Courtesy of Brad DeLong

Notes on HHMT: Kevin Hassett, Glenn Hubbard, Gregory Mankiw, and John Taylor, "The Romney Program for Economic Recovery, Growth, and Jobs"

HHMT: We are presently in the most anemic economic recovery in the memory of most Americans, with significant joblessness and long-term unemployment, as well as lost income and savings.

WRONG: We are in the worst downturn, but we are not in the “most anemic” recovery–the recovery of 2001-2004 was more anemic. HHMT should know: three of them held high federal office in the George W. Bush administration that managed that recovery, and back then all four attempted (uncovincingly, IMHO) to rebut claims from people (like me) that the early 2000s recovery was anemic and that more stimulative policies were then needed.

Why don’t HHMT make the true claim that we are in the worst downturn? Why do they make the wrong claim that we are in the most anemic recovery? Because they do not want to talk about how back when they were in office they played their role in failing to use their leverage to argue for more expansionary fiscal and monetary policies to speed the then-recovery.

Why weren’t HHMT arguing, back in 2001-4, either inside or outside the government, for more expansionary fiscal and monetary policies to speed the then-recovery? I don’t know.

Those of us who were so arguing would have found their help most welcome.

HHMT: The Obama administration says that the economy’s awful performance reflects the reality of the aftermath of a financial crisis and that the administration’s policies generated what little recovery we have seen from the severe 2007-2009 recession – Americans should stay the course. But the historical record is clear: Our economy usually recovers quickly from recessions, and the more severe the recession, the faster the subsequent catch-up growth…

DOES NOT FOLLOW: The argument that recovery is highly likely to be slow in the aftermath of a financial crisis is a powerful one—made by many who are not Obama administration-flunkies, including the well-respected Reinhart and Rogoff (2010) and the IMF (2011). The “But” sentence does not rebut this powerful argument—although HHMT mean for their readers to think that it does.

HHMT: The Romney economic program will change the direction of policy to focus on economic growth. Its pro-growth effects will work in two basic ways: It will speed up the recovery in the short run, and it will create stronger sustainable growth in the long run.

WRONG: There is no Romney program—a program is complete, coherent, and scoreable, Romney has repeatedly said that his statements are not scoreable. In order to estimate the economic effect of any program, you have to know what its pieces will do–you need to have it scored. Until Romney presents a complete and coherent program with scoreable pieces, HHMT have no basis for asserting anything about its economic impact.

One of the most annoying things here is the partisan asymmetry: the rules of the game seem to be that Democratic proposals have to be scoreable and coherent, while Republican proposals don't.

It would have been very nice if HHMT had done what we Democratic economists do–told their political masters that they could not estimate economic impacts until they were given a coherent, complete, and scoreable plan.

Why they did not do this I do not claim to know.

HHMT: Declines in business investment and employment were particularly sharp in this recession. Far from being a lightning bolt hitting a smoothly running economy, the crisis was exacerbated by structural biases against business investment (from the tax code and regulation), financial imbalances (particularly fueled by biases against private saving and by the need to borrow abroad to finance our government deficits), and regulatory choices (excessive promotion of housing investment and inadequate attention to existing financial regulations and the rise of and consequences of shadow banking). No single party or administration is responsible for structural headwinds to growth, but the Obama administration’s errors and choices exacerbated the economy’s structural problems and weakened the recovery.

FRED Graph  St Louis Fed 1

DOES NOT FOLLOW: The argument that America has over the last two decades suffered from structural biases against business investment in categories like equipment and software simply does not follow at all. Business investment grew at a very healthy pace during the Clinton administration—and has grown twice as fast under Obama as it did in the years of what National Review used to call the “Bush Boom”.

The pieces of autonomous spending that are right now far-below the values seen before the crisis and the downturn are (i) primarily residential construction, and (ii) secondarily government purchases–these are the results of a broken housing finance system and of Republican austerity programs, not of an anti-business climate.

The pieces of autonomous spending that are responsive to the business climate–the willingness of businesses to purchase equipment and the confidence of businesses that make them willing to export–are doing just fine right now. If residential construction and government purchases were doing as well, we would be out of this current mess.

Thus the point about “excessive promotion of housing investment and inadequate attention to existing financial regulations and the rise of and consequences of shadow banking” is well-taken—it is the collapse of housing investment and its failure to recover that is at the core of our still-deep downturn. HHMT should have done something about those policies when they were in office—or at least they should have tried hard enough to do something about them that the rest of us could see that they were in a fight.

We don’t see any signs of that.

HHMT: Rather than focusing on the structural problems revealed by the financial crisis and the ensuing recession, the Obama administration focused on short-term fiscal ‘stimulus.’

FALSE: I am sorry, but here I just have to escalate from "WRONG" to "FALSE", because this is not just wrong, this is false–and knowingly false.

Obama administration attempts to focus on the structural problems revealed by the financial crisis were hobbled by Republican obstruction to the reform effort that eventually yielded Dodd-Frank.

HHMT were conspicuous by their absence in the lobbying for reforms to deal with the defects of existing financial regulations and with the rise of and consequences of shadow banking.

Why they were conspicuous by their absence I do not claim to know.

HHMT: To put the economy back on track, they borrowed deliberately and spent recklessly, ignoring weaknesses in housing, business investment, and employment. These short-term stimulus packages were ineffective, leaving the nation with higher debt, which acts as a drag on long-term growth because households and businesses understand that the administration must raise taxes significantly to pay off that debt.

WRONG: In the model of Mankiw and Weinzerl (2011), at least, households and businesses that understand that government debt must be paid off or monetized respond by increasing their spending because of lower real interest rates. What HHMT call “reckless spending” is from the MW point of view a useful adjunct to and perhaps a necessary part of optimal quantitative easing monetary policies.

HHMT: The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies. Research by Atif Mian of the University of California, Berkeley, and Amir Sufi of the University of Chicago showed that the cash-for-clunkers program merely moved new car purchases ahead a few months with no lasting effect.

DOES NOT FOLLOW: Such policies are supposed to shift demand forward in time into periods where the crisis is acute from future periods in which, it is hoped, demand is less slack. When Mian and Sufi present their work, they characterize it not as showing the failure but rather the success of programs like CFC.

HHMT: In short, the Obama administration chose to emphasize short-term fixes – ineffective stimulus,cash for clunkers, myriad housing programs that went nowhere, and a rush to invest in 'green' companies irrespective of cost – rather than restoring long-term growth and productive private-sector job creation.

FALSE: The Obama administration from December 2009 on focused on the long run—on rebalancing the long-run financing of America’s social insurance state. Their attempts to strike a bipartisan deal to match future spending with future taxes were blocked by obstructionist Republicans, who believed that Obama must on no account be allowed to accomplish anything.

It was my view—and the view of others—that this pivot to the long-term structural was a mistake and was premature.

But for HHMT to claim that Obama did not so pivot is false, and knowingly false.

HHMT: As a consequence of short-termism, uncertainty over policy – particularly over tax and regulatory policy – limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 18 months.

LIE: I am sorry, but I have to escalate from "FALSE" to "LIE". The phrase "particularly over tax and regulatory policy" makes this a lie.

As Simon van Norden writes:

To understand the integrity of [the HHMT] argument, consider his claim that ‘uncertainty over policy–particularly over tax and regulatory policy–slowed the recovery and limited job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4% in 2011 alone.’ Note the phrase ‘this uncertainty’: he's talking about uncertainty ‘particularly over tax and regulatory policy’. Now read the analysis by Baker, Bloom and Davis From their abstract: ‘The index spikes around presidential elections and major events such as the Gulf wars and the 9/11 attack. Index values are high in recent years and show clear jumps associated with the Lehman bankruptcy, the 2010 midterm elections, the Euro crisis and the U.S. debt-ceiling dispute.’ Uncertainty over regulatory policy? No mention. Uncertainty over tax policy? No mention. What Hubbard seems to be doing is interpreting the uncertainty created by elections (and the debt-ceiling showdown) as uncertainty about regulatory and tax policy (as opposed to, say, government spending.)

HHMT: In addition to these policy errors, the Obama administration has made choices to bypass reforms that would jumpstart long-term growth and job creation. Such reforms would address our anti-competitive tax code and unsustainable trajectory of federal debt – but the president ignored his own deficit commission and submitted no plan for entitlement reform.

FALSE: The Affordable Care Act—ObamaCare—is by itself a major, major entitlement reform, scored by CBO in its current-law fiscal scenario as removing 2/3 of the long-run fiscal gap. Other Obama proposals—many other Obama administration proposals—have been rejected by Republicans in Congress for no reason other than their political decision to make sure Obama accomplishes as little as possible.

HHMT: The president’s choices cannot be ascribed to a political tug of war with Republicans in Congress. President Obama and Democratic congressional majorities had two years to tackle anypriority they chose.

LIE: I am sorry. I think we have to escalate from “FALSE” here.

There were at least seven Democratic senators in 2009-2010—Baucus, Landrieu, Lincoln, Bayh, Nelson, Pryor, Spector, Webb—who were “professionally bipartisan” in that they would not vote for cloture in any but the most extraordinary circumstances without Republicans voting by their side. Unless the Democrats could peel off a Collins, a Snowe, or a Voinovich, they had not a filibuster-proof working majority of 60 but rather a filibuster-vulnerable working majority of 53.

HHMT: Governor Romney’s economic plan will completely change the direction of economic policy…. Measuring from the first quarter of 2013 through the fourth quarter of 2022, the average growth rate is expected to be approximately 4 percent per year with the upper long-term growth range,and about 3.5 percent with the lower long-term growth range. This compares favorably with the approximately 2 percent pace of the current recovery. Real GDP under the Romney plan will be between $5.5 and $6.5 trillion higher than today, and between $2.1 and $3.1 trillion higher in2022 than it would be under a continuation of current slow growth. The difference between these expected outcomes and the record and plans of the Obama administration is stark. That difference reflects both new economic ideas and policy choices.

DOES NOT FOLLOW: The CBO currently estimates potential real GDP at the end of 2022—what we would expect without policy changes to boost economic growth—to be $18.5 trillion real dollars. Current real GDP is $13.5 trillion. Applying HHMT’s lower-range growth numbers produces an end-of-2012 real GDP not $2.1 trillion higher than CBO projects but rather $0.6 trillion higher. $1.5 trillion of their claims thus arise not from faster growth of the economy’s productive potential but from an implicit—and unmotivated—assumption that under Romney policies aggregate demand in 2022 is equal to potential output, but under other policies it is not.

HHMT: Assessing growth effects from the change in economic policy under the Romney plan can be done by analyzing likely growth effects of individual elements of the plan…. A significant body of economic research concludes that fundamental tax reform could increase real GDP growth over the next decade by 0.5 to 1 percentage point per year. Kevin Hassett and Alan Auerbach surveyed the literature and found that tax reform could increase output by between 5 and 10 percent.

DOES NOT FOLLOW: Romney has not proposed and is not proposing the shift without long-lasting transition rules to a consumption tax needed in order to fit the definition of “fundamental tax reform”. The HA estimates do not apply to the Romney plan—whatever the Romney plan turns out to be.

Some economists–Miles Kimball comes to mind–think that the ultimate Romney plan will turn out to be something sensible, but that Romney cannot say what it is because doing so would disrupt the con Romney is currently running on the Republican base. Miles may be right. I fear he is overoptimistic.

HHMT: The epitome of the deviations from basic principles is the self-inflicted fiscal cliff where many important provisions of the tax code change at the end of 2012.

DOES NOT FOLLOW: HHMT were conspicuously absent in 2010 and 2011 from the ranks of those of us arguing that the economy was being harmed by the debt-ceiling debate, the debate that produced the “fiscal cliff” as the only outcome congressional Republicans could be induced to accept.

Those of us who were arguing then for consistent and coherent long-run fiscal policies would have found their help most welcome.

HHMT: Recent research by John Cogan and John Taylor of Stanford University and Volker Wieland and Maik Wolters of Goethe University estimates that the output effects of a fiscal consolidation, like the Romney plan, would gradually reduce federal spending relative to GDP. In a long-run model, the fiscal consolidation raises both investment and output (the latter by almost 2 percent). In an alternative model with short-run rigidities, the spending consolidation also raises output by about 2 percent. In both cases, output rises even in the short run, as households and businesses respond to lower expected future tax rates as a result of the fiscal consolidation.

FALSE: I have seen the CTWW team in action before, back in 2009, when they were arguing that the Recovery Act would do nothing because it would lead the Federal Reserve to raise interest rates.

False then. False now.

Back in 2009 they claimed that their model had produced very different results than the Romer-Bernstein model for “exactly the same economic policy change”. When I dug into it, it turned out that the CTWW claim was not correct: the policy change that Romer-Bernstein modeled was one in which the government increased government spending. and the Federal Reserve held short-term safe nominal interest rates constant. The CTWW policy change was one in which the government increased government spending and the Federal Reserve raised short-term safe interest rates in order to keep the inflation rate constant. Yet CTWW claimed that the Romer-Bernstein model must be wrong because it produced different estimates for “exactly the same” policy change.

In Europe, that gets you four red cards. In America, that gets you sent to the showers.

After that, I don’t count citations to CTWW as evidence of anything.

HHMT: Recent research by Alberto Alesina and Silvia Ardagna of Harvard University argues that policies to increase economic growth are more effective if done with tax cuts than with spending increases. In their conclusion, they write about the Obama stimulus: “About two-thirds of this fiscal package is constituted by increases in spending, including public investment transfers, and government consumption. According to our results, fiscal stimuli based upon tax cuts are muchmore likely to be growth-enhancing than those on the spending side.”… Separate research by Andrew Mountford of the University of London and Harald Uhlig of Humboldt University concurs: “Our key finding is that the best fiscal policy to stimulate the economy is a deficit-financed tax cut and that long-term costs of fiscal expansion through government spending areprobably greater than the short-term gains.” (See Andrew Mountford and Harald Uhlig, “What Are the Effects of Fiscal Policy Shocks?,” CEPR Discussion Paper, July 2005.)

DOES NOT FOLLOW: AA and MU both consider an economy far from the zero lower bound on nominal interest rates. Their conclusions do not apply to an economy at the ZLB.

HHMT: Recent research by Ellen McGratten and Nobel laureate Edward Prescott concludes that higher regulatory costs reduced both R&D and fixed investment during the financial crisis and its aftermath; and regulations continue to increase.

DOES NOT FOLLOW: Edward Prescott also believes that the American economy was crippled during the twentieth century by the policies of Roosevelt–Theodore Roosevelt, assisted by that interventionist statist Calvin Coolidge.

HHMT: Policy responses in the early 1980s aimed not just at overcoming the 1981-1982 recession, but at overcoming the structural problems of the 1970s. By reducing domestic discretionary spending, setting out a three-year program to reduce tax rates, and alleviating the regulatory burden, policymakers sought to make it profitable to invest in America again. These principles match those in the Romney plan. Governor Romney would reduce the size and cost of the federal government. He champions a reduction in marginal tax rates in the context of a general tax reform. Particularly powerful are his proposals to reduce marginal tax rates on business income earned by corporate and unincorporated businesses alike.

DOES NOT FOLLOW: As noted above, there is no business unwillingness to invest in America. Our problems are insufficient investment by government—the results of austerity programs—and insufficient investment in residential construction—the results of a broken and unfixed housing-finance system.

And the embarrassing reality underlying the Reagan years 1981-1989 is that the rate of growth of America’s productive potential, as estimated by the Congressional Budget Office, was no faster over 1981-1989 than it had been over 1973-1981. If Reagan administration policies were truly aimed at boosting American growth, they failed—in large part because of the drag placed on investment by the high real interest rates that businesses had to pay in the Reagan years, as they competed for scarce pools of capital left over after the U.S. government had financed the Reagan deficits.

If you want to make it more attractive to invest in America, you simply do not take Ronald Reagan’s economic policies as your model.**

HHMT: The Romney plan will achieve these objectives with four main economic pillars…. reduce federal spending as a share of GDP to 20 percent – its pre-crisis average – by 2016; reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains… [r]educe the corporate income tax rate… to 25 percent… broaden the tax base to ensure that tax reform is revenue-neutral;… reduce growth in Social Security and Medicare benefits… block grant the Medicaid program to states; remove regulatory impediments to energy production and innovation… repeal and replace the Dodd-Frank Act and the Patient Protection and Affordable Care Act…

DOES NOT FOLLOW: Repealing Dodd-Frank—with not a hint as to what will replace it—does not decrease but increases regulatory uncertainty. Repealing ObamaCare—also with not a hint as to what will replace it—does not decrease but increases regulatory uncertainty, especially as up through the middle of 2009 what we now call ObamaCare was then calledRomneyCare, and its biggest booster was Mitt Romney. How can uncertainty fail to be generated by would-be President Romney’s declaration that he opposes RomneyCare and seeks to replace it with something else that he will not reveal?

Similarly, Romney has not even the outlines of a plan for how to reduce federal spending to 20% of GDP, or how he could possibly broaden the tax base to keep his tax cuts for the rich revenue-neutral.

If you do indeed fear uncertainty about tax and regulatory policy, you need to vote against Romney as you would vote against the plague—and urge everybody you know tovote against Romney, and urge them in the strongest possible terms.

Art by William Banzai7 at Flickr

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