The American economy will sink back into recession if Congress fails to unwind a messy coil of austere fiscal policies that will trigger automatically at the beginning of the year.
Across the spectrum, experts are imploring political leaders not to be myopic and unyielding: delay the budget cuts until the economic recovery really takes hold, but be ready with a more considered course of deficit reduction when that moment arrives.
Yet Barack Obama and Mitt Romney, and their surrogates on Capitol Hill, are locked in a fight over which candidate and which party will more quickly and effectively reduce the deficit — the opposite of what economists say we need.
The Obama administration and campaign trumpet data and articles showing that Obama’s supposed spending binge is a right-wing fabrication. Paul Ryan — the GOP’s official spokesman on fiscal issues — boasted that a Republican victory in November will give his party a mandate to turn his controversial spending-slashing budget into law.
“If we make the case effectively and win this November, then we will have the moral authority to enact the kind of fundamental reforms America has not seen since Ronald Reagan’s first year,” Ryan said.
At the same time, the parties are at pains to paint their rivals as the true merchants of austerity.
“Ryan also argued with a straight face on [Meet The Press] that the Ryan-Romney plan would avert the very European-style austerity on which it’s modeled!” Obama strategist David Axelrod tweeted recently.
Resolving the tension between these two seemingly incompatible arguments — more fiscally responsible, less austere — turns out to be more difficult than adding up numbers on a ledger. But it provides an instructive look at what the candidates and parties stand for this election cycle.
Awarding the austerity prize turns out to be impossible for a simple reason: Unlike Obama, Romney leaves black boxes on both the tax and spending sides of his budget. He claims he’d offset the revenue loss from very specific tax cuts by closing scores of unspecified loopholes. He also claims he’d dramatically cut government spending, but, with a few key exceptions, has been shy about which programs he’d actually slash.
“You have to decide, when you analyze Romney — and we struggle with this — do you analyze just what he’s said?” asks Urban Institute Fellow Howard Gleckman, who authors the Tax Policy Center’s TaxVox blog. “Or do you assume that he’ll have these offsetting tax increases in his pocket?”
Because we can’t know for sure what will become of the unknowns in Romney’s fiscal plan, it exists simultaneously on both ends of the Keynesian scale. If the offsetting base-broadeners never materialize, and the spending cuts don’t happen as advertised, Romney’s plan amounts to a hugely stimulative tax cut.
“A large amount of stimulative tax cuts, and no contractionary spending cuts would suggest the true Keynesian in the race is Romney,” says University of Pennsylvania economist Justin Wolfers.
If, by contrast, his tax reforms are revenue neutral, as he claims they will be, and he pairs them with massive cuts to government spending, he’s proposing an austerity program that would make European elites gleam with pride.
“If you want to analyze [only] what you know, then it’s true that Romney’s budget is far more stimulative than Obama’s budget,” Gleckman says. If you take Romney at his word, though, “what you’re left with is a revenue neutral tax platform which is neither stimulative nor austere, and big spending cuts, largely undescribed, which would presumably reduce economic growth.”
Obama’s budget is much more specific. It calls for reducing deficits over the next 10 years with a mix of higher taxes and spending cuts — a less radical mix of policies, but a real call for budget consolidation.
“Obama certainly has written down a plan that leads to smaller deficits in the long run,” Wolfers says. “If they stick to it, then, yes, he has a modest claim to be more austere — or fiscally responsible is the more polite term.”
Gleckman takes modest exception to the use of the term austerity. “You’ve got to be careful about that word austerity. It doesn’t mean less stimulative, it actually means austerity,” he says. “Obama is clearly not doing that. If you look at the CBO analysis of Obama’s budget, relative to their baseline in 2013, Obama would add $365 billion to the budget deficit for fiscal year 2013. In no year does he add less that $270 billion. You can’t really say that’s austerity. It is certainly very modestly stimulative, or if you’re an Obama supporter you would say more prudent.”
Regardless, at a macro-level it exists somewhere in the middle of the hyper-austere and hyper-stimulative interpretations of Romney’s plan. That’s makes conservatives skeptical.
“You can write anything you want in the President’s budget,” says conservative economist Douglas Holtz-Eakin. “If a Keynesain can’t be happy with the hand over fist spending of President Obama, they’re never going to be happy.”
Burrow deeper and the comparison gets thornier.
Obama’s budget contains much more federal spending than Romney’s, and even if you assume Romney would enact stimulative tax cuts without offsetting them completely, Obama’s measures provide more efficient stimulus.
“If our deficit is entirely because of huge tax cuts for rich people, then you don’t get quite as much economic boost out of it,” says Michael Linden, director of tax and budget policy at the liberal Center for American Progress.
That’s for two reasons, Wolfer’s explains. First, a dollar spent is a dollar spent, whereas a dollar in tax cuts can idle in a bank account. Second, wealthy beneficiaries of tax cuts are less likely to spend the money they save.
“Reducing the size of government would actually contract the economy,” Wolfers adds.
If you take Romney at his word, this is exactly what he’s advertising. And that’s a much more austere plan than Obama’s
“I guess I would say — you’re conflating austerity with fiscal responsibility,” Linden says. “If you define austerity as immediate short-term fiscal contraction, by endorsing the Ryan plan, Romney’s far more austere than the Obama budget. In the near-term I think it’s pretty clear that Romney’s far-more austere. In the long-run I think Obama’s more fiscally responsible.”