Romney: Opaque and Wishy Washy

Mitt Romney has been running for president for over six years, since his final days as governor of Massachusetts.  He has run for public office three times before.  He won his race for governor in 2002 and lost his race for the Senate in 1994, and for president in 2008.  He was third in the Republican presidential primaries in 2008, measured by number of delegates won, and conceded to John McCain just over a month into the race.

This year it took much longer to settle the nomination.  A number of highly rated candidates, including Jeb Bush, Chris Christie and Mitch Daniels (all successful current or former governors) failed to enter the race, leaving Romney the favorite in a lackluster field.  Yet it was not until April that he finally dispatched Rick Santorum, a militantly conservative former senator from Pennsylvania who lost his re-election bid in 2006 by eighteen points, and Newt Gingrich, a mercurial former Speaker of the House of Representatives who had “more baggage than the airlines”, as a pro-Romney ad memorably put it.

Romney has struggled with the conservative base, which had misgivings about his inconsistent record.  Right-wing pundits dwelt on the fact that he had run for the Senate, and for governor of Massachusetts, promising not to limit access to abortion—but now claimed to be vehemently pro-life.  By the same token, he had supported a regional cap-and-trade scheme to trim greenhouse-gas emissions in Massachusetts before renouncing it late in his governorship.  He now says that the causes and extent of global warming are too uncertain to merit expensive efforts to fight it, especially in such grim economic times.  Above all, he stoked suspicions on the right by championing health-care reforms in Massachusetts that served as the template for Barack Obama’s health-care law, before denouncing Obamacare as an affront to liberty that must be repealed.

In the end Romney prevailed partly by adopting a series of positions designed to please right-wing primary voters.  He unexpectedly unveiled a proposal for a whopping tax cut that the 59-point economic plan he released last year had mysteriously failed to mention. He also developed a fervent opposition to anything that smacked of compassion towards illegal immigrants, chastising both Gingrich and Rick Perry, the governor of Texas, for their supposed lapses in that regard during debates among the Republican candidates. Romney and his supporters also vastly outspent his rivals, blitzing them with vicious advertisements.

Since clinching the nomination, Romney has moved back towards the center in some respects. He has spent most of his time and advertising budget talking about the economy, rather than the more polarizing social issues that often arose in the primaries. He has released a new immigration policy which makes no mention of his call for those present illegally to “self-deport”, but embraces some more cuddly-sounding goals such as reuniting families and making it easier for foreigners to take up seasonal jobs.  He has also pledged to rescind the $716 billion in savings that Obama’s health-care reforms aim to garner from Medicare over the next decade, presumably to curry favor with older voters.

Romney’s advisers, a peculiar mix of zealots and moderates, provide little hint as to where his own instincts really lie.  On immigration policy he has sought the advice of Kris Kobach, secretary of state of Kansas, and the guiding force behind controversial laws in Alabama and Arizona cracking down on illegal immigrants.  On foreign policy he has consulted lots of bellicose neocons from the Bush administration, notably John Bolton, as well as a few more measured voices, such as Robert Zoellick.  Two mainstream academics and former advisers to Mr Bush, Greg Mankiw and Glenn Hubbard, have the most prominent roles on the economic team.

The campaign has unveiled endless “advisory groups” on different topics—with more members than Romney could possibly consult in a lifetime, let alone during a presidential campaign.  It is hard to know whose counsel Romney really values beyond that of his wife, a few former colleagues from his days as a private-equity investor, and his senior campaign staff, many of whom are holdovers from his previous presidential run.  Ed Gillespie, a former chairman of the Republican National Committee and co-founder of the Crossroads groups, which plan to spend hundreds of millions of dollars this year boosting Republican candidates, is also playing a role.

By picking Paul Ryan as his running mate this month, Romney has further muddied the ideological waters.  Ryan, after all, is best known for his efforts to cut spending on entitlement programs such as Medicare—something Romney is now attacking President Obama for.  His selection is widely seen as an effort to enthuse the Republican base, which likes his government-shrinking budget proposals.  Democrats spy an opening: they are drooling at the chance to link Romney with Ryan’s ruthless proposed cuts to things like food stamps and student loans.

One of the most dangerous parts of Romney’s campaign since clinching the nomination is his lack of openness and specificity.  He has refused to make tax returns available, not even going back a measly five years when his father proudly started the practice of making the candidates’ returns public in the 1960’s by releasing twelve years of returns.  What does Romney have to hide?  We know that he had a Swiss bank account and that he has investment funds offshore, both of which smell bad for someone who wishes to be president.  If there is nothing to hide, why not bring everything out into the open?

Also, he has not really provided any specifics on the proposals he has brought forward.  He seems to think that there will be no divided Congress if he elected and that he will be able to make changes by mandate.   More about this problem in future posts.

Take care. 

Gross inequality between the Top 1% and the rest of us

The following is a copy of an article from The Economist from about two weeks ago.  The italics are mine, and I have a comment at the end of the article.

In the search for the villain behind the global financial crisis, some have pointed to inequality as a culprit. In his 2010 book “Fault Lines”, Raghuram Rajan of the University of Chicago argued that inequality was a cause of the crisis, and that the American government served as a willing accomplice. From the early 1980s the wages of working Americans with little or no university education fell ever farther behind those with university qualifications, he pointed out. Under pressure to respond to the problem of stagnating incomes, successive presidents and Congresses opened a flood of mortgage credit.

In 1992 the government reduced capital requirements at Fannie Mae and Freddie Mac, two huge sources of housing finance. In the 1990s the Federal Housing Administration expanded its loan guarantees to cover bigger mortgages with smaller down-payments. And in the 2000s Fannie and Freddie were encouraged to buy more subprime mortgage-backed securities. Inequality, Mr Rajan argued, prepared the ground for disaster.

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Mr Rajan’s story was intended as a narrative of the subprime crisis in America, not as a general theory of financial dislocation. But others have noted that inequality also soared in the years before the Depression of the 1930s. In 2007 23.5% of all American income flowed to the top 1% of earners—their highest share since 1929. In a 2010 paper Michael Kumhof and Romain Rancière, two economists at the International Monetary Fund, built a model to show how inequality can systematically lead to crisis. An investor class may become better at capturing the returns to production, slowing wage growth and raising inequality. Workers then borrow to prop up their consumption. Leverage grows until crisis results. Their model absolves politicians of responsibility; inequality works its mischief without the help of government.

New research hints at other ways inequality could spur crisis. In a new paper Marianne Bertrand and Adair Morse, both of the University of Chicago, study patterns of spending across American states between 1980 and 2008. In particular, they focus on how changes in the behaviour of the richest 20% of households affect the spending choices of the bottom 80%. They find that a rise in the level of consumption of rich households leads to more spending by the non-rich. This “trickle-down consumption” appears to result from a desire to keep up with the Joneses. Non-rich households spend more on luxury goods and services supplied to their more affluent neighbours—domestic services, say, or health clubs. Had the incomes of America’s top 20% of earners grown at the same, more leisurely pace as the median income, they reckon that the bottom 80% might have saved more over the past three decades—$500 per household per year for the entire period between 1980 and 2008, or $800 per year just before the crisis. In states where the highest earners were wealthiest, non-rich households were more likely to report “financial duress”.

The paper also reveals how responsive government is to rising income inequality. The authors analyse votes on the credit-expansion measures cited in Mr Rajan’s book. When support for a bill varies, the authors find that legislators representing more unequal districts were significantly more likely to back a loosening of mortgage rules.

Inequality may drive instability in other ways. Although sovereign borrowing was not a direct contributor to the crisis of 2008, it has since become the principal danger to the financial system. In another recent paper Marina Azzimonti of the Federal Reserve Bank of Philadelphia, Eva de Francisco of Towson University and Vincenzo Quadrini of the University of Southern California argue that income inequality may have had a troubling effect in this area of finance, too.

The authors’ models suggest that a less equitable distribution of wealth can boost demand for government borrowing to provide for the lagging average worker. In the recent past this demand would have coincided with a period of financial globalisation that allowed many governments to rack up debt cheaply. Across a sample of 22 OECD countries from 1973 to 2005, they find support for the notion that inequality, financial globalisation and rising government debt do indeed march together. The idea that inequality might create pressure for more redistribution through public borrowing also occurred to Mr Rajan, who acknowledges that stronger safety nets are a more common response to inequality than credit subsidies. Liberalised global finance and rising inequality may thus have led to surging public debts.

Reasonable doubt

Other economists wonder whether income inequality is not wrongly accused. Michael Bordo of Rutgers University and Christopher Meissner of the University of California at Davis recently studied 14 advanced countries from 1920 to 2008 to test the inequality-causes-busts hypothesis. They turn up a strong relationship between credit booms and financial crises—a result confirmed by many other economic studies. There is no consistent link between income concentration and credit booms, however.

Inequality occasionally rises with credit creation, as in America in the late 1920s and during the years before the 2008 crisis. This need not mean that the one causes the other, they note. In other cases, such as in Australia and Sweden in the 1980s, credit booms seem to drive inequality rather than the other way around. Elsewhere, as in 1990s Japan, rapid growth in the share of income going to the highest earners coincided with a slump in credit. Rising real incomes and low interest rates reliably lead to credit booms, they reckon, but inequality does not. Mr Rajan’s story may work for America’s 2008 crisis. It is not an iron law.

While Mr. Rajan's research may not result in an economic principle, it certainly illustrates how the increasing inequality between the very rich and the rest of us is a cause of our current problems.

Take care.