In his economic policy address Tuesday in Chicago, Tim Pawlenty set a goal of 5% economic growth. By setting out such a rosy projection he may be repeating one of President Obama’s biggest mistakes: promising voters targets he can’t reach.
Pawlenty’s always struck me as a reasonable candidate. Even though it’s unlikely he’ll beat Obama (can anybody?), he’s also unlikely to hurt Republican candidates down ballot (as opposed to some of the more colorful GOP presidential contenders). That’s why I was disappointed by his economic speech in Chicago. I understand that he has to pay lip service to various segments of the Republican base; I just wish he didn’t so far in doing so. In the speech’s vaguer sections I wished he were more specific. But whenever he actually went into specifics, I instantly wished he had remained vague. That’s never a good sign.
In his address, Pawlenty started off well, but strangely missed a chance to make his indictment of Obama’s economy even stronger by mentioning a serious chronic unemployment problem rather than just the overall high level of unemployment. He then made a major unforced error by setting a 5% economic growth goal. Why not 6%? Why not 10%? If you are going to dream, dream big!
Pawlenty himself acknowledged that neither the Reagan boom nor the Clinton boom actually produced sustained 5% growth, although both came close. It sounds a bit arrogant when he asserts that he can do better than Reagan. More importantly, it sets him up for serious political problems in the future. Obama is in more trouble than necessary right now precisely because he claimed that his stimulus would allow the unemployment rate to climb to only 8% instead of 10% – which it rose to anyway. Why emulate him?
Furthermore, it’s likely Democrats will attack the 5% target as impossible, Pawlenty will be forced to defend it, it will become his signature issue, and then, if he actually wins, he’ll spend his reelection campaign in 2016 trying to explain why the economy only grew at 3% (if he’s lucky!) rather than the promised 5%.
More importantly, does Pawlenty actually know how to do it and can he sell the recipe to voters? He offered very ambitious tax cuts (once again trying to outdo Reagan by lowering the top marginal tax rate to an even lower level than Reagan did). Only in the first four years of the existence of the personal income tax was the top marginal rate even lower than the one Pawlenty has proposed: 25%. He has also proposed a big cut in corporate taxes and elimination of the inheritance tax and taxes on capital gains and dividends. I have absolutely no objection in principle to any of these ideas. But I have two questions.
1) How do we know these tax cuts will in fact trigger a much higher growth rate? The 25% rate was in effect in 1925 – 1931, and the economic record of that period is rather mixed, to put it charitably. Most of the Reagan boom occurred at a time of the 50% top marginal tax rate (in effect 1982 – 1986), while the further reduction to 28% in 1988 was in fact soon followed by an economic slowdown and a shallow recession.
2) How will a huge reduction in tax revenues be offset? Pawlenty didn’t offer any new taxes on consumption (say, VAT or carbon tax) to go along with his elimination or reduction of taxes on investment and work. And nobody outside the Tea Party is going to buy the myth that tax cuts pay for themselves (especially given that in the case of complete elimination of investment taxes that argument can’t be made with a straight face).
But maybe Pawlenty has a plan for huge spending cuts, making tax revenue offsets unnecessary? Well, this brings me to the most depressing part of the speech. Apart from mentioning block-granting Medicaid to the states and raising the Social Security retirement age, Pawlenty was very vague on spending cuts. That isn’t necessarily bad, since spending cuts are unpopular, and it may not be a good idea to give one’s opponents material for attack ads. But Pawlenty also fully embraced the pernicious idea of the balanced-budget amendment.
Furthermore, he proposed “that Congress grant the President the temporary and emergency authority to freeze spending at current levels, and impound up to 5% of federal spending until such time as the budget is balanced.” Besides the questionable constitutionality of this idea, just how on earth is he going to freeze spending at current levels? 10,000 baby boomers apply for Social Security and Medicare every day. As the cost of their benefits is rapidly increasing, a real spending freeze would mean deep cuts elsewhere to offset the benefits costs.
Where exactly would those cuts happen and why can’t we just go straight to those cuts without all this gimmickry? Or does Gov. Pawlenty mean to freeze spending on everything other than retirement and healthcare (and, of course, national debt service and a couple other items)? In this case, he sounded a lot like Monty Python: “All right, but apart from sanitation, medicine, education, wine, public order, irrigation, roads, the fresh-water system and public health, what have the Romans ever done for us?”
That proposal was immediately followed by a bizarre claim: “As an example — cutting just 1% of overall federal spending for 6 consecutive years — would balance the federal budget by 2017.” Actually, the deficit is not 6% of the federal budget – it’s about 40% this year. Granted, economic growth will reduce the deficit a lot – but not that much. Besides the immediate political problems now, Pawlenty’s claim that he can balance the budget by 2017 will surely come back to haunt him if he wins and then runs for reelection amid reduced but still huge deficits.
His comments on regulations made good points. But it’s a little misleading to say that “federal regulations will cost our economy $1.75 trillion this year alone” without providing any breakdown. I would bet that the bulk of these costs come from just a handful of regulatory areas – clean air, clean water, food safety, drug safety and transportation safety. There’s no political support whatsoever for, say, allowing factories to dump toxic waste into rivers again. So Pawlenty needs to be careful about realistic economic effects from feasible deregulation. Just as with his 5% growth target, it is better to under promise and over deliver than the other way around.
His thoughts on trade and money bordered on incoherent – a fine example of trying to offer something to everyone, without any regard for internal consistency. Pawlenty promised to double exports – but he also wants a strong dollar. Even worse, these contradictory statements were separated by only three sentences. If you have to contradict yourself, at least give your listeners more time to forget your first statement!
Pawlenty also strongly opposed quantitative easing and implied that the Fed printed money “with reckless abandon”. This isn’t junt an unwarranted slander, but also very short-sighted rhetoric. If Pawlenty becomes president, it will be because the economy in late 2012 was still very bad. And, we may still face a danger of deflation in 2013, perhaps forcing President Pawlenty to print money “with reckless abandon.”
Gov. Pawlenty also said that “Inflation cruelly undermines the life savings — and life prospects of every American.” Actually right now the life prospects of millions of Americans are cruelly undermined by deflation – deflation in housing prices. Maybe Gov. Pawlenty knows a lot of people who keep their life savings in the form of cash in a mattress, but most Americans have most of their life savings in assets that are fully inflation-protected – houses and stocks (in 401(k) portfolios). Furthermore, Americans currently carry a lot of debt (this, in fact, is the primary reason for the mess we are in). A little inflation right now could be quite beneficial to most middle class Americans.
Gov. Pawlenty needs to develop a better economic platform and tell hard truths to the Republican base. And when he absolutely has to pander, he needs to learn to do that without compromising either his appeal in the general election or his ability to govern if elected. His speech showed he still has a way to go.