Romney Is Wrong on What Drives a Recovery
The original draft:
Governor Romney Pretends That There Is No Glass at All
For almost 200 years economists have known two sources of high unemployment: structural unemployment, when the salaries workers expect to get are greater than those businesses expect to pay; and cyclical unemployment, when households, businesses, and governments in the economy are collectively planning to spend less than they take in. Governor Mitt Romney, the presumptive Republican Party candidate for November’s Presidential election, has a plan for dealing with structural unemployment. He does not have a plan for dealing with cyclical unemployment.
This is, in itself, a big problem for the rest of us--for right now the country does not suffer from the disease of structural but rather from the disease of cyclical unemployment. Structural and cyclical unemployment are different diseases with different cures. You cure the first by bringing workers’ and businesses’ expectations salaries into accord. You cure the second by rearranging matters so that household, business, and government planned spending is equal to what they take in. As the Washington Post’s Greg Sargent complained, Governor Romney responds to questions of what he would do to cure cyclical unemployment with zero proposals for dealing with cyclical unemployment, and six proposals for dealing with structural unemployment: (i) opening more international markets to American trade, (ii) balancing the budget over the long term, (iii) subsidizing drilling for oil and gas, (iv) “revamping” the National Labor Relations Board, (v) lowering tax rates for businesses, and (vi) repealing ObamaCare.
I don’t think these are particularly good policies for dealing with structural unemployment, with the exception of opening markets and balancing the budget--but anybody looking at Republicans Reagan and the Bushes on the one hand and Democrats Clinton and Obama on the other knows that one and only one political party has stepped up to the plate and worked to try to balance the budget. Hint: it’s not the Republicans. Claiming in the next breath that he wants to lower business tax rates undoes claims to want to balance the budget. Everybody not bought and paid for by the oil companies knows by now that clean energy is a better and in the long run much cheaper place for America to invest in than carbon energy. The National Labor Relations Board’s teeth have already been pulled so that it has no effect on the economy, for ill or good. And ObamaCare--well, back when it was called RomneyCare and Governor Romney was its biggest booster, he was not scared that it would cost jobs. RomneyCare in fact has not cost jobs in Massachusetts: that businesses and households can purchase insurance through the Health Exchange makes Massachusetts a more attractive place to move to and locate in. But let that pass. These are at least policies. We can have a substantive debate over them. Our big problem: The biggest crisis facing the American economy today is a cyclical employment crisis. One of our major political parties is about to nominate a candidate for President who has no plans at all for even attempting to solve it.
If 2012 were a normal business cycle year, 63% of American adults would have jobs. Instead, only 58.6% do. At least two out of three Americans now are or have a close relative who ought to be working, and would be working in normal times, but is jobless. 58.6% is better than the 58.2% who had jobs late in 2009, when the emergency stabilization policies--the Bush TARP bank bailout and the Obama administration’s Recovery Act and stress-test bank recapitalizations--brought the decline to a halt. But to go from 58.2% to 58.6% when you ought to have a plan for getting to 63% leaves lots of work to be done. President Obama has a plan for doing this work: the American Jobs Act--payroll tax holidays; investment incentives; employing more people (not, as Governor Romney wants to do, fewer) as cops, firefighters, and teachers; mortgage refinancing; reforming the unemployment insurance system.
Governor Romney has no plan for dealing with cyclical unemployment.
If the Democrats and Republicans in Congress had passed Romney's plans last year, right now employment in the U.S. would be exactly where it is. If the Republicans in Congress had not blocked the American Jobs Act last year, employment in the U.S. right now would be between one and three million higher. That would not have gotten us all the way to the 63% of full employment. But you cannot climb out of as deep a hole as we are in in a single year. And the AJA was a bid to break partisan gridlock--it was built on ideas that moderate Republicans had supported in the past--and would be supporting now if they were proposed by a Republican president.
President Obama plans to fill the glass. His plans--if not blocked by Republicans last year--would by now have filled the glass half full, and this year there would be an AJA II proposal to fill the glass completely.
But Governor Romney pretends that there is no glass at all.
And I guess I should be replying to commenters over at the Detroit News...
Two things stand out about the critics:
- They seem to sit around hating California.
- Nobody says: "That's wrong: Romney does have a plan for dealing with cyclical unemployment."
Some comments:
Some parts of the New Deal were awful--raising taxes in 1937-8 to try to balance the budget, the National Industrial Recovery Act. Some parts of the New Deal worked extremely well: abandoning the gold standard in 1933, faster monetary expansion, dropping Hoover's policy of trying to balance the budget immediately in the years before 1937. On balance, the New Deal seems to have worked quite well: looking over North Atlantic industrial countries in the 1930s, the sooner countries adopted New Deal-like policies the faster they started to recover from the Great Depression--with Japan and Britain leading the way, Germany and the U.S. in the middle, and France, which stuck to policies much like those of today's Republicans, bringing up the rear. In Japan and Britain recovery began in 1931. In Germany and the U.S. recovery began in 1933. But in France recovery did not begin until 1937. That's a striking pattern--and it matches a country's starting its own New Deal to a Model T...
I think that there is a distinction that you are missing here--and a lot of it is us economists' fault. "Saving" can mean two things. A first kind of saving is really a kind of spending, but you are spending not on things that you use up immediately but on things that make your economy more productive in the future: roads, bridges, ports, the human capital of 12 year olds, large turbine generators, and so forth. America does much too little of this kind of saving, and we really ought to be doing a lot more. The other kind of saving is when people cut back on their spending on currently-produced goods and services to try to hoard financial assets that they think are safe or liquid stores of value. That kind of savings excess is what we see now, and that is very damaging: that is what has gotten us to our current pass where 3/4 of Americans are or have a close relative who is cyclically-unemployed. As I said, your confusion is our fault--a failure of rhetoric and communication on us economists' part. One of the things I get to do this summer is to think about how to write textbooks to try to eliminate or at least reduce this confusion...
If I may add another comment: One truly scary thing is that Romney has some very smart advisors who have what I, at least, think are good and sound plans for addressing our cyclical unemployment crisis. Glenn Hubbard, for example, wants to reorganize mortgage finance to break the logjam that keeps construction depressed, and keeps so many others who are underwater on their homes frantically trying to cut their spending in order to build up their stocks of financial assets to feel safe. (And, of course, when everybody tries to cut spending the fact that your income is somebody else's spending is what sends us into depression.) Greg Mankiw has some very good ideas about how monetary policy should be used to temporarily raise the rate of inflation and so trigger processes to put Americans back to work. (The third of the triad, John Taylor, doesn't seem to me at least to have many good ideas.) But there is no sign at all that Romney is listening to these advisors. I hope he is. But I don't think we can count on it...
Re: "stimulus did not work the first time". I'm with Christy Romer on this: The stimulus ought to have been about $2000 per American per year, and we actually did only $500 per American per year at the Federal level--and that was offset by state level cuts. And right now the burden of the debt is higher than if we had done more stimulus because slow (or rather negative) growth greatly raises the burden of the debt on the economy. Let me see if I can add a picture originally from
Jared BernsteinJay Shambaugh:
http://graphics8.nytimes.com/images/2012/06/19/opinion/061912krugman1/061912krugman1-blog480.jpg
That is pretty striking, to me at least: countries that cut their spending most have gotten into the most trouble in the past three years. Countries--like China and Germany--that have kept their own government spending on an even keel or even raised it have done best...If I may add another comment: One truly scary thing is that Romney has some very smart advisors who have what I, at least, think are good and sound plans for addressing our cyclical unemployment crisis. Glenn Hubbard, for example, wants to reorganize mortgage finance to break the logjam that keeps construction depressed, and keeps so many others who are underwater on their homes frantically trying to cut their spending in order to build up their stocks of financial assets to feel safe. (And, of course, when everybody tries to cut spending the fact that your income is somebody else's spending is what sends us into depression.) Greg Mankiw has some very good ideas about how monetary policy should be used to temporarily raise the rate of inflation and so trigger processes to put Americans back to work. (The third of the triad, John Taylor, doesn't seem to me at least to have many good ideas.) But there is no sign at all that Romney is listening to these advisors. I hope he is. But I don't think we can count on it...
"JoAnne Hite: Brent, the state has rebounded because of the auto bailout. Stimulus spending does work if it's not spent on tax cuts which most of Obama's "stimulus" was for. Tax cuts will not work, businesses want demand for their products before they hire and there won't be demand if people either have no jobs or are not making enough money." I would say "rebounding". I would not say "nicely"...
"Michael Smitka · Professor of Economics at Washington and Lee University: FDR had a plan? He was initially elected on a promise to cut spending to balance the budget. And he did, as soon as the economy began recovering in 1936, pushing us back into recession. The Civilian Conservation Corps? -- it was never more than 300,000 out of a population of 125 million. The Army? -- small until war loomed in 1940. And my grandfather, a teacher (by then principal) in Wyandotte, was paid in script. Most government workers were (and remain) local teachers and police, and the Great Depression hit local revenues and employment hard. FDR did nothing to offset that." There is a very eloquent letter from John Maynard Keynes to FDR in 1937/38 asking him "why are you doing this?"...
Those countries that have cut the most over the past four years are those countries that have done the worst. Those that have actually expanded government spending--China, Germany--have done the best. There are countries where increasing government spending adds to uncertainty. There are countries where increasing government spending reduces uncertainty--where the big uncertainty is whether there are going to be any customers, and knowing that at least some of your potential customers will have income is reassuring. How can you tell the difference? Look at the interest rates at which the government can borrow. If they are high--Greece, Spain--the government has no business trying to boost the economy by spending more. If they are low--the U.S., Germany--the government does have business doing so...
"Diane Burton: Brad DeLong germany is not spending, she knows thats trouble." Diane: In Europe, Greece, Ireland, Italy, Portugal, Spain, and Slovenia have cut. Finland, the Netherlands, Belgium, Austria, Slovakia, France, and Germany have not. Where are you getting your information? They don't seem interested in informing you...
"Jeff Banker: JoAnne Hite - you are wrong - most of the roughly $800B stimulus did not go to tax cuts. that piece was only ~$60B/yr for 1-2 years. The bulk of the stimulus went to preserving gov't jobs such as teachers, police, and firefighters." Jeff Banker: Like everything else, it depends. Spending money on mortgage refinancings and investment tax credits looks to me to have been likely to have had the biggest bang for the buck--but loans or grants to states, and direct federal funding of construction don't look bad. We will be combing through the frustratingly noisy data for years to come...
"Mary Fitzgerald Feola · Oakland Community College: The state has come back because of the auto bailout. Period." Mary Fitzgerald Feola: I wouldn't say "just". I would say "largely". Liquidating GM and Chrysler would have been very bad news--and contrary to what Romney now claims, there was nobody willing to advance debtor-in-possession financing in 2008-9, so back then bankruptcy = liquidation and shutdown.
"Mike Corey: You should do stand-up comedy. You're hilarious." Do you really think comments like this convince anybody? Or inform anybody? I am curious why you do this...
"Mike Corey: Once I saw Berkeley in your job title, your comment made sense. That was all that made sense." It is odd... I have never heard anybody in Berkeley say anything like "as soon as I saw 'Michigan'... your comment made sense". What kind of a person judges whole sections of the country in such a way?
"Rhonda Fuller: He calls himself an economics professor, ha! We weathered the situation created by Barney Frank, Fannie Mae and Freddie MAC." Do you really believe that Barney Frank ran U.S. financial regulatory policy, or are you just saying that to try to confuse the issue?
"Lonnie Heuer: I suggest you take care of Caliphony! What we don't need is more of our tax dollars going to government unions. The Private sector workers pay the bills, along with private sector businesses!" I somehow get the impression that you don't like California. Why not? I mean, people in California don't sit around and say that they don't like Michigan...
"Lonnie Heuer: Maybe The Professor could explain baseline budgeting to us! Maybe Stabenow could tell us what's she doing to cut our deficits?" As Mitt Romney would be among the first to tell you, now is not the time to cut the federal deficit: the U.S. government can borrow on extraordinarily easy terms, and we badly need the jobs funded by government demand. The time to cut the deficit is when the economy is growing rapidly, not when the economy as stagnating. As for Stabenow... she voted for the Affordable Care Act, which--if the Supreme Court allows it to go into effect--does the greatest amount of reduction in government deficits over the next fifty years ever planned in America. It really socks it to insurance companies that don't manage health coverage and improve their efficiency over the next decade...
