Arguably, no presidential campaign in the past 30 years has dawned with voters as singularly focused on a single issue as they are this year. In the aftermath of a debilitating financial crisis and amid a feeble and halting recovery from recession, polls show that voters want economic growth and more jobs. President Obama and Mitt Romney are offering dramatically different paths to those ends—in philosophy and in the fine print of policy; in the targets of their campaign-trail attacks; and even in what they’re not saying about the nation’s most pressing economic problems.
This all-about-the-economy election has given Obama and his Republican challenger no shortage of topics to argue about. They include economic fairness; the federal budget deficit; the president’s understanding of America’s free-enterprise system and what makes it exceptional; the importance of the effective income-tax rate for Warren Buffett’s secretary; the macroeconomic merits of the private-equity business model; spending cuts; tax cuts; tax hikes; regulatory burdens; investments in education, infrastructure, and technology; the plight of the middle class; the effects of the 2009 stimulus package; the growing gap between the rich and poor; and Greece.
Not included, though, is a detailed debate over how to get millions of unemployed Americans back to work right away. Each candidate has a reason for soft-pedaling when it comes to delivering fast-acting comfort to the 13 million in the United States who are looking for a job and can’t find one and who will spend an average of 40 weeks on the unemployment rolls before they return to work. Romney’s reason for avoiding this question is very different than Obama’s, a reality that reflects the candidates’ divide in economic thinking.
Romney’s economic philosophy begins with the classic conservative notion that intrusive government has stifled the free market. Obama’s starts with the liberal notion that government can and must play a critical role in nurturing innovation and vital industries. Each camp lays out medium- and long-term strategies for improving America’s economic fundamentals and coaxing growth and job-creation back up to speed. In the short term, neither has a lot to offer. Obama has no FDR-style public-works program to employ millions of people. Romney has no plans to impose dramatic and immediate austerity—nothing on par with the proposals offered by the most conservative members of Congress, or even British Prime Minister David Cameron—to squash market fears and unleash business confidence and hiring.
This is by design. Romney’s 160-page economic plan leads off with the assertion that Washington has weakened the United States’ long-term growth prospects through its efforts to create jobs in the crisis’s aftermath. As his lead economic adviser, Columbia Business School Dean R. Glenn Hubbard, writes in the introduction, “In the first conversation I had with Governor Mitt Romney in the post-crisis period, he asked me why policymakers were not more focused on the seeds of the crisis and on the need to build a foundation for long-term growth. With the mantras of fiscal stimulus and easy money being repeated in Washington, his question seemed spot-on to me. Could we change the conversation from policies contributing to the long-term growth of government to policies contributing to the long-term growth of the economy?”
Obama, by contrast, is struggling with voters’ widespread belief that his short-term economic efforts have failed, and with political realities that largely preclude further steps in the same direction. He eagerly nudges voters toward the perception that the national economy is improving. Congress has ignored the president’s few recent proposals to stimulate consumer spending or business investment, including deepening the temporary reduction in payroll-tax rates and upping national infrastructure spending by several hundred billion dollars.
So Obama has fallen back to campaigning on a series of small-scale, poll-popular initiatives such as boosting manufacturing exports, forcing millionaires to pay higher tax rates, and developing an economy that is “built to last.” He and his top economic advisers have increasingly turned their rhetoric and policy attention to the growing gap between the wealthiest Americans and everyone else.
As Alan Krueger, the chairman of Obama’s Council of Economic Advisers, said in a speech earlier this year, “The rise in inequality in the United States over the last three decades has reached the point that inequality in incomes is causing an unhealthy division in opportunities and is a threat to our economic growth. Restoring a greater degree of fairness to the U.S. job market would be good for businesses, good for the economy, and good for the country.”
Complicating any comparison between Obama and Romney is the sheer diversity of economic policies that each candidate has championed in the past, and the question of which ones he would pursue in the future.
Obama has shifted economic emphasis several times during his presidency. First, he was a strict Keynesian, pushing through nearly $1 trillion in stimulus spending and tax cuts during his first months in office in hopes of blunting the Great Recession with a consumer-demand boost powered by federal borrowing. After the 2010 midterm elections devastated his party in Congress, the president tacked, attempting to coax U.S. industry to hire workers with the record profits it was racking up. Only in the past year has he cloaked himself in the populism of income equality.
Romney has largely abandoned the semi-Keynesian instincts that gripped him during the recession, when he called for Congress to pass an economic-stimulus plan, albeit one smaller and more weighted toward tax cuts than the one Obama eventually pushed through. At the start of the Republican primary campaign, Romney emphasized deficit reduction, tax reform, and deregulation. To help lock down the nomination, however, he amped up his proposed tax cuts while offering little detail on how he would pay for them; he now appears to be foremost a tax cutter, not a budget balancer.
Yet, for all their twists and turns, Romney and Obama have always disagreed on the proper role of government in the economy. Romney’s view, forged in his years running Bain Capital, is that smaller government frees private industry to create more productivity, more profits, and more jobs; that high levels of government spending and debt crowd out private investment; and that overregulation stifles economic growth. Obama’s view is that government plays a critical role in correcting market failures; in investing in public goods such as roads and schools; and in regulating industries—most notably Wall Street—that could drag the national economy down if left to their own excesses.
Romney believed that only bankruptcy could save the Detroit automakers in 2009. Obama believed that the government needed to rescue the industry. Today, both men claim vindication.
The differences in their belief systems underpin every one of the candidates’ disagreements on economic policies, starting with job creation—and even with what a job-creation policy is.
The jobs package that Romney says he would send to Congress on the first day of his presidency is a mix of five policy goals: reducing the top corporate-tax rate from 35 percent to 25 percent; cutting $20 billion a year in domestic spending; expanding domestic oil and gas drilling; implementing free-trade agreements; and consolidating and reforming federal job-training programs. He has also proposed an across-the-board 20 percent tax cut for individuals, on top of making the Bush tax cuts permanent. And by virtue of his choice of House Budget Chairman Paul Ryan as his running mate, Romney has seemingly embraced the House Republicans’ plan to rein in debt by limiting the growth of safety net spending, in hopes of boosting investors’ and financial markets’ confidence and averting a U.S. sovereign-debt crisis.
The president has called for a large new infrastructure-spending package and for more government investments in research and development. He has embraced a next-generation industrial policy, though not by name, aimed at boosting competitiveness and growth in targeted sectors such as auto manufacturing and clean energy. He has pushed a series of initiatives to expand exports, which have grown into one of his few bragging points of the economic recovery. The president has touted his own plan to streamline and improve job training. Lately, he has cast the “Buffett Rule,” his proposal to raise the minimum effective tax rate for millionaires, as a job creator.
Financial markets aren’t likely to rise and fall on the rhetoric. “I don’t know that I’d pay a lot of attention to it,” said Josh Feinman, global chief economist for DB Advisors in New York City, “because whoever wins is then going to have to sit down and be president,” and probably have to compromise with the other party.
Time and again during the recovery, Federal Reserve Board Chairman Ben Bernanke has expressed frustration that paralyzed fiscal policy has forced the burden of job creation onto the Fed. He has responded by keeping interest rates effectively at zero and pursuing unconventional monetary policy to inject liquidity into financial markets and bolster growth. Obama remains carefully walled off from those decisions, but they accrue to him nonetheless; after all, he reappointed Bernanke to a second term, which expires in 2014.
Romney is not a Bernanke fan. The GOP front-runner said in primary-campaign debates that he would replace the Fed chairman and that he would prefer to see interest rates begin to rise. Romney has worried openly about the possibility of inflation worsening. He said this summer that he would oppose a third round of quantitative easing—QE3—from the Fed, because he does not believe it would be effective at spurring growth. But perhaps his most controversial monetary-policy position isn’t about the Fed. It’s about China. As president, Romney says, he would formally charge Beijing with artificially devaluing its currency. If successful, the move could force China to let the yuan appreciate against the dollar, allowing Chinese consumers to buy more American products. If unsuccessful, it could spark a trade war.
Early in Obama’s term, Treasury Secretary Timothy Geithner flirted with the possibility of making that currency-manipulator designation. He decided instead to apply bilateral pressure on Chinese officials to let the yuan appreciate. Treasury has also chosen not to take direct action to buffer the U.S. financial system from Europe’s ongoing woes.
Obama and Geithner spent tremendous political capital pushing Congress to approve sweeping additions and reforms to government regulation of the financial markets, in hopes of preventing a repeat financial crisis. The resulting Dodd-Frank law yielded a thicket of new requirements for financial institutions and rule-making blanks for regulators to fill in. Congressional Republicans have stalled some of that rule-making through repeated attempts to defund implementation of the law or stall confirmation of key regulators to enforce it. The result is that regulatory agencies are not even halfway toward setting all the rules envisioned under the law.
Romney has criticized Dodd-Frank for sowing uncertainty among businesses and financial institutions and for chilling lending, particularly by smaller banks. He wants to scrap the law and replace it with a “streamlined regulatory framework,” although he has offered few details on what that might look like. The closest he comes in his economic plan is to praise a few parts of Dodd-Frank: “Greater transparency for interbank relationships, enhanced capital requirements, and provisions to address new forms of complex financial transactions are all necessary elements of effective financial reform,” he writes. “But these concepts must be translated into law in a way that creates a simple, predictable, and efficient regulatory system appropriate for our dynamic economy.”
The most persistently difficult economic problem for the next president will almost certainly be the sickly housing market, which may only now be finding the bottom of the very deep trench it sank into during and after the recession. Obama has been late to the game of stanching the flow of foreclosures and stabilizing still-falling home values, a huge sinkhole sapping Americans’ wealth, spending, and business formation. After three years of muddled and ineffective policy, the administration has begun advocating aggressively for housing lenders Fannie Mae and Freddie Mac to write down mortgages for borrowers who owe more than their house is worth, among other efforts.
Romney opposes those plans, along with any other government intervention in the housing market. Reporters overheard him telling a closed meeting of funders that he would consider axing the Housing and Urban Development Department. Last fall, he told the editorial board of the Las Vegas Review-Journal that he favored letting the foreclosure process “run its course and hit the bottom.”
As Romney knows, that would be a long wait, and one that would likely hamper job growth for years to come. It’s possible that his position could evolve further, particularly since Hubbard, his chief economic adviser, is a fierce advocate of government write-downs of mortgages. It’s also possible that Obama and Romney won’t spend much time debating housing policy and its immediate job-creation effects. If so, it wouldn’t be for lack of sharp contrasts on the issue. It would be because there are too many juicier, tangential economic arguments to be had.
This article appears in the August 25, 2012 edition of National Journal Magazine.