to the debt-to-GDP ratio, are there any economists who would agree with your characterization of the difference as you have?
Deleveraging cycles have happened for centuries, wherever people and governments have owed more than they can pay. Ours is on a different scale, but many of the principles apply today. Once you reach a certain debt ratio, your only remaining options are to print currency or go bankrupt.
Do you know what caused the Carter-Reagan recession?
DeleteYes, I was there, and I lived through it. It was particularly severe in Pittsburgh, where the steel industry, having taken on huge obligations through having supported a number of generations of increasingly greedy steel workers, increasingly sought to "deleverage" itself from those burdens. New steel-making technologies enabled them to make as much steel with 12,000 employees as they previously had when they had a payroll that was some 10-20 times that large.
Do you know what pulled the country out of that recession?
You probably don't remember how IBM fostered a whole new industry in the 1980's, in the form of of applications developers who created apps to run on the IBM PC platform. This was all in the wake of the worst recession since the 1930's. While it was happening, there were probably economic studies in academia. But then, there was the reality of it; I lived through it, and I read about it in the papers, and I had friends and family who went in various directions both to avoid the economic difficulties and to pursue the emerging opportunities in a new technology industry.
This did not involve the printing of new money. It involved many cycles of economic growth that derived from funding whole new technologies that no one had ever seen work in the past. After all, businesses worked fine without computers for centuries. Who needed computers in offices? It seemed ridiculous to some. But others went out of business for not keeping up.
As was the case in this comment of mine from up above, I cannot cite economic studies to the effect that this happened. What I do rely on is "living memory" of participating in those events, or watching them nearby, and seeing the outcome. This is how things worked in the 70's and 80's; this is how it worked in the 1990's. So, it's the government that's debt-ladened and not the steel industry. The steel industry had some hard medicine, but in another neck of the woods, there was growing prosperity.
The "deleveraging" of the US from war debt in the 1940's and 1950's did not involve either pain nor inflation. I've cited that several times here, but you seem to gloss over it. Nor is "The Ryan Plan" the same as the path that the Japanese followed. I admit, things are difficult, and things will be difficult.
But I'm not ready yet to fly the white flag yet, by any stretch.
Here's the TL;DR version of your most recent comments:
DeleteI don't know any economists who agree with me because I haven't read any economists on this subject. I don't care what experts on this subject have to say because I have anecdotal evidence.
Arguing with you on this is like arguing with a liberal who gets his perspective on the world from the editorial pages of the New York Times.
The "deleveraging" of the US from war debt in the 1940's and 1950's did not involve either pain nor inflation. I've cited that several times here, but you seem to gloss over it.
You need to pay attention. I ignore this example for the same reason I've dismissed your other examples. Are there any economists who think that period was a credit bubble? Your fundamentals are wrong. You can't just argue that any scenario with debt is analogous to our current scenario with debt. Not only are the debt levels substantially different, but the fundamentals are as well.
The free market isn't some panacea you can just sprinkle over any problem like some magic fairy dust. It's an ideal. But you can't get directly to it from our current location. Your generation made financial promises it couldn't keep. Now my generation is paying for it.
For what it's worth, Larry Kudlow is an economist who alternately praises and criticizes Romney's economic message.
ReplyDeleteJohn,
ReplyDelete"Businesses are sitting on capital because there is uncertainty."
True, at least regarding the uncertainty, but the banks are also sitting on all kinds of cash that came from the bailout when the Feds juiced the money supply big time.
And just as soon as the uncertainty thing resolves itself due to the election of Romba Obamney, they are going to start lending/spending that cash. Guess what happens then?
More paper money chasing tangible hard goods or inflation, even of the hyper variety.
The problem is rather that both parties think it is government's job to fix the economy and give people jobs. Both parties believe in the bankrupt economics of keynesianism, i.e. more govt. debt, spending and credit is good/of the essence of "free market capitalism".
Further maybe, just maybe, the short term economic benefits of Romney compared to Geo. W. Obama are outweighed by the possibility of Romney being more interested in going to war with Iran.
And how about that conservative Supreme Court Bush appointee, Roberts? That under Obamacare, failure to buy insurance will be penalized by a tax, enforced and collected by the IRS?
And do we really believe that Obamacare passed by the Dim opportunist in chief will be overturned by a Repug flip flopper who signed Romneycare into law in the first place?
As far as ancient history goes, remember 'no new taxes' from Bush I?
How about 'a humble foreign policy' from Bush 2?
And 'transparency/internet posting of all bills before Congress votes on them' from Bush 3/Obama?
Likewise both candidates are in favor of the unconstitutional undefined and unlimited “War on Terror”, the Patriot Act and the NDAA – in principle, if not in fact since Romney couldn’t sign the last like Obama, but he’s for it – we have already crossed some lines and all the flagwaving, party politics and jingoism is not going to change that.
A triple pox on both their houses.
IOW how do you know a politician is lying?
They got their mouth open all the while they are breathing through their nose, which like Pinocchio’s is long enough to stay out in front of their baloney promises.
If Americans, whether they are evangelical or not, want both security and bread from their government, they will get neither. Rather they will be played big time for the idolaters that they are.
Do we want to vote? Then vote. But let’s not pretend what we are up to. A calculated risk/gamble that we won’t be worse off if we just don’t ignore the whole charade.
And I am not trying to be cynical.
cheers/rant over and out,
Bob S.