Pethokoukis

Yes, Romney probably really does believe in growth through austerity

Ronald Reagan had the Laffer Curve. Bill Clinton had the Bond Market Strategy. Barack Obama has the Keynesian Multiplier Effect.

So what is Mitt Romney’s big idea about how to increase economic growth? Top economic adviser Glenn Hubbard gives a pretty big hint in the Financial Times today that his boss isn’t some sort of closet, old-school Keynesian:

While a growth-focused agenda would have many parts, two fiscal policy issues stand out – getting our fiscal house in order and reforming the tax code. The US is on an unsustainable fiscal trajectory, with a debt-to-gross domestic product ratio projected to rise to second world war levels in the coming years. High and rising debt burdens are a structural impediment to growth. They raise expected future tax burdens, discouraging investment and limiting productivity growth. … Gradual fiscal consolidation may also be stimulative in the short run. Research by Hoover Institution economists concludes that reducing federal spending relative to GDP to pre-financial-crisis levels over a decade would increase GDP in the short and long term. This outcome reflects lower future tax rates and the boost from lower interest rates to investment and net exports.

In other words, Hubbard suggests American-style austerity — cutting spending and debt without raising taxes — and the policy certainty it brings can lift growth both in the short and long term.

And since Hubbard mentions the Hoover study, I decided to take a look at the 32-page analysis. (A key chart from the study is at the top of this post.) Here is the key section looking at the relationship of spending cuts on near-term economic growth:

A big question is whether the reduction in government spending reduces GDP in the short run, a concern that has been raised by many economists and policy makers.  … According to the initial model simulations, the strategy increases GDP in both the short run and the long run relative to the baseline.

There appear to be three sources of this positive effect. First, lower levels of government spending in the future, compared to the baseline, imply lower tax rates which provide incentives and stimulate employment.

Second, the expectation of reduced government spending in the future lowers interest rates, which stimulates demand today offsetting the decline in government spending in the short run.

And third, the lower interest rate reduces the exchange rate thereby increasing net exports which also offset the decline in government spending. More generally, the gradual and credible decline in government spending allows the private sector to adjust smoothly to the decline in spending without negative disruptions.

Indeed, the plan modeled by the Hoover academics would begin cutting spending immediately, though gradually, in 2013. If Romney wants to present research that supports his plan to a) balance the budget and b) cap spending at 20% of GDP — this is it.

The Hubbard op-ed and the Hoover study certainly suggest that a President Romney would impose austerity on Washington in order to create prosperity on Main Street. Less government, more growth.

7 thoughts on “Yes, Romney probably really does believe in growth through austerity

  1. Of course he does. romney is just obama-light and BOTH are OWNED by the New World Order folks who want the USA to be a 3rd world country. “austerity” is just PRACTICE for being a 3rd world country.
    romney probably figures (if he bothers to think at all and doesn’t just say what his puppeteers tell him to say) that once we become 3rd world, we’ll be a prosperous/”growing” 3rd world country

    • The quickest way to get normal people to tune you out is start in on that conspiracy theory gibbering. I realize you don’t care, just being neighborly in telling you.

  2. But interest rates are already at a record low and exports are up without any austerity? The most logical point is that it’s better to gradually reduce spending than to do it all at once, but I can’t see why that would boost gdp *in the short term.*

  3. For a smile, read Brian Caplan on how government economists Toe the Party Line
    Whatever their true thoughts, they leave out any criticism or speak only in vague terms so that they can support their master’s policies.
    === ===
    [edited]  Jeff Frankel says, “In every case, the economic adviser managed to avoid saying something he did not believe to be true.” Fankel is damning appointees with faint praise. An independent thinker doesn’t merely “manage to avoid” lying.
    === ===

    All governments are Keynesian, and just as wrong as Keynes was. Amazingly, the US and most countries use the following logic:
    -> When it rains, many people use umbrellas:
    -> So, if we make people use umbrellas, then it will rain.

    Don’t believe me? Here is the exact logic of US government economists:

    (1) We have measured GDP (Gross Domestic Product) at different times.

    (2) During times of prosperity, GDP is high. (This makes sense. People are producing more useful stuff.)

    (3) We can raise GDP (by accounting definition) by borrowing and taxing, then spending to build more stuff and paying people do work of any kind regardless of utility.
      This was the stimulus package, building millions of houses, and ongoing bloat in the federal and state governments. Government spending increases GDP by the definition of government.

    (4) Wait a bit, prosperity is sure to come.

    For example, the US has built thousands of sidewalks in the wrong locations as part of the stimulus. According to government accountants, this has all added to GDP. We are all waiting now for the prosperity that is sure to come. And the rain.

    For example, Solyndra has gone bankrupt after consuming $535 million of tax money. Every bit of that is considered extra GDP. This was just as useful to our society as digging a $535 million ditch in the wrong place. Yet, that ditch has added to our accounting of GDP.

    Government says we will face an economic slowdown if we lower federal spending. Yes, false GDP from government spending would go down. This is quite different from an actual economic slowdown. Scarce resources (including all of the engineers at Solyndra) are diverted to poor uses by government projects.

    A reduction in government spending will allow those resources to be applied to projects which will mostly add value to our society, rather than use up resources to gain nothing. It doesn’t matter if false GDP disappears, it would improve our lives.

    • “We can raise GDP (by accounting definition) by borrowing and taxing, then spending to build more stuff and paying people do work of any kind regardless of utility.
        This was the stimulus package, building millions of houses, and ongoing bloat in the federal and state governments. Government spending increases GDP by the definition of government.”

      Nice straw man. The idea is that in a demand slump, i.e. now, the government can be the purchaser of last resort. If the government spends, it puts money into business, which causes hiring and purchasing, which causes more hiring and purchasing. The government can be counter-cyclical, while private entities have little to no ability (or desire) to do so.

      The rest of your post betrays lots of misunderstanding of macro.

      • So, you think Solyndra was a valuable addtion to our economy, despite going broke? Solyndra certainly put more than $500 million of purchasing into the economy.

        If you really believe that, then would you support having 100 solyndras, thus injecting $50 billion of wealth producing spending into the society. Or, why not more?

        When someone, or the government, purchases something, the money is not the valuable thing being exchanged. It is what the money buys which purchases something. The money is an intermediary.

        After the government borrows or prints money and spends it, then where are the real things which will be transferred in payment? The extra money in circulation compared to the absence of new valuable things created is called inflation. It is going to hit us good and hard.

  4. Did nobody read the hoover study. This study is incredibly flawed, look up the ricardian equivilance and you will know exactly what I am talking about. The Ricardian Equivilance must be one of the worst assumptions any economic researcher can make

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