Which candidate’s plans are more Keynesian?
Unemployment remains far too high, and the culprit is clearly deficient spending in the economy. Yet, a full-throated call for aggressive Keynesian remedies for this (i.e., something like another Recovery Act) is far from the top-shelf item on the agenda. Instead, most policy attention in the race centers on which candidate would more rapidly reduce projected budget deficits—a policy maneuver that, in the next couple of years, would be all but guaranteed to lead to higher unemployment rates. This move away from a defense of Keynesian cures for high unemployment started a long time ago and has codified by the 112th Congress (Jan. 2011–present), when federal budget policies pivoted sharply toward austerity.
Republicans have clearly led the charge away from Keynesianism, vociferously decrying the increase in budget deficits since the Great Recession began and demanding a dollar of spending cuts for every dollar increase in the statutory debt ceiling. Democrats have (generally) been more ambivalent—calling for (and passing) some fiscal support while often rhetorically privileging deficit reduction over other policy goals. Given this partisan pattern, it’s somewhat unexpected to hear some commentators speculate that a Mitt Romney administration could be more likely to provide Keynesian fiscal support to the U.S. economy in the near-term than a second administration by President Obama.
We can see the contrarian appeal of this story; Romney is indeed calling for very large increases in budget deficits in the near term (if one realistically assesses his budget plans), and since the most effective brands of Keynesian fiscal support requires it be deficit-financed, the Romney plan could qualify. In a new paper, Who would promote job growth in the near term? Macroeconomic impacts of the Obama and Romney budget proposals, Andrew Fieldhouse and I decide to take the candidate’s plans seriously to see if there’s much evidence that the Romney plan provides a bigger Keynesian boost to the economy in the short run. The quick answer is that it doesn’t.
Basically, increasing the budget deficit is only one plank of effective fiscal support; the other is spending borrowed funds on measures that provide a large boost to economic activity for each dollar increase in the deficit (i.e., spend on measures with a large “bang for buck”). Because so much of the increase in deficits in the Romney plan is driven by individual income and corporate tax rate cuts for affluent households, and because this is extremely inefficient fiscal stimulus, there is very little Keynesian boost. Worse, this ineffective increase in fiscal support on the tax side is counteracted by very damaging cuts on the spending side (his proposal to cap government spending at 20 percent of GDP is highly contractionary under any reasonable phase-in assumptions). Because spending cuts do indeed provide a large bang-for-buck, the Romney plan, even though it increases deficits in the near-term, actually sees net job losses over some of this period (calendar years 2013 and 2014).
We also note that Romney often claims that unspecified tax increases (so-called “base-broadening”) will make his second round of tax cuts (reducing individual income rates by 20 percent and eliminating the alternative minimum tax) deficit-neutral. For many reasons (mostly due to the lack of specifics), we don’t think this is likely, but we also provide an estimate of the Romney plan under such an assumption, which (by definition) provides an even weaker Keynesian boost from tax cuts and a comparable drag from spending cuts—for sizable net job losses.
The Obama record on providing Keynesian support in recent years is a bit more mixed than is commonly presented. The Recovery Act was not the last bit of such support pushed by the administration—a number of what we call “ad hoc” stimulus measures were actually poured into the economy since 2010 (at the cost of extending the upper-income Bush tax cuts and a big estate tax cut, among other things). And while the Obama administration has more-than-occasionally engaged in anti-Keynesian rhetoric, its own budget proposals for the next couple of years actually allow for some more fiscal support to reach the economy than is commonly recognized, mostly through the spending provisions called for in the proposed American Jobs Act. (Council of Economic Advisers Chairman Alan Krueger recently wrote on the White House blog that, “President Obama continues to support the elements of the American Jobs Act that have not yet passed, including further investment in infrastructure…” We assume provisions would take effect one year later than initially proposed to allow for feasible implementation.)
So, the paper shows that the Obama budget plan actually provides more Keynesian support to the economy in coming years. We should be quick to note that this is an assessment of plans. And plans often don’t come to pass (see the American Jobs Act). But, we have decided to take what the candidates have said on this issue seriously, which may be naïve, but strikes us as the best that can be done.
Finally, it’s true that to think much of this analysis, you have to agree that deficient spending is the primary constraint on the current U.S. recovery—but really, everybody does agree with this when the rubber meets the road. Evidence of this is simply that you cannot find a policy analyst, of any party, who doesn’t want to undo at least part of the fiscal contractions starting Jan. 1, 2013 that make up the so-called “fiscal cliff,” and the desire to undo these changes stems entirely from the recognition that they all will sap spending in the economy and make recovery slower.