The Closet Keynesian
Republicans may well embrace stimulus if Romney wins—but not a liberal-style stimulus.
Photograph by Justin Sullivan/Getty Images.
Last week’s Republican National Convention was long on criticisms of the Obama administration and extremely short on policy proposals. But the week did give us several important hints about a Romney administration’s likely economic policy. And the news is good, indicating that Republicans are prepared to swiftly jettison a lot of terrible economic theories they’ve opportunistically embraced since November 2008 and do what it takes to keep the economy on track.
To appreciate the significance of this, you have to understand what a vast and swift revolution has taken place in Republican Party economic thinking in the past several years. Democrats and Republicans have traditionally disagreed about a lot of things, but one thing they have agreed on is the ability of expansionary fiscal and monetary policy to bolster a depressed economy. That was true when the Reagan administration rode out the brutal-but-brief 1982 recession with giant budget deficits and huge interest rate cuts, and it was true right through the George W. Bush administration. Bush started off his term touting his tax-cut plan as vital economic stimulus and Paul Ryan was a loyal spear-carrier in the Keynesian cause. Near the end of the Bush administration, the story was the same, as Democrats and Republicans came together to pass a stimulus measure by overwhelming margins.
But then came Barack Obama’s election.
If Democrats and Republicans have agreed that fiscal stimulus works, they also traditionally disagreed about how to do it. Democrats like to increase government spending, both because this has a higher “multiplier” in standard models and also because Democrats tend to believe that public services are very valuable. Republicans prefer tax cuts, both because this is administratively faster and simpler, and also because the GOP tends to think that public spending isn’t very useful. The Obama administration, cognizant of these points of agreement and disagreement, outlined a stimulus proposal that was partially weighted toward Democratic ideas but also chock-full of tax cuts. But as exhaustively documented in Michael Grunwald’s new book, The New New Deal, Republicans made a strategic decision to oppose Obama’s stimulus plans en masse.
Initially, this involved criticizing the details of Obama’s stimulus while remaining open to the concept of fiscal stimulus and indeed backing a package that was in many respects similar to Obama’s. But then the GOP went off in a very different direction.
For decades there have been alternate ideas about macroeconomics ignored by mainstream politics. So-called “real business cycle theory” has been influential in academia for decades, and “Austrian” economics has a cult following in libertarian circles. Neither had traditionally impacted the policy domain, but both offered more theoretical firepower for slams on Obama. These ideas quickly started gaining a higher profile among conservatives. Harvard economists Alberto Alesina and Silvia Ardagna argued that cuts in government spending could boost economic growth, bolstering a political argument that deficit reduction rather than stimulus should be the order of the day. Monetary policy, too, came under attack. Ron Paul’s “audit the Fed” movement gathered steam steadily, Rick Perry indicated that Ben Bernanke deserved to be physically assaulted if he tried to stimulate the economy, and Ryan became a strong advocate of tight money policies. The point of all this was to argue that the economy suffered not from an easily remediable lack of demand but from profound structural problems most likely related to Obama’s socialistic reign of terror.
Overstatement is nothing new in politics, but this all raised the prospect that if put in charge, Republicans would actually try to implement their new ideas. Maybe we would see the kind of effort at immediate deficit reduction that David Cameron has (disastrously) brought to the United Kingdom, paired with the contractionary monetary policy popular among the conservative grassroots. And maybe we will. Most of the time, politicians do try to do the things they say they’ll try to do, and 2013 could be no exception. But there is new evidence on the other side.
Edward Lazear, chairman of the Council on Economic Advisers under George W. Bush, released a paper last week attempting an empirical estimate of whether current unemployment is “structural” or “cyclical” and came down firmly on the side of a cyclical explanation. Released 12 months ago, that would have read as a powerful argument for the Democratic side in an ongoing argument about stimulus. But everyone knows that stimulus is not going to happen between now and the election. Instead, it’s a sign that prominent economists in GOP circles haven’t really abandoned the New Keynesian consensus in policy circles but were only putting it in cold storage to hobble President Obama. Earlier in August, Alesina published a new paper with two coauthors arguing that deficit-reduction plans do hurt growth after all—but only when they involve tax hikes. Together, these papers lay the foundation for a 2013 agenda of big, deficit-increasing tax cuts—coincidentally enough the exact same policy that was at the heart of Reagan and Bush administration economics.
Meanwhile, accepting the GOP nomination, Romney argued that “cuts to our military will eliminate hundreds of thousands of jobs, and also put our security at risk”—a precisely Keynesian take on every Republican’s favorite form of government spending.
Romney also swore that “when nations cheat in trade, there will be unmistakable consequences.” The Republican platform more specifically argues that America should “impose countervailing duties if China fails to amend its currency policies.” That’s a policy whose previous most prominent advocate has been none other than ur-Keynesian Paul Krugman. More broadly, it’s an indication that Romney may be thinking of pursuing much-needed monetary policy stimulus and trying to frame it as a nationalistic anti-Chinese measure.
If this comes to pass, a Romney stimulus would not be the kind of stimulus that liberals like. Instead it would pair a cheaper dollar with big regressive tax cuts and a burst of military spending only partially offset by cuts to domestic programs. Democrats hated this reactionary Keynesianism when the Bush administration implemented it, and in their Tuesday-night speeches seemed eager to re-embrace their fiscal scolds role from the mid-aughts. But whatever you think of the implications of these policies for long-term justice or prosperity (I don’t think much of it), they would certainly be better for the short-term economic outlook than the debt-obsessed austerity policies Republicans have pushed throughout the Obama years. Would Romney actually pursue this course? It’s impossible to know, and certainly it’s risky to vote for a candidate on the basis of the idea that he’s lying about his basic economic approach. But then again, consistency has hardly been the watchword of Romney’s political career.