Since Romney’s tax plan is “mathematically impossible”, a President Romney could end up a closet Keynesian like Reagan

Josh Barro has written a very comprehensive post at Bloomberg analsying Mitt Romney’s tax plan. His conclusion is that the plan is mathematically impossible, leading one to assume that a President Romney would have to break his pledge on the deficit, taxes or cut more. Which is likely to happen, if Romney gets to the White House. That’s a question many weren’t asking before two weeks ago. But Romney has made the US presidential race contestable. And so it is an important question in understanding likely outcomes on the fiscal cliff and other political questions that impact the US and global economy.

Here’s the key point from Barro’s article:

The Tax Policy Center paper that sparked this discussion found that Romney’s plan couldn’t work because his tax rate cuts would provide $86 billion more in tax relief to people making over $200,000 than Romney could recoup by eliminating tax expenditures for that group. That means his plan is necessarily a tax cut for the rich, so if Romney keeps his promise not to grow the deficit, he’ll have to raise taxes on the middle class.

This is a political issue of course and to be fully transparent, I will note that I am a political independent. So I don’t have a dog in this hunt. But, of course Barro is right. More left-leaning commentators are all over this.  For example, see William K. Black’s two excellent pieces at New Economic Perspectives on this issue. The first is “Ryan and Romney’s Secret Plan to Cut the Deficit – and why Romney opposes it“. The second related piece is “Romney is shocked to learn how the Fed creates money“. Let me concentrate on the first piece here.

Now, Bill’s logic in the first piece is good but the way he puts it is biased and very anti-Romney/Ryan. Bill notes that Ryan, as the architect of the recent budget proposals for the US House Republicans, has put forward plans that are not realistic in the least because they assume huge economic growth to make the deficit goals work. Moreover, Romney’s claims that he will not raise overall taxes but cut tax rates and make up the revenue difference by closing loopholes is not credible. Further, Romney plans to increase military spending as well. This all adds up to higher deficits, not lower deficits.

To my ears, this sounds very much like Ronald Reagan. Two years ago I wrote a post on exactly this issue called Ronald Reagan the Keynesian:

“If you recall, Ronald Reagan cut taxes massively during the double dip recession of 1980-82 in order to spur on the economy. This had the effect of increasing aggregate demand, so much so in fact that we had extreme financial excess by the mid-to-late 1980s, much of which was channelled into mergers and acquisition and junk bonds. A Keynesian President would see this as a sign of incipient inflation in an economy operating at near full employment. The Keynesian approach, therefore, would be to use fiscal policy as a control mechanism – raising taxes to choke off demand.

“And that’s exactly what Reagan did. So, was Ronald Reagan a libertarian who also appealed to populist anti-intellectuals and was pragmatic in economic decision-making and taxation? Or was he a closet Keynesian who presided over a large increase in government spending and used fiscal policy to steer the economy?”

If I would answer that question, I would say it doesn’t matter. The outcome is the same. And I believe that’s what we’re seeing here with Romney as well. Bill Black pointed to a May interview Romney conducted with Mark Halperin that is instructive here. The dialogue goes like this:

“Halperin: Why not in the first year, if you’re elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you’d like to see after four years in office? Why not do it more quickly?

Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression. So I’m not going to do that, of course.”

Bottom line: when push comes to shove Romney will not cut the deficit materially in the near-term because he knows that means recession. And because Romney is a Republican, his Republican congressman will give him leeway on this that they would not give Barack Obama. Republicans realize that a recession hurts incumbents. All of those people now pushing for the fiscal cliff would back off if the White House were occupied by Romney instead of Obama. Do I think that’s good or fair? No. It’s the reality though. This is politics and that’s how politics works. So I would expect a backloaded deficit reduction plan from Romney if he were to be President. In the short term, I would expect Romney to cut taxes and for these cuts to aid growth but not cut the deficit. The deficit could well rise if growth is slow. Most of future deficit spending is projected to be in military spending and Social Security and Medicare spending. So to back load deficit reduction, Romney would go after Social Security and Medicare spending and leave military spending alone since this is his party line.

Source: Bloomberg News