According to Mitt Romney, our choice in the November elections is to choose between Obama and a European future of high unemployment, a welfare state and the end of American leadership or get back on the road to economic expansion. Romney argues that what this country needs is entrepreneurial economy.

July 2012
Weekly Standard

Mitt Romney has articulated the choice we will make in November. We can choose President Obama and a European future—i.e., high unemployment, demographic winter, big government commanding over 50 percent of future output, a welfare state engineered and manipulated by the Washington bureaucracy, the end of American leadership, and, ultimately, national insolvency. Or we can embark once again on the road to rapid economic expansion, through pro-growth tax reform, smaller government, a balanced budget, and sound money. What we need, Romney argues, is an entrepreneurial economy based on the free price mechanism, free markets, free and fair international trade. For Romney the goal of rapid economic growth is full employment, a strong national defense, and a rising American standard of living. These policies are necessary. But are they sufficient?

Romney’s analysis emphasizes the character of presidential leadership, the need for hands-on White House direction of national economic policy. Workable economic policies require not only the right goals but also a strong president capable of leading Congress and the nation in a new direction—away from Obama’s backward-looking statism, and forward to pro-growth tax policies, budgetary equilibrium, and sound monetary policies. Regulations must be radically simplified. The tax code must be comprehensively reformed—with a larger base, fewer loopholes, and lower rates.

In his 2010 book Seeds of Destruction, Glenn Hubbard, a top economic adviser to Romney, summarizes the entrepreneurial spirit underlying Romney’s approach. “First and foremost, it will mean putting unemployed Americans back to work. Second, it will mean stabilizing the housing market and housing prices. Third, it will mean increasing the productivity of the American worker and making U.S. industry more competitive in international markets so that wage and economic growth can once again boost purchasing power. Fourth, it will mean reducing America’s dependence on increasingly expensive oil. Finally, it will mean creating a strong and stable dollar so that our import bill remains manageable.”

On this last point, Romney has criticized the Greenspan-Bernanke Fed—the ultimate cause of the stock market bubble of the 1990s and the subsequent crash and recession (2000-2002); the ultimate cause also of the real estate bubble, its collapse, and the Great Recession (2007-2009). Romney argues in almost every economic speech that Obama’s stimulus policies are poorly planned and ineffective, and that Obama has been AWOL on major legislation, defaulting to a pork barrel Democratic congressional majority on economic and health care policy in 2009-2010, when he had a majority in both the Senate and the House.

In private and public comments, Romney and Hubbard have suggested that hyper-expansive Fed policy and quantitative easing—repressing interest rates to zero—is a reckless monetary approach that in the past has led to bouts of inflation, followed by deflation and recession.

I embrace much of this analysis and many of Romney’s proposals. His program is necessary, but it may not be sufficient.

Romney often cites GDP numbers. In the textbook equation, gross domestic product equals consumption plus government spending plus business investment plus (or minus) net exports. Citing GDP numbers implies this is the best way to measure national wealth and prosperity. But if net exports are negative and business investment is declining, while government spending and consumption are growing very rapidly, nominal GDP can still be positive, even as national wealth is declining. The GDP equation is one-dimensional accounting; it omits the balance sheet—assets minus liabilities—which tracks the true increase or decrease in the wealth of nations, firms, and families. Recall that GDP was growing in 2007, but because of exponential increases of debt fueled by the Fed, the bubble and net national wealth were about to collapse.

As an analogy, consider an American car company (pre-2007). Its sales (or top-line income) may have been going up, but its real profits were declining. The car company continued to build new factories, hired more people, created new dealers. But its net worth had been running down for years—heading toward zero. Ultimately, bankruptcy or a bailout had to be the result.

How did the car company show rising top-line income, or sales (analogous to GDP), while its wealth was collapsing? The answer is by borrowing from banks and bondholders everywhere and whenever it could, at home and abroad—mortgaging its assets and dissipating the wealth accumulated for generations—until, finally, it became insolvent. This is the European path now followed by the Obama government and several of our state governments. There is a better path, as Governor Scott Walker of Wisconsin has shown.

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