Economix Blog: A Closer Look at Romney’s Economic Plan

Now that we’ve had a day to digest Mitt Romney’s economic plan, Matthew Yglesias looks between the lines and finds what he calls an “agenda on social welfare policy that’s basically every bit as extreme as anyone else’s.”

So although Robert Reich calls the plan “unremarkable” and “way too reasonable for the current G.O.P.,” Mr. Yglesias points out that Mr. Romney’s commitment to lower taxes will have to come at the expense of something, and that something could very well be Medicare.

In the plan, Mr. Romney says that “before President Obama exploded the size of the federal government, our existing tax rates were more or less adequate to pay for the government we needed.”

True, in 2006, the Bush-era tax rates were able to finance government spending with a much smaller deficit. But even without a financial crisis, the aging demographics of the United States population mean that in the absence of serious health care cost reform, the government will need more money to pay for Medicare and Medicaid services for the elderly, disabled and poor in coming years.

“Maintaining America’s commitment to health insurance for senior citizens is going to require higher taxes,” writes Mr. Yglesias. “When politicians try to say that we can get by with Bush-era levels of taxation indefinitely, they mean we can get by with Bush-era levels of taxation if we scrap Medicare.”

The Romney camp argues that some of the tax cuts — particularly the drop in the corporate tax rate from a high of 35 percent to 25 percent — will be offset by more companies’ bringing their operations back to the United States and more investment here by companies, generating more corporate income to be taxed at the lower rate. But many economists and tax experts say that without reforming the tax code and eliminating the many loopholes that already allow companies to pay far less than 35 percent — or less than 25 percent, for that matter — it’s hard to imagine such a corporate tax cut being that effective.

Mr. Romney’s campaign officials declined to say just how much they believed the lower rate would be offset by generation of taxable revenues in the United States by more companies. And the plan also specifically “does not promise the immediate creation of some imaginary number of jobs, because government cannot create jobs.”

Campaign officials did say that the plan, in its totality, would raise economic growth over all to an average of 4 percent on an annual basis, induce private companies to create 11.5 million jobs and reduce the unemployment rate to 5.9 percent by the end of Mr. Romney’s first term in office.

That strikes economists as hugely ambitious. “I think it’s a stretch,” said Michael Spence, a Nobel Prize-winning economist and the author of “The Next Convergence: The Future of Economic Growth in a Multispeed World.” “Nobody knows how well we’re going to respond both on the public- and private-sector side and restore competitiveness.” Acknowledging that the plan was of course an “opening shot,” Mr. Spence, a senior fellow at the Hoover Institution, said: “Does his set of policies do it? My answer would be no.”

There are several challenges for Mr. Romney, one of which he would create on his own. By calling for a shrinking of government, he is promising to shrink the federal work force. Although the private sector dominates employment, layoffs by government at all levels have weighed heavily on the labor market during the weak recovery. Mr. Romney said he planned to reduce the federal work force by about 10 percent, which works out to about 282,000 workers at current levels.

And one thing Mr. Romney did not address at all in the plan unveiled on Tuesday was housing. The recent crisis was set off by a collapse in the housing market, and millions of owners currently owe more than their homes are worth. Despite record low interest rates, home sales are still sluggish. That’s bad news for the more than 1.1 million unemployed construction workers, not to mention the millions of others in banking, real estate, retail and home improvement whose livelihoods depend at least in part on a robust housing market. It’s hard to imagine a healthy economy without some fix for housing. Mr. Romney’s campaign officials say a plan for that is coming.

Article source: http://feeds.nytimes.com/click.phdo?i=26791e61dd36c69f8635d1ff9b749bf8