Negative Interest

An unconvincing President Romney counterfactual

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Luigi Zingales, a generally respectable economist to the best of my knowledge, has a new piece at Bloomberg View arguing that the country would have been better off for the past four years had Mitt Romney been president. Perhaps some people will find his case convincing, but it didn’t convince me of much beyond the limitations of Mr. Zingales’ imagination.

His counterfactual rests on four areas. True to the form of the man he supports for president, Zingales’s examples are short on detail and long on empty rhetoric.

On health care, he criticizes the Obama administration for passing a law that was not fully implemented immediately. “Even if you are a hard-core supporter of health-care reform,” he argues, “you have to concede that the new law didn’t have any positive impact in the past four years, and might have had some negative ones.” This particular supporter of health care reform disagrees with this assessment; this timeline disagrees in far more detail. When Zingales writes that “[a]ll the good changes advertised by the Obama administration will take place only after this year’s election,” he apparently does not count the extension of dependent coverage to age 26 that has led to a 40% drop in young adults’ uninsured rate as a good change advertised by the Obama administration. The White House disagrees.

What would Romney do differently on health care? If you said that he would “try to fix problems” and “not advance…an ideology,” you apparently possess deep insight worthy of a Bloomberg editorial. His evidence that Barack Obama has governed like an ideologue is that Obama kept a campaign promise to pass a health care reform bill. Apparently the high costs, low coverage, and poor quality of the United States health care system did not represent a problem worth fixing. Apparently abandoning the biggest policy priority of your party is the sign of a successful president. I’ll give Zingales one thing: Mitt Romney would not govern the country to advance an ideology, because he has no ideology to advance.

On unemployment, Zingales is again upset that Obama decided to advance legislation that fulfilled his campaign promises. Instead of focusing solely on temporary tax cuts as stimulus, he “used the crisis as an opportunity to expand government spending in sectors dear to him, such as green energy, construction and education.” Instead of promoting stimulus projects that would also act as a long term solution to the country’s energy, infrastructure, and education problems,  Zingales argues that Romney would have simply passed a payroll tax cut and a temporary sales tax rebate. In forty years I will drive my electric car to the high speed rail station, bitterly weeping about the temporary sales tax rebated that got away. Though he doesn’t quite say it, he implies that Mitt Romney would not do something as foolish as fulfilling his campaign promises once elected. Here I can join with Zingales in agreeing that that would be a good thing.

On the auto bailout, he suggests that the comparison that Obama saved the automakers while Romney would have let them go bankrupt is “disingenuous.” He argues that it is disingenuous because “[b]ankruptcy is not liquidation” and American Airlines and United Airlines are still flying. He does not actually address the topic of liquidation; for this, I will turn to Steve Rattner, former “auto czar” in the Treasury:

As a presidential aspirant, Mr. Romney evidently hasn’t felt a need to be consistent or specific as to what should have been done to address the collapse of the auto industry starting in late 2008. But the gist is that the government should have stayed on the sidelines and allowed the companies to go through what he calls “managed bankruptcies,” financed by private capital.

That sounds like a wonderfully sensible approach — except that it’s utter fantasy. In late 2008 and early 2009, when G.M. and Chrysler had exhausted their liquidity, every scrap of private capital had fled to the sidelines.

I know this because the administration’s auto task force, for which I was the lead adviser, spoke diligently to all conceivable providers of funds, and not one had the slightest interest in financing those companies on any terms. If Mr. Romney disagrees, he should come forward with specific names of willing investors in place of empty rhetoric. I predict that he won’t be able to, because there aren’t any.

Without government financing — initiated by President George W. Bush in December 2008 — the two companies would not have been able to pursue Chapter 11 reorganization. Instead they would have been forced to cease production, close their doors and lay off virtually all workers once their coffers ran dry.

Those shutdowns would have reverberated through the entire auto sector, causing innumerable suppliers almost immediately to stop operating too.

Despite the relative health of its balance sheet, even Ford would have been forced to close temporarily, because critical parts would have become unavailable. And service providers — trucking companies, restaurants and more — would have been severely affected.

More than a million jobs would have been lost, at least for a time. Michigan and the entire industrial Midwest would have been devastated.

Ignoring this point, Zingales claims that the only difference between Romney and Obama on the auto bailout is that Obama bailed out unions by bullying creditors and a bankruptcy judge, which Romney presumably would not have done. This ignores the concessions made by the United Auto Workers in the final deal, but again this is a criticism of process, not policy. “Opinions may differ on whether this was fair, but it was done the wrong way” looks an awful lot like “I have no substantive criticism of the administration’s policies” to me.

It’s in the paragraph on financial regulation that the brilliance really shines through. It’s worth quoting in full:

In principle, it’s reasonable to expect that Romney would have been more sympathetic to Wall Street’s interests, a bias that could have been an impediment to much-needed reform. In practice, it’s hard to imagine he could have done worse than Obama and Treasury Secretary Timothy Geithner, who enacted regulations that increase the cost of doing business while failing to solve the problems that caused the crisis. In fact, Romney probably would have done better. He might not have introduced much effective regulation at all, but he would have avoided the populist and anti-business rhetoric Obama was forced to use to please his electoral base.

Catch that? While Romney’s Wall Street sympathies would likely have been an impediment to financial reform, he would have done a better job on financial regulation than Obama because he would have avoided populist and anti-business rhetoric while not introducing effective regulation at all. Finally, someone with the guts to say that the key to effective financial regulation is saying nice things about rich people and bankers and not passing any financial regulations.

For those of you keeping score at home, Zingales’ case that Romney would have made a better president over the past four years had four arguments. On health care, Romney would have governed as “the ultimate pragmatist…trying to fix problems, not advance an ideology.” On the economy, he would have “focused on subsidies to employment (a payroll-tax cut) and incentives for purchases of durable goods (a temporary sales-tax rebate)…rather than on pushing a liberal agenda.” On the auto bailout…well, Zingales doesn’t actually say what Romney would have done differently. To be fair to him, Romney himself still hasn’t settled on what he would have done differently. And on financial regulation, he would “not have introduced much effective regulation at all, but he would have avoided the populist and anti-business rhetoric Obama was forced to use to please his electoral base.”

Are you inspired yet?

“A president should be judged for his ability to play the cards he has been dealt, not for his luck (or lack thereof)” Zingales argues, and on this point I have some sympathy. Zingales is doing his best to play the cards he has been dealt. It’s his bad luck that he has to resort to arguing for such unconvincing counterfactuals to defend such a poor candidate, so I will try not to judge him too harshly.


Written by negativeinterest

September 24, 2012 at 3:30 am

Posted in Uncategorized

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