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The Romney Program for Economic Recovery, Growth, And Jobs

The Romney Program for Economic Recovery, Growth, And Jobs

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Published by Mitt Romney

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Published by: Mitt Romney on Aug 12, 2012
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01/04/2013

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 1
The Romney Program for Economic Recovery,Growth, and Jobs
R. Glenn Hubbard (Columbia University), N. Gregory Mankiw (Harvard University),John B. Taylor (Stanford University), and Kevin A. Hassett (AEI)
The U.S. economy has the talent, ideas, energy, and capital for the robust economic growth thathas characterized much of America’s postwar experience. Our living standards going forward,and the nation’s standing as a world power, depend on restoring that growth and broadly shared prosperity.We are presently in the most anemic economic recovery in the memory of most Americans, withsignificant joblessness and long-term unemployment, as well as lost income and savings. We arestuck in a low-growth trap following the 2007-2009 recession and financial crisis. The anemic job growth and tragically high unemployment are a consequence of that low-growth trap. Therecent second quarter 2012 Gross Domestic Product (GDP) growth estimate of 1.5 percent,following 2 percent growth in the first quarter, makes a stark fact clear:
The economy is not  getting stronger, it’s getting weaker.
 The Obama administration says that the economy’s awful performance reflects the reality of theaftermath of a financial crisis and that the administration’s policies generated what little recoverywe have seen from the severe 2007-2009 recession – Americans should stay the course.But the historical record is clear: Our economy usually recovers quickly from recessions, and themore severe the recession, the faster the subsequent catch-up growth. For example, recentresearch by Michael Bordo of Rutgers University and Joseph Haubrich of the Federal ReserveBank of Cleveland makes clear from historical data that a slow growth recovery is not inevitable.In fact, each year, the administration has forecast just such robust growth for the year ahead, andeach time these hopes have been dashed. These repeated forecasts contradict the administration’sexcuse that slow growth is the inevitable result of the recession and financial crisis. If a slowrecovery were the predictable aftermath of a financial crisis, why has the administrationcontinued to forecast a robust recovery?America took a wrong turn in economic policy in the past three years. The United Statesunderperformed the historical norm shown in the administration’s own forecasts, and its policiesare to blame. To see why, we will explore the administration’s economic errors and poor choices.Understanding why the administration’s policies have stuck the economy in a slow-growth trap,we can explain how different economic ideas and choices can move us forward. The Romneyeconomic program will change the direction of policy to focus on economic growth. Its pro-growth effects will work in two basic ways: It will speed up the recovery in the
 short run
, and itwill create stronger sustainable growth in the
long run
.
 
 2
From President Obama: Misdiagnosis and Mistakes in Economic Policy
The 2007-2009 financial crisis produced a severe recession. GDP fell 4.6 percent from its peak during the recession to the trough in June 2009. But GDP growth has been anemic since then,averaging just 2.2 percent per year since the trough. This pattern is unusual. The past tenrecessions have been followed by faster recoveries, and GDP has fairly swiftly recovered to the previous trendline.Declines in business investment and employment were particularly sharp in this recession. Far from being a lightning bolt hitting a smoothly running economy, the crisis was exacerbated bystructural biases against business investment (from the tax code and regulation), financialimbalances (particularly fueled by biases against private saving and by the need to borrowabroad to finance our government deficits), and regulatory choices (excessive promotion of housing investment and inadequate attention to existing financial regulations and the rise of andconsequences of shadow banking). No single party or administration is responsible for structuralheadwinds to growth, but the Obama administration’s errors and choices exacerbated theeconomy’s structural problems and weakened the recovery.Rather than focusing on the structural problems revealed by the financial crisis and the ensuingrecession, the Obama administration focused on short-term fiscal ‘stimulus.’ To put the economy back on track, they borrowed deliberately and spent recklessly, ignoring weaknesses in housing, business investment, and employment. These short-term stimulus packages were ineffective,leaving the nation with higher debt, which acts as a drag on long-term growth becausehouseholds and businesses understand that the administration must raise taxes significantly to pay off that debt.The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies. Research by Atif Mian of the University of California, Berkeley, and Amir Sufi of the University of Chicago showed that the cash-for-clunkers program merely moved newcar purchases ahead a few months with no lasting effect. John Cogan and John Taylor of Stanford University examined the 2009 stimulus act and found that the temporary payments andcredits sent to people failed to jumpstart consumption, just as predicted by basic economic theory.Moreover, federal grants sent to the states for infrastructure investment were either stashed awayin state or local coffers or had the perverse effect of reducing government purchases of goodsand services due to various strings attached to the grants. A core error in the administration’sapproach was to assume that short-term stimulus, many times if needed, would put the economy back on a sustainable long-term growth path. Rather, attention to long-term structural problemsin taxation, spending, and regulation would have offered a better tonic for growth in the short run.Indeed this is the conclusion of a number of economists with policy and empirical experience asdocumented in a recent book edited by Lee Ohanian, John Taylor, and Ian Wright.In short, the Obama administration chose to emphasize short-term fixes – ineffective stimulus,cash for clunkers, myriad housing programs that went nowhere, and a rush to invest in ‘green’companies irrespective of cost – rather than restoring long-term growth and productive private-sector job creation.
 
 3As a consequence of short-termism, uncertainty over policy – particularly over tax andregulatory policy – limited both the recovery and job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago foundthat this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisislevels of uncertainty would add 2.3 million jobs in 18 months. These attempted short-term fixes,even with unprecedented monetary accommodation, produced average real GDP growth of just2.2 percent over the past three years, and the consensus outlook looks no better in the year ahead.The accompanying sustained increases in debt raise the specter of large future tax increases,further chilling business investment and job creation today.In addition to these policy
errors
, the Obama administration has made
choices
to bypass reformsthat would jumpstart long-term growth and job creation. Such reforms would address our anti-competitive tax code and unsustainable trajectory of federal debt – but the president ignored hisown deficit commission and submitted no plan for entitlement reform. Treasury SecretaryGeithner famously told the Congress that the administration was putting forth no plan, but “whatwe do know is that we don’t like yours.”Such reforms would also emphasize opening global markets for American goods and services,and improving access to goods and services for American consumers. Yet the president has madeno contribution to the global trade agenda, and was only recently dragged into supportingindividual trade agreements.The president’s choices cannot be ascribed to a political tug of war with Republicans in Congress.President Obama and Democratic congressional majorities had two years to tackle any prioritythey chose. Their priority was not growth and jobs but rather a regulatory expansion. The PatientProtection and Affordable Care Act raised taxes, unleashed significant new spending, and raisedhiring costs for workers. The Dodd-Frank Act missed the mark on housing and “too-big-to-fail”financial institutions, but raised financing costs for households and small and mid-sized businesses.President Obama’s budget initiatives have stymied growth. The administration has thrown upimpediments to domestic energy production and energy security. His plan to raise marginal taxrates on upper-income Americans and on saving and investment (through higher tax rates ondividends and capital gains) fly in the face of tax reform needed to increase American investmentand competitiveness. A recent study by Ernst & Young concludes that the president’s policieswould reduce GDP by 1.3 percent (or $200 billion per year), destroy 710,000 jobs, depressinvestment by 2.4 percent, and reduce wages and living standards by 1.8 percent. According tothe Congressional Budget Office, the large deficits codified in the president’s budget wouldreduce GDP during 2018-2022 by between 0.5 and 2.2 percent compared to what would occur under current law. And America’s weakened fiscal position puts our international economicleadership in jeopardy, which in turn negatively affects economic growth.These economic errors and policy choices have consequences: high unemployment, high long-term unemployment, and ranks of discouraged workers. And most startling: At the present rateof job creation, the nation will
never 
return to full employment.

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