The Debate on the American Economy - The Lines are Drawn

The Candidates Speak in Ohio

Yesterday, President Obama and Republican presidential hopeful Mitt Romney gave speeches in the crucial swing state of Ohio outlining two distinct economic philosophies. Obama’s speech, billed as a reframing of his economic argument, characterized the election as a choice between two fundamentally different visions on how to grow the economy, create jobs, and reduce the deficit. Romney’s speech rehashed his overarching campaign rhetoric, that Obama is hostile to business and that the economy’s meager recovery demonstrates the president’s inability to effectively manage the economy. This election, as both candidates recognize, hinges on which candidate voters think can best lead on the economy. Voters must realize that Republicans are offering an anachronistic economic approach, while Democrats offer one calibrated to meet modern economic challenges. 

A Struggling Economy

Unemployment remains above 8%. Demand for goods and services is weak, and the long term unemployed account for nearly half of our unemployed population. GDP grew only 2.2% in the first quarter of 2012, compared with a historical average of 3.1%. A Federal Reserve Report from earlier this week showed a huge drop in median American wealth. 

These facts indicate short-term hardships for many Americans. But they also point toward long term obstacles to prosperity. NDN has produced a wealth of research on structural shifts in the economy away from “things” toward “ideas.” Evidence strongly suggests that our workforce is not prepared to succeed in this changing business environment.  In 2011, the CBO reported that approximately one half of one percentage point of unemployment above 5% is attributable to a “skills mismatch,” that is, our workers increasingly lack the skills that employers look for. That amounts to 14% of unemployment above the natural rate and roughly 700,000 unemployed workers. 

Further, the CBO identified “skills erosion” as another contributor to high unemployment. Skills erosion occurs during prolonged periods of unemployment when workers lose the chance to build skills on the job. The CBO attributed one quarter of a percentage point of unemployment above the natural rate to this skills erosion, but stated this share will grow. With nearly 3 million people out of work for more than six months, this skills erosion has significant implications for the US’s economic future. Long term economic success is contingent on a workforce able to perform in a rapidly changing, hi-tech workplace.   

Two Fundamentally Different Visions

As Obama made abundantly clear during his Ohio speech, the candidates offer two distinct visions for how to put our economy back on track. These two visions embody two different economic philosophies: one that places its full faith in the private sector and another that believes in the right combination of public and private investments. 

The Republicans have been very clear on how they intend to grow the economy. Representative Paul Ryan’s budget, which calls for massive spending and tax cuts, is a manifestation of this philosophy. According to the Tax Policy Center, the Ryan budget would result in nearly $10 trillion in tax cuts. To even begin making up this lost revenue, the plan slashes government spending on everything from research to social programs for the poor. And even then, Ryan still needs to make up $700 billion in lost revenue. It is thus very unclear whether the plan could actually reduce deficits. Further, the Tax Policy Center finds that Romney’s tax plan would actually end up raising rates for the poorest Americans. Republicans, however, believe that these massive spending cuts, coupled with tax breaks for the wealthy, will unleash the private sector and create jobs. 

Obama offers a very different economic philosophy. The President plans to cut the deficit by $4 trillion over the next decade with discretionary spending cuts and tax raises on wealthy Americans. The American Jobs Act, the centerpiece of Obama’s economic strategy, will put millions of people back to work by investing in infrastructure and clean energy and rewarding businesses for creating jobs. It seeks to support the middle class by helping responsible homeowners refinance their mortgages at lower rates. 

An important aspect of Obama’s budget is its expansion of research funding. A 2005 report from the National Bureau of Economic Research shows that since the late 1980s, research conducted at universities has played an increasingly important role in industrial innovation. The report, which looks at patent data, shows that a significant number of industrial patents originated in labs in America’s eminent research universities – whether they were based off university research or the product of industrial researchers with advanced degrees. Funding to universities is therefore crucial to cultivating both the ideas and the human capital that make America a leader in innovation. The philosophy is simple: create near term jobs, grow the middle class and make prudent investments for the long-term. 

Adopting the Republican approach would be calamitous for America’s economic future. It fails to make the necessary investments this country needs, not to mention the impact it will have on demand by cutting important social programs. It backs off of education and research funding during a time when we need it the most. Not only is the Ryan budget unsympathetic to the most disadvantaged Americans, it makes little economic sense amid deep structural shifts in our global economy. It operates under the assumption that, if left to its own devices, the free market will address the structural challenges I mentioned above. It therefore leaves the fate of the middle class to a fickle market, The Obama economic plan on the other hand, while not focused immediately on deficit reduction, makes important investments that will induce growth and job creation and reduce debt in the long-term by preparing the American economy for the 21st century.   

The Myth of the Anti-Business, Spending-Crazed Obama Administration 

Romney’s characterization of the Obama administration as inimical to the private sector is inaccurate. Since Obama took office, we have seen the highest corporate profits in history and record breaking IPOs. He recapitalized our banks and bailed out the auto industry, which today is stronger than it was before the recession. Under Obama’s leadership, the private sector has created more jobs in the past 27 months – 4.3 million – than it had during the seven years preceding the recession. Obama cut the payroll tax to reduce the cost burden on employers. He signed into law the Small Business Jobs Act of 2010, which provides over $12 billion in lending support to small businesses across the country. By most counts, Obama has been a friend to businesses. 

Moreover, Republican accusations that Obama is a profligate spender are not supported by the data. When Obama took office in 2009, government expenditures as a percentage of GDP grew from 32.6 to 37.1. But most of this increase was due to the Troubled Asset Relief Program (TARP), which bailed out the banks, and the stimulus bill, both of which ensured that our recession didn’t turn into a depression and which saw private sector growth months after their implementation. From 2009 onward, spending as a percentage of GDP has fallen gradually too 35.4. Much of this continued expenditure comes from higher Medicare costs and income support programs like unemployment insurance. On average, spending has increased by 2.9 percent annually, compared with 3.4 percent under Bush and an overall average of 2.7 percent since Ronald Reagan assumed office in 1981. 

A Clear Choice 

The President is correct in identifying this election as a choice between two economic visions. One purports to “unshackle” the private sector through massive spending and tax cuts. Given deep structural changes in the global economy, this philosophy is outdated. The other makes prudent public investments in our workforce, our infrastructure, and the sources of American innovation to tackle short term ills and position America for long term success. This plan induces more growth, which will lead to more jobs and less debt. The consequences of a Republican win: les growth, less jobs, more debt. The choice is clear, and it is up to voters to make the right one.