I'm just going to say it: Based on where things stand now, Mitt Romney's plans for the economy better address the problems we face than what we've heard from the president.
And clearly, despite a curious drop in the unemployment rate to 7.8% last Friday -- in what was the largest statistical outlier since 2003 just one month before Election Day -- we've still got problems. The employment-to-population ratio is mired at early 1980s levels. The underemployment rate remains near 15%. Wages are stagnant, barely keeping pace with rising costs of living. Household wealth remains well off its pre-recession peak. And recent job gains have been focused on part-time and government-dependent education and health care positions.
Why Romney? Sure, his delivery can be wooden. His compassion for the 47% of Americans who don't pay federal income taxes is in question. And the tower from which he looks down is a tall one.
But in the battle for economic ideas, he is winning. A new Pew Research poll reflects this. After last week's debate, Romney enjoys a clear advantage on ideas for jobs, taxes and the deficit.
This isn't to say we haven't made progress under the current president, as I discussed in "Are we better off under Obama?" Rather it's about where we're going, given recent stagnation. It's about who can best bury his spurs into the hide of this economy and take it from a lazy trot back into a full gallop.
Anthony Mirhaydari
It comes down to this: Romney's focus on boosting the confidence of business owners large and small via streamlined regulation, tax cuts and simplification of the tax code is exactly what's needed to resuscitate growth, encourage investment, create jobs, help close the budget deficit and, yes, increase the welfare of average working Americans.
The right focus
Both candidates talk about cutting the corporate tax rate. But only Romney talks about income tax relief for the small and midsize businesses that are the engines of any robust recovery. These businesses have been limited by reduced financing from hesitant banks, are exposed to new requirements under President Barack Obama's health care plan and often pay taxes at the 33% and 35% personal tax rates.
Romney's plan, as outlined last week, is to cut marginal rates by 20% for everyone while streamlining the tax code and broadening the tax base by capping the use of deductions, credits and exemptions (which, I do need to note, haven't been specified). He also wants to encourage U.S.-based businesses to bring home money stashed overseas and to make temporary research and development credits permanent.
This is a pro-growth, simulative action designed to be revenue neutral via increased economic growth. As Princeton economist Harvey Rosen notes in his analysis of Romney's plan (.pdf file), if more people are working and making money as a result of the change, more people are paying taxes. The mechanism for action is the confidence boost from lower rates as well as reducing the dead-weight loss of the $400 billion spent annually to comply with the complex tax code used to collect overall income tax payments of $1.1 trillion.
(Rosen's study was itself a response to doubts created by a much-publicized analysis of Romney's plan by the Tax Policy Center, which said Romney's numbers didn't add up. Rosen says the Tax Policy study left out the so-called "micro-dynamic behavioral responses" he relies on.)
Romney also says that he will not change the progressivity of the tax code or the tax burden borne by upper-income households -- a burden that has the top 20% of households by income paying nearly 70% of all federal tax liabilities while earning 51% of all income.
Given Romney's shifting stances on many issues, and the deficit blowouts associated with prior Republican-led tax-cut campaigns, many doubt the effectiveness and authenticity of what Romney is calling for. Whether it's genuine, I don't know, and whether it works will also depend on the cooperation of Congress. But at face value, there is much to like.
The key is growth
Really, the only way to attack the budget deficit and start reducing the national debt is focused short-term growth measures combined with action on long-term structural drivers of the deficit, namely health care cost inflation and unfunded entitlements.
Tax measures, I believe, will be more effective than another round of stimulus spending, because they tap into the one area of the economy best positioned to help: the corporate sector, which has been underinvesting and is relatively unleveraged compared with the indebted household and government sectors.
Compare this to the tax hikes being deployed in Europe in a vain attempt to close budget deficits through painful austerity. That strategy didn't work in the Great Depression, since the more you raise taxes and cut spending, the weaker your economy becomes, causing tax revenues to drop and spending on things like unemployment benefits to rise, causing your deficit to widen again.
And as the International Monetary Fund warns in its latest World Economic Outlook (.pdf form) it won't work now, either. The focus must be on short-term growth combined with long-term reform.
Why Medicare must change
Romney has some ideas here too: using the power of competition and the free market to force things like price transparency and cost-benefit analyses into an industry that's been sheltered by government largesse and the public's reluctance to address issues of morality and mortality. It will require patients to do more legwork, shopping for insurance and subjecting their health care providers to more scrutiny. And they will bear the burden of fighting the relentless rise in health care costs. But it must be done.
Medicare costs are expected to double, to $1 trillion, over the next eight years. Yet according to the Urban Institute, the average couple turning 65 in 2010 had paid $109,000 in Medicare taxes but would receive $343,000 in benefits. Simply raising taxes on the wealthy to close the funding gap -- combined with the Affordable Care Act's bureaucratic and limp-wristed attempt at cost control -- is a terrible idea.
Not only will that make the short-term, cyclical portion of the deficit worse by impeding growth, it will also further damage the economy's long-term vitality by additionally weighing on capital investments and productivity gains. This will lower the economy's potential rate of growth and its ability to create prosperity.
I'll say it like this: I don't want more tax dollars forced from the hands of society's most productive members to be reallocated, by the rule of law and penalty of imprisonment, into one of the economy's most inefficient sectors to pay for benefits that were overpromised and underfunded. Instead, let's allow entrepreneurs and innovators to spend that money on ways to lower the cost of care and increase the quality of life for everyone via things like new DNA sequencers and research-and-development spending, while consumers demand better services at lower costs.
That's because the only way to create U.S. jobs is to increase the demand for American labor. And the only way to do that is to make small and midsize enterprises feel comfortable investing and hiring again and to give them a source of financing -- via retained earnings from lower taxes -- to fund that investment in lieu of limited bank lending. (Large enterprises, for their part, are sitting on a ton of cash and can borrow at extremely low rates in the corporate bond market.)
This is what's needed if America is going to take advantage of jobs coming back from China.
Obama's focus on more onerous regulatory burdens, tax hikes and wealth redistribution toward the middle class isn't working: Growth of the gross domestic product has been slowing steadily since 2010, industrial production has stalled, durable goods orders are falling hard (shown below), and CEO confidence has crashed as corporate profits come under pressure. Companies have cut capital expenditures so deeply that the country's industrial capacity is roughly where it was a decade ago. And hiring and capital investment plans, based on a recent Business Roundtable survey, have fallen back to levels seen when the jobs recession was raging in late 2009.
This is a problem I've talked about in past columns. In the context of Romney's gaffe about the 47%, I noted that the Organisation for Economic Co-Operation and Development warned that "taxing more and spending more" won't solve our problems. Back in August, I wrote that our economy won't roar back to life unless we persuade CEOs to open their wallets and start taking risks.
We've been here before
Don't think our current predicament is unique. Barry Knapp at Barclays Capital sees eerie similarities between the current situation and President Harry Truman's 1948 re-election. Truman's Fair Deal campaign has much in common with Obama's platform. Indeed, in his closing statement in last week's debate, Obama reiterated his desire to see that "everybody's getting a fair shot" and that "everybody's getting a fair share." Both have emphasized things like universal health care, increased education spending and pro-union legislation.
Economic conditions were also similar -- with the government deeply indebted, the Federal Reserve capping the Treasury's borrowing costs and housing recovering from a national decline.
And then, like now, capital spending started to fall ahead of the election before dropping sharply in the early part of 1949 after Truman won a surprising upset over Republican challenger Thomas Dewey, thanks to his attacks against a "do-nothing" Congress and Dewey's lack of policy specifics. What followed was an 11-month recession and a 19% drop in the stock market between November 1948 and June 1949.
(To be fair, stocks are up nearly 120% from their March 2009 low under Obama. But it's hard to know how much of this was driven by Federal Reserve policies rather than those of the president.)
The late market historian Robert Sobel wrote of the Truman period in his work "The Big Board: A History of the New York Stock Market":
"Wall Street prepared for the year-end rally in late October, as volume and prices both rose. Then came the shock of the Truman victory, shattering dreams of a pro-business administration in Washington. The next day opened with a rush of sell orders, and trading was held up as specialists tried to establish an orderly market."
It's possible that the reverse of this could play out in the weeks to come as Romney's chances rise. But so far, I'm not seeing signs of optimism from Wall Street. Maybe there needs to be another strong debate performance before Wall Street reacts.
I'm recommending my newsletter subscribers and money management clients maintain a defensive posture, including a short position against industrial engine manufacturer Cummins (CMI).
Cummins was hit with selling pressure earlier this week after the company downgraded its forward guidance. It is now looking for third-quarter revenues of $4.1 billion, compared with a consensus estimate of $4.42 billion, and 2012 fiscal year revenue of $17 billion, compared with a $18.1 billion consensus. Management cited heightened uncertainty, delayed capital expenditures, lower demand and weak conditions in China for the move.
In response, Cummins is taking actions including planned workweek reductions, manufacturing facility shutdowns and layoffs of as much as 1,500 people by year end. This is a perfect example of the negative ramifications of a drop in corporate investment.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column. He has recommended a short position in Cummins to his newsletter subscribers and money management clients.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
