President Obama and Republican nominee Mitt Romney seem to be living in alternate economic realities. In Obama’s world, his policies led the economy out of the worst recession since the Great Depression and lay out a balanced approach to deficit reduction. In Romney’s world, Obama’s policies have been a drag on the economy and will eventually make the country as debt-laden as Greece.
Nobody expects a presidential candidate to put forward an economic plan that isn’t flavored with a little ideology. But whoever wins may have a problem: Each has cherry-picked statistics to suggest his own economic plan will result in economic growth, but if he’s wrong, he’ll have both destroyed his credibility and failed to solve the problem voters care most about.
Romney has argued that his plan of deregulation and lower taxes would unleash a wave of growth; Obama has backed away from the word “stimulus” and offered a higher tax rate on the wealthy. Each candidate has deployed a stable of experts and academics to back up his claims, but neither side is telling the full story.
The partisan back-and-forth is enough to make your head spin. Take this recent debate between an Obama and a Romney adviser, hosted by the National Association for Business Economics.
“Everyone knows that the problem is spending,” said Romney’s adviser, American Enterprise Institute senior fellow Kevin Hassett. “Spending is not out of control in this country,” maintained Obama adviser and Harvard Professor Jeffrey Liebman. Each man accused the other of putting forward fudged numbers and referring to partisan studies.
In economics, assumptions help drive thinking—and in a partisan election, assumptions can become etched in stone. “Remember, economics is not a physical science,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former economic adviser to Vice President Joe Biden.
Supply-side theory, the Republican contention that cutting taxes leads to growth, is based more on “wishful thinking” than experience, Bernstein said. On the Democratic side, he said, the idea that entitlement spending doesn’t need to be checked is just as fantastical.
The campaign trail rhetoric doesn’t mean there’s no expert consensus. A February survey of leading economists from the University of Chicago Booth School of Business found overwhelming agreement that the 2009 stimulus helped stave off job losses. In other Chicago Booth surveys, no respondents said lowering income taxes would lead to so much income growth that, five years later, tax revenue would have increased, and respondents disagreed with the idea that raising taxes on the wealthiest Americans would be enough to substantially reduce budget shortfalls.
“The best plan would deal with short-run issues—but do so in the context of stabilizing the public debt-to-GDP ratio,” said William Longbrake, executive-in-residence at the University of Maryland Robert H. Smith School of Business. The ideal program would have a ratio of about $2 of spending cuts for every $1 of tax increases, Longbrake said, along with a short-term spending plan to boost the economy right away.
Obama’s 2011 jobs proposal, the American Jobs Act, included some “sensible” ideas for creating jobs in the short term, said Gary Burtless, senior fellow in Economic Studies at the Brookings Institution. But it wasn’t about to restore full employment, and it was dead on arrival in Congress. Obama rarely utters the word “stimulus” on the campaign trail, though many experts argue that more stimulus wouldn’t hurt.
Romney, meanwhile, has slammed the $787 billion 2009 stimulus as careless and accused Obama of presiding over an explosion of regulation and spending that has stifled growth. The Romney camp argues that “uncertainty”—caused by deficit spending—has been a drag on the economy, but that claim is hard to quantify. So is the GOP claim that lower income taxes lead to economic growth.
“We really don’t have any evidence that [personal income-tax rates have] any effect on growth,” University of California (Berkeley) Professor Alan Auerbach recently told Bloomberg Businessweek. “A lot of the research showing otherwise is based on theoretical calculations.” Economists agree that lowering corporate taxes would help businesses, and both candidates have put forward a plan to do so.
Team Obama likes to talk about how low taxes during the George W. Bush years coincided with economic stagnation, while higher Clinton-era tax rates coincided with economic growth and a federal surplus. But Obama isn't advocating for the Bush tax cuts to expire, focusing instead on raising taxes on the highest earners. The logic is that the revenue increase would go toward reducing the deficit, but critics point out that the revenue increase would be just a drop in the bucket.
Romney has conceded that reducing government spending too fast would be bad for the economy in the short term, and Obama has acknowledged that the growing deficit is a long-term problem. But both candidates have put forward an economic plan that’s as much about values as it is about economics. Obama has characterized higher taxes on the wealthy and protecting discretionary spending as matters of fairness. Romney has called deficit spending “immoral.”
Former President Clinton, at the recent Democratic National Convention, said that creating budget surpluses was a matter of just one thing: “arithmetic.” This election, supposed to be all about the economy, has proved that economic arithmetic can be more flexible than you might suppose. It may be an election about the economy, but it’s not an election about economics.