Pawlenty’s Growth Rate: Too Good To Be True

June 8th, 2011 at 10:33 am | 32 Comments |

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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.

Recent Posts by Andrew Pavelyev



32 Comments so far ↓

  • ottovbvs

    Pawlenty’s program was a total fraud. Don’t worry, it will go to an early grave unwept, unhonored and unsung.

    • Smargalicious

      Well, we could stay with the African’s current program, and enjoy stagflation, housing double-dip and almost 10% unemployment…

      • baw1064

        I like his program quite well, actually. So does the stock market–up about 80% since January 2009.

  • balconesfault

    Does anyone have any evidence that Pawlenty actually understands what he’s talking about when he talks economics?

    He really comes off as someone who sat through a couple briefings with the Club for Growth, read a few NRO online and WSJ op-ed articles, and then sat down and turned a bunch of jumbled talking points into a “plan”. In short, he comes off like a bunch of the college kids who Frum generously gives headline status to on this website … able to recite ideological cant, but with no actual grounding in reality.

  • valkayec

    Okay, Mr. Pavelyev, we both agree that Pawlenty’s economic plan is fantasy. Pie in the sky, over the top fantasy.

    But here’s my problem: why do all GOP candidates engage in such fantasy talk about their plans for the economy? I don’t mean that they have to engage in doom and gloom, but a little real information and serious, thoughtful ideas would benefit the nation a great deal more than fantasy plans.

    By the way, as Bruce Bartlett has pointed out, the cures that worked for Reagan won’t necessarily work today. The economy is different and the problems are different. Just going back to Reagan’s plan won’t touch the challenges the economy faces today in a globally competitive market. We need new ideas and new solutions. Right now, I suspect no one has the answer or the plan, although Obama’s ideas probably come closest.

    Moreover, if the GOP were really concerned about unemployment and the economy right now, I’d expect them to be working harder with the President to rebuild and renew our economy, regardless of their short term political goals. The nation and her people are far more important than a political agenda.

    • PracticalGirl

      why do all GOP candidates engage in such fantasy talk about their plans for the economy?

      Because they can, and because they and their media arms (talk radio, Fox News and the millions of bloggers out there) have built a base that accepts-even expects- fantasy over reality. Because every single one of these candidates or might-be-candidates need to pretend that they have easy solutions to really complex problems to appease the voters and none of them are actually charged with a damn thing that would make them accountable for their words. Most of them understand very well that they’ll never actually get to that stage, but are still happy to stoke the base with what the base seems to want.

      To be fair, as a nation the majority of voters (led by the Independents) seem to demand easy answers over real solutions. I think it’s the main reason that the “power pendulum” shifts so rapidly from Democrats to Republicans.

    • balconesfault

      But here’s my problem: why do all GOP candidates engage in such fantasy talk about their plans for the economy?

      Because that’s what their party orthodoxy requires from them.

      The “cut taxes” mantra must be obeyed, and so we’re left with politicians trying to design a blueprint for progress based on a predetermined solution … rather than coming up with a solution based on a blueprint for progress.

    • armstp

      And if the GOP was really concerned about the economy they would not create all this uncertainty by not voting for a raising of the debt ceiling.

  • CentristNYer

    In a debate with Obama, he’ll fold like a cheap camera. He couldn’t even hold his own against Jon Stewart when he was on The Daily Show earlier this year.

  • armstp

    T-Paw is just flailing is arms around in the air saying any bullshit that he thinks might have the slightest chance at getting him any traction.

    The truth is it is Republican policies over years which got us into this mess. What he needs to do is to explain what his Republican policies are and why they will work when all they have done in the past is get this country into economic and debt problems.

    Give me 5 minutes in front of a camera with T-Paw and I will tear him another asshole and make him look like the fool and fraud he is.

    • Smargalicious

      T-Paw is just flailing is arms around in the air saying any bullshit that he thinks might have the slightest chance at getting him any traction.

      Has some merit. The guy is a politician.

      The truth is it is Republican policies over years which got us into this mess. What he needs to do is to explain what his Republican policies are and why they will work when all they have done in the past is get this country into economic and debt problems.

      You’re out of your freakin’ mind. Republicans didn’t invent the Great Society or War on Poverty programs that begat our present socialist nanny state that subsidizes illegitimacy, and produced millions upon millions of parasitic, worthless citizenry.

      Give me 5 minutes in front of a camera with T-Paw and I will tear him another asshole and make him look like the fool and fraud he is.

      :D

      • armstp

        Smarg,

        The current deficit has little to do with the social safety net. Clinton had the country in surpluses and on a tragetory to entirely pay-off the debt. What happened since then? Bush and the GOP completely blew-up the deficit and debt and handed Obama a $1.4 trillion deficit for 2009 and deficits for years to come.

        Republican policies of de-regulation directly resulted in the housing bubble and financial crisis, which plunged this country into the biggest recession since the Great Depression.

        Republican tax cuts have never produced economic gain, but only fiscal deficits.

        The Republicans have been a complete failure on the economy over and over again and they always need the Dems to bail them out. In fact, if you look at either economic growth, stock market performance or deficits and debt, Democratic presidents have had a far better track record and performance than Republican presidents since Eisenhower.

        T-Paw just preached more of the same nonsense. In fact, what he preaches is even worse, as he preaches complete fantasy and lies.

  • Frumplestiltskin

    A little man in search of a big office. Not only does he say his policies will produce 5% growth, but will do so year in and year out for 10 years.

  • Graychin

    TP’s slant on economics is no more unrealistic than that of any other Republican candidate – or Republican governor or member of Congress, for that matter.

    This is an excellent commentary on the current state of Republican economics. The question: will any Republican candidate be successful in selling this snake oil to the American voters? Which one will be most effective in doing so?

    • armstp

      Graychin,

      There is so much unwarranted hatred of Obama out there, that I am sure the GOP will be able to sell their snake oil to a fair number of voters.

      I find that most do not vote for the GOP for economic reasons, as the GOP clearly has a far worse economic and fiscal track record than the Dems over the last 60 years. Most vote for the GOP for emotional reasons.

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  • Carney

    Can’t find it online but I remember a Dana Carvey skit doing Ross Perot where he offers the American people a deal something like in which 3% growth (“which a chimp can do”) gets him nothing, 4% growth gets him 1 billion, and 5% growth gets him a $100 billion.

  • ottovbvs

    American people a deal something like in which 3% growth (“which a chimp can do”

    There you go Carney. I told you there was something in this evolution theory. 3% is what we’ve averaged since the war.

  • LFC

    armstp said… The current deficit has little to do with the social safety net. Clinton had the country in surpluses and on a tragetory to entirely pay-off the debt. What happened since then?

    Can you imagine how much better off this nation would be today if Clinton had remained President for 8 more years instead of the idiot man-child? Or if Gore had become President. Or Kerry. Or any other capable human being. Or a chimpanzee.

  • armstp

    ANALYSIS: Pawlenty’s Tax Plan Would Cost $7.8 Trillion Over Ten Years, Triple The Size Of Bush Tax Cuts

    Including Bush tax cuts, Pawlenty’s tax plan would cost $10 trillion by 2021

    Pawlenty called for:

    Cutting the top individual income tax rate down to 25 percent;

    Having just two income tax brackets, 10 percent and 25 percent;

    Eliminating all taxation on capital gains, dividends, and estates;

    Cutting the corporate tax rate down to 15 percent

    These proposals, taken together would bestow a massive tax cut on the wealthiest people in the country. They would also reduce overall federal revenues to a such a low level that even if Pawlenty’s draconian, radical spending targets were achieved, deficits and debt would still soar out of control.

    All together, Pawlenty’s tax proposal would generate an average revenue level of just 13.6 percent of GDP from 2013-2021. That translates to a tax cut of $7.8 trillion, and that’s on top of $2.5 trillion cost of extending all of the Bush tax cuts.

    http://thinkprogress.org/economy/2011/06/07/238929/analysis-pawlentys-tax-plan-cost/

  • armstp

    “Alarmingly, Pawlenty’s plan is being greeted by conservatives not as some nee plus ultra supply-side vision but as an opening bid. The Wall Street Journal editorial page asks, at the end of a glowing editorial, “Now that Mr. Pawlenty has laid down his marker, what do his competitors have to offer?” Once you’ve eliminated all tax on capital income and slashed the rates, how much further can you go? Romney hasn’t come out with his plan yet, but he can’t let Pawlenty outflank him. I hesitate to even think of where the bidding will stand by the time Michelle Bachmann unveils her proposal.”

    “As the candidates try to out-tea-party one another, they push the Overton window of acceptable economic policy to the absurd right. This makes it much more difficult for a reasonable Republican candidate to win office, and for any Republican politician to support reasonable economic policy. And no matter what party you belong to, you should find it troubling that Mr Pawlenty’s ridiculous economic plan could ever be considered acceptable by a large portion of the population.”

    http://andrewsullivan.thedailybeast.com/2011/06/the-profound-unseriousness-of-tim-pawlenty-ctd.html

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