Why do voters fall for Romney's snake-oil economics?

A point-by-point analysis of why Romney's cures would make the economy much worse. And why Democrats, too timid to propose clear alternatives, share the blame.
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Obama-Romney voting in the 30th Legislative District

A point-by-point analysis of why Romney's cures would make the economy much worse. And why Democrats, too timid to propose clear alternatives, share the blame.

It should be surprising that Mitt Romney’s economic ideas get credence from so many people. Polls show that more people think the Republican presidential candidate has a better handle on the economy, and most of the reporting on the campaign treats the Romney-Ryan prescription with an amazing degree of respect.

Romney is criticized for a lack of specificity in his plans, but he's quite clear about what he wants to do: Cut federal spending and taxes, reduce regulation, rescind President Obama’s health care plan, and privatize Medicare. That seems pretty straightforward.

But what would those ideas do?

Let's start with his plans to cut federal spending: This undeniably would reduce overall demand in the economy and make it worse. Less federal spending means less direct federal employment, fewer contracts for private firms that sell to the government, less infrastructure investment, and less support for research and education. This means a smaller economy, more unemployment and another downward spiral.

Many agree that if Congress fails to reach a budget deal and the federal budget is automatically slashed next year, we’ll go back into recession. Why? Recessions are caused by mostly one thing: a drop in overall demand. Demand falls when people lose jobs and income. In the long run, economies do sort this out, but in the long run, we’re all dead. The past five years of recession and limping recovery are gone; you don’t get them back. So if you think people should live better lives, as Romney promised in his acceptance speech, then we ought to do something about the economy now.

Remember that it was only massive federal spending for World War II that ended the Great Depression. President Franklin Roosevelt spent most of his first two terms in office trying to balance the federal budget. His recovery programs were never very large and he chose to pay for them by doing things such as cutting federal workers’ salaries, blunting the impact of increased federal spending elsewhere. When FDR got Congress to cut spending in 1936 and 1937, the economy fell farther and faster than it had in 1929-30.

So we should understand that federal budget deficits are not the source of our current problems. We should also understand that nobody thinks we can run this kind of deficit forever. But in the short term, cutting spending will only make the economy worse. Ongoing cuts in state and local government spending have largely offset private sector job gains in recent years.

The usual Republican complaint about deficit spending is that borrowing money crowds out private investment. There is zero evidence that this ever happens. Then again, it’s only Democrat deficits that provoke this outcry; George W. Bush’s surplus-killing deficits, in the words of Dick Cheney, "didn’t matter."

Romnivores also claim that businesses aren’t investing because they’re afraid of what government will do. This is poppycock.  Businesses invest because they see rising demand for their products and services. A dimwitted business person wouldn’t pause a minute to worry about government if he saw a chance to make a buck because his customers wanted more of his stuff.

When demand rises, because people have more jobs and more money, businesses respond by ordering more product and hiring more help. Existing workers get more overtime, or even raises to keep them from running off to another firm. This filters upward throughout the economy – more orders mean more sales for wholesalers and producers, who in turn have more money to spend, save or invest. This is not rocket science. It is the opposite effect of what happens in a recession, in every way.

So, as long as demand is slow, because people either don’t have jobs, don’t have good jobs, or are afraid that they will lose their jobs, the happy times will not return to Main Street.

Now, what about the nostrum of cutting taxes? Tax cuts have a fairly miserable record for stimulating economic growth, but remain the Republican panacea for all problems. It is the old Jack Kemp, supply-side argument, warmed over: If taxes are too high, economic growth will be curbed.

But how high is too high? The Kennedy tax cuts in the early ‘60s were followed by a modest bump. Both the Reagan and Bush tax cuts produced nothing more than larger deficits. Even tax credits for new hires don’t produce much boost in employment.

Meanwhile, the United States already has nearly the lowest taxes of any industrialized nation on earth, which includes corporate taxes. The top marginal rate is indeed 35 percent, but virtually no U.S. corporation pays that rate. Given the generous banquet of deductions offered, the effective rate is about 20 percent, which is in line with other nations. Mittens’ proposed cuts would take the effective rate to around 5 percent.

But if our economic growth is lagging behind that of other nations, most of whom have higher tax rates, how can our taxes be too high?

U.S. states with lower taxes and better “business climates” in fact have lower wages, lower standards of living, and more problems. The irony of the red state/blue state divide is that the anti-union, low-tax, low-regulation, anti-federal intrusion red states in fact take in more in federal aid than they pay back in federal taxes. The feed off the surplus of blue states' economies.

Next on the Romney prescription: deregulation. Same song, different verse. We already have less regulation than other industrialized nations, and our economy still sucks. End of story. And it was an utter lack of regulation that led to the banking crisis, which you may recall as the source of our current problems.

So how about ending Obamacare? As Mittens is the man for all reasons, he is campaigning on ending the very same plan he campaigned for as governor of Massachusetts. What would this achieve? By taking people out of insurance pools, we would revert to the system where only healthy and wealthy people would buy insurance, leaving the uninsured to show up at emergency rooms, getting the most expensive care possible, in hospitals who then pass the cost on to their insured customers in the form of higher costs. Meanwhile, we would get lower productivity from workers who would be more sick more often because they lack basic health care.

Granted, the Obama plan was a terrible piece of legislation, albeit an improvement on the status quo. A much better idea would have been something like Germany’s system, where everyone gets basic health coverage from the government, and anybody who wants a higher level of care can buy private insurance on their own dime. But that was not politically possible.

Then we come to a favorite of Paul Ryan: privatizing Medicare. Turning the system into vouchers would clearly mean less coverage for more senior citizens. This makes us all better off? If Medicare is failing, it’s because it, like Social Security, is supported by an insufficient tax system. Scrap the cap on taxable earnings and those problems largely disappear.

All of this raises two questions: 1. Why do the Republicans persist in pushing a plan that makes so little economic sense? 2. Why do people still believe this stuff? Human beings can convince themselves that nearly any behavior is justified. The Republicans are job creationists, with an unwavering faith in the power of markets to profitably be rigged by the rich and powerful for their own benefit. They are, without fail, true to their creed: The rich need to be richer so they can create more jobs.

Politically, the obvious upshot of Mittens’ economic menu is that the rich will indeed get richer, allowing them to further dominate the political system and further impoverish the rest of the country.

That might benefit a political party, but will the people continue to swallow this? Do you think you still live in the land of opportunity? We now rank 56th out of 200 countries for income inequality, and 93rd for income mobility. We are behind Argentina and  Guatemala. A poor person is more likely to become rich in most parts of Europe than he is in the United States. And the average  American is now in fact poorer than the average Canadian, who thrives in a land of high taxes, high regulation, government-run health care and gay marriage.

So why do people persist in believing that Romnenomics would make the economy better?

Most of the voters are perfectly intelligent people, but we do have a subset for whom  “keep the government out of my Medicare” can become a rallying cry.  Don’t confuse them with facts.

We shouldn’t really blame the Republicans for apparently being willing to say anything, over and over again, regardless of the truth, in order to get elected. This is the history of political campaigns, and always will be. Franklin Roosevelt, who put Romney to shame for general vagueness, railed against “irresponsible Republican budget deficits” in the 1932 campaign, without having a clue about what he was saying.

No, the real culprits here are the Democrats, from top to bottom the most inept political party of the last 40 years. Beginning with Ronald Reagan’s election in 1980, Democrats typically have been scared to make a case for their view of government. Rather than arguing for the valuable role a strong government can play in the economy, they run, they hide, they apologize, they whimper. They cede the field to Republicans, who despite having become little more than the Greedy Old Party, at least say something coherent, as nonsensical as it is.

President Obama still makes a good stump speech, but it’s not good enough. He will probably point to health care reform as the crowning achievement of his administration, but it could be regarded as his greatest folly. As many in Congress urged him, had he spent his precious political capital on economic recovery, by way of a big enough stimulus package, the Democrats might not have lost control of the House of Representatives in 2010 and the 2012 election would be a very different story.

Meanwhile, Democratic gubernatorial candidate Jay Inslee is continuing the tradition established by Christine Gregoire of not making a particularly compelling case for being governor. Inslee is flouncing around the state talking about renewable energy and green jobs. This would probably work amid an economic boom, but that’s not where we’re at, is it?

Inslee used this approach in a speech to a gathering of heavy industry representatives earlier this year. How much sense does it take to tailor your pitch to a group from the smokestack industries? What's the wisdom in walking into a group like that and blindly repeating “We need more green jobs”?

If Democrats actually want to win this election, they need to be hammering home two things: What the Republicans want won’t help. That dog don’t hunt; that pony don’t run. What we want will work better, and here’s why. Cutting spending will simply hurt the economy even more. Now is the time to invest, not to shrink. Investing in the economy – public works, support for basic research, and more education and training for more people – is what will keep us from turning into a third-world country.

Democrats also need to say: We’re not anti-business. We don’t want to put anybody out of business. We want to continue to help create the conditions that help businesses thrive. And that means a government that keeps the playing field level, that provides the human and physical infrastructure that makes profit possible, that balances the need for regulation with the need for flexibility and fairness. You need a strong private sector to keep the power of the state in check. And you need a strong state to keep the power of the private sector in check. A blind and total faith in markets makes no more sense than a complete rejection of them.

The Democrats are counting on the other party’s standard-bearer to keep hitting his own head on his backswing. That isn’t a lock-down campaign strategy. At some point, you have to be for something.



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About the Authors & Contributors

T.M. Sell

T.M. Sell is professor of political economy at Highline College.