October 29, 2012
On economic policy, Mitt Romney makes his own decisions.
The former Massachusetts governor and private equity executive considers the advice from his cadre of economics PhDs but ultimately charts his own course, according to the Romney campaign. President Obama has knocked the resulting policies as vague. But two of Romney's leading advisers who both served as chairman of George W. Bush’s Council of Economic Advisers have some novel ideas that haven’t gotten much airtime from the candidate—and even contradict some of his proposals.
Since those ideas could easily become part of the conversation in a Romney White House, The Fiscal Times dug through the work of Columbia University’s Glenn Hubbard and Harvard University’s Greg Mankiw for the six big ideas not being discussed by the GOP nominee on the campaign trail.
No More Cheap Oil – Here’s the core of the Romney energy policy: Strip away federal restrictions; drill more for oil and natural gas; ink a partnership with Canada and Mexico, and, voila, energy independence for all of North America and three million new U.S. jobs.
“If the president's energy policies are working, you're going to see the cost of energy come down,” Romney stipulated at the Oct. 16 presidential debate. But it will take higher prices to break our addiction to petroleum, according to the 2010 book, Seeds of Destruction, co-written by Hubbard and Peter Navarro, an economics professor at the University of California, Irvine.
The book recommends charging a “flexible” tax whenever oil prices fall below a minimum target. Guaranteed higher prices would cause Americans to fuel up less often—cutting down our petroleum imports, reducing our trade deficit, and increasing our gross domestic product.
“For example, if the world price of oil is $80 a barrel and the target $100, the initial fee is $20 a barrel. However, if the world price moves up toward the target rate—say, to $90—the fee falls to $10. Moreover, whenever the world price moves above the target, there is no fee! ... We also believe that any revenues raised from such a fee should be given back to the American people in the form of tax cuts.”
That plan has a trade-off. If the White House and Congress agreed to the $100 level used in the book, the $3.54 a gallon average that Americans currently pay for gasoline could become the lowest possible price at the pump.
Tax Carbon Emissions – Many scientists argue that the consequences of climate change can be witnessed in extreme weather patterns—droughts, intense hurricanes, and a level of volatility that defies seasonal norms. Mankiw argued in a 2009 paper that taxing carbon emissions would help stem climate change.
Taxing things that cause high social costs—like cigarettes because of lung cancer—comes from the English economist Arthur Pigou. In his paper, Mankiw accepts the scientific conclusions about global warming at face value and discusses how charging taxes can occasionally produce benefits for society, even noting that a congestion tax would reduce traffic.
“Discussing the size of a carbon tax, rather than alternatives to it, would be a big step forward compared to where the public discussion is right now,” Hubbard wrote. “As judged on purely political terms, higher Pigovian taxes are a wacky idea. I have yet to see a major candidate for President endorse the concept….We can hope that in future elections the gap between the advice of the economic advisers and the advice of the political consultants will become a lot smaller.”
Romney, like some scientists, is uncertain whether climate change is manmade. “The idea of spending trillions and trillions of dollars to try and reduce CO2 emissions is not the right course for us," he said at a campaign fundraiser, according to NPR. But Romney would actually go a step further, proposing in his 59-point economic plan, “Believe in America,” to amend the Clean Air Act and stop the government from regulating carbon dioxide.
All Medical Expenses Become Tax Deductible – Hubbard thinks that tax incentives have caused health care costs to surge, putting pressure on American families and the federal budget. The single largest tax break ($184.4 billion a year) comes from employer-sponsored health insurance. These plans “insulate consumers from the true costs” of treatment and “leads to a whole range of wasteful medical practices,” Hubbard argues in his book.
But because it would be “a huge political hot potato” to get rid of the deduction, he prefers to extend the deductions to all individual medical expenses, so that more people would have incentives to buy their own health insurance with higher deductibles and—as savvy consumers—control costs.
Paul Fronstin, a senior research associate with the Employee Benefit Research Institute, noted that about 20 percent of the population accounts for 80 percent of all medical spending—and it’s highly uncertain about how their spending habits would change under this plan.
“We’re already moving in this direction to get people to use less health care, yet premiums are still increasing at twice the cost of inflation. Will changing the tax structure change the way they use health care?” Fronstin said. “I want to see the numbers before I say this will work or won’t work.”
Refinance 14 Million Mortgages – Along with his colleagues Alan Boyce, Chris Mayer, and James Witkin, Hubbard developed a plan to refinance mortgages for as many as 14 million Americans, saving them more than $2,500 a year on average.
Their proposal applies to borrowers with fixed-rate mortgages from Fannie Mae and Freddie Mac who have been current with their payments for at least three months. It streamlines a process that has been road blocked since the housing bust, and resembles a plan sponsored by Rep. Dennis Cardoza, D-Calif., Sen. Barbara Boxer, D-Calif, and Sen. Johnny Isakson, R-Ga.
The additional $2,500 a year would essentially be a constant form of stimulus. But Romney famously told a Nevada newspaper last year that the government should not intercede with the housing market and let it hit the “bottom.” The Romney campaign in September released a vague plan promising “foreclosure alternatives” for struggling homeowners.
Thumbs Up for Ben Bernanke – Mankiw dubbed the second round of quantitative easing, known as QE2, by the Federal Reserve “a small but risky step in the right direction,” on his blog in 2010. He also congratulated Fed Chairman Ben Bernanke in The New York Times for keeping inflation so far near the central bank’s 2 percent target.
Romney has made no secret of how much he dislikes Bernanke. As noted by Bloomberg News, the Republican nominee told Fox News in August that he wants someone “who shared my economic views” and ensures “monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril.”
End Capital Gains and Dividend Taxes – Romney would end all taxes on investment gains for those earning less than $200,000, giving them an incentive to save. For those with larger incomes, he would maintain the current tax rates of 15 percent on capital gains, interest and dividends.
Hubbard recommends ending all taxation on investment, creating an income tax that focused more on consumption, known as a value added tax (VAT). “Such a ‘progressive consumption tax’ meets the most important challenge of stimulating growth by providing maximum incentives for individual saving and business investment while removing the double taxation of capital income,” he wrote.
While the Columbia economist pitches the idea as a bipartisan “middle ground,” not all progressives see it that way. As proposed by Hubbard it would skew toward the wealthy, while the Romney plan would apply to Americans without much income to save, said Chye-Ching Huang, a tax policy analyst at the Center on Budget and Policy Priorities.
“These people are much more likely to spend any resources they have,” Huang told The Fiscal Times. “There’s very little evidence that if you give these people a tax cut on dividends that they’re going to save more.”