Mitt Romney and America’s Four Deficits

BERKELEY – The United States is beset by four deficits: a fiscal deficit, a jobs deficit, a deficit in public investment, and an opportunity deficit. The budget proposals put forward by presidential candidate Mitt Romney and his running mate, Paul Ryan, could reduce the fiscal deficit, but would exacerbate the other three.

To be sure, Romney and Ryan have failed to provide specifics about how they would reduce the fiscal deficit, relying on trust me assertions. But the overarching direction of their proposals is clear: more tax cuts, disproportionately benefiting those at the top, coupled with significantly lower non-defense discretionary spending, disproportionately hurting everybody else – and weakening the economy’s growth prospects.

Despite 30 months of private-sector job growth, the US still confronts a large jobs deficit. The unemployment rate remains more than two percentage points above the normal rate (when the economy is operating near capacity). Moreover, the labor-force participation rate remains near historic lows.

More than 11 million additional jobs are needed to return the US to its pre-recession employment level. At the current pace of recovery, that is more than eight years away. In the meantime, persistent high unemployment reduces the economy’s growth potential by robbing today’s workers of skills and experience.

When weak aggregate demand causes the economy to operate far below its potential, cuts in government spending enlarge the jobs deficit. Indeed, in his recent speech in Jackson Hole, Wyoming, US Federal Reserve Chairman Ben Bernanke warned that such cuts significantly inhibit job creation.

Without revealing which programs he would reduce, Romney promises to slash federal spending by more than $500 billion in 2016, capping it at 20% of GDP thereafter. He also promises an immediate 5% cut in non-defense discretionary spending in 2013, on top of the huge cuts already scheduled to take effect. And he has ruled out additional temporary fiscal measures aimed at job creation, like President Barack Obama’s proposals for additional grants to states and additional infrastructure spending.

Romney acknowledges that large spending cuts, along with the scheduled expiration of tax cuts at the end of this year, could throw the economy back into recession in 2013. But he vows to steer the economy from the fiscal cliff by extending the tax cuts enacted under George W. Bush, doubling down with a further 20% across-the-board cut in income-tax rates and cutting the corporate rate from 35% to 25%.

With the possible exception of the extension of the Bush-era tax cuts, these changes would take considerable time to implement. Even when enacted, their near-term effects on job creation would be minimal. An across-the-board reduction in tax rates performs poorly in terms of budgetary effectiveness (the number of jobs created per dollar of foregone revenue). Payroll-tax relief and spending on programs like food stamps and unemployment compensation are much more effective.

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