Wishful Thinking

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.

8 comments… add one
  • And of course, Romney can’t do anything of those things without the approval of Congress. How likely is that?

  • michael reynolds Link

    I don’t think anyone invests in job creation, they invest to turn a profit. If that means replacing humans with machines, or off-shoring, or simply cutting jobs, that’s what they’ll do. No one creates a job except reluctantly.

    So what evidence do we have that any action of government – any action at all – will actually result in jobs and not just higher profits that go to benefit a small percentage of the population?

    And if we are to actually reduce the government payroll won’t that just add to the number of unemployed meaning the hill we have to climb is just that much higher?

    It seems like only yesterday we were being told that low corporate tax rates in Ireland were responsible for that country’s incredible growth. Ireland was supposedly the proof. Well, how’s that working out for the Celtic Tiger now? What’s the new exemplar of a nation soaring on the wings of low corporate taxes? And while we’re at it, how about an example of austerity creating sudden surges in employment? How’s austerity working for the UK?

    I don’t think Romney has any more idea than Obama has how to “fix” the economy, because I don’t think the human race knows how to “fix” economies. I suspect we have about as much capacity to effectively manipulate economies as we have to manipulate weather.

    I think Shakespeare had it wrong. The first thing we do, let’s kill all the economists.

  • I don’t think Romney has any more idea than Obama has how to “fix” the economy, because I don’t think the human race knows how to “fix” economies. I suspect we have about as much capacity to effectively manipulate economies as we have to manipulate weather.

    I agree with that. However, the converse isn’t true. Just because we don’t know to manipulate the weather it doesn’t mean that over the millennia we haven’t come up with some pretty fair ways to keep from drowning every time it rains.

    Back in the economic realm and completely consistent with your comment we know, for example, that planned economies just don’t work. And yet there are always people who desperately want them to work.

  • michael reynolds Link

    What strikes me is that very different countries — the US, Spain, the UK, China and more — with different governments ranging from conservative to socialist to single-party, with economies ranging from huge to modest, each end up with a massive housing bubble which eventually pops. If government is so important to the equation, how do we all end up in similar straits?

  • michael reynolds Link

    Also, even if we supposed we did know what to do about the economy, given the dysfunctional nature of our own government, and given our interconnectedness to numerous other equally dysfunctional governments running equally screwed-up economies, doesn’t the chess game go from two-dimensional to three-dimensional to some quantum chess game from hell that no one can possibly hope to play?

  • Drew Link

    Never one to miss a business opportunity, I’m officially opening the hemlock concession. $5 for two fingers, $7 for three. Um, cash only.

    Michael, how many do you want?

  • steve Link

    “He would reduce the size and cost of the federal government.”

    You missed this sentence. Reagan increased the size of government. I think you also understate the importance of interest rates. If borrowing is very expensive, then you make it cheaper, you get a boom. Look at what happened when Spain, Italy and Greece suddenly got to borrow at German rates. The evidence for tax rates as a major factor in our economy remains weak. While it is what we argue about the most, other factors are clearly much more important.

    Drew- Who does quality control?


  • You missed this sentence.

    I didn’t miss it. I commented on it. I actually think that’s a job he’s well-qualified to do. Unfortunately, other than the military and entitlements optimizing the federal government isn’t a task that’s on the critical path. And he’s not running on right-sizing the military or meaningful reforms of entitlements.

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