Lehigh: The economy, generically oversimplified

By SCOT LEHIGH

New York Times News Service

As Mitt Romney knows, changing circumstances sometimes require changing messages. And so, with the US economy steadily improving, Romney is now arguing that the recovery would be stronger but for the president’s policies. Yet Romney, whose supposed point of distinction is his economic savvy, would sound more convincing if his indictment of Obama weren’t so familiar and generic.

For Mitt mavens, there’s a diverting bit of deja vu to his evolving message. In his Monday speech at the University of Chicago, Romney invoked the book “The Wealth and Poverty of Nations,” quoting author David Landes’s conclusion that “if we learn anything from the history of economic development, it is that culture makes all the difference.” The aspect of our culture that fires our economy, continued Romney, is our freedom — and “the Obama administration’s assault on our economic freedom is the principal reason why the recovery has been so tepid.”

Landes, economic development, culture … now let’s see, where have we heard that before? Oh, yes — when Romney first began testing the presidential waters, way back in 2005, he conscripted the same sentence into battle against gay marriage. Back then, he fretted that same-sex unions would spell the collapse of the family, which he described as the fundamental building block for American success in the world.

Over time, of course, unfounded fears fade. But to vaccinate ourselves against a new case of the vapors, let’s review another idea from Landes’s book, one situated only a few sentences further along. “Economic analysis cherishes the illusion that one good reason should be enough, but the determinants of complex processes are invariably plural and interrelated,” the author writes. “Monocausal explanations will not work.” In other words, economics is complicated; beware over-simplification.

Which brings us to Romney’s critique. First in his bill of particulars is that Obama favors “restoring the marginal tax rate from 35 to 40 percent.” True enough. Obama favors letting the Bush tax cuts for upper earners lapse at year’s end, which would put the top rate at 39.6 percent.

But that hasn’t happened yet, which makes it hard to blame higher rates, except in an anticipatory sense, for current economic conditions. That’s not to dismiss completely the conservative argument that a lack of certainty unsettles the business world. Still, mainstream economists think weak demand has been a much bigger problem than uncertainty about tax rates. Even if a businesswoman were absolutely confident about future rates, if sales are sluggish, she’d have little reason to make new hires or buy new equipment. The confidence argument, in other words, ignores the bigger issue in favor of the smaller.

It’s also instructive to recall that Republicans predicted economic disaster when President Clinton raised taxes (the top rate: 39.6 percent) in 1993. Actually, the economy performed better over the next seven years than it did in a similar period after George W. Bush cut taxes. Indeed, measured by growth in GDP, consumption, investment, wages and salaries, and employment, the Bush recovery was among the weakest since World War II, according to the Center on Budget and Policy Priorities, a liberal think tank. The nation also saw stronger growth with higher top rates in the 1950s and 1960s. That’s not to say higher taxes promote better growth. But history simply doesn’t support the notion that higher upper-income rates inevitably hobble growth while lower rates are a sure-fire economic tonic.

Romney’s second big example of an Obama misstep was the Dodd-Frank financial-reform law. By requiring big banks to hold larger reserves, that legislation will likely have some effect on the economy; the forthcoming rules, and uncertainty about them, may as well. But by helping catapult the economy into the Great Recession, the financial sector’s abuses were far more damaging.

As Nobel Prize-winning economist Peter Diamond observes, policy-makers faced this choice: Do nothing, and thereby risk a repeat of those abuses; have Congress write the complex rules itself; or — the one they chose — leave the technical rule-making to the regulators, a process that allows for comments and revisions, but takes more time. “The alternatives were clearly worse,” he notes.

Romney’s critique will please the Republican base. But it’s an unconvincing effort, one that fails to showcase the economic expertise Romney claims as his calling card.

Scot Lehigh writes for the Boston Globe.