Sunday, December 21, 2008

Romney's Stimulus Plan

I detailed some shortcomings of Obama's economic plan last week. Now let's talk about what should be done instead. Mitt Romney wrote a column last week, detailing his prescription for our economy, and most of it is pretty agreeable. The basic difference between Obama and Romney on the economy boils down to government spending vs. tax cuts (Keynesian vs. supply side economics).

Romney cites empirical research that indicates that a $1 increase in government spending (i.e. a stimulus check) will increase GDP by between $1 and $1.40. $1 in tax cuts, on the other hand, increases GDP by $3. This is a major blow to the Keynesian model.

Why do tax multipliers exceed spending multipliers? Here's the basic idea: tax cuts give people more money to spend, which stimulates demand (the essence of Keynesian prescriptions) but unlike increased government spending (which increases demand in the same way), lower taxes encourage investment, which generates jobs and more production. For example, let's say Obama lowered payroll taxes, effectively lowering the cost of employing people. Using our basic supply/demand curve, we know that lower labor costs will increase demand for labor. Workers will take home more of their pay, which they will spend, driving up demand for goods and services, and companies will hire more people.

Romney agrees that infrastructure projects should be a high priority, but notes that the economic benefits of these projects are no where near immediate because these projects take a while to complete. Romney warns against excessive regulation and the Employee Free Choice Act that would "virtually impose unions on small business by eliminating the right of workers to vote by secret ballot in the workplace. This 'card check' payback for the AFL-CIO’s support of the Democrats would devastate business formation and employment".

Romney does support government spending on "basic research" for technologies that will make us more energy dependent. I maintain my basic argument on this subject: while the impact on global warming is debatable and energy independence would be great, this government spending is not likely to help the economy in the long term and definitely won't help in the short term.

All choices in government require trade-offs:

There is a danger that new spending and deficits will lead to runaway inflation, flight from the dollar, and another economic crisis. It is essential, therefore, that Congress and the president commit to reform entitlement spending as soon as the economy recovers. With the footing of our long term economy at risk, with entitlements already reaching 60 percent of federal spending and with baby boomers nearing retirement, this can be delayed no longer.

Unfortunately, elections have consequences and Obama is likely to choose ideology over sound economics.

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