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The Keynesian case for Romney

Even if you disagree with every one of Mitt Romney's policies, there's a chance he's still the best candidate to lift the economy in 2013.

That's not because he has business experience. For all his bluster about the lessons taught by the private sector, his agenda is indistinguishable from that of career politician Paul Ryan. Nor is it because he's demonstrated some special knowledge of what it takes to create jobs. Job growth in Massachusetts was notably slow under Romney's tenure. It's because if Romney is elected, Republicans won't choose to crash the economy in 2013.

The Congressional Budget Office estimates that if Congress gridlocks this year — if it simply gets nothing done — the economy will take a $607 billion hit in 2013 as the Bush tax cuts expire, the payroll tax cut expires and assorted spending cuts kick in. Falling off that "fiscal cliff," they predict, will throw us back into recession.

But it's worse even than that: Speaker John Boehner has said he wants another debt-ceiling showdown. We're not expected to hit the debt ceiling until February or March, and so the only scenario in which the debt ceiling matters is one in which Congress has already pushed us over the fiscal cliff. So as bad as the last debt-ceiling crisis was — and Gallup's polling showed it did more damage to consumer confidence than the fall of Lehman Bros. — this one would be worse.

Miles Nadal, CEO of the marketing and communications firm MDC Partners, says that at a recent event with executives of more than 100 companies, the business leaders, panicked about this possibility, agreed on the best outcome for the economy: "a Republican landslide." Why? "Because anything that breaks the logjam is positive," he says. "The quality of the leader is less relevant than the ability to break gridlock."

There's no reason to believe Romney could "break" gridlock. But there's reason to believe he wouldn't face it in the first place. Republicans control the House. They're three seats from controlling the Senate — and, because this Senate election follows 2006, which was a wave election for Democrats, Republicans are defending 10 seats while Democrats are defending 23. It's difficult to imagine a scenario in which Romney wins the White House and Republicans don't control the House and Senate. On the other side, while it's not impossible to imagine President Barack Obama winning the White House and Democrats taking back the House, it's unlikely.

Romney and the Republicans are not likely to reach 60 seats in the Senate, but they won't need them. The major issues on the table are budgetary. That means they can be considered using the budget reconciliation process, which can't be filibustered. So if Republicans can maintain party unity — and they usually can — they'll be able to govern effectively. And there's no way that they'll permit the Bush tax cuts to expire or the debt ceiling to lapse. Investors, knowing that, would likely stop worrying about the debt ceiling the moment a Romney win became clear.

Now, Republicans could still push the economy into recession if they pass an immediate austerity budget that slashed spending in 2013. And, given Republican rhetoric about how slashing the size of government will lead to more growth because the confidence fairy will come out and persuade businesses to spend more, you might think that's exactly what they'll do.

But Romney, though he often buys into that sort of nonsense while criticizing Obama, knows better. Time magazine asked him about cutting spending in 2013. "If you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5 percent," Romney said. "That is by definition throwing us into recession or depression. So I'm not going to do that, of course." You couldn't have gotten a clearer definition of Keynesian budgeting from Obama.

There's a good chance that a Romney administration would extend both Bush and Obama's tax cuts and delay the scheduled spending cuts. Congress would raise the debt ceiling after Romney promised congressional Republicans that he'd sign some variant of Paul Ryan's budget as soon as it's sent to him. Somewhere along the way, Romney would pass both more short-term tax cuts and a long-term transportation bill — something Republicans have been blocking under Obama — that doubles as an infrastructure package and includes, to secure Republican support, the Keystone XL oil pipeline.

Nor is it clear that this will come at the cost of harsh deficit reduction in coming years. There will almost certainly be deep spending cuts if Romney is president, but both the Romney and Ryan proposals include trillions of dollars in unpaid-for tax cuts and defense spending. If Republicans clear that hurdle by simply assuming that deep tax cuts will lead, through supply-side magic, to larger revenues, their deficit-reduction plans might well end up increasing the deficit over the next few years. "Remember," wrote Business Insider's Joe Weisenthal, "Republicans were pro-deficit, and pro-entitlement expansion under Bush and Reagan. Deficit cutting only became part of the party's ideology under Obama."

Compared to anything Obama is likely to get from a GOP House, that is, at least in the short term, a much more expansionary, Keynesian approach. But it's also an awful precedent. In a sense, Republicans are holding a gun to the economy's head and saying, "vote for us or the recovery gets it." That might well prove an effective political strategy: The more they say that they're willing to let the debt ceiling expire and the economy run over the fiscal cliff, the more businesses will pull back and households will stop spending in order to make sure they have enough cash on hand to ride out another crisis. That will further depress the economy this year, making it more likely that Romney wins, and that Republicans embrace the smooth Keynesian glide path that they're denying Obama.

If Obama wins, it's of course possible that the two sides will come to a swift agreement. That's the president's prediction. "I believe that if we're successful in this election, when we're successful in this election, that the fever may break, because there's a tradition in the Republican Party of more common sense than that," Obama has said. "My hope, my expectation, is that after the election, now that it turns out that the goal of beating Obama doesn't make much sense because I'm not running again, that we can start getting some cooperation again."

But privately, many top Democrats admit that congressional Republicans, angry after a narrow loss and appealing to a base that is likely to blame the defeat on Romney's moderate past, might prove just as obstructionist after the election than before it. If that happens, they say, the president can't keep giving into Republican threats. Much as the government shutdowns in the 1990s discredited Newt Gingrich's hardball tactics, Obama will have to let voters see the consequences of the tea party's approach. But while that might be sage political advice, the economic consequences could be devastating.

This is the logical conclusion of a system biased toward gridlock: The out-party benefits when the public feels that Washington is failing and it often has the power to make Washington fail. Which, arguably, leads to another unusual reality about this election: Even if you agree with Romney's policies, it may be that voting for Obama, and delivering a landslide against the GOP's economic brinksmanship, is the only way to end the dangerous appeal of strategic gridlock going forward.

So which are you more worried about? The fiscal cliff and the debt ceiling? Or the political system?

© The Washington Post Company

Editor's note: Ezra Klein's essay appeared in the Washington Post last week. After it was published, he wrote the following addendum.

A lot of people took my column on the Keynesian possibilities of a Romney presidency as a commentary on who they should vote for rather than as an observation on the policy consequences of gridlock. So let me put it slightly differently.

There are two variables worth thinking about in the 2012 election: Who is the president? And is Congress divided? That gives you four possible outcomes: Barack Obama can win with a divided Congress or a Democratic Congress, and Mitt Romney can win with a divided Congress or a Republican Congress. Here's how I'd rank the Keynesian possibilities of those four scenarios, in descending order:

(1) Obama and a Democratic Congress;

(2) Romney and a Republican Congress;

(3) Romney and a divided Congress;

(4) Obama and a divided Congress.

I think the only choice on that list that's even mildly controversial is ranking Romney and a divided Congress above Obama and a divided Congress. But Romney clearly understands and agrees with the need for short-term Keynesian budgeting, and as Jon Chait has written, "Democrats don't have any history of opportunistically abandoning Keynesian economics when the other party's neck is on the economic line."

Congressional Republicans, meanwhile, do have a history of opportunistically abandoning Keynesian economics when the other party's neck is on the economic line. Making matters worse, the Obama administration believes, rightfully, that they can't let Republicans continuously hold the economy hostage. At some point, this brinksmanship has to end. But that means that if the GOP insists on taking us over the cliff and breaching the debt ceiling, there's a good chance Obama will let them do it, at least so long as he's confident they'll be blamed. So Republicans will be holding the line for contractionary policy, and there's a high chance of fiscal/financial disaster. That's terrible for the recovery.

Now, let's rank those scenarios by their probability of occurring, at least according to the InTrade market's betting estimates:

(1) Obama and a divided Congress.

(2) Romney and a Republican Congress;

(3) Romney and a divided Congress;

(4) Obama and a Democratic Congress;

The least Keynesian outcome is suddenly the most likely outcome. The most Keynesian outcome is the least likely outcome. But Romney and a Republican Congress — the second most Keynesian outcome — remains the second-most likely outcome.

Which is the basic point of my column: If you assume the only really likely outcomes are Obama and a divided Congress and Romney and a Republican Congress, the most Keynesian outcome is probably Romney and a Republican Congress. But that's also the outcome that's worst for the political system's long-term health, as it will mean the Republican Party was rewarded for the incredibly dangerous brinksmanship of the past year, and if their victory is partially because the economy slows on fears of a crisis in 2013, based on their reckless promises of more brinksmanship next year.

The overarching point isn't that I'm telling you who to vote for — that's not my job, and this doesn't say anything about whose long-term policies for the economy are better, or whose Supreme Court picks would be superior, or who is more likely to go to war with Iran, to name just a few considerations you'll want to make — but that people need to understand the role strategic gridlock is playing in our economic problems. Right now, however, neither candidate has a persuasive plan for how they'll end gridlock going forward. The only idea with even a possibility of working is if the American people delivered a clear verdict against its practitioners at the polls.

— Ezra Klein

Editor's note: Ezra Klein's essay appeared in the

Washington Post last week. After it was published,

he wrote the following explanatory addendum.

A lot of people took my column on the Keynesian possibilities of a Romney presidency as a commentary on who they should vote for rather than as an observation on the policy consequences of gridlock. So let me put it slightly differently.

There are two variables worth thinking about in the 2012 election: Who is the president? And is Congress divided? That gives you four possible outcomes: Barack Obama can win with a divided Congress or a Democratic Congress, and Mitt Romney can win with a divided Congress or a Republican Congress. Here's how I'd rank the Keynesian possibilities of those four scenarios, in descending order:

(1) Obama and a Democratic Congress;

(2) Romney and a Republican Congress;

(3) Romney and a divided Congress;

(4) Obama and a divided Congress.

I think the only choice on that list that's even mildly controversial is ranking Romney and a divided Congress above Obama and a divided Congress. But Romney clearly understands and agrees with the need for short-term Keynesian budgeting, and as Jon Chait has written, "Democrats don't have any history of opportunistically abandoning Keynesian economics when the other party's neck is on the economic line."

Congressional Republicans, meanwhile, do have a history of opportunistically abandoning Keynesian economics when the other party's neck is on the economic line. Making matters worse, the Obama administration believes, rightfully, that they can't let Republicans continuously hold the economy hostage. At some point, this brinksmanship has to end. But that means that if the GOP insists on taking us over the cliff and breaching the debt ceiling, there's a good chance Obama will let them do it, at least so long as he's confident they'll be blamed. So Republicans will be holding the line for contractionary policy, and there's a high chance of fiscal/financial disaster. That's terrible for the recovery.

Now, let's rank those scenarios by their probability of occurring, at least according to the InTrade market's betting estimates:

(1) Obama and a divided Congress.

(2) Romney and a Republican Congress;

(3) Romney and a divided Congress;

(4) Obama and a Democratic Congress;

The least Keynesian outcome is suddenly the most likely outcome. The most Keynesian outcome is the least likely outcome. But Romney and a Republican Congress — the second most Keynesian outcome — remains the second-most likely outcome.

Which is the basic point of my column: If you assume the only really likely outcomes are Obama and a divided Congress and Romney and a Republican Congress, the most Keynesian outcome is probably Romney and a Republican Congress. But that's also the outcome that's worst for the political system's long-term health, as it will mean the Republican Party was rewarded for the incredibly dangerous brinksmanship of the past year, and if their victory is partially because the economy slows on fears of a crisis in 2013, based on their reckless promises of more brinksmanship next year.

The overarching point isn't that I'm telling you who to vote for — that's not my job, and this doesn't say anything about whose long-term policies for the economy are better, or whose Supreme Court picks would be superior, or who is more likely to go to war with Iran, to name just a few considerations you'll want to make — but that people need to understand the role strategic gridlock is playing in our economic problems. Right now, however, neither candidate has a persuasive plan for how they'll end gridlock going forward. The only idea with even a possibility of working is if the American people delivered a clear verdict against its practitioners at the polls.

Ezra Klein

The Keynesian case for Romney 06/09/12 [Last modified: Saturday, June 9, 2012 5:31am]
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