Mitt Romney built his business record at Bain Capital on shrewd investments grounded in hard numbers. But his central diagnosis of what ails the U.S. economy depends heavily on theories, not empirical evidence, and it neglects the most quantifiable explanations for why this recovery is historically anemic.
At the beginning of his 59-point economic plan, Romney writes, “No small part of the [weakness in the recovery] has to do with the wrenches the Obama administration has thrown into the economy. Badly misguided policies have acted as a severe drag on growth.” He goes on to accuse President Obama of stifling private investment through overregulation, overspending, mounting debt, and the threat of higher taxes.
John Taylor, a Stanford University economist who is advising Romney, says that the diagnosis flows from a reading of economic theory, history, and some contemporary data, such as the proliferation of federal debt and government regulations. “The main concern right now about the recovery is the uncertainty about tax rates and whether they’re going to rise,” Taylor said. “We can’t possibly continue on this current track” of deficit spending.
Evidence for that position, however, is elusive. An economic white paper issued this month by Taylor and three other Romney economic advisers does not cite any studies that quantify a drag on growth from the tax, spending, and regulatory policies since 2009. Instead, they reference a Stanford/University of Chicago study that attempts to measure levels of economic policy “uncertainty,” which they say “reduced [gross domestic product] by 1.4 percent in 2011 alone.” But the study didn’t conclude whether rising uncertainty triggers lower growth, or vice versa; one of the authors told Convention Daily in an e-mail that the Romney characterization “pushed a bit further than we would be comfortable with.”
Some prominent conservative economists who endorse Romney’s theory say that it is difficult to support empirically in real time. “The major problems that economists such as myself see are very hard to quantify,” said the University of Chicago’s John Cochrane. “We see growth-killing effects of overregulation, and Dodd-Frank, Obamacare, [labor rulings from the National Labor Relations Board], EPA, and annual chaos over what taxes will be in the future holding things back. There aren’t that many lines [of data from] the Bureau of Labor Statistics that quantify that.”
The strongest quantifiable explanation for the enduring recession is the housing bust. Economists Atif Mian and Amir Sufi have shown that high debt levels from the housing downturn are responsible for 65 percent of job losses in the recession—and are the “primary reason” for the weak recovery. Economists Michael Bordo and Joseph Haubrich found evidence suggesting that the plunge in residential-construction investment explains “a sizable fraction” of why this recovery is such a historical outlier. (They did not test for effects of uncertainty or regulations.) “The housing story is the key to the financial collapse,” Bordo said, “and the key to the recovery that’s taking a long time. Obviously, we should be talking a lot about it.”
Romney doesn’t talk much about housing. Nor about Europe’s financial crisis, which several analysts estimate is sapping up to 1 percentage point of GDP growth from the U.S. recovery right now.
He also doesn’t talk about the quantifiable loss in growth and jobs from shrinking local, state, and federal government workforces across the United States. It’s an especially stark contrast to the Reagan recovery of the 1980s, which Romney’s team often cites as proof that cutting taxes and deregulating is the best recipe to spur growth.
This article appears in the August 30, 2012, edition of NJ Convention Daily.