Romney vs Obama on the Economy

Budget
No matter how one looks at it, the 2012 presidential election will be a referendum on the economic policies of the Obama administration. The sub-prime mortgage fiasco of 2007/08 and the resulting recession, which wiped off almost $17 trillion from the wealth of the citizenry, played a prominent part in Senator John McCain’s defeat to President Obama in the 2008 presidential election. The aftereffects of that recession are now threatening to derail the Obama presidency. Things are definitely not looking particularly rosy for the Democrats at the moment, and the tepid job market is certainly not helping.

President Obama is being personally held responsible by a majority of the conservative Republican base for the spiraling federal debt, the unchecked federal deficit of the past three years and the general sense of malaise pervading the psyche of the nation.

However, despite unceasing pressure from GOP lawmakers, President Obama remains unyielding on one of the bulwarks of his 2008 presidential election campaign, which is also one of the principal tenets of his socioeconomic policy – Social Security, along with Medicare and Medicaid.

A myriad set of numbers have been traded across the political spectrum on the size of unfunded entitlement liabilities, with some estimating the figure to be in excess of a hundred trillion dollars, highlighting the urgent need to either revamp or dismantle entitlement programs to fix the budget and in the process, salvage the long-term future of the nation.

However, the Obama administration, with the declared aim of repealing the tax cuts of former President Bush and bringing the federal tax rates back to the 40% level of the Clinton era, is confident that the additional tax revenue and amendments of entitlement programs benefits will restore the fiscal viability of the social net mechanism.

Less one forget, this is a central part of President Obama’s manifesto in the 2008 campaign.

"I will reform our tax code so that it is simple, fair, and advances opportunity, instead of distorting the market by advancing the agenda of some lobbyist or oil company. And I'll use the money to help pay for a middle class tax cut that will provide $1000 dollars of relief… We'll also eliminate income taxes for any retiree making less than $50,000 per year. Because every senior, every senior, deserves to live out their life in dignity and respect… I will never waver in my commitment to protect that basic promise as president. We will not privatize Social Security. We will not raise the retirement age and we will save Social Security for future generations by asking the wealthiest Americans to pay their fair share”

Blueprint For Change: Fiscal, Barack Obama’s Campaign Manifesto for the 2008 Election

The key requirement towards a short-term fix for our budget lies with reducing unemployment. Halving of the unemployment rate would see the nation receiving a gross injection of almost $400 billion annually into the economy from direct wages and reduced support costs. The Obama administration claims that they are well on their way towards achieving that, pointing at the recovery of employment figures as a result of the $787 billion American Recovery and Reinvestment Act of 2009 stimulus spending beginning from February 2009.

Opinions are sharply divided along partisan lines, with legislators trading blows almost daily in the capitol and on the national media.

Deficit and Debts

President Barack Obama has presided over the largest federal budget deficit in the nation’s history, and the federal debt in turn, has skyrocketed into stratospheric levels.

His first full budget, for the period between October 1, 2009 to September 30 2010, showed a net operating deficit of $1.294 trillion. Between Jan 2009 to June 2011, the federal debt grew from $10.6 trillion to $14.3 trillion, an increase of $3.7 trillion. The White House has projected that the federal deficit will peak in 2011, featuring a record breaking $1.645 trillion, before leveling off to sub-$700 billion position starting from 2014.

So how does President Obama reconcile these numbers with the pledge he made in his 2011 State of the Union Address?

“Now the final critical step in winning the future is to make sure that we aren't buried in a mountain of debt. We are living with a legacy of deficit spending that began almost a decade ago. And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people's pockets. But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in. That is not sustainable. Every day families sacrifice to live within their means. They deserve a government that does the same.

So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. Now this would reduce the deficit by more than four hundred billion dollars over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was President. This freeze will require painful cuts. Already, we've frozen the salaries of hard working federal employees for the next two years. I've proposed cuts to things I care deeply about, like community action programs.

Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without”

President Obama’s State of the Union Address

The Obama administration claims that the combination of stimulus, bailouts, lending and other measures adopted by the government effectively prevented a catastrophic economic meltdown that could’ve rivaled the Great Depression itself.

The Congressional Budget Office (CBO) partially supports the claim. In their Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From July 2010 Through September 2010 report, the CBO opines that:

• They raised real (inflation-adjusted) gross domestic product (GDP) by between 1.4 percent and
• 4.1 percent,
• Lowered the unemployment rate by between 0.8 percentage points and 2.0 percentage points,
• Increased the number of people employed by between 1.4 million and 3.6 million
• Increased the number of full-time-equivalent jobs by 2.0 million to 5.2 million

The administration claims were supported further by a report co-written by Mark Zandi, the respected non-partisan Chief Economist of Moody, and former Federal Reserve Vice-Chairman, Alan Blinder.

"The U.S. government’s response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multifaceted and bipartisan, involving the Federal Reserve, Congress, and two administrations. Yet almost every one of these policy initiatives remain controversial to this day, with critics calling them misguided, ineffective or both. The debate over these policies is crucial because, with the economy still weak, more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed’s consideration of further easing.
In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation… While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective,”

July 27, 2010, How the Great Recession Was Brought to an End (Zandi and Blinder).

Critics, however, charge that the report’s findings were flawed as it was based entirely on Zandi’s econometric modeling. Furthermore, the report was not submitted for peer-review with any scholarly journal, casting further doubts on its methodology and conclusions. Some even contend that the piece was merely a piece of political propaganda.

Policy

Liberal. Socialist. Left Wing. Obamanomics.
These are some of the more prevalent expressions used to describe President Obama. However, on matters concerning the economy at least, his actual philosophy might raise a few eyebrows. In his 2006 bestseller, The Audacity of Hope, Obama remarkably revealed streaks of Reaganomics in his economic perspective. In page 92 of the book, Obama confides,

“In his rhetoric, Reagan tended to exaggerate the degree to which the welfare state had grown over the previous twenty-five years. At its peak, the federal budget as a total share of the U.S. economy remained far below the comparable figures in Western Europe, even when you factored in the enormous U.S. defense budget. Still, the conservative revolution that Reagan helped usher in gained traction because Reagan’s central insight—that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing the pie—contained a good deal of truth. Just as too many corporate managers, shielded from competition, had stopped delivering value, too many government bureaucracies had stopped asking whether their shareholders (the American taxpayer) and their consumers (the users of government services) were getting their money’s worth.”

His understanding and acceptance of the open market is further illustrated in an interview with the New York Times on August 20, 2008, where economist David Leonhardt reveals,

“… he (Obama) didn’t think President Bush deserved all that much blame for the stagnant incomes of the current decade. Income growth for most families began to slow in the 1970s, and the causes of the great pay slowdown were complex. Obama didn’t name them all, but a decent list would look something like this: new technologies that have made some blue-collar work obsolete; a slowing in the nation’s educational attainment; the shriveling of labor unions; the increase in one-parent families, which are far less economically secure; and the rise of other countries that have huge low-wage work forces.

Obama blamed the current administration for {, he said, was} aggravating these trends with the tax code. To a large extent, Obama’s own economic agenda revolves around reversing Bush’s tax policies and then going a bit further in the other direction. Here, more than in his regulatory approach, Obama stands on the left side of the Democratic Party, but not exactly in the traditional tax-and-spend ways.”

To complicate matters further, Obama appointed Austan Goolsbee, Professor of Economics from the University of Chicago, to head his Council of Economic Advisors. The Booth School of Business of the University of Chicago, which is one of the finest economics departments in the world and the force behind the neoclassical Chicago school of economics, is famous for its rejection of the Keynesian macroeconomic theory, which has long been synonymous with the Democratic Party. Obama’s decade-long tenure there as a Constitutional Lecturer would have provided the perfect setting in exposing him to the fundamentals of the neoclassical economic slant of the faculty.

The icing on the cake comes in the form of the Democratic Party economic point-man - Director of the National Economic Council, Senior Fellow at the influential Council of Foreign Relations and the ex- National Economic Adviser of former President Bill Clinton - the progressive, liberal heavyweight, Gene Sperling.

At a glance, Obama looks to have surrounded himself with an array of conflicting economic ideology, and he appears to be the often talked about, but rarely found, progressive-conservative; a believer in the free-market forces, tempered by a liberal social outlook. However, this blend of controlled expansion anchored on a solid center has not been all too evident in his 30 months in office, despite the occasional glimpses. We will revisit this issue once again next year, as the rhetoric dies down and his maturing policy reveals itself more clearly.

“Today, I’m introducing a plan consisting of 59 specific proposals — including 10 concrete actions I will take on my first day in office — to turn around America’s economy. Each proposal is rooted in the conservative premise that government itself cannot create jobs.”