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Economists Agree Romney’s Plan Would Spark a New Recession

Economists Agree Romney’s Plan Would Spark a New Recession

Austerity and Tax Cuts for the Rich Would Cripple Economic Growth

Sarah Ayres and Heather Boushey detail the reasons why so many economists agree that Republican presidential candidate Mitt Romney’s policies would be devastating for our economy.

Former Massachusetts Gov. Mitt Romney (R) speaks to delegates at the New Hampshire Republican Convention in Concord, New Hampshire, Saturday, September 25, 2010. (AP/Mary Schwalm)
Former Massachusetts Gov. Mitt Romney (R) speaks to delegates at the New Hampshire Republican Convention in Concord, New Hampshire, Saturday, September 25, 2010. (AP/Mary Schwalm)

The private sector of the U.S. economy has added jobs for the past 27 months in a row, corporate profits have hit an all-time high, and the U.S. auto industry is back, with manufacturers consistently adding jobs for the longest period since the mid-1990s. Still, as President Barack Obama has said, “we are still not creating (jobs) as fast as we want.” And the biggest hurdle to swifter job creation is the embrace of austerity by Republicans in Congress who refuse to implement measures that would boost employment—a position supported by their presidential candidate, former Massachusetts Gov. Mitt Romney.

This austerity has real—negative—economic consequences. Increasingly, economists are pointing to austerity as a key reason for too-slow job creation. Despite considerable warnings from economic experts that government spending is critical to creating jobs, conservative leaders in Congress are inflicting these austerity programs on us at the federal, state, and local level. According to Yale economists Ben Polak and Peter Schott:

Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent.

Even though austerity is not good for the U.S. economy, this is exactly the economic policy promoted by Romney. His ideologically driven agenda would continue the failed supply-side policies of President George W. Bush by giving even more tax breaks to the rich—a policy that has not generated strong and sustained economic growth—while slashing investments in our middle class and America’s future competitiveness, such as education, public safety, basic research and development, and infrastructure upgrades. Romney’s plan for spending cuts is deliberately vague, but it is clear that it will require drastic cuts to programs that support middle-class families and support economic growth in order to fund tax cuts for the rich.

The House Republican budget developed by Rep. Paul Ryan (R-WI) would fund $3 trillion in tax breaks for the rich by ending guaranteed Medicare coverage for our elderly and slashing middle-class investments in education, infrastructure, and research. This no-growth budget provides a starting point for Romney’s economic plan, which then goes further down the path of austerity and will enact substantially deeper spending cuts. Romney does not specify how he would cut federal spending but he has promised to cut taxes while also capping federal spending and balancing the budget. In order to meet these constraints, his plan would require extraordinary cuts to federal programs.

The result would bring more austerity and less growth. According to an analysis by the Center on Budget and Policy Priorities, “by 2022, if the [federal] budget had to be balanced while taxes were cut,” which is Romney’s goal, “the proposals would require cutting entitlement and discretionary programs other than Social Security and core defense by more than half.” Specifically, the Center for Budget and Policy Priorities estimates that Romney’s proposals would deplete Medicare, Medicaid, and the Children’s Health Insurance Program by $3.4 trillion over the next 10 years. In addition, the nonpartisan think tank says that, under Romney’s plan, compensation payments for disabled veterans would be cut by one-quarter, and 13 million people struggling to put food on the table for their families would be kicked off the Supplemental Nutrition Assistance Program.

None of this would create jobs—never mind Romney’s claims that austerity for almost all of us will lead the wealthy to invest more in job creation. In fact, what it would do is undermine middle-class economic security, which in turn would lead to less spending and more and more families struggling to make ends meet. These kinds of cuts will hurt our economic future because we won’t be making the kinds of investments—in education or infrastructure—that will drive future growth.

We have already seen the effect austerity has on economic growth and it is not pretty. For the past two years, Republicans in Congress have inflicted an austerity regime that has held back job growth and slowed the economy. The Republican-led House of Representatives has repeatedly refused to consider measures like the American Jobs Act, which would spur growth and reduce unemployment by beefing up aggregate demand. By refusing to act, Congress has ensured that huge job losses in the public sector drag down overall employment levels.

Given the mounting evidence that such mandated spending cuts are hindering economic growth, it is no surprise that many economists are critical of Romney’s dramatic spending cuts. Here’s what an array of economists are saying:

  • Joel Prakken, chairman of economic forecasting firm Macroeconomic Advisers, asks the directly pertinent question: “Are all these things going to reduce the unemployment rate from eight to five in two years?” No, he says, because Gov. Romney’s ideas “would do little to stimulate aggregate demand in the short run. The reason that unemployment is as high as it is inadequate aggregate demand, not inadequate supply.”
  • Mark Hopkins, senior adviser at Moody’s Analytics, states plainly that “on net, all of [Romney’s] policies would do more harm in the short term. If we implemented all of his policies, it would push us deeper into recession and make the recovery slower.”
  • Nobel Prize-winning economist Joseph Stiglitz is more blunt: “The Romney plan is going to slow down the economy, worsen the jobs deficit, and significantly increase the likelihood of a recession.”
  • James Galbraith, business professor at the University of Texas at Austin, worries that “if applied, these fiscal measures would be utterly draconian. The attacks on Medicare and Social Security would throw large portions of the population into poverty.”

At the heart of economists’ worries is that Romney’s economic plan fails to address the single-biggest drag on the U.S. economy—a continued lack of aggregate demand. Federal Reserve Board Chairman Ben Bernanke recently explained, “while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor.” Most small-business owners agree: A Gallup survey of small businesses shows that 71 percent are not hiring because there isn’t enough demand to justify new hires. Big corporations are similarly reluctant to hire, instead choosing to sit on record levels of cash.

As many experts realize, investments in infrastructure, education, and other services can go a long way to help correct the shortfall in aggregate demand and give our economy a much-needed boost to spur growth while laying the foundation for long-term economic growth. One needs look no further than the American Recovery and Reinvestment Act of 2009. According to Congressional Budget Office Director Doug Elmendorf, the Recovery Act “created higher output and employment than would have occurred without it.” And four out of five economists surveyed by the University of Chicago’s Booth School of Business agree that employment at the end of 2010 was higher than it would have been without the Recovery Act.

The U.S. economy is not adding jobs quickly enough to bring back full employment anytime soon, and for that Americans can blame obstinate congressional Republicans intent on cutting spending instead of creating jobs. Now, despite clear evidence that their spending cuts are slowing economic growth, Mitt Romney has a plan that doubles down on austerity.

What the U.S. economy needs now is the exact opposite. Investing in education, infrastructure, and research and development will boost the economy in the short term and set the United States on a path to long-term competitiveness. As Nobel Prize-winning economist Paul Krugman explains, “Now is not the time to be laying off school teachers. Now is not the time to be doing public works, rehiring those school teachers, to get this economy moving again.” In other words, deficit reduction should wait until after we have given our economy the kick-start it needs today. Romney’s plan is the wrong prescription.

Heather Boushey is Senior Economist at the Center for American Progress Action Fund. Sarah Ayres is a Research Assistant on the Economic Policy team at CAP Action.

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Heather Boushey

Senior Fellow