On Tuesday, the Romney campaign responded to the fire it’s taking from economic analysts by unleashing some artillery of their own. They released a paper by four decorated economists associated with the campaign — Glenn Hubbard, Greg Mankiw, John Taylor, and Kevin Hassett — that tried to lend some empirical backing to “The Romney Program for Economic Recovery, Growth, and Jobs.”
Hubbard, Mankiw, Taylor and Hassett make three main points: The first is that this recovery has been terribly slow, even by the standards of post-financial crisis recoveries. The second is that the Obama administration made a grievous error by relying on stimulus. And the third is that Romney’s tax and economic plans would usher in an era of rapid growth that would both be good for the country and provide the boost to revenues and employment necessary to make their numbers work out.
Each of these sections include supporting documents from independent economists. And so I contacted some of the named economists to ask what they thought of the Romney campaign’s interpretation of their research. In every case, they responded with a polite version of Marshall McLuhan’s famous riposte. The Romney campaign, they said, knows little of their work. Or of their policy proposals.
“The historical record is clear,” write the Romney campaign’s economists. “Our economy usually recovers quickly from recessions, and the more severe the recession, the faster the subsequent catch-up growth.” The paper they’re relying on here is “Deep Recessions, Fast Recoveries, and Financial Crises: Evidence from the American Record,” by Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland. So I asked Bordo whether he agreed that this recovery had been inexplicably sluggish, and whether a different set of policies could have dramatically shortened it.
“This recession is really quite different,” Bordo said. But he didn’t see government policy as the obvious cause. “We found that a lot of the difference between what would’ve been predicted by the normal behavior of recessions and what we observed now is explained by the collapse of residential investment. Put another way, if residential investment were what it was in a normal recovery, we would have recovered already.”
That is to say, what Bordo found was fairly consistent with the rest of the literature on this topic: Recessions associated with a housing bust tend to have very slow recoveries. That’s rather different than the Romney campaign’s interpretation of Bordo’s paper, which is that the features of this particular recession couldn’t explain the slow recovery, and thus you had to conclude that “America took a wrong turn in economic policy in the past three years.”
The Romney campaign then turns to the Obama administration’s response to the recession. “The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,” they write. When Dylan Matthews surveyed the literature, he found 15 studies, of which 13 found the stimulus had a positive effect. But the Romney campaign only names two studies. One is by John Taylor, a Stanford economist who advises Romney and is, as luck would have it, one of the economists the Romney campaign tapped to coauthor this brief. That leaves one study that is not by a Romney-affiliated economist: Amir Sufi and Atif Mian’s look at the “Cash for Clunkers” program.
Sufi, an economist at the University of Chicago, is quick to point out that his paper did not show a negative effect for “the administration’s stimulus policies.” His paper was just about Cash for Clunkers. “This was a $4 billion program. It’s nothing, basically. We weren’t saying anything specific about broader stimulus programs, we were just looking at these programs to bring forward purchases of durable goods.”
So I asked Sufi what he thought of the stimulus more broadly. “Most of the research is pretty positive on stimulus,” he said. In particular, he pointed to a paper from Emi Nakamura and Jón Steinsson that used “cross-sectional data that seems to indicate the fiscal multiplier is quite large when you’re in a recession.”
I also asked him whether he thought the Romney campaign was right that this recovery was unusually slow in a way that was best explained by policy failures. “I strongly believe the evidence shows these private debt overhangs are always longer, the recoveries always slower,” he said. So that’s two strikes for the Romney campaign.
The key argument the Romney campaign makes for their candidate’s plan comes toward the end, when they try and answer the criticism of the vague tax-reform proposal. ”The Romney tax reform plan will increase GDP growth by between 0.5 percent and 1 percent per year over the next decade,” Romney’s economists write. “These long-run gains from tax and budget reform have been the subject of significant study by economists, as documented in the Appendix.”
So I turned to the appendix. Of the four studies mentioned, two of them are co-authored by Berkeley economist Alan Auerbach. When I looked deeper into the studies, however, they didn’t seem all that applicable to Romney’s tax plan. The Romney campaign, for instance, was using an estimate from a simulation Auerbach ran in which he replaced the income tax with a consumption tax. If the Romney campaign proposed such a policy, that would be very big news. But they have not proposed such a policy.
So I e-mailed Auerbach the relevant quote from the Romney campaign’s paper, and added two questions: “Given what we know and don’t know of the Romney plan, is it reasonable to attach these kinds of dynamic estimates to it? Do you think that reporters like me should assume that the 0.5-1% gdp boost is a reliable base case?”
His response came quickly. “I did not see the [Romney campaign's] paper, but from your description the basic answer to both of your questions is ‘no’,” he replied. His paper looked at “a much bigger tax change than Romney is proposing.” It also “assumed that all tax changes were revenue-neutral on an annual basis; the size of the Romney tax cuts makes this a questionable assumption.”
So, that’s three economists named in the Romney paper, not one of whom would sign on to the interpretation the Romney paper gave to their work.
There are interesting criticisms of the Obama campaign buried in the work of the economists the Romney campaign cited — the problem is that the Romney campaign doesn’t have the standing to make them.
Both Sufi and Bordo agree that the housing market was at the core of this recession, and of the sluggish recovery that has succeeded it. So one possible criticisms — which I’m sympathetic to — is that the Obama administration bobbled the single most significant policy question related to the recovery: What to do about housing.
But Sufi and Bordo disagree on what should have been done. “If the problem is housing, then the market needs to clear, and when the market needs to clear, it needs minimal amount of government intervention,” says Bordo. But when I probed whether Bordo was implicitly criticizing the Obama administration’s housing policies, he essentially shrugged. “We didn’t have massive government intervention in it anyway,” he says.
Sufi’s argument leads to a clearer critique of the Obama administration. He points to a Bloomberg column where he argued that “in both the data and the theory, the critical problem is the high level of debt in the household sector. So why doesn’t macroeconomic policy directly combat this problem?” Sufi goes on to advocate a program of debt forgiveness, though he admits that designing such a program effectively is very difficult. But while the Obama administration has been tepidly supportive of plans to reduce principal for underwater borrowers, the Romney campaign opposes it.
Indeed, the Romney campaign doesn’t have a housing policy at all. “Housing” isn’t one of the issues on their Web site. The word is only mentioned twice in their 160-page economic plan. There are no recommendations in this paper. Indeed, Hubbard, one of the authors of this paper and a key adviser to Romney, has advocated a large program to encourage mortgage refinancing in the past, but Romney hasn’t embraced it.
Indeed, as Nick Timiraos notes, Romney’s comments on housing have been self-contradictory. At one point, his position was, “Don’t try to stop the foreclosure process. Let it run its course and hit the bottom.” Later, he said, “The idea that somehow this is going to cure itself by itself is probably not real. There’s going to have to be a much more concerted effort to work with the lending institutions and help them take action, which is in their best interest and the best interest of the homeowners.” But the campaign never released a formal policy resolving these tensions.
Meanwhile, Auerbach added another interesting wrinkle to his analysis. “Our paper didn’t take into account business-cycle considerations,” he said. “To the extent that the Romney plan spurs a more rapid economic recovery from our current state of high unemployment, that could make a big difference in short-run growth estimates. These would basically be demand-side stimulus effects.” In other words, insofar as Romney’s tax cuts act as a Keynesian stimulus package, they could do more for the economy in the short-run than standard tax models would assume. But that requires assuming that Keynesian stimulus works, which would contradict the first section of the Romney campaign’s paper.
So even the studies that the Romney campaign’s economists handpicked to bolster their case don’t prove what the Romney campaign says they prove. And some of the key policy recommendations that flow from those studies are anathema to the Romney campaign. And in perhaps the key policy area highlighted by these studies, the Romney campaign doesn’t have a formal policy. If this is the best they can do in support of their economic plan, well, it’s not likely to quiet the critics.