The best way to rescue an economy from a demand shortfall, Mankiw and his Harvard colleague Matthew Weinzierl argued in a research paper last year, is by flooding the marketplace with liquidity: Cut interest rates all the way to zero to make borrowing cheap. If that isn’t enough to reduce joblessness to what economists consider full employment, the central bank should take extraordinary steps, such as signaling that interest rates will stay low for years to come. “A sufficiently flexible and credible monetary policy is always sufficient to stabilize output following an adverse demand shock,” Mankiw and Weinzierl wrote. They see no danger of rising inflation until the economy reaches full employment or any need for Keynesian-style government spending to bolster demand unless politics gets in the way of monetary easing.
But what if potential homebuyers can’t take advantage of low interest rates? This is the hindrance to a recovery that Hubbard and two colleagues worried about in a paper last September (updating work from 2008). In it, they explained that the troubles in today’s mortgage market, including falling housing prices and tight credit conditions, have slowed the recovery by turning away middle-class Americans whose job prospects have suffered. Hubbard and his coauthors, Columbia economist Christopher Mayer and business consultant Alan Boyce, suggested that Washington allow anyone with a mortgage backed by a government-sponsored entity (such as Fannie Mae or Freddie Mac) to refinance at today’s rock-bottom interest rates, potentially saving mortgage-payers some $70 billion.
Taken together, Hubbard’s and Mankiw’s prescriptions promise to accelerate the economy’s growth at low cost. They also defy the tax-cutting, lower-spending, interest-rate-raising orthodoxy that prevails among Republicans—including Romney.
Romney’s economic plan does include crucial elements endorsed by Hubbard, who wrote the introduction, as well as by Mankiw and numerous other conservative economists. Among them: reforming the tax code to cut marginal rates and to eliminate loopholes (although Romney has provided few details); paring federal regulations to encourage business investment; and curbing spending on safety-net programs, such as Medicare and Social Security, as a means of reducing government’s presence in the economy.
Still, the story that the candidate’s economic advisers like to tell about the housing market and monetary policy is one that the candidate’s plan sidesteps. It does nothing, for one thing, to address the crisis in foreclosures and falling home prices; on the stump, Romney says he would let the housing market heal itself. His plan is also silent on monetary policy, although in a debate last fall, Romney said he would replace Bernanke as chairman for having “overinflated the amount of currency he has created.” Translation: I want to tighten monetary policy, not ease it.
Housing and monetary policy aren’t the only issues on which Romney has parted ways with his economic advisers. Mankiw has praised the Simpson-Bowles deficit-reduction plan, which includes net tax increases, and Hubbard has endorsed revenue-raising tax reform, yet Romney and other GOP hopefuls have pledged to balance the federal budget through spending cuts alone. Mankiw has championed taxes—on gasoline, for example—that are meant to reduce pollution or otherwise compensate for market inefficiencies.
Economists who have advised presidents and would-be presidents concede that it would be delusional to expect Romney, or any candidate, to parrot his advisers on every economic issue. An adviser’s influence, they say, rises and falls on personal rapport with the candidate and on how well the economist frames proposals in political terms. The more a policy sounds like an electoral winner, the easier it is to sell.
“Many academics kind of have an unrealistic view of how a campaign works—their view of how it should work is like a Platonic philosopher-king,” said Austan Goolsbee, who stepped down last year as chairman of Obama’s Council of Economic Advisers to resume teaching at the University of Chicago. “The economist would say, ‘Here are some policies; let’s build a campaign around it.’ That’s not how it works.” In truth, Goolsbee said, the economic adviser is part of a pit crew—“one of the guys who jumps over the wall with the tire tool and a gas can in the NASCAR race. But Dale Jr. is the guy driving the car…. The economists would do well to remember that. So would the people who cover the economists.”
BUCKING FOR INFLUENCE
Even so, friends and colleagues of Hubbard and Mankiw say they have reason to believe that the two economists could wield a particular power over Romney’s mind. (Both declined requests for an interview.) After Hubbard helped persuade George W. Bush to eliminate taxes on stock dividends, The Weekly Standard’s Fred Barnes described him as “the most influential chairman of the Council of Economic Advisers in two decades.” His star soared among conservative economists, thanks in part to the salesmanship and persistence you’d expect from a man who peddled shoes as a child in central Florida and made financial trades in his youth.