Is Mitt Romney a closet Keynesian?

By Anatole Kaletsky
October 10, 2012

John Maynard Keynes said back in 1936 that “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Keynes himself is now a seemingly defunct economist, but his influence connects the two most important events of the week and perhaps of the year: the sudden reversal of fortunes in the U.S. election and the powerful critique of overzealous fiscal austerity produced by the International Monetary Fund.

What connects these two events is an economic question that almost nobody dares to raise publicly, but that now seems destined to dominate the U.S. election and that hung over the IMF annual meeting in Tokyo this week: Do deficits really matter? Or, to restate the issue more precisely: Are government efforts to cut budget deficits counterproductive in conditions of zero interest rates when fiscal austerity suppresses economic growth?

This conclusion is strongly suggested by the IMF’s “World Economic Outlook” produced for the annual meeting. The WEO presented six detailed case studies, starting with Britain from 1918 to 1939, of economies that tried to reduce large public debt burdens with various policy mixes in the past 80 years. It concluded that two conditions were essential for success: very low interest rates and adequate rates of economic growth. If fiscal austerity produces high unemployment and economic stagnation, it is doomed to failure, causing the government’s debt burden to go up instead of down. After examining this historical evidence, the IMF report hinted strongly that at least two major economies were now caught in self-defeating debt spirals: Spain, where the debt trap is created by political pressures from the euro zone, and Britain, where the futile austerity is entirely self-imposed.

The British example is particularly striking. While the British government has implemented bigger tax increases and spending cuts than any other major economy apart from Spain (equivalent to 4.3 percent of GDP since 2009), it has suffered a double-dip recession, missed all its fiscal targets and seen its national debt nearly double from 46 percent to 84 percent of GDP since 2009. Meanwhile, the U.S., which started with a bigger deficit and debt than Britain in 2009 and has made very little effort to tighten fiscal policy since then, has seen its net national debt grow considerably more slowly, from 54 percent to 84 percent of GDP. The better U.S. fiscal performance, despite far less fiscal “effort,” has been due entirely to faster economic growth.

Which brings me to the presidential debate last week. Mitt Romney won the debate largely by denying that his plan for a 20 percent tax cut would increase the U.S. budget deficit. Pressed to explain where the money for his tax cut would come from, Romney spoke of eliminating “deductions and exemptions [so] we keep taking in the same money when you also account for growth.”

But in interviews since the debate, Romney has promised not to touch any of the loopholes big enough to compensate for a 20 percent reduction in tax rates – mortgage interest, charitable contributions and healthcare. That has led most analysts to conclude either that Romney is not serious about cutting taxes or (more probably) that he is not serious about fiscal arithmetic and will allow deficits to explode.

There is, however, a third possibility. Perhaps large tax cuts would boost the U.S. economy so strongly that the lost revenues would quickly be restored through rapid income growth? In the Denver debate, Romney focused on this growth theme: “The revenue I get is by more people working, getting higher pay, paying more taxes. That’s how we get growth and how we balance the budget.”

Many Democrats instinctively reject the possibility of self-financing tax cuts, accusing Romney of “magical thinking” and likening his approach to Reagan’s trickle-down economics. But let us not forget that Reaganomics proved remarkably successful, generating average growth of 4.7 percent annually for six years. And neither should Democrats forget that self-financing fiscal stimulus, whether through tax cuts or public spending, is the essence of Keynesian economics.

Was Reaganomics successful because of Keynesian demand stimulus or conservative supply-side economics? Nobody can say for certain, and most likely there were benefits from both incentive and demand effects. But either way, Reagan was hailed as a national savior. Romney would be equally lauded if his tax cuts delivered strong economic growth, regardless of whether budget deficits initially expand, as they certainly did under Reagan.

This statement may sound like “deficit denial” – and in a sense it is – but the IMF has now produced persuasive evidence to back it up. This week’s WEO reports a new study of fiscal changes in 28 countries since the Lehman crisis, which shows fiscal policy working in much the way that Keynes predicted, but with two to three times more impact on GDP than previously supposed. The very high fiscal multipliers identified by the IMF suggest that big tax cuts could indeed be largely self-financing, as Romney hopes.

That fiscal policy is now much more powerful than in the past is hardly surprising. The world is again stuck in a liquidity trap, in which monetary policy is ineffective, much as it was in the 1930s, when Keynes developed his ideas on fiscal stimulus. How ironic that it now takes a conservative such as Romney to stop panicking about deficits and propose a full-scale Keynesian policy for growth.

PHOTO: Stacks of U.S. hundred-dollar bills are displayed during a presentation to the media in Mexico City, November 22, 2011. REUTERS/Bernardo Montoya

10 comments

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What is being ignored in this article is the greatly heightened extent to which the wealth being produced in our economy is being captured at the top and not spread across the working population. When the worker produces more, for the most part he does not earn more, so simple economic formulas or theories which were useful and descriptive in the past may not be so now. The S&P Index has almost doubled since early 2009, but the middle class has continued to be hollowed out.

Posted by bcrawf | Report as abusive

Are you serious? Where did you get your degree in economics? I would ask for my money back.

The least you can do is stop trying to peddle your twisted version of economics to those who understand it — reading your BS hurts my brain.

Clearly, you do not understand Keynesian economics — put very simply, it is designed to be economic triage for an economy that has collapsed due to unfettered capitalism, mainly because capitalism without strict rules and regulations is highly unstable (i.e. certainly not “self-correcting” as the wealthy class and their sycophants would have you believe), but NOT as a permanent solution!

Also, if you understood Keynesian economics you would know that we are in what Keynes called a “liquidity trap”, a fact no one wants to mention.

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From Wikipedia (solely for easy access to those who don’t understand what the term means, evidently including you):

“A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth.

A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war.

Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.

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I would like to make one addition to the above definition. The wealthy are hoarding cash because that is what the wealthy class normally does (history is my proof). And it has now reached such a global phenomenon that there is little cash remaining for anyone else, which drives up prices, drives down demand and increases profits for the wealthy class. Soon the global economy will collapse due to a lack of liquidity. Printing money is NOT a solution, because it decreases the value of the cash in circulation, which causes hyperinflation. DUH!

Apparently not even Mr. Bernanke seems to understand what a liquidity trap is either, since he is attempting to re-inflate the US economy by printing money when there is clearly no demand.

If you want to understand the inevitable results of what Mr. Bernanke is doing, I suggest you take a look at the definition of “hyperinflation”.

There is so much else wrong with what you say that I simply cannot address it in this venue. For example, “Do deficits really matter?” is so stupid a comment that it can’t be answered at all.

PLEASE stop writing about things you know absolutely nothing about!

Posted by Gordon2352 | Report as abusive

I forgot to mention that perhaps the most egregious error you make is contained in this statement:

“Perhaps large tax cuts would boost the U.S. economy so strongly that the lost revenues would quickly be restored through rapid income growth?

In the Denver debate, Romney focused on this growth theme: “The revenue I get is by more people working, getting higher pay, paying more taxes. That’s how we get growth and how we balance the budget.”

Many Democrats instinctively reject the possibility of self-financing tax cuts, accusing Romney of “magical thinking” and likening his approach to Reagan’s trickle-down economics.

But let us not forget that Reaganomics proved remarkably successful, generating average growth of 4.7 percent annually for six years.

And neither should Democrats forget that self-financing fiscal stimulus, whether through tax cuts or public spending, is the essence of Keynesian economics.”

——————————————————

Let me say this about that: TAX CUTS TO THE WEALTHY NEVER, NEVER, NEVER PRODUCE JOBS.

In fact, tax cuts for the wealthy result in exactly the opposite, because of their propensity to hoard cash.

The specific problem with what Romney is saying is that to give the US wealthy more money is to finance their capital investments in lower cost, less regulatory third world countries. This is pure BS on the face of it, since it is a matter of public record Romney with all his wealth has NEVER produced jobs in the US. He has, in fact, gone out of his way to destroy US jobs. And most of his income is derived from offshore tax havens, which proves the wealthy do not “spread the wealth” with their ever-growing largess.

THAT does NOT mean jobs in the US.

THAT is our problem right now. We are currently financing the wealthy class on their greatest profit binge in history. In fact, it is this massive investment in the third world countries for the past 30+ years that is the root cause of the problem.

If we give them more money by reducing taxes they will continue to strip this country of everything we have simply to gain more wealth for themselves.

The solution to this insanity is to REVERSE ALL THE TAX, FREE TRADE AND BANKING REGULATIONS FOR THE LAST 30+ YEARS THAT HAVE PERMITTED TO WEALTHY CLASS TO LOOT THIS COUNTRY.

And NO there is no such thing as “self-financing fiscal stimulus, whether through tax cuts or public spending” — tax cuts don’t translate into “fiscal stimulus” for the reasons I stated above, and “public spending” is simply transfer payments that produce no revenue, which can ONLY be gained by exports (except we have no manufacturing base left anymore) — and it is certainly NOT “the essence of Keynesian economics”.

Posted by Gordon2352 | Report as abusive

Romney is a pure capitalist. If you look at all his work throughout his life, it’s been about enriching himself at the expense of everything and everyone. Private Equity does not create jobs, it destroys them by downsizing, stripping and outsourcing jobs. Romney looks for ways to pay the least taxes possible, and he even banks his money overseas where he can earn the best returns and pay the least taxes. Romney is not of one economic persuasion or another. If he knew he’d make more money by being a communist, then Romney is the type that would become a communist without delay. In fact, a year ago Romney was fervently on the right-wing, anti-abortion, pro-Romneycare (Obamacare) etc. Now he’s moved so far to the left, just this week he’s anti-Obamacare, won’t change abortion laws, etc. Romney is a closet flip-flopper!

Posted by Caspary | Report as abusive

We should highlight the corporate fiscal policy vs. the individual.

Closing big corporate loopholes like full offshore outsourcing deductions and raising the 15% corporate federal tax bracket from $50k to $250K would just help create more domestic jobs without raising the deficit.

Posted by robb1 | Report as abusive

under reagan/bush1 the % deficit to gdp skyrocketed from 32% to 66%, and in ’87 produced a 500+ point tumble in the dow once everyone woke up to realize the “good economy” under reagan was a total sham and completely financed by huge deficit spending. tax cuts to the wealthy is the primary gop goal, not improving the economy through tax cuts. same goal under bush2 (with a 7000+ point slide in the dow) and will also be the same goal under romney if elected. the rest of the BS is, well, just BS.

Posted by jcfl | Report as abusive

> “Do deficits really matter?”
— I’m glad you’re asking this question! The leaders of some countries (like Argentina) seem to believe deficits don’t matter.

Should we all lift each other up by the seat of each other’s pants? If we try this, then will we all fly in defiance of gravity? Obama has been taxing America at 15% of GDP, and spending at 24% of GDP; yet he talks only of spending more over the next four years. How sustainable is this?
IN the long-term, If we try to make water flow uphill and try to get energy out of it at the same time, water will simply find an alternative way to flow downhill. Similarly, Obama’s economic policy is a Keynesian dead-end… In the long term, it will only tend to support the hoarding of gold and the replacement of the USD-based system of world trade with something else (we’ve already seen proposals to invoice in gold, and Utah has even made gold legal tender!)
http://www.goldalert.com/2011/03/utah-ap proves-gold-silver-as-legal-tender/

We’ve got to try something new, and since the root cause of the problem is a LIQUIDITY & CONFIDENCE crisis, it may now require some fresh faces at the top to make this work.

> “Reaganomics proved remarkably successful”
— You’re talking about “Reaganomics” in your article but Romney said in the debate that he’s proposing something different to everything that’s been tried before; which is a good thing because Reaganomics failed last time it was tried!
http://www.slyman.org/blog/2011/07/reaga nomics-and-prudent-taxation/
Until you factor in the economic warfare that Reagan was running against the Soviet Union and the peace dividends that followed the Soviet Union’s collapse (which resulted from Reagan’s policies and Soviet paranoia), it’s hard to see “Reaganomics” in a positive light (evaluated as a purely economic policy, it failed). But if you say that under different circumstances it would have made economic sense as well (say, in a severe LIQUIDITY & CONFIDENCE crisis like what we have now); then I can understand and potentially support that point of view. Again, Romney claimed recently that he wasn’t merely planning a re-run of old Reagan era policies — so your article may be partly missing the point.

Cutting tax rates while eliminating deductions and reducing the structural deficit to manageable levels via GDP/3BL-prioritized pruning of spending programs (Romney’s policy) is certainly a more viable plan than wasting $-trillions more on a bunch of bankrupt taxpayer-funded boondoggle patronage projects to keep Democratic Party donors/constituents out of the mire with no overall gain (Obama’s plan, if we go by his record of the last four years or if you heard him speak during the last presidential debate where his response to the crisis was to list loads more incalculably expensive projects that he wants to run in the next four years — perhaps the reason why Obama’s policies have failed is more to do with his specific spending priorities than the actual principle of spending during a severe downturn). Romney’s track-record and economic plan is infinitely more credible than Obama’s.

Will someone with journalistic clout please ask the Romney campaign which deductions he would eliminate? PARTICULARLY: Is Romney going to address those corporate tax deductions (indefinite postponements of tax) that David Cay Johnston has been writing about, which allow large companies with clever accountants like GE to pay near-zero tax rates for years on end whilst operating at record profits? This could reduce the deficit by a few percent, at a stroke…

Posted by matthewslyman | Report as abusive

Romney is a closet failure- he has only succeeded in enriching himself, but society has lost out through downsizing of the companies Bain managed, outsourcing jobs to China and also the fact that Romney pays very little tax. Yes, a complete closet failure.

Posted by Caspary | Report as abusive

@Caspary: Would society have lost out MORE through an EVEN BIGGER DOWSIZING (a.k.a. “bankruptcy”) that would inevitably have taken place if Bain had not taken the hard decisions and done what they had to do to make these companies profitable? Why do you think these companies had to be sold to Bain at a knock-down price anyway? They weren’t exactly hot-beds of profitability before going into their care… Most of those businesses were on a dead-end track, due to living in a CHANGING WORLD.

Character-assassination attempts aside; with this experience and his time in politics/ as a public servant; no-one knows better than Romney how to fix this system, stop the jobs bleeding to China at the expense of the USA, and rebalance the American economy.

Posted by matthewslyman | Report as abusive

Possibly you have certainly not planned to do so, although I believe you’ve got managed to convey your state of mind that many everyone is with. Your feeling regarding needing to guide, but not knowing how as well as where, is usually some thing many of us intend as a result of.