I don’t know that I’ve ever encountered an airier excursion into wishful thinking than in Phil Gramm and Glenn Hubbard’s op-ed in Wall Street Journal. It’s title, What a Romney Recovery Might Look Like certainly grabbed my attention. Here’s the meat of it:
Mr. Romney’s economic principles are strikingly similar to Reagan’s. He 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. His goal, like Reagan’s, is to make it profitable to invest in job creation.
Let’s go through that sentence by sentence. When Ronald Reagan took office the top marginal tax rate was 70% and had been greater than 60% for nearly a half century. Inflation was in double digits. The unemployment rate was just over 7%. Personal consumption was about 60% of GDP. Manufacturing employed a little over 20% of the population. Under Reagan the top marginal rate was slashed by 35 points, the rate of inflation was cut by 9 percentage points, and unemployment was cut by about 1.5 percentage points.
Now the top marginal tax rate are 35%, inflation is under 3%, and unemployment is 8.2%. Personal consumption is 70% of GDP. Manufacturing employees fewer than half the percentage of workers it did thirty years ago, a drop in absolute numbers.
I think was can agree that President Romney would not reduce the top marginal rate by 35 points and inflation by 9 points. If unemployment is reduced by 1.5 percentage points it will be roughly where it was when Reagan assumed office. Will significantly smaller changes produce large results? Mr. Romney’s economic philosophy may be like Reagan’s (a debate for another time) but the circumstances are completely different. One size does not fit all.
How, precisely, will cutting taxes by the very small percentage that is foreseeable induce a resurgence in growth? The tax cuts at the beginning of the Aughts didn’t have that effect. Neither did the multiple tax cuts at the end of that decade. The former did produce a small bump in consumption, the effects off which had vanished from the economy by 2003. The bumps in consumption that followed the multiple tax cuts at the end of the last decade were too small to measure with any real confidence.
Do we really need to increase the role of personal consumption in our economy? It’s already as high as any country in the world.
I agree that Mitt Romney is probably the right man at the right time to reduce the size of government operations. He is very well prepared to do that by training and experience. Unfortunately, federal government operations other than defense is small potatoes and he’s pledged to increase defense spending.
The real opportunities for cost-cutting are in defense and the entitlements which, at this point, Mr. Romney has pledged to preserve.
I agree that making it profitable to invest in job creation is essential for an economic recovery worthy of the name. Unfortunately, what Mssrs. Gramm and Hubbard list are pretty weak tea.
Assuming that the recovery (and, technically, we are in a recovery) continues during a hypothetical Romney Administration in the absence of serious structural reforms, greater than anything proposed to date, I believe it is overwhelmingly likely to resemble the recovery during the Obama Administration: inflation that’s too high, unemployment that’s too high, and growth that’s too slow.