DAVID MALPASS: ROMNEY, OBAMA AND THE ECONOMIC CHOICE
Voters go to the polls with an unusually clear choice in U.S. economic policy: We can double down on the current approach in the hope that bigger government will create jobs, or we can adopt growth policies that are more market-oriented and less government-centered.
Current economic policy will lead to a recession in 2013, according to warnings from the Congressional Budget Office, and to rapid increases in the national debt. The Romney alternative to President Obama is based on wholly different principles and would lead to an economy in which the private sector grows faster than the government, a key step in restoring prosperity.
Whoever wins, the defenders of big government entrenched in Washington will come out in force during the next administration to protect high levels of government spending. Keynesian economic models argue that more government spending is better. And so, to take a recent example, no matter how dire the immediate wealth-destroying effects of Hurricane Sandy might be, some will view the storm as a form of stimulus and an opportunity for bigger government.
This is misguided. It understates the value to the economy of the assets that are damaged in a storm like Sandy—and it understates the burden on the economy of the extra debt that governments and individuals will take on during the rebuilding effort.
Economic growth rests upon capital accumulation, labor and innovation. Hurricane losses hurt long-term growth unless the rebuilding process improves productivity. With the government in charge of so many aspects of the rebuilding, there’s no reason to think the rebuilding will be done efficiently.
Hurricane Sandy may have blunted Gov. Romney’s momentum coming out of the debates and steered focus away from the Libya coverup and the weak second-term plan that the president finally announced shortly before the storm. But the plan speaks for itself—a thin pamphlet of ideas for bigger government, including a new network of manufacturing institutes, described amid 18 pictures of the president. It was unworthy of the voters, unworthy of the $3.6 trillion in annual spending he commands and of the huge fiscal challenge Washington faces.
The president’s approach is no mystery and it hasn’t worked. Yet many of the crystal balls in Washington and on Wall Street three years ago were certain that Mr. Obama’s huge $787-billion 2009 stimulus would cause fast growth and reduce unemployment. When the surging fiscal deficit and centrally planned investment choices (read: Solyndra) instead added to unemployment, the administration blamed it on insufficient federal spending. The private sector’s concern that deficits lead to higher taxes went unaddressed.
The good news is that markets are naturally forward-looking and dynamic. America is in a very deep economic hole but can improve quickly if steps are taken to encourage the private sector, restrain government spending, and improve the tax code.
Mr. Romney’s explicit foundation for growth is to rebuild private-sector confidence. His emphasis is encouraging: Businesses indeed are eager for a policy improvement and will respond with greater investment and hiring.
A 2013 shift to growth policies would be particularly effective because business-sector cash balances are high—estimated at $2.3 trillion—and there is pent-up investment demand. Businesses have been underinvesting for clear reasons: the administration’s antibusiness rhetoric, rising health-insurance costs, the president’s advocacy of a major year-end tax hike, the seemingly uncontrolled increase in the national debt, and the downgrade of the U.S. government credit rating below AAA.
But the defense of bigger government in the coming months and years will be full-bore and global. The International Monetary Fund launched a pre-emptive attack on deficit reduction with a study last month in the World Economic Outlook showing that countries that planned a reduction in their fiscal deficits tended to grow slower than countries that didn’t.
On Oct. 11, the IMF chief economist, Olivier Blanchard, made the case directly that “budget cuts are having a bigger [negative] impact on economic output than previously reckoned.”
The catch is that most of the deficit reduction involved tax increases. Spain’s value-added tax was raised to 21% in September, sending a clear message to the private sector to invest less. Italy’s VAT is scheduled to go up to 22% in July 2013. Greece’s deficit-reduction plan featured a VAT increase to 23%.
Even the United Kingdom’s conservative government counted heavily on a VAT increase to reduce its budget deficit. It ended up with a double-dip recession starting a year ago.
The United States is not immune to this potentially disastrous path. On April 21, 2010, President Obama told CNBC: “I know that there’s been a lot of talk around town lately about the value-added tax. That is something that has worked for some countries. . . . I want to get a better picture of what our options are.”
The natural human condition is to try to earn more next year than this year. That means growth should be steady unless something intervenes to impede it. Uncontrolled deficit spending saps that energy because people and their businesses hunker down, waiting for the tax bill to hit. Yet many governments have somehow convinced themselves that the private sector should pay higher taxes and that government spending cuts will hurt growth no matter how big the national debt.
Some of Washington’s strongest defenses are the ingrained models and procedures at the heart of the tax-and-spend budget process. The Obama administration has made clear its intention to use those models to expand government. A Romney presidency could overcome the status quo by keeping its eye on the prize: private-sector growth and jobs through spending restraint and growth-oriented tax reform.
Mr. Malpass, a deputy assistant Treasury secretary in the Reagan administration, is president of Encima Global LLC.
A version of this article appeared November 6, 2012, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: Romney, Obama and the Economic Choice.
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