Debunking Romney (Part 2): The Advisers Respond

 This post is part two of a three part series debunking a few central claims that have been made by the Romney campaign this year. The first part deals with Romnay's tax policies, the recent Tax Policy Center study, and Romney's response to that study. The second part deals with the white paper Romney's advisers wrote to attempt to justify his plan. Finally, the third part deals with Romney's recent Medicare claims, as well as his impossible promises on the subject. 

Romney's economic advisers attempt to defend Romney's Tax and Economic plans:

As FactCheck points out, Romney initially tried to defend the plan using other studies before the most recent TPC study emerged:

"But, when pressed for specifics, Romney told Schieffer that he will “go through that process with Congress as to which of all the different deductions and exemptions” will be eliminated or reduced. In that interview, he said the National Commission on Fiscal Responsibility and Reform issued a report in December 2010 that proved it is “mathematically … possible” to reduce tax rates and reduce the deficit.

That’s true — but Romney failed to note that the commission’s illustrative tax-reform proposal “taxes capital gains and dividends as ordinary income” (see footnote on page 29), eliminating a tax break that benefits mostly those with high incomes. But Romney’s tax plan would “[m]aintain current tax rates on interest, dividends, and capital gains,” taking that option off the table. Under current law, capital gains (profits on sale of stock or real estate, for example) are generally taxed at a top rate of 15 percent, while ordinary earnings from salaries or business are taxed at a top rate of 35 percent of income over $388,350. (If the Bush-era tax cuts are allowed to expire, the rate would return to 20 percent.)

So how can Romney design a revenue-neutral plan that would cut income tax rates without disproportionately benefiting the wealthiest, and still maintain the current low rates on capital gains and dividends? That was the subject of the Tax Policy Center’s latest report, which immediately renewed the debate over who would benefit — and who would not — under Romney’s tax plan." (emphasis mine)

This was just of the Romney campaign's misrepresentations of various studies to defend the proposal. In an attempt to put some intellectual weight behind their ideas, Romney's economic advisers drafted a white paper to back them up. In the paper Romney's team combined more misrepresentations with  blatant falsehoods, partisan research, and the ignoring of research they should know about. In addition, many authors of the studies they cite actually called out the Romney campaign for misrepresenting their research (this link is the Ezra Klein source for the bullet list below). Brad DeLong has taken look at the paper and has provided a point by point rebuttal of the paper's main arguments. I will summarize and expand here:

• Romney's team incorrectly calls this recovery the most anemic in recent History. But the Bush recovery was actually just as slow from the private sector's point of view. The difference is that the downturn Obama inherited was much worse than the one Bush inherited. In addition austerity has slowed the recovery quite a bit.
• Romney's team claims that history has shown this recession should have experienced a quick recovery. The problem is that they ignore the fact that history shows the aftermath of financial crises (a housing bust in this case) tend to include sustained periods of slow recovery (Reinhart and Rogoff 2010). Romney's team should be familiar with this.In order to bolster their claim, Romney's team used a paper by Bordo and Haubrich (2012). Ezra Klein asked Bordo if the Romney team's interpretation of his paper was correct. Evidently Romney's team got it wrong:

“This recession is really quite different,” Bordo said. But he didn’t see government policy as the obvious cause. “We found that a lot of the difference between what would’ve been predicted by the normal behavior of recessions and what we observed now is explained by the collapse of residential investment. Put another way, if residential investment were what it was in a normal recovery, we would have recovered already.”

That is to say, what Bordo found was fairly consistent with the rest of the literature on this topic: Recessions associated with a housing bust tend to have very slow recoveries. That’s rather different than the Romney campaign’s interpretation of Bordo’s paper, which is that the features of this particular recession couldn’t explain the slow recovery, and thus you had to conclude that “America took a wrong turn in economic policy in the past three years.” (emphasis mine)

In a later op-ed in the Washington Post, two of Romney's advisers further claimed that if the recession was supposed to be a “Rogoff-Reinhart” slow recovery recession, then stimulus didn't make much sense, since it would be largely ineffective. However, as Ezra Klein points out, Ken Rogoff was one of the economists Obama consulted about the proper size of the stimulus. Rogoff recommended the stimulus be $1 trillion over two years (larger than the real stimulus):

"As for Reinhart, I asked her about this for a retrospective I did on the Obama administration’s economic policy. “The initial policy of monetary and fiscal stimulus really made a huge difference,” she told me. “I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn’t fully appreciated.”

Now, it’s true that Reinhart and Rogoff have opposed “indefinitely sustaining aggressive post-crisis fiscal stimulus“ without accompanying deficit reduction. But even in an op-ed making that case, Rogoff was careful to say, “aggressive fiscal stimulus in the run-up to the financial crisis was reasonable as part of an all-out battle to avoid slipping into a depression.”" (emphasis mine)

So both economists have argued that the stimulus was necessary to keep the recession from being worse, even if it wasn't supposed to necessarily accelerate recovery. Perhaps the Romney campaign was confused by this distinction.

• Romney's team makes claims about his mostly non-existent plan that can't be backed up because his plan is mostly non-existent. The TPC made the most favorable assumptions for Romney's plan. So we can assume no matter how Romney shapes his plan, the criticisms seen here will still apply.
• Romney's team tries to blame the slow recovery on "structural biases against business, financial imbalances, and regulatory choices." They also claim this has been happening for multiple decades. Only Obama has made it worse. Brad DeLong graphs growth in multiple areas and shows that the real fault lies with government purchases (austerity) and residential construction (the housing crisis).

• Romney's team tries to blame Obama for his focus on stimulus, despite the fact that Republicans in congress have kept him from being able to do any of said stimulus for nearly two years.
• Romney's team attempts to argue against the same Keynesian ideas they have already argued for and proven effective.
• The paper tries to claim that empirical studies have documented “The negative effect of the administration’s ‘stimulus’ policies." However, Dylan Matthews surveyed the research and found 13 our of 15 studies actually showed the stimulus had a positive effect. Of the two studies cited by the Romney team, one was written by a Romney adviser and the other looked at just the Cash for Clunkers program. The paper's author, Amir Sufi has called out the Romney campaign on this distortion. When Ezra Klein asked him about his view of the stimulus he responded positively.

"So I asked Sufi what he thought of the stimulus more broadly. “Most of the research is pretty positive on stimulus,” he said. In particular, he pointed to a paper from Emi Nakamura and Jón Steinsson that used “cross-sectional data that seems to indicate the fiscal multiplier is quite large when you’re in a recession.”" (emphasis mine)

• Romney's team falsely claims Obama has avoided tackling long term budget issues.
• DeLong claims Romney's team has misrepresented the work of Baker, Bloom, and Davis (2012) over the role of uncertainty in the slow recovery. However, after skimming the paper, I'm not 100% sure they have. It is arguable since Romney's team failed to mention that the largest spikes in uncertainty had more to do with the debt ceiling fights, recessions, bailouts, and elections than tax and regulatory policy in general. They also blame this on "short-termism." However, the biggest spike occurred as a result of a long term policy debates that occurred during the debt ceiling fight. John Taylor (who seems unaware of the complaints from the authors of the studies Romney misrepresented) claims this was what Romney's team was talking about, saying "Policy uncertainty is high now for a number of reasons, and reducing it with a long-term strategy rather than more short-term fixes will increase economic growth and create jobs." He may have a point, but as I have noted before. Obama has been working for long-term policy solutions. Republican obstructionism has kept this from happening. In addition, Ezra Klein points Baker, Bloom, and Davis may be attributing uncertainty to the wrong factors in this paper:

The larger issue is that, as Baker, Bloom and Davis concede, the biggest driver of economic policy uncertainty is usually a bad economy, full stop. This past fall, Mark Schweitzer and Scott Shane of the Cleveland Fed tried to figure out whether Baker, Bloom and Davis were picking up real effects of uncertainty, or whether the uncertainty itself was just an outgrowth of a bad economy, and had no further bad economic effects of its own. Their conclusion was that while uncertainty does reduce small business hiring and purchases, the weak economic fundamentals are a much more important factor: (emphasis mine)



The blue line is expected small business hiring under Schweitzer and Shane’s model, and the brown line expected hiring in the absence of uncertainty. The models show, the authors conclude, “statistically significant negative effects of policy uncertainty on small business owners’ plans to hire and make capital expenditures.” But they also note that a model that doesn’t take uncertainty into account explains 79 percent of variation in hiring and 76 percent of variation in business spending. So while uncertainty can explain some variation in hiring and spending by businesses, other factors (like economy-wide hiring and interest rates) are needed to explain the vast majority of it. (emphasis mine) 

• Romney's team perpetuates the myth that Obama had the kind of filibuster proof majority needed to tackle their priorities for two years. Try 14 weeks.
• Romney's team misrepresents studies to show his tax-reform proposals will increase GDP by .5% to 1% per year. Ezra Klein explains:

"Of the four studies mentioned, two of them are co-authored by Berkeley economist Alan Auerbach. When I looked deeper into the studies, however, they didn’t seem all that applicable to Romney’s tax plan. The Romney campaign, for instance, was using an estimate from a simulation Auerbach ran in which he replaced the income tax with a consumption tax. If the Romney campaign proposed such a policy, that would be very big news. But they have not proposed such a policy.

So I e-mailed Auerbach the relevant quote from the Romney campaign’s paper, and added two questions: “Given what we know and don’t know of the Romney plan, is it reasonable to attach these kinds of dynamic estimates to it? Do you think that reporters like me should assume that the 0.5-1% gdp boost is a reliable base case?”

His response came quickly. “I did not see the [Romney campaign's] paper, but from your description the basic answer to both of your questions is ‘no’,” he replied. His paper looked at “a much bigger tax change than Romney is proposing.” It also “assumed that all tax changes were revenue-neutral on an annual basis; the size of the Romney tax cuts makes this a questionable assumption.” (emphasis mine)

• Romney's team appears to blame Obama for the fiscal cliff, which was set in motion by a bipartisan deal in 2011, a deal the VP pick, Paul Ryan, voted for. Maybe Romney would have a leg to stand on if he had not been silent practically the entire time while embracing the kind of attitude that led the the deal in the first place.
• Romney's team cites partisan research to back up their claims of fiscal consolidation and deregulation.
• Romney's team cherry picks research to claim that tax cuts would be more stimulative than spending increases. Macroeconomics is very divided on this issue. In addition, the research considers cases where interest rates are far from the Zero Lower Bound, unlike today.
• Romney's team claims that Romney's policies are similar to the policies used to help fight the recessions of the early 80s and the structural problems of the 70s. The problem is that these were two very different recessions. David Frum explains:

Yet in almost every way, today's economic problems are exactly the opposite of those of 30 years ago. Then we had inflation, today we are struggling against deflation. Then we had weak corporate profits, today corporations are more profitable than ever. Then we had slow productivity growth, today it is high. Then the top individual income-tax rate was 70%. Today it is 36%. Then energy regulations produced energy shortages. Today the removal of banking regulations has produced an abundance of debt.

In the end Romney's team produces a list of policy objectives:

"The Romney plan will achieve these objectives with four main economic pillars.... reduce federal spending as a share of GDP to 20 percent – its pre-crisis average – by 2016; reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains... [r]educe the corporate income tax rate... to 25 percent... broaden the tax base to ensure that tax reform is revenue-neutral;... reduce growth in Social Security and Medicare benefits... block grant the Medicaid program to states; remove regulatory impediments to energy production and innovation... repeal and replace the Dodd-Frank Act and the Patient Protection and Affordable Care Act..."

And Brad DeLong responds:

"DOES NOT FOLLOW: Repealing Dodd-Frank—with not a hint as to what will replace it—does not decrease but increases regulatory uncertainty. Repealing ObamaCare—also with not a hint as to what will replace it—does not decrease but increases regulatory uncertainty, especially as up through the middle of 2009 what we now call ObamaCare was then called RomneyCare, and its biggest booster was Mitt Romney. How can uncertainty fail to be generated by would-be President Romney’s declaration that he opposes RomneyCare and seeks to replace it with something else that he will not reveal?

Similarly, Romney has not even the outlines of a plan for how to reduce federal spending to 20% of GDP, or how he could possibly broaden the tax base to keep his tax cuts for the rich revenue-neutral.

If you do indeed fear uncertainty about tax and regulatory policy, you need to vote against Romney as you would vote against the plague—and urge everybody you know to vote against Romney, and urge them in the strongest possible terms." (emphasis mine)

More on this plan in part 3.

As Ezra Klein notes, Romney's plan cannot produce the economic output he envisions because it fails to tackle the most important factor in the slow recovery of the last four years, the housing market:

"So, that’s three economists named in the Romney paper, not one of whom would sign on to the interpretation the Romney paper gave to their work.

There are interesting criticisms of the Obama campaign buried in the work of the economists the Romney campaign cited — the problem is that the Romney campaign doesn’t have the standing to make them.

Both Sufi and Bordo agree that the housing market was at the core of this recession, and of the sluggish recovery that has succeeded it. So one possible criticisms — which I’m sympathetic to — is that the Obama administration bobbled the single most significant policy question related to the recovery: What to do about housing." (emphasis mine)

Indeed the issue of housing is a complex issue where nobody can seem to agree on a single solution. But there are solutions available, sometimes as relatively simple as high short term inflation targets. But Romney has no such plan. Ezra Klein continues:

"Indeed, the Romney campaign doesn’t have a housing policy at all. “Housing” isn’t one of the issues on their Web site. The word is only mentioned twice in their 160-page economic plan. There are no recommendations in this paper. Indeed, Hubbard, one of the authors of this paper and a key adviser to Romney, has advocated a large program to encourage mortgage refinancing in the past, but Romney hasn’t embraced it.

Indeed, as Nick Timiraos notes, Romney’s comments on housing have been self-contradictory. At one point, his position was, “Don’t try to stop the foreclosure process. Let it run its course and hit the bottom.” Later, he said, “The idea that somehow this is going to cure itself by itself is probably not real. There’s going to have to be a much more concerted effort to work with the lending institutions and help them take action, which is in their best interest and the best interest of the homeowners.” But the campaign never released a formal policy resolving these tensions." (emphasis mine)

So Romney still cannot escape the conclusions of the TPC paper. And his plans rely on regurgitated Republican talking points that either do not apply to this recession or have been discredited altogether. Romney's team also relies on blatant falsehoods, ignores highly respected research they should know about, misrepresents other research, cites unreliable partisan research, and tells blatant lies to support his plan. This is not the level of competency we should expect from a presidential candidate.

Next we take a look at Romney's plans for medicare, as well as his criticisms of Obama's Medicare policies.

Update 8/20/12: Ezra Klein expands on the problem of the housing market, as well as the Obama administrations failures in that area. It is a MUST READ for anyone curious as to why this recovery has been so anemic.

The Roundup: 

Romney's Failed Policy Ideas Edition

Paul Krugman: Culture Of Fraud

"The big story of the week among the dismal science set is the Romney campaign’s white paper on economic policy, which represents a concerted effort by three economists — Glenn Hubbard, Greg Mankiw, and John Taylor — to destroy their own reputations. "

"And when I talk about destroying reputations, I don’t just mean saying things I disagree with. I mean flat-out, undeniable professional malpractice. It’s one thing to make shaky or even demonstrably wrong arguments. It’s something else to cite the work of other economists, claiming that it supports your position, when it does no such thing "

Romney's Failed Unemployment Strategy and the Bizarro Stimulus of Paul Ryan
Romney has no serious plans to curb unemployment. He wants to fix the "structural problems" with the market and hopes the unemployment rate goes down. Ryan, on the other hand, has embraced the discredited "bizzaro stimulus" of expansionary austerity (even though Romney has recently criticized they idea). Neither of the two has embraced real conservative stimulus ideas. Mike Konczal discusses some of these ideas while pointing out why Ryan and Romney's ideas will fail if implemented.

Erskine Bowles: Romney’s tax plan wouldn’t cut the deficit
Erskine Bowles, who served as chief of staff to President Bill Clinton, was co-chairman of the National Commission on Fiscal Responsibility and Reform. Possibly the most respected deficit hawk on the left, he was a co author of the famous Simpson-Bowles commission, which provided a number of recommendations to the president and congress for reducing the debt. Romney has tried to compare his tax reform proposal to that famous plan. However, as Bowles puts it, Romney's plan just doesn't measure up:

"This month, Romney said that his tax reform proposal is “very similar to the Simpson-Bowles plan.” How I wish it were. I will be the first to cheer if Romney decides to embrace our plan. Unfortunately, the numbers say otherwise: His refor m plan leaves too many tax breaks in place and, as a result, does nothing to reduce the debt."

...

"Obama hasn’t gone as far in cutting spending, particularly in health care, as is necessary to stabilize the debt at a reasonable level and keep it on a downward path as a percentage of the gross domestic product. But in contrast to Romney, the president — like the “Gang of Six” and other like-minded members of both parties — has embraced the central principle of Simpson-Bowles: that America will turn the corner on its debt only if Republicans and Democrats come together to support a balanced deficit-reduction plan. For the numbers to work, both parties need to put aside partisanship." (emphasis mine)

Note: Ezra Klein also argues why Erskine Bowles, Paul Ryan's "favorite Democrat", should be chosen as Obama's next Treasury Secretary.

Paul Krugman: What’s In The Ryan Plan? 
Paul Krugman goes through the CBO's report on Ryan's 2011 plan:

"Ryan basically proposes three big things: slashing Medicaid, cutting taxes on corporations and high-income people, and replacing Medicare with a drastically less well funded voucher system. These concrete proposals would, taken together, actually increase the deficit for the first decade and beyond.

All the claims of major deficit reduction therefore rest on the magic asterisks. In that sense, this isn’t even a plan, it’s just a set of assertions." (emphasis mine)

Update 8/27/12:

David Frum: Are Housing Hawks Wrong?

Dean Baker of the Center for Economic and Policy Research delivers a strong reproof to those (like me!) who believe that reducing consumer debt is the key to accelerating recovery.