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Maybe Romney Should Stay In The Private Sector

A new Mitt Romney ad running in Florida offers yet more proof of how he's retooled his campaign around the economy -- and how it plays to his strengths as a candidate:

While the ad briefly mentions tax cuts and "conservative change," the primary focus is Romney's biography.  As he says, "I know how America works because I spent my life in the real economy. I ran a business, turned around the Olympics, and led a state." This is old news to those of us who have followed the presidential campaign.  But for many voters in Florida and the February 5 states, this will be their first introduction to Romney.  And I'm sure a lot of them will be pretty impressed.  

But maybe they shouldn't be. Consider Romney's proposed economic stimulus -- which, at $250 million, is twice as large as what the Democratic presidential contenders have proposed.  When I wrote about it a few days ago, I asked if any economists out there could weigh in on whether the package was well-designed.  Fortunately, Jason Furman of Brookings and Dean Baker of the Center for Economic Policy Research obliged the request. 

Here's an excerpt of what Jason told me:

Even asking the question was way too nice to Romney. September Romney proposed eliminating capital taxes for households making less than $200,000. The stated goal of the plan was to get people to spend less (i.e., save more). Now that exact same tax plan is a part of his stimulus proposal. If it worked as Romney intended (and I put the chances of this just north of zero percent) the result would be to weaken the economy in the short run as it contracted aggregate demand – which is what matters now, while increasing the level of output in the longer run as the higher savings rate led to a larger capital stock.

...Romney outbids all of his Republican competitors by proposing to take the corporate rate down from 35 to 20 percent. Again, whatever the merits for long-run growth (and I don't see many if it is not part of a broader, revenue-neutral tax reform), this is not a way to stimulate aggregate demand today because most of the benefit would go to reward companies for past investment choices, not to encourage them to make investments this year. The non-partisan CBO’s latest report has a table rating stimulus options and they put this one at "small" for cost effectiveness and "long" for the length of time to affect the economy. This is tied for worst of all the options CBO reviewed...

...the proposal does have roughly $40 billion of what I would call "stimulus" -- specifically the reduction in the bottom tax bracket and the payroll tax break for seniors. But this genuine stimulus is one-third of what the President, Democratic leaders in Congress and Democratic candidates are calling for. And its efficacy is limited by the fact that the tax reductions are not refundable and thus would not go the households most likely to spend them.

Oh yeah, and it would increase the very large long-run deficit thus hurting the economy in the long run and potentially even leading forward-looking financial markets to raise interest rates and crowd out even the initial stimulus. Unless of course it is paid for by spending cuts but I haven’t found any of those on Romney’s website.

Dean cited some of the problems, adding these:

...He proposes to permanently eliminate Social Security taxes for people over age 65. My guess is that this would take some time to implement administratively, even if you got Congress to salute it tomorrow. There are not that many people working at these ages (around 5.6 million or about 15 percent of the total senior population). It would not be a huge sum of money (many work part-time), but it disproportionately would benefit higher income people (more educated people tend to work later in life) and it doesn't really look like stimulus since it would have very little impact on the spending of these folks.

...he proposes temporarily permitted businesses to deduct 100 percent of the cost of their investments. As business tax breaks go, this is the closest to stimulus. But, there are already very generous expensing provisions for small businesses, so this will have little effect on their behavior. For larger businesses, it could lead them to move some investment plans forward, but it no one is going to rush through with major investments just to get slightly better tax

In sum, this should be dubbed "Mitt Romney's 5 ways to redistribute income upward under the guise of stimulus."

Note that Dean and Jason cover a pretty broad spectrum of left-leaning economic thinking, from the left (which is where I'd put Dean) to the center-left (which is where I'd put Jason).  So their agreement here should carry even more weight.  

Of course, the point of the Romney proposal -- like the other ones from the presidential candidates -- was never to put out an idea that would actually become law.  Everybody understood that, by the time any of today's candidates took office, conditions would have changed -- and a stimulus, hopefully, would already be in place.  (Sure enough, we just got word that Bush and Congress have agreed on a package.)

But these proposals are important as windows into the candidates' thinking and qualifications for office.  And the apparent flaws in Romney's stimulus ought to give everybody some pause -- particularly those who assume that a former businessman is necessarily well-suited to rescuing the economy.

--Jonathan Cohn