The Guardian Unlimited, August 13, 2012
Now that Representative Paul Ryan has been added to the ticket we'll have to see the extent to which Governor Romney embraces his running mate's rather extreme economic positions. But earlier in the week, the Romney economic team made its first effort to argue for the merits of Romney's somewhat more moderate economic plan. It went down in flames.
The basic problem is that they have an impossible story. They want to try to blame President Obama for the current weakness of the economy. Their argument of necessity focuses on the weakness of the recovery since their guy, President Bush, was calling the shots went things fell apart. This inconvenient fact means that the Romney crew can't focus on the real problem, the severity of the downturn.
But this recovery actually has not been extraordinarily weak, and in fact is stronger by most measures than the 2001-2004 recovery. That recovery was largely guided by the top members of Governor Romney's current economic team, most of whom held top positions in the Bush administration.
This leads Romney's team to argue non sequiturs about how uncertainty over taxation and regulation is impeding investment. This would seem a hard argument to make since taxes are the lowest share of GDP since before World War II and the Obama administration has actually imposed relatively few major regulations.
Of course what makes the argument really tough is that, measured as a share of GDP, investment in equipment and software is pretty much back to its pre-recession level of output. That's pretty impressive given the large amounts of excess capacity in many sectors of the economy. This leaves the Romney team effectively trying to convict President Obama for the murder of a man who turns out to be alive. Good luck with that one.
But if the Romney team's efforts on behalf of their candidate seem destined to fail, they may still have the positive effect of bringing about better economics on the Democratic side. In particular, Brad DeLong, a former Clinton administration official who remains close to the economists who guided President Obama's economic policy, seems to have changed his position on some key issues in response to the Romney team's memo.
Specifically DeLong asks:
"Why weren't HHMT [the Romney team] arguing, back in 2001-4, either inside or outside the government, for more expansionary fiscal and monetary policies to speed the then-recovery? ... Those of us who were so arguing would have found their help most welcome."
Perhaps Brad was arguing for more expansionary fiscal and monetary policies in those years, but that certainly was not the general theme coming from the Democratic side of the aisle. Most of the Democratic leadership was complaining about the size of the Bush tax cuts, which we were told endlessly "blew a hole in the deficit." (Don't ask me what that means.)
There were also complaints about fighting the wars in Iraq and Afghanistan without paying for them. (Note the complaint was about not paying for the wars, it was not that we were fighting them.) Both of these complaints were that Bush's fiscal policies were too expansionary, the exact opposite of the complaint that Brad now expresses, that they were not expansionary enough.
As far as monetary policy, Brad was a self-described Greenspan worshipper, a view he expressed quite openly again two years later in his rave review of Greenspan's autobiography. If he had complaints that Greenspan's monetary policy was insufficiently expansionary in the years 2001-2004, he certainly did not express them at the time.
Brad has previously made atonements for some of his prior positions and he deserves credit for being one of the most open-minded macroeconomists around with serious standing in the mainstream of the profession. The point here is not to beat up on him for changing his mind.
However there are some fundamental issues raised by Brad's criticisms of the Romney team that deserve exploring. It would be great if it became the accepted view among Democrats that the fiscal and monetary policy in the years 2001-2004 were insufficiently expansionary. The problem was that the economy in the Clinton years was driven by a stock bubble. When that bubble collapsed, just as when the housing bubble collapsed in 2007-2008, there was no obvious source of demand to make up the shortfall.
In the short-term only the government can fill the gap with large-scale deficit spending; larger than what we have actually seen following both downturns. The Fed can play a supporting role with quantitative easing and other extraordinary measures.
In the longer term, the only way to fill the demand gap is by bringing down the trade deficit, which requires a lower-valued dollar. In a world in which many countries deliberately prop up the dollar in order to run large surpluses with the United States, the value of the dollar is only likely to be reduced through deliberate and explicit policy. In other words, the government and the Fed must pursue a conscious policy of making U.S. goods more competitive internationally by bringing down the value of the dollar.
Is this the view that Brad now holds of the way out of the current downturn? If so, he would be a valuable ally to have in this struggle, especially if he can convince people like Larry Summers of the merits of this position. And Governor Romney's team might well deserve some of the credit for bringing him around.