In the second Presidential debate yesterday, the heart of Romney's economic case was wrong, and Obama pointed it out—partly, but only partly. Simply cutting taxes on the rich is not going to create a boom in economic growth and jobs; it never has.
But Romney is now arguing that his lowering of rates on the rich he is going to make revenue neutral from each income level—or that's what I think he's arguing, it's hard to tell. But how is this supposed to suddenly create jobs? If it's revenue neutral, then there is no more money in the hands of the 'job creators,' so why under Romney's theory would there be any more job growth? In reality, when there was such a restructuring of the tax code, in 1986 there was no significant impact on job growth in the subsequent five years, as Bruce Bartlett, who was a Reagan advisor, points out. He also links to a report of Martin Feldstein, Romney defender, who says that the 1986 restructuring had no effect on employment.
Obama's attack on the failure of 'trickle down' is on target. But his failure to articulate the key role of government is extremely disappointing. Here is what he said in answer to a question from a 'Barry':
"Barry, I think a lot of this campaign, maybe over the last four years, has been devoted to this notion that I think government creates jobs, that that somehow is the answer. That’s not what I believe.
"I believe that the free enterprise system is the greatest engine of prosperity the world’s ever known. I believe in self-reliance and individual initiative and risk-takers being rewarded. But I also believe that everybody should have a fair shot and everybody should do their fair share and everybody should play by the same rules, because that’s how our economy is grown. That’s how we built the world’s greatest middle class."
First of all, the government does create jobs. Every government job is a job with real pay. This isn't to say that every single government program is a good idea and every single federal employee is productive, but they are real jobs. As someone pointed out, the sight of a bunch of congressmen, who all have real federal jobs, saying that the government doesn't create jobs is on its face self-refuting and ridiculous.
One way these government jobs are important is that they contribute to consumer demand, the 'multiplier' or 'ripple effect', where the spending of employed people boosts the economy. This is why the Republicans blocking the American Jobs Act, which would have reversed the contraction of 700,000 state and local workers—teachers, firefighters, and police—has contributed to the stagnation of the economy.
But aside from creating demand, which is a cyclical issue, there is a critical role of government in creating jobs in the private sector. This is not simply a matter of "fairness," as Obama has it, but of government investment in public goods, which creates the conditions for economics growth and jobs in the private sector. This includes investment in infrastructure, education, and research.
As mentioned before in this blog, the book Success in Agricultural Transformation looked all around the world and throughout history to see what was necessary to change from a poor, subsistence agricultural economy to a modern prosperous one. And in every case sustained investment in public goods was necessary, and key. And in recent times, we have seen this continue in the US. The microchip was invented as part of the moon landing program, a public program. And the internet began as part of DARPA, a defence department research organization.
The point is that investment in education—and Romney has poo-pooed investment in teachers—infrastructure, research, and—yes—keeping the population healthy all are critical government functions that are necessary for economic growth. Such government investment was historically around 15%, but the Romney austerity goals would reduce it to 5%. This is a policy of eating our seed corn. So it is harmful in the short term, because we still need counter-cyclical stimulus, and disastrous in the the long term.
Obama's motto should be "Invest in America"; he needs to get with the program. And yes government both creates jobs directly, and is plays an essential role in enabling private sector growth to happen. Admittedly, Obama has at times emphasized that these are investments. But he doesn't seem to 'get' that this is a core, essential role of government. Romney's basic argument is that a dollar in the hands of the rich is always better than a dollar taxed and then invested by the government in teachers, researchers, infrastructure, and health. But all of history refutes this. Obama needs to counter Romney's magical 'Believe in America' by saying that if you really believe in America you have to invest in America. Romney doesn't believe in America, he believes in the wealthy.