What kind of effect would a Romney presidency have on the U.S. economy?

In comments below, Matthew Schultz suggested that I have been a bit optimistic in my thoughts that Romney’s pro-growth policies will mirror Reagan’s, or more specifically, that the results we might see in a Romney presidency will be different from what we saw in the Reagan years.

He says:

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.

Keep in mind that I am not an economist, and nor is Matthew. But I don’t think Japan is a good analogy at all. Maybe Japan is a good analogy in case Obama wins the election. But not Romney.

First, we need to be careful not to mix up two different economic phenomena here: dealing with a national debt that reaches 100% of a nation’s GDP, and also, spurring on the economy after a recession.

Second, if Obama used “traditional government methods” to address the “debt bubble”, it was Keynsian. There is another school of thought (Hayek) that holds that Keynsian economics are flawed at best. Some think that Keynsian economics prolonged the “Great Depression” far longer than need be.

Along those lines, Obama did nothing to address debt. In fact, he greatly added to the debt. If anything, Obama’s economic policies will serve as a case study, in favor of Hayek’s version of economic policy.

While Obama did indeed rely on deficit spending [and increasing the debt] to bail out GM and other companies that were “too big to fail”, Romney has said he’d have allowed GM to go through bankruptcy, and we’d have to think he’d have similar responses to financial companies as well.


This article discusses how different economies have responded when reaching a debt-to-GDP ratio that the US has currently reached. And to be sure, in the last 20 years, Japan has gone on to greatly expand that debt from 100% of GDP up to about 240% of its GDP. But the US economy and the Japanese economy (and especially the philosophies of Romney/Ryan and the current Japanese government) operate differently enough that we should see a clear difference in the handling of this debt.

I’m not going to claim that the US economy will have enough steam in it in the coming years to take the national debt down to the 50% of GDP level that it reached in the 1950’s, but Romney/Ryan are leaning more toward the US economic model followed in the 1950’s, than that followed by Japan more recently.

In 1945, to fund World War II, the US government rolled up debt to a 100% debt-to-GDP ratio of 100%. That's at a similar ratio to the US today, a deficit-to-GDP ratio of about 24%, which we have now. While the second chart in this post shows 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 treasury bonds, US and other corporations, and foreign nations. You never really have to “pay down” that debt, but you do face interest payments. Many of the debt settlements they are talking about in Europe involve the forgiveness of some debt and the re-negotiation of other debt. In the US, we are nowhere near where Europe is. (For example, Europe’s 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 the Ryan plan, which looks out beyond the next 30-40 years, in some cases to 2080.

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” Matthew seems to think is coming.

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Meanwhile, on the topic of economic growth coming out of a recession, 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.

We 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 infrastructures. Our would-be customers at the present time certainly do need what we sell, but because of the tax and regulatory uncertainty over the last two years, especially, they aren’t buying at the moment, because they are trying to hold down on some expenses.

However, I can foresee a tsunami of purchasing if Romney is elected, and here’s why. (And keep in mind that 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).

Romney has not promised “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, 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.

This is the kind of activity that will result in a very noticeable release of pent-up demand, which will give us a good final quarter of the year (1Q 2013), and I can personally see increases in the 5-10% 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.

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 that I 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.

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As Christians, we need to keep in mind that “The LORD detests dishonest scales, but accurate weights find favor with him” (Proverbs 11:1).

For a nation, that means a sound economic policy. A lot of readers here advocated voting for Ron Paul for this very reason. I don’t think Paul looked at the economy from a growth perspective. And I think Romney does.

We will never have a perfect president. But I think we can feel comfortable to vote for a president who will at least have some of these economic fundamentals in mind.