What would actually happen to the U.S. economy if President Obama and Mitt Romney had their way with the budget? IHS Global Insight, a financial analysis firm, ran a simulation to figure it out. Their main findings: Both candidates' budget plans would put economic growth at risk in the near term, but weak growth would continue longer under Romney because of the dramatic cuts that he wants to government spending.
IHS Global Insight cautions that there are a lot of details that are lacking about the candidates' plans—e.g. how Romney would pay for his rate cuts—so the simulation isn't definitive. But the firm comes to a few major conclusions about what would happen if Romney and Obama were to carry out their fiscal plans as stated.
There are major differences between Romney and Obama's plans for 2013: Obama wants to raise taxes for the wealthy, while Romney wants to sharply reduce government spending. But in the near-term, IHS concludes that Obama and Romney's budgets would produce the same result for the macroeconomy: Both plans would dampen growth next year by the same amount because they impose austerity measures sooner than IHS expects to happen otherwise. "Both simulations show growth averaging 1.2 percent in 2013, compared with 1.8 percent in our baseline," the firm points out.
However, weak economic growth would continue for longer under Romney's plan "because of the cuts in government spending required to reduce government spending to his target of 20 percent of GDP by fiscal 2016," the firm explains. "Monetary policy is already extremely loose, and cannot offset the extra fiscal squeeze." While Romney's tax reform would have longterm benefits, it wouldn't increase demand in the shorter-term, particularly given his big government spending cuts, IHS adds.
After 2016, both the Romney and Obama plans would produce stronger economic growth, bolstered by lower corporate tax rates that both candidates support. But there are some key differences in how they'd do it.
Romney's proposal to reduce individual taxes by 20 percent would also raise the potential labor supply by 2 percent by 2022, the analysis concludes. His plan would reduce the federal deficit to 2.4 percent of GDP and 1.9 percent of GDP through major cutbacks to domestic spending, Medicaid and the federal workforce. And even with those cuts, Romney's plan does not manage to balance the budget as promised, according to the IHS simulation: He would raise defense spending substantially and Medicare spending would actually rise because the Affordable Care Act's cost-saving measures would be repealed.
Obama's budget would be less effective at bringing down the long-term deficit: It would come down to 2.9 percent of GDP in 2016 then would rise to 3.6 percent in 2020. Defense spending would fall slightly more than it would otherwise.
IHS stresses that this isn't what they expect to happen if Romney or Obama were elected, as both candidates are likely to be constrained by a split Congress and the political realism. But they at least give us another way to evaluate the policies each candidate would be pushing for.