The Romney Program for Economic Recovery,
Growth, and Jobs
R. Glenn Hubbard (Columbia University), N. Gregory Mankiw (Harvard University),
John B. Taylor (Stanford University), and Kevin A. Hassett (AEI)
The U.S. economy has the talent, ideas, energy, and capital for the robust economic growth that
has characterized much of America’s postwar experience. Our living standards going forward,
and the nation’s standing as a world power, depend on restoring that growth and broadly shared
prosperity.
We are presently in the most anemic economic recovery in the memory of most Americans, with
significant joblessness and long-term unemployment, as well as lost income and savings. We are
stuck in a low-growth trap following the 2007-2009 recession and financial crisis. The anemic
job growth and tragically high unemployment are a consequence of that low-growth trap. The
recent second quarter 2012 Gross Domestic Product (GDP) growth estimate of 1.5 percent,
following 2 percent growth in the first quarter, makes a stark fact clear: The economy is not
getting stronger, it’s getting weaker.
The Obama administration says that the economy’s awful performance reflects the reality of the
aftermath of a financial crisis and that the administration’s policies generated what little recovery
we have seen from the severe 2007-2009 recession – Americans should stay the course.
But the historical record is clear: Our economy usually recovers quickly from recessions, and the
more severe the recession, the faster the subsequent catch-up growth. For example, recent
research by Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve
Bank of Cleveland makes clear from historical data that a slow growth recovery is not inevitable.
In fact, each year, the administration has forecast just such robust growth for the year ahead, and
each time these hopes have been dashed. These repeated forecasts contradict the administration’s
excuse that slow growth is the inevitable result of the recession and financial crisis. If a slow
recovery were the predictable aftermath of a financial crisis, why has the administration
continued to forecast a robust recovery?
America took a wrong turn in economic policy in the past three years. The United States
underperformed the historical norm shown in the administration’s own forecasts, and its policies
are to blame. To see why, we will explore the administration’s economic errors and poor choices.
Understanding why the administration’s policies have stuck the economy in a slow-growth trap,
we can explain how different economic ideas and choices can move us forward. The Romney
economic program will change the direction of policy to focus on economic growth. Its progrowth effects will work in two basic ways: It will speed up the recovery in the short run, and it
will create stronger sustainable growth in the long run.
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From President Obama: Misdiagnosis and Mistakes in Economic Policy
The 2007-2009 financial crisis produced a severe recession. GDP fell 4.6 percent from its peak
during the recession to the trough in June 2009. But GDP growth has been anemic since then,
averaging just 2.2 percent per year since the trough. This pattern is unusual. The past ten
recessions have been followed by faster recoveries, and GDP has fairly swiftly recovered to the
previous trendline.
Declines in business investment and employment were particularly sharp in this recession. Far
from being a lightning bolt hitting a smoothly running economy, the crisis was exacerbated by
structural biases against business investment (from the tax code and regulation), financial
imbalances (particularly fueled by biases against private saving and by the need to borrow
abroad to finance our government deficits), and regulatory choices (excessive promotion of
housing investment and inadequate attention to existing financial regulations and the rise of and
consequences of shadow banking). No single party or administration is responsible for structural
headwinds to growth, but the Obama administration’s errors and choices exacerbated the
economy’s structural problems and weakened the recovery.
Rather than focusing on the structural problems revealed by the financial crisis and the ensuing
recession, the Obama administration focused on short-term fiscal ‘stimulus.’ To put the economy
back on track, they borrowed deliberately and spent recklessly, ignoring weaknesses in housing,
business investment, and employment. These short-term stimulus packages were ineffective,
leaving the nation with higher debt, which acts as a drag on long-term growth because
households and businesses understand that the administration must raise taxes significantly to
pay off that debt.
The negative effect of the administration’s ‘stimulus’ policies has been documented in a number
of empirical studies. Research by Atif Mian of the University of California, Berkeley, and Amir
Sufi of the University of Chicago showed that the cash-for-clunkers program merely moved new
car purchases ahead a few months with no lasting effect. John Cogan and John Taylor of
Stanford University examined the 2009 stimulus act and found that the temporary payments and
credits sent to people failed to jumpstart consumption, just as predicted by basic economic theory.
Moreover, federal grants sent to the states for infrastructure investment were either stashed away
in state or local coffers or had the perverse effect of reducing government purchases of goods
and services due to various strings attached to the grants. A core error in the administration’s
approach was to assume that short-term stimulus, many times if needed, would put the economy
back on a sustainable long-term growth path. Rather, attention to long-term structural problems
in taxation, spending, and regulation would have offered a better tonic for growth in the short run.
Indeed this is the conclusion of a number of economists with policy and empirical experience as
documented in a recent book edited by Lee Ohanian, John Taylor, and Ian Wright.
In short, the Obama administration chose to emphasize short-term fixes – ineffective stimulus,
cash for clunkers, myriad housing programs that went nowhere, and a rush to invest in ‘green’
companies irrespective of cost – rather than restoring long-term growth and productive privatesector job creation.
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As a consequence of short-termism, uncertainty over policy – particularly over tax and
regulatory policy – limited both the recovery and job creation. One recent study by Scott Baker
and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found
that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis
levels of uncertainty would add 2.3 million jobs in 18 months. These attempted short-term fixes,
even with unprecedented monetary accommodation, produced average real GDP growth of just
2.2 percent over the past three years, and the consensus outlook looks no better in the year ahead.
The accompanying sustained increases in debt raise the specter of large future tax increases,
further chilling business investment and job creation today.
In addition to these policy errors, the Obama administration has made choices to bypass reforms
that would jumpstart long-term growth and job creation. Such reforms would address our anticompetitive tax code and unsustainable trajectory of federal debt – but the president ignored his
own deficit commission and submitted no plan for entitlement reform. Treasury Secretary
Geithner famously told the Congress that the administration was putting forth no plan, but “what
we do know is that we don’t like yours.”
Such reforms would also emphasize opening global markets for American goods and services,
and improving access to goods and services for American consumers. Yet the president has made
no contribution to the global trade agenda, and was only recently dragged into supporting
individual trade agreements.
The president’s choices cannot be ascribed to a political tug of war with Republicans in Congress.
President Obama and Democratic congressional majorities had two years to tackle any priority
they chose. Their priority was not growth and jobs but rather a regulatory expansion. The Patient
Protection and Affordable Care Act raised taxes, unleashed significant new spending, and raised
hiring costs for workers. The Dodd-Frank Act missed the mark on housing and “too-big-to-fail”
financial institutions, but raised financing costs for households and small and mid-sized
businesses.
President Obama’s budget initiatives have stymied growth. The administration has thrown up
impediments to domestic energy production and energy security. His plan to raise marginal tax
rates on upper-income Americans and on saving and investment (through higher tax rates on
dividends and capital gains) fly in the face of tax reform needed to increase American investment
and competitiveness. A recent study by Ernst & Young concludes that the president’s policies
would reduce GDP by 1.3 percent (or $200 billion per year), destroy 710,000 jobs, depress
investment by 2.4 percent, and reduce wages and living standards by 1.8 percent. According to
the Congressional Budget Office, the large deficits codified in the president’s budget would
reduce GDP during 2018-2022 by between 0.5 and 2.2 percent compared to what would occur
under current law. And America’s weakened fiscal position puts our international economic
leadership in jeopardy, which in turn negatively affects economic growth.
These economic errors and policy choices have consequences: high unemployment, high longterm unemployment, and ranks of discouraged workers. And most startling: At the present rate
of job creation, the nation will never return to full employment.
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From Governor Romney: A Better Way
It doesn’t have to be this way: this tough spot reflects economic errors and policy choices.
Economic policy must change course. And the American people have a choice. A policy agenda
focused on job creation, rising incomes, and broadly shared prosperity is a choice we can make.
That choice is Governor Romney’s economic plan for America.
Governor Romney’s economic plan will completely change the direction of economic policy. It
will emphasize the long-term changes that will increase GDP and job creation, both going
forward and now. It will put growth and recovery first.
The Romney plan has three overarching objectives: to restore confidence in America’s economic
future, to make America once again a place to invest and grow, and to provide opportunities for
Americans to compete and succeed. These objectives are all about unlocking the potential for
innovation, investment, and initiative in America’s dynamic economy.
The Romney plan will achieve these objectives with four main economic pillars:

Stop Runaway Federal Spending And Debt.
o Reduce federal spending as a share of GDP to 20 percent – its pre-crisis average – by
2016.
o In so doing, reduce policy uncertainty over the need for future tax increases.

Reform The Nation’s Tax Code To Increase Growth And Job Creation.
o Reduce individual marginal income tax rates across-the-board by 20 percent, while
keeping current low tax rates on dividends and capital gains. Reduce the corporate
income tax rate – the highest in the world – to 25 percent.
o Broaden the tax base to ensure that tax reform is revenue-neutral.

Reform Entitlement Programs To Ensure Their Viability.
o Gradually reduce growth in Social Security and Medicare benefits for more affluent
seniors. Give more choice in Medicare to improve value in health care spending.
o Block grant the Medicaid program to states, enabling experimentation to better fit local
situations.

Make Growth And Cost-Benefit Analysis Important Features Of Regulation.
o Remove regulatory impediments to energy production and innovation that raise costs to
consumers and limit job creation.
o Repeal and replace the Dodd-Frank Act and the Patient Protection and Affordable Care
Act. The Romney alternatives will emphasize better financial regulation and marketoriented, patient-centered health care reform.
History and economic theory suggest the benefits that can be achieved with the Romney
economic plan. Better policy raises long-run growth, returning to a trendline of more promising
potential GDP growth, as opposed to the prospect of continuing sluggish growth forever. Good
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policy also fosters recovery, a period of faster growth as the level of economic activity returns to
normal.
Without a change of course from the current administration’s policy choices, nearly non-existent
economic growth is likely to continue at its current pace of approximately 2 percent per year.
This pace of economic growth has left us with high unemployment and unused resources.
If the current pace of economic growth were in line with the average of past recoveries from
deep recessions, the economy would be creating more jobs. If we had a recovery that was just the
average of past recoveries from deep recessions, like those of 1974-1975 or 1981-1982, the
economy would be creating about 200,000 to 300,000 jobs per month. By changing course away
from the policies of the current administration and ending economic uncertainty, as proposed by
the Romney plan, we expect that the current recovery will align with the average gains of similar
past recoveries. History shows that a recovery rooted in policies contained in the Romney plan
will create about 12 million jobs in the first term of a Romney presidency.
The Romney plan will also create stronger sustainable growth in the long run. The Romney tax
reform plan will increase GDP growth by between 0.5 percent and 1 percent per year over the
next decade. These long-run gains from tax and budget reform have been the subject of
significant study by economists, as documented in the Appendix. We view these estimates as
conservative as they fail to capture important, but hard-to-model, output gains from improved
regulation, more certainty about the path of policy, and the aggressive agenda that Governor
Romney has put forward with respect to energy, trade, education, human capital, and labor
policy. Combined, and bolstered by sound monetary policy, we estimate that the Romney
economic program will enable the private sector to create an additional 7 million net new jobs
over the next decade beyond the improvement in employment from a more robust cyclical
recovery in the short-term as a consequence of the Romney economic program.
How large is the growth rate increase including both the short-term recovery and the long-term
growth effects? Focus on the next decade. From 2013 to 2022, under CBO’s current projection,
potential GDP will grow about 2.5 percent per year on average. Thus, under the Romney
program, long run growth over this period would rise to between 3 and 3.5 percent per year. But
because of faster growth during the recovery period, actual real GDP growth will be stronger
over the decade.
Measuring from the first quarter of 2013 through the fourth quarter of 2022, the average growth
rate is expected to be approximately 4 percent per year with the upper long-term growth range,
and about 3.5 percent with the lower long-term growth range. This compares favorably with the
approximately 2 percent pace of the current recovery. Real GDP under the Romney plan will be
between $5.5 and $6.5 trillion higher than today, and between $2.1 and $3.1 trillion higher in
2022 than it would be under a continuation of current slow growth.
The difference between these expected outcomes and the record and plans of the Obama
administration is stark. That difference reflects both new economic ideas and policy choices.
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APPENDIX – GROWTH ESTIMATES FOR THE ROMNEY ECONOMIC PLAN
Assessing growth effects from the change in economic policy under the Romney plan can be
done by analyzing likely growth effects of individual elements of the plan (recognizing that some
are more easily quantified than others) or by historical comparisons with earlier periods in which
similar policies were enacted (recognizing the inherent difficulty in such benchmarking).
Tax Reform. A significant body of economic research concludes that fundamental tax reform
could increase real GDP growth over the next decade by 0.5 to 1 percentage point per year.
Kevin Hassett and Alan Auerbach surveyed the literature and found that tax reform could
increase output by between 5 and 10 percent. (Auerbach, J., Alan, Kevin A. Hassett, Toward
Fundamental Tax Reform, Washington, D.C.: The AEI Press, 2005). David Altig, Alan
Auerbach, Laurence Kotlikoff, Kent Smetters and Jan Wallsier found that reform proposals
would increase GDP by between 5 and 9 percent over the long run, using a dynamic economic
simulation model. (Altig, David, Alan J. Auerbach, Laurence J. Kotlikoff, Kent A. Smetters, Jan
Wallsier, “Simulating Fundamental Tax Reform in the U.S.,” University of California, Berkeley,
September 29, 1999). Young Lee and Roger Gordon found that a cut in the corporate tax rate by
10 percentage points would increase economic growth by 1.1 to 1.8 percent annually. (Lee,
Young, Roger H. Gordon, “Tax Structure and Economic Growth,” University of California, San
Diego, July 15, 2004)
More recently a study by John Diamond of Rice University estimated that the Romney tax
reforms will raise real GDP by about 0.6 percent per year over a decade and increase
employment in the long run (above the level possible in a more robust cyclical recovery) by 7
million jobs.
A long-term reform would also create a more stable tax code, which adds further gains in output
by increasing policy predictability. The number of provisions of the tax code expiring each year
has skyrocketed from 11 in 2000-2002 to 133 in 2010-2012. The epitome of the deviations from
basic principles is the self-inflicted fiscal cliff where many important provisions of the tax code
change at the end of 2012. Scott Baker, Nicholas Bloom, and Stephen Davis report the
quantitative impact of this uncertainty (in their paper in Government Policies and the Delayed
Economic Recovery edited by Lee Ohanian, John Taylor, and Jan Wright).
One important feature of business taxation is the link between the taxation of unincorporated
business income and the investment and employment decisions of unincorporated businesses.
Using estimated effects of taxation from previous research, one can calculate the change in
unincorporated business investment and employment as a result of the Romney program’s
proposed lower marginal tax rates, as opposed to Obama’s proposed higher marginal tax rates.
(See the research in Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S. Rosen,
“Entrepreneurs, Income Taxes, and Investment,” in Joel Slemrod, ed., Does Atlas Shrug?: The
Economic Consequences of Taxing the Rich. Cambridge: Harvard University Press, 2000; and
Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S. Rosen, “Income Taxes and
Entrepreneurs’ Use of Labor,” Journal of Labor Economics, April 2000.) Using similar research
methods, the decline in the top effective rate in the Romney program raises the probability that a
small business undertakes additional investment by 40 percent, and augments the capital outlays
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of those that do expand by 54 percent. As these expansionary incentives are put in place, the
demand for capital goods will rise – a fundamental of strong economic growth. The decline in
the top effective rate under the Romney program would raise the probability that a small
business would add to payrolls by roughly 48 percent – a significant impact. Similarly, for those
firms that do additional hiring, the growth in payrolls would be enhanced by over 14 percent. In
sum, tax reform that reduces marginal tax rates would benefit workers by increasing hiring and
wages.
Spending and Entitlement Reform. Recent research by John Cogan and John Taylor of Stanford
University and Volker Wieland and Maik Wolters of Goethe University estimates that the output
effects of a fiscal consolidation, like the Romney plan, would gradually reduce federal spending
relative to GDP. In a long-run model, the fiscal consolidation raises both investment and output
(the latter by almost 2 percent). In an alternative model with short-run rigidities, the spending
consolidation also raises output by about 2 percent. In both cases, output rises even in the short
run, as households and businesses respond to lower expected future tax rates as a result of the
fiscal consolidation.
Beneficial Effects of Tax Cuts Versus Temporary Stimulus Packages. Recent research by
Alberto Alesina and Silvia Ardagna of Harvard University argues that policies to increase
economic growth are more effective if done with tax cuts than with spending increases. In their
conclusion, they write about the Obama stimulus: “About two-thirds of this fiscal package is
constituted by increases in spending, including public investment transfers, and government
consumption. According to our results, fiscal stimuli based upon tax cuts are much more likely to
be growth-enhancing than those on the spending side.” (See Alberto Alesina and Silvia Ardagna,
“Large Changes in Fiscal Policy: Taxes versus Spending,” in Jeffrey Brown, ed., Tax Policy and
the Economy, Cambridge: MIT Press, 2009.) Separate research by Andrew Mountford of the
University of London and Harald Uhlig of Humboldt University concurs: “Our key finding is
that the best fiscal policy to stimulate the economy is a deficit-financed tax cut and that longterm costs of fiscal expansion through government spending are probably greater than the shortterm gains.” (See Andrew Mountford and Harald Uhlig, “What Are the Effects of Fiscal Policy
Shocks?,” CEPR Discussion Paper, July 2005.)
Regulatory Reform. Recent research by Ellen McGratten and Nobel laureate Edward Prescott
concludes that higher regulatory costs reduced both R&D and fixed investment during the
financial crisis and its aftermath; and regulations continue to increase. Between 2009 and 2010,
the number of pages devoted to final rules in the Federal Register rose from 20,782 to a 24,914 –
a 20 percent increase. Stopping this growth and applying cost benefit analysis will remove
impediments to investment and increase long-term growth.
Historical Comparison to the Reagan Recovery. One historical comparison is particularly
relevant in this context – the recovery from the 1981-1982 recession. In the 1981-1982 recession,
the unemployment rate soared to 10.8 percent. In the 2007-2009 recession, it peaked at 10
percent.
“Both downturns were rooted in financial convulsions. The 1981-1982 recession was
induced by restrictive monetary policy aimed at breaking the back of double-digit
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inflation and interest rates, which generated a housing and savings-and-loan crisis. The
more recent recession resulted from excessive government intervention to increase
homeownership by expanding subprime housing loans, on which substantial leverage was
built. The resulting wave of defaults damaged the base of the banking system.
Fifty-three months after the start of the 1981-1982 recession, total employment in the U.S.
was up 7.5 million, or almost 7.5 percent higher than when the recession began. The
labor-force participation rate rose to 65 percent from 63.8 percent, as optimism about the
future pulled potential workers into the job market. Real per capita gross domestic
product increased by $2,870, and was 11 percent higher than when the recession started.
Fifty-three months after the start of the 2007-2009 recession, however, total employment
in the United States is still down four million jobs, or 2.7 percent lower than when the
recession began. The labor-force participation rate has dropped to 63.8 percent from 66
percent, as discouraged workers have exited the labor market. Real per capita GDP has
declined by $964, and is 2.2 percent lower today than when the recession began.
If the current economy had matched the job-creation rate of the recovery from the 19811982 recession, there would be 15 million more Americans at work today, 8.3 million
more Americans would be in the labor force, and per capita GDP would be $5,792 higher
than it is today.” (Phil Gramm and Glenn Hubbard, Op-Ed, “Gramm and Hubbard: What
A Romney Recovery Might Look Like,” The Wall Street Journal, 06/06/12)
Policy responses in the early 1980s aimed not just at overcoming the 1981-1982 recession, but at
overcoming the structural problems of the 1970s. By reducing domestic discretionary spending,
setting out a three-year program to reduce tax rates, and alleviating the regulatory burden,
policymakers sought to make it profitable to invest in America again. These principles match
those in the Romney plan. Governor Romney would reduce the size and cost of the federal
government. He champions a reduction in marginal tax rates in the context of a general tax
reform. Particularly powerful are his proposals to reduce marginal tax rates on business income
earned by corporate and unincorporated businesses alike.
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