Romney has a new economic white paper. Here’s what he left out.

August 7, 2012

The Romney campaign is out with a new white paper, co-authored by Harvard's Greg Mankiw, Columbia's Glenn Hubbard, Stanford's John Taylor and AEI's Kevin Hassett, defending his economic plan, and in particular his tax plan, in the wake of the damning Tax Policy Center study on it. Like most such documents, the white paper references a lot of outside research. But does it take all the relevant studies into account?

On the stimulus, the answer is certainly "no." Here's what the white paper says about the 2009 stimulus bill:

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 new car 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 and credits 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 away in state or local coffers or had the perverse effect of reducing government purchases of goods and services due to various strings attached to the grants.

First off, this description of the literature on Cash for Clunkers is very incomplete. While the Mian and Sufi study found little impact, a conclusion in which they were joined by one from Resources for the Future (pdf), two other reports -- one from economist Michael Hicks (pdf) of Ball State University, and one from Maritz Automotive Research Group -- suggest that the program was stimulative. Hicks found that the Department of Transportation estimate of 690,000 additional cars sold due to the program is accurate, and the Maritz report puts the figure at 542,000. All of which is to say that this is a matter of serious contestation among researchers.

What's more, Cash for Clunkers cost only $3 billion -- a paltry sum compared to the stimulus bill. So evaluating fiscal stimulus writ large through reference to CfC is more than a little dubious. Similarly, the Cogan and Taylor study cited does not actually show that the stimulus failed to provoke growth. It simply concluded that it was often used by states to pay off debt, freeing up other funds for program spending which could be stimulative. If anything, as Noah Smith argued here, Cogan and Taylor's research suggests that the stimulus was too small, as a bigger one would have been spent on both debt repayment and new or expanded programs.

The bigger problem is that the Taylor study is one of only two reputable pieces on the subject to conclude the stimulus didn't work, and the other one didn't have any statistically significant findings. The overwhelming majority of studies conducted on the stimulus bill conclude that it worked. The Romney white paper misrepresents the balance of the evidence on the question.

The rest of the paper is not much better. Here's what the authors have to say about regulatory uncertainty:

Uncertainty over policy – particularly over tax and regulatory 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 found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 18 months.

But as Matt O'Brien at The Atlantic pointed out the last time Hubbard brought up this study (pdf), the uncertainty judged to hurt growth in that paper isn't uncertainty due to Obama's policies. It's due, overwhelmingly, to unrelated events. Here's the authors' policy uncertainty index, with major upticks in uncertainty noted:


Source: Scott Baker, Nicholas Bloom and Steven Davis.

The kind of shocks to uncertainty that Baker, Bloom, and Davis conclude hurt growth are things like wars, elections (no matter who wins), and large-scale financial crises. They're not studying the effects of Obama pursuing a different health-care policy, in other words. They're studying how businesses react to uncertainty about what the government will do in the face of big events. So the jump in policy uncertainty that Romney's advisers say hurt growth was due to the financial crisis writ large, not Obama's response to it. It's hard to see how pursuing a different policy would have reduced uncertainty, assuming the crisis still occurred.

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Dylan Matthews | August 7, 2012