In the ongoing debate between which party or candidate has the correct vision for the economic future of the United States, the next few blogs will be an analysis of the policies from each candidate's website (as liked below) and the realist view of whether or not that policy will in fact create jobs. As a point of reference, it is difficult at best to say with any sincerity that government has the ability to create jobs outside of its own bureaucracy. With that in mind, the question becomes, are these promised jobs being created by the public sector in reaction to the policies, or is it just the engine of capitalism in its ebb and flow, creating new opportunities?
The first economic plan is from Governor Mitt Romney (R), and is developed with four main economic pillars. These are to stop runaway federal spending and debt; reform the nation's tax code to increase growth and job creation; reform entitlement programs to ensure their viability; and make growth and cost-benefit analysis important features of regulation. Each pillar has sub-areas which will be discussed as well.
Stop Runaway Federal Spending And Debt
In order to achieve this goal, Governor Romney has stated that federal spending should be reduced as a share of GDP to 20% (its pre-economic crisis average) by 2016. Currently, federal spending by the Federal government is 22.4% of the GDP (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/13msr.pdf) page 29. The question then becomes, will lowering spending by 2.4% in four years really reel in runaway federal spending and debt? From a purely realistic point of view, this lowering of spending will not have the desired outcome, and quite certainly would have no impact on possible employment and job creation. It also does not take into account any changes in the economy. To claim spending cuts as an economic boon is idealistic, as that idea places economic growth in a vacuum, rather than the economy being fluid and having the ability to ebb and flow. Also, the assumption is that the GDP will stay static in that four year time frame. If the idea is to cap spending at 20% of GDP, then one must take into account not only economic downturns, but also economic growth. As an example, if the GDP were to grow to 1 million dollars, then the federal government could expect to spend $200,000. In the next year, the GDP grew to 5 million dollars, then the federal government could expect to spend $1,000,000. In that one year swing, the federal government would be spending more than the prior year's GDP. This is necessary to understand in order to see how real dollars would be spent given this cap. In my analysis, it is unsustainable to link federal spending to the GDP, as the society ages and new employees enter the market, the GDP will remain in flux. Given this fact, the expectation of those who receive a federal benefit (Social Security, Medicare, etc.) is not, nor should it be, related to the GDP at all. Instead, the question should become, what is acceptable to cut or limit in federal spending in light of the expectations of the citizens.
Reform The Nation’s Tax Code To Increase Growth And Job Creation
The Romney plan states the desire to "Reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains. Reduce the corporate income tax rate – the highest in the world – to 25 percent." This policy does not address the fundamental issue. A majority of corporations that are in business in the United States are in multi-national entities, and may not be based in the U.S. If they are not based there, are they subject to the U.S. tax code? Let us address the latter. Of the corporations that operate in the United States, just how much in taxes do they pay. According to the GAO, "eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions." (http://www.gao.gov/products/GAO-09-157). So, if that is what is happening, how will reducing the corporate income tax rate increase job creation. In light of the current corporate tax rate (35%), corporations still manage to come to the United States, because it is an economic superpower, regardless of what the current candidate states. In fact, "the worldwide operations of U.S. multinationals are highly concentrated in America in their U.S. parents, not abroad in their foreign affiliates. The idea that U.S. multinationals have somehow “abandoned” the United States is not supported by the facts. They maintain a large presence in America relative to the overall U.S. economy and relative to the size of their foreign affiliates." (http://www.uscib.org/docs/foundation_multinationals_update.pdf). And so, how, exactly will this increase job creation? It will not. Plain and simple. If the desire is to reform the tax code, then the loopholes that exist that allow corporations to pay less that they are required will have to be closed. If that is done, then the market will dictate job growth, as those corporations that are competitive would continue to be so.
While each of these policy positions may seem to come across to people as being attainable, a further look shows that perhaps they are from an idealistic viewpoint. It would be ideal, I agree, to be able to limit federal spending to a percentage of the GDP. However, realistically, this is untenable, as it does not take into account any variances in the economy. I find this highly problematic, as a businessman should have the acumen to realize that there is not one answer that fits economic growth. A more realist view would either cap the federal spending at a level commensurate with the census (that is, paying for the services rendered based on the actual population of the country), or create cuts to federal spending as it relates to foreign expenditures, and use any available funds to ensure domestic solvency.
The next blog will address the final two pillars of the Romney plan and analyze them as well. From there, I will discuss the economic plan being put forth by the President.
Links:
http://www.mittromney.com/JobsPlan
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/13msr.pdf
http://www.gao.gov/products/GAO-09-157
http://www.uscib.org/docs/foundation_multinationals_update.pdf
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