Mitt Romney’s Wet-Noodle Economics

Mitt Romney is smart enough not to join Newt Gingrich and Sarah Palin in using the proposed mosque at Ground Zero to to lauch a presidential bid. While Gingrich is busy comparing Muslims to Nazis (“Nazis don’t have the right to put up a sign next to the holocaust museum in Washington”), and Palin is calling on New Yorkers to “refudiate” the plan (she subsequently corrected her word choice), Romney is offering an economic plan.

That’s a wise choice. Mitt knows Americans don’t care about mosques in Manhattan. They care about money in their own mitts.

Romney is intent on selling himself to America as the businessman who can turn the country around (sad to say, unemployment is likely to remain high all the way through November, 2012). Unlike Palin and Gingrich, Romney did, after all, run a business (yes, it was a firm that bought and sold companies and laid off lots of people along the way but, hey, that’s business).

So we should take Romney’s economics seriously. In today’s (Wednesday’s)  Boston Globe op-ed Romney attacks Obama’s economic policies for being ineffective and calls for what he calls a “growth and jobs” agenda. Here are the main points:

– match U.S. corporate taxes with those of other developed economies,

– preserve the Bush tax cuts for everyone, “especially small business,”

– allow businesses to write off capital investments made in 2010 and 2011 rather than over time,

– eliminate taxes on investment dividends,

– eliminate taxes on capital gains and interest for households earning less than $250,000 a year, and

– balance the federal budget.

Apart from the impossibility of simultaneously cutting taxes and balancing the budget without taking a meat cleaver to Social Security, Medicare, and defense spending (Romney delicately sidesteps this conundrum by urging we “reshape government programs” and “restructure entitlements”), his policies raise a more fundamental problem.

Call it the wet-noodle problem.

For Romney, the key to America’s recovery is to cut taxes on businesses and on people who invest in them. These steps, he says, are the “conditions that enable businesses of all sizes to grow and thrive.” In other words, if businesse get more capital at less cost, they’ll create jobs.

But anyone looking closely at the American economy today would see this is nonsense. American corporations have an unprecedented $1.8 trillion of cash. The Fed, meanwhile, has slashed interest rates to essentially zero – a record low – and is still holding over $2 trillion in securities that it said last week it will keep from shrinking. And a Federal Reserve survey released earlier this week showed that banks have been making it easier for businesses of all sizes to get loans. Credit standards for small firms have been loosened for the first time since late 2006.

In other words, businesses have all the capital they need. They’re sitting on it or can borrow it more cheaply than ever. But they aren’t using it to create jobs.

Why not? Because there’s not enough demand for their products or services. Consumers aren’t buying.

Retail sales continue to slide. Wal-Mart, Home Depot, and Target report disappointing sales for July. Same with popular back-to-school retailers like Aeropostale, American Eagle Outfitters, and TJX. Housing sales are down. Appliances are down. (Cars sales are up a bit but that’s mainly because they fell to record lows in 2008 and 2009, and by now some people who have held back need another.)

Romney’s supply-side economics won’t create jobs. It’s pushing on a wet noodle. Businesses create jobs only if consumers are pulling the noodle from the other end.

These days, businesses are raising profits by cutting costs (mostly by laying off even more workers), shifting operations abroad wherever they can find consumers (China, Brazil, India), and buying up their own shares of stock. Romney’s tax breaks will only hasten all this.

If Mitt Romney really wanted to increase American jobs and not just corporate profits he’d understand why consumers aren’t buying, and focus his proposals there.

The first reason they’re not buying is they’re still carrying a huge debt load. Mortgage debt is still engulfing millions of families. Americans also owe some $826.5 billion in revolving credit, mostly on credit cards (credit card debt was $975.7 billion in September 2008, so they still have a long way to go). On top of that, outstanding student loans (both federal and private) total some $829.7 billion.

So instead of boosting corporate profits, let Americans reorganize their mortgage debt in personal bankruptcy, protect them from credit card companies that charge gargantuan interest on credit card debt, and give their kids more direct aid for college.

The second reason consumers aren’t buying is their nest eggs have shrunk down to the size of peas. Homes are still worth 20 to 40 percent less than in 2007, and 401(k)s are down 20 percent. Baby boomers now have to save for retirement big time.

So instead of a giving corporations a tax break on their incomes, and giving investors tax breaks on dividends and capital-gains, cut the payroll tax for ordinary Americans. 80 percent of Americans pay more in payroll taxes than in income taxes, and it’s a regressive tax. Eliminate payroll taxes on the first $20K of income and make up the difference by raising the cap on income subject to payroll taxes (now about $106,000).

The third reason consumers aren’t buying is they’ve lost their jobs or are scared of losing them, or can only find part-time jobs that pay less. And because most families rely on two wage earners, the chance that at least one of them has lost or is in danger of losing a paycheck is double. That means families have no choice but to economize.

So instead of giving tax breaks to companies for buying more machines to replace their workers, make big profitable companies pay severance to any worker they lay off, equal to a month’s salary times the number of years worked. And require that any corporations receiving government contracts and subsidies (including defense contractors) use the money to create jobs in the United States.

Mitt Romney is the most credible of all the likely Republican presidential candidates. He’s right to focus on the economy, and he’s to be commended for coming up with specifics. But his specifics are looney. Romney’s wet-noodle economics won’t create American jobs.

About Robert Reich 545 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

Visit: Robert Reich

8 Comments on Mitt Romney’s Wet-Noodle Economics

  1. Theoretical economists like Reich don't know how to create jobs. It's not the businesses' fault that consumers are not buying. Consumer demand is low because consumers are scared about their future and jobs because Obama's policies are anti-growth and would not help productivity that's targeted at either the domestic or the foreign market.

  2. "allow businesses to write off capital investments made in 2010 and 2011 rather than over time"
    As a small business owner – that is huge. I have to write out a check right away when I buy something, but the gov't says I have to depreciate it over many years. It's an expense, pure and simple. That will dramatically increase private sector spending, and the only downside is the government has to wait a little while before collecting taxes.

    • Fortunately, Romney might actually know what businesses need in order to grow, hire, and prosper. Kind of a nice change of pace from Obama's "stimulus plan" strategy.

  3. Robert Reich, all 5-feet of him, using the term wet-noodle to describe anything is hilarious. Rack him! Great take, Bob. Epic. Wonder what the odds are in Vegas for Bob Reich vs. Wet Noodle. Not good, Bob. Not good. More of Romney and less of Reich is the way to go.

  4. Robert Reich is ascribing to a failed economic ideology. The ideology is that the entire problem is that consumers are not buying, therefore the government needs to borrow money and spend it in order to make up for the shortfall in consumer spending. There are several problems with this approach:

    1) The "stimulate" approach assumes that there is no cost to borrowing that money, and that spending it will actually do some good. This is not true. We are going to run a $1.3T deficit in 2010. Assuming a very low interest rate of 2% we will have to pay $24B in interest every year from now on forever just because we borrowed this money for one year. People and businesses are not stupid. They are factoring the costs of paying that bill in terms of higher taxes. So Federal borrowing money and spending it has a directly negative affect upon the willingness of private citizens to invest and spend. It is also not clear that spending the money actually does any good. Given how it is being spent it is not creating anything of lasting vaule – it is just propping up the budgets of states who have been fiscally irresponsible.

    2) Under the right circumstances you can have a supply side driven recovery. Businesses have three to five year planning horizons. If they see a favorable climate for investment and return on capital they will use a recession as an opportunity to invest in the future. This has happened many times in the past. We just need to have a government that understands how to create such a climate. Rommney's proposals are exactly the kind of thing that we need in order to create the climate that fosters the investments that in turn create the jobs which when created create demand all on their own.

    It is just very simply a choice in whether you believe that the government can create prosperity of of thin air by borrowing money and spending it, or whether you believe that prosperity can only come from the private investment in business that create products, value, profits and the ability to pay people. Reich, Larry Summers, Obama, Tim Geithner, and their cabal clearly believe in government driven approaches this problem. There is only one problem with their belief. There is not a single example of it ever having worked in any country. No government has ever spent its citizens and its economy to prosperity. However on the other hand, supply side economics lead to the longest boom in the history of our country (the Reagan/Bush/Clinton years) which only ended as Clinton raised tax rates, and it also got us out of the recession caused by 9/11 (the Bush tax cuts). The evidence is clear to anyone who chooses to accept it. Since the liberal cabal in power is blind to the truth they are just going to have to get thrown out starting this November.

  5. I am really disappointed by the comments to this article by Robert Reich, I would have thought that the WP readers would have been somewhat more thoughtful.
    But the uncomfortable fact is that Robert Reich is exactly right. The problem in this economy is the lack of consumer demand. There is no lack of money for investment: the Fortune 500 companies have never had so much cash in their lives!
    The figures are inescapable. Median real family incomes declined 6.7% during the Bush years. And now, the increasing penury of middle class Americans has stalled the economy to the point of recession, or even depression.
    Henry Ford, certainly no bleeding heart liberal, understood this economic axiom well, when he more than doubled the wages of his workers. He understood that he could become incredibly wealthy if there was a mass market of affluent workers out there who could buy his products.
    So go ahead…. pray for the Republicans to win and go back to more of the Neo-Con economic policies of high leverage and falling wages. It will only hasten the day when your own businesses have to face the fact that they will go broke because there is no longer an affluent marketplace to sell goods and services in.

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