Paul Hoffmeister: Romney is a Keynesian and His Plan Would do Nothing to Spur Economic Growth

Economist Paul Hoffmeister penned an excellent piece in Forbes in which he methodically takes apart Mitt Romney’s “Keynesian” plan to jump-start the economy.  Never mind that Obama’s Keynesian economic policies are to blame for the crushing debt and bleak economic outlook America faces, Mandate Mitt wants to continue down this same path. Hoffmeister begins with his theory as to why 75% of Republicans don’t support the Mittster:

According to the polls summarized by RealClearPolitics, Mitt Romney has been unable to win more than 25% of the Republican vote for the party’s presidential nomination for more than a year. This is because the former Massachusetts governor is not a pro-growth Republican. Instead, his economic platform reflects a man who is devoutly  Keynesian, and who, as president, would not be able to reinvigorate the U.S. economy.

There may be something to this.  Romney himself has made it crystal clear he doesn’t want to return to Reagan’s policies (you know, the policies that brought America storming back from the disastrous Jimmy Carter economy) and his so-called economic plan puts an exclamation point on that.  I don’t know if Romney’s Obamaesque economic proposals are why he’s stuck at 25%, but I do know they are one reason (of many) I will never vote for the guy.   Hoffmeister explains the simple formula for growing the economy, Reagan style, which Romney’s plan implicitly rejects:

A pro-growth Republican is a “supply-sider” who believes that stable money, low taxes, and limited regulation produce prosperity. And as Art Laffer has said, if regulatory policy is important by a factor of 1, then tax policy is important by a factor of 10, and monetary policy by 100.

The purpose of these bedrock principles is to encourage capital formation, and thereby raise the national standard of living. The virtuous, supply-side process starts like this: 1) low taxes increase the amount of capital available to invest in businesses; and, 2) stable money, low tax rates, and limited regulation increase the after-tax returns on investment.

Stable money eliminates the risk that inflation will depreciate the real value of future cash flows and the severe boom-bust credit cycles that threaten the very survival of businesses. Low tax rates obviously increase after-tax returns. Limited regulation removes the obstacles in the way of doing business, thereby reducing costs and increasing returns.

When more capital is available for investment, and the monetary, fiscal and regulatory conditions are supportive of attractive after-tax returns, the amount of capital in the economy increases relative to the supply of labor. That is, the capital-labor ratio increases. This is important because the only way to increase real wages is to increase the amount of capital relative to labor.

When a person fishes with their hands, their capital to labor ratio is 1 to 1. With a fishing pole, their capital to labor ratio is 10 to 1. With a boat and a fishing net, it is 1000 to 1. Clearly, the fisherman earns more when capital is plentiful.

Therefore, when the amount of investable capital increases relative to labor, labor will be able to demand and receive higher wages. Middle and lower income Americans rely on wages, and the rise in real wages shrinks income disparities, improves social mobility, and raises living standards.

Pretty basic stuff, but apparently beyond Mitt’s comprehension and, therefore, notably absent from his silly 59-point plan.  Indeed his plan does just the opposite as it’s full of the Keynesian, government-directed flow of resources we’ve come to expect from Democrats and crony capitalists, and indicates Mitt has remarkably little faith in free-market capitalism.  But then Romney has never been a great believer in free markets, as RomneyCare makes painfully clear. In Romney’s view, individual freedom should be subordinated to the wisdom of technocrats like himself.

Hoffmeister analyzes Romney’s tax proposals:

On taxes, Mitt Romney is seeking to eliminate the death tax, cut the corporate tax rate to 25%, extend current income tax rates, and eliminate the tax on capital gains, dividends, and interest for those earning less than $200,000 per year. With our economy struggling because of a dearth of capital investment, the plan is surprisingly timid for a Republican.

Eliminating the death tax is certainly positive because it would unleash more capital into the economy. A 25% corporate tax rate would only cause the U.S. rate to be equivalent to the average rate for OECD countries. As a result, U.S. corporations would not gain a meaningful competitive advantage. And only extending current income tax rates and limiting the tax exemption on capital gains, dividends, and interest are unacceptable. But Romney’s defense of not completely eliminating the tax on capital gains, dividends, and interest is shocking.

In an interview with Fox’s Chris Wallace on December 18, Romney said: “I’m saying don’t raise taxes on anyone. I want to make sure that with the precious dollars we have, if we can provide the tax relief, that those dollars go to middle-income Americans. The people that have been hurt in the Obama economy are — are not the wealthy. The wealthy are doing just fine. The people that have been hurt are people in the middle class. And so I focus the — those precious dollars that we have — I focus that on the middle class.” In other words, let’s only cut taxes for the middle class because they have been hurt the most by the recession.

Based on the supply-side economic model, Mitt Romney and his tax platform will hurt the very people that he is trying to help. His plan will scarcely benefit middle and lower income Americans, effectively delivering four more years of the current economic stagnation. The wages and livelihoods of middle and lower income Americans will only begin to improve when investable capital becomes abundant, and what Mitt Romney is proposing will not make investable capital abundant. If Mitt Romney understood the supply-side model and specifically how capital formation increased real wages, he would never make such a defense.

Romney’s defense is rooted in the belief that those who have suffered the most economically deserve to have more money in their pockets. This is the Keynesian prescription of putting money into people’s pockets to spur consumer demand. More money in people’s pockets does nothing for capital formation, which is why Keynesian stimulus plans do not work.

Indeed. Romney is basically accepting the Democrats’ premise that government policy should be directed at redistributing wealth rather than fostering an environment, via low marginal tax rates and regulatory sanity, in which wealth is created.  Even if we accept that some wealth redistribution to those most in need is a worthy goal, how can we redistribute that which hasn’t been created? Romney’s “tax proposals” are more about avoiding Obama’s class-warfare rhetoric than they are about growing the economy.  Given the mess our economy is in, can we afford this?  We can’t solve the economic problems we’re in by accepting the underlying premise that got us here in the first place.

Hoffmeister next discusses Romney’s support of a weak dollar:

The most disturbing thing about Mitt Romney is that he supports a weak dollar. He does not believe in a stable currency. In December 2008, as the Federal Reserve was telegraphing to markets that it would pursue quantitative easing, he endorsed the expansion of the money supply and devaluation of the dollar.

Then in recent months, he has promised that on his first day as president he would sign an executive order identifying China as a “currency manipulator” and demand that the yuan be strengthened against the dollar. If they fail to comply, he will place punitive tariffs on Chinese exports into the United States.

This is code for: “I believe in a weak dollar to boost exports.” But currency devaluation does not necessarily correlate with a lower trade deficit. It instead raises the risk of domestic inflation and threatens to spark trade wars, where countries attempt to outdo each other with ever higher tariffs, ultimately raising living costs for citizens in those countries.

Even worse, a fluctuating currency increases the risk of depreciating cash flows for businesses in the future. As a result, unstable money reduces the willingness to take risks. Capital formation declines. Wage growth, productivity, and national living standards suffer.

With the Federal Reserve aggressively devaluing the dollar in a misguided attempt to accelerate economic growth, the U.S. economy does not need a currency manipulator in the White House. It needs a president who will seek a stable dollar that provides a sound unit of measurement for commerce.

To be sure, Mitt is not alone in his desire to further weaken our currency, but that doesn’t make it any less suicidal.  I continue to be amazed that anyone could possibly believe that making our dollar worth less is somehow a good idea.  Think about it.  Would you rather have a dollar that purchases more stuff, or less stuff?  Personally, I want the dollar in my wallet to buy as much stuff as possible.  Even Jimmy Carter understood this on some level, as his appointment of Paul Volker demonstrated.  Weakening the dollar is ultimately self-defeating for all the reasons Hoffmeister indicated above.  But Mitt’s determined to continue down this road undaunted.  The question, then, is this: How would Romney’s economic policies change the basic trajectory Obama has put us on?  Answer: They won’t.

Hoffmeister concludes his piece with this:

American democracy has developed two political parties: a party of economic growth and a party of income redistribution. If a credible plan for growth is offered, the electorate will vote for it. If such a plan is not offered, then it will vote for income redistribution, hoping that the party of growth will get its act together someday.

The historical evidence reveals that the American electorate always chooses policies that optimize economic performance. When these are absent, it chooses policies that socialize risk to better endure the economic hardship.

Mitt Romney is not a supply-sider. He will not benefit American labor. In fact, he represents the greatest risk that the Republican Party will fail to beat President Obama in November 2012.

In other words, if offered a choice between Democrat and Democrat-lite, the Democrat will win every time.  But, when offered a choice between a Democrat and an actual Republican, the Republican will win.  Bold colors, not pale pastels.  Unfortunately, it appears increasingly likely the 2012 contest will be between Democrat and Democrat-lite.  Given America’s precarious position, that the Republicans are unable to offer a real, pro-growth alternative to Obama is tragic. Read Hoffmeister’s entire article here.



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