The Economic Policy Institute has run the numbers and finds that
President Obama’s budget would boost economic growth far more than
Republican challenger Mitt Romney’s.
Obama’s plan would create 1.1 million jobs in 2013 and 280,000 jobs in 2014, while Romney’s
budget would create 87,000 jobs in 2013 and lose 641,000 jobs in 2014, provided that his plans are deficit-financed, according to a new EPI study (pdf).
How did EPI come to its conclusions? By using multipliers of the GDP impact of spending and tax policies based on those published by Mark Zandi, chief economist for Moody’s Analytics.
“Large cuts in government spending will exert a strong drag on economic activity while large output gaps persist,” EPI explains. At the same time, “tax cuts, particularly tax cuts for businesses and higher-income households, are highly inefficient at spurring growth.” By Zandi’s calculations, general government spending has a multiplier effect of 1.4 for every $1 spent, while a payroll tax cut for employers has just a 1.04 multiplier effect.
According to EPI, the growth in jobs under Obama’s plan would primarily come from the American Jobs Act, which includes $142 billion in temporary spending, as well as some tax cuts. By contrast, EPI calculates that Romney’s major spending cuts — totaling an estimated $250 billion in net cuts in 2013 and 2014 — would be a drag on growth in the near term. The drag would be bigger if Romney makes his tax reform revenue-neutral, as he’s promised.
“Zandinomics,” however, have come under criticism by those who believe that Zandi is overstating the multiplier effect of government spending. Robert Barro and Charles Redlick, for example, found that the average multiplier for defense spending was only about 0.6 to 0.7 when the unemployment rate was an average of 5.6 percent, and that the estimated multiplier effect rose only to 1.0 when the employment rate was extremely high, at 12 percent.
The reason, Barro and Redlick explain, is that other contributors to GDP fell when government spending on defense rose. “Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little,” they write, reasoning that non-defense spending would have an even weaker multiplier effect. So EPI’s findings will be far from the final word.
But note that Romney doesn’t dispute the basic finding that cutting spending will be a drag on the economy. Take this interview he did with Time Magazine’s Mark Halperin:
That said, the EPI paper only assesses the candidate’s plans. It doesn’t tell us anything about the laws that will actually come out of Congress. And Ezra, for one, has argued that in 2013 at least, Romney and a Republican Congress are likely to prove more keynesian than Obama and a Republican Congress.
source:washingtonpost
Obama’s plan would create 1.1 million jobs in 2013 and 280,000 jobs in 2014, while Romney’s
budget would create 87,000 jobs in 2013 and lose 641,000 jobs in 2014, provided that his plans are deficit-financed, according to a new EPI study (pdf).
(Source: EPI)
“Large cuts in government spending will exert a strong drag on economic activity while large output gaps persist,” EPI explains. At the same time, “tax cuts, particularly tax cuts for businesses and higher-income households, are highly inefficient at spurring growth.” By Zandi’s calculations, general government spending has a multiplier effect of 1.4 for every $1 spent, while a payroll tax cut for employers has just a 1.04 multiplier effect.
According to EPI, the growth in jobs under Obama’s plan would primarily come from the American Jobs Act, which includes $142 billion in temporary spending, as well as some tax cuts. By contrast, EPI calculates that Romney’s major spending cuts — totaling an estimated $250 billion in net cuts in 2013 and 2014 — would be a drag on growth in the near term. The drag would be bigger if Romney makes his tax reform revenue-neutral, as he’s promised.
“Zandinomics,” however, have come under criticism by those who believe that Zandi is overstating the multiplier effect of government spending. Robert Barro and Charles Redlick, for example, found that the average multiplier for defense spending was only about 0.6 to 0.7 when the unemployment rate was an average of 5.6 percent, and that the estimated multiplier effect rose only to 1.0 when the employment rate was extremely high, at 12 percent.
The reason, Barro and Redlick explain, is that other contributors to GDP fell when government spending on defense rose. “Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little,” they write, reasoning that non-defense spending would have an even weaker multiplier effect. So EPI’s findings will be far from the final word.
But note that Romney doesn’t dispute the basic finding that cutting spending will be a drag on the economy. Take this interview he did with Time Magazine’s Mark Halperin:
Halperin: You have a plan, as you said, over a number of years, to reduce spending dramatically. 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?So whatever you believe about the multiplier effect, Romney agrees that swift spending cuts will be a drag on economic growth, and his plan does appear to call for swift spending cuts.
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.
That said, the EPI paper only assesses the candidate’s plans. It doesn’t tell us anything about the laws that will actually come out of Congress. And Ezra, for one, has argued that in 2013 at least, Romney and a Republican Congress are likely to prove more keynesian than Obama and a Republican Congress.
source:washingtonpost
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