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June 1, 2012

So Romney's a Keynesian. Is that a Problem?

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According to an opinion piece in today's Politico, Mitt Romney has revealed that he is a Keynesian.

Is Romney a Keynesian? Is that a problem? And is anyone surprised?

Last question first: I don't think anyone is under the delusion that somehow Mitt Romney is a Laffer Curve, Jack Kemp supply-sider (I wish he were). That's why there was room for Newt Gingrich and Ron Paul in the Republican field, and it's at least part of why conservatives are resigned rather than excited about Romney as the Republican nominee.

Next, IS Romney a Keynesian?

The killer quote is as follows:

You have a plan to cut spending dramatically over a number of years, Halperin said. Why not in the first year?

“Because,” Romney answered, “if you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink GDP over 5 per cent. That is by definition throwing us into recession or depression. So I’m not going to do that, of course. I don’t want to have us go into a recession in order to balance the budget.”

Supply-side conservatives like me hate to hear stuff like this, because we think it belies a belief that government spending drives economic growth (rather than private sector investment). Romney goes on in the article to say several more times that he thinks that cutting spending too precipitously would have a harmful impact on economic growth.

So yeah, he almost certainly is a Keynesian. Like both Bushes and Clinton were, and like Obama certainly is (although we may need to coin a new term for Obama, since he has an undying faith in government spending that would make Keynes blush.)

But before I get to whether or not I think this is a problem, I want to give Romney a bit of a pass.

No, as a supply-side, tax-cutting Reagan conservative, I don’t believe that government spending drives economic growth, or that it should. And I think that the next time rational politicians gain the majority in Congress, they should cut spending at the steepest rate politically possible.

But people tend to forget just how big a part of our economy government has unfortunately become. Today, federal spending comprises 26% of total overall GDP, and when you figure in spending by all government levels, it’s above 40%.

So would a dramatic cut in government spending result in some economic harm? Almost certainly, since government has grown to such a size that it DOES have an enormous impact on the economy.

So Romney is not completely wrong in his thought that a big cut in government spending might have negative consequences.

The obvious retort to this concern is that a) given how difficult it is politically to cut spending, there is almost no chance that we could be so successful at cutting government spending to the point that it caused a big problem; and b) even if it does, the gains to the economy are worth some short term pain.

Which Reagan understood. That’s why he and Paul Volker realized that squeezing the runaway inflation out of the economy in the 1980s was worth a recession. And it was.

But Romney deserves credit for something else he said in the interview:

“So you have to, at the same time, create pro-growth tax policies.”

Bingo! Give those furloughed government employees somewhere else to work. Make sure there are better, more effective places for that capital to go to work than at the Department of Whatever. It’s not enough to just slash spending. Indeed, my fear for my Tea Party friends is that they think simply cutting spending will “get the economy moving again.” It will not.

Cutting spending will do nothing to encourage an additional dollar of investment in the U.S. In order to grow the economy, we have to give capitalists reasons to increase their U.S. investment. Things like eliminating harmful regulations, cutting the corporate income tax and moving to a territorial tax system, enacting a repatriation holiday, and making small business less fearful of hiring new employees by, for instance, repealing Obamacare and other federal mandates.

But now I get to the final question: Is it a problem if Romney is a Keynesian?

That’s up to Congress. Specifically, up to the Republican leaders I expect to control Congress after the next election.

When we elect a President, we don’t elect a dictator. Presidents don’t determine economic policy—or at least they shouldn’t. Under our Constitution, the President runs the Executive Branch, and is the Commander-in-Chief of the military. He is not an economic dictator. He does not set tax policy, or levels of spending. Those prerogatives lie with Congress.

Hopeful conservatives like me are determined that Congress must not defer to a President Romney the way it did to President Bush. Regardless of Romney’s philosophies, it falls to Congress to cut spending AND enact pro-growth tax policies. If Congress defers to a President Romney and allows him to set economic priorities, design tax policy and determine budgets and spending policy, then shame on Congress.

So it shouldn’t actually matter all that much if Romney or any other President is a Keynesian. What matters is whether or not Congressional leaders defend their prerogatives, accept their responsibilies, and do their jobs.


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