2012 Republican Presidential Debate: Summary and Economic Impact
On January 26, 2012, all four Republican Presidential candidates -- Newt Gingrich, Ron Paul, Mitt Romney, and Rick Santorum -- proposed how they would fix the economy. This is an area where their similarities are greater than their differences. They all oppose President Obama's economic policies. They all support tax cuts, reduced government spending and fewer regulations, such as the Dodd-Frank Wall Street Reform Act.
Their economic platforms are consistent with conservative supply-side economics. This theory states that reducing government spending and taxes are enough to unfetter business growth. The resultant economic growth will increase tax revenues enough to reduce the budget deficit. The candidates were asked questions on a variety of economic issues.
Why They Feel They Are the Best Candidate to Beat Obama
- Paul: Is for a limited government, an idea popular with Americans.
- Romney: Is the candidate for extraordinary change, scale back the size of government, maintain military strength abroad, cut back bailouts.
- Gingrich: Participated in the Reagan Administration and the Republican Contract with America. Prefers paychecks to food stamps, and a strong defense.
- Santorum: Opposes Wall Street bailouts, and top-down health care, handouts vs new jobs.
Reform Entitlement Programs
- Santorum: People are angry about Obamacare. They don't want to be forced to buy health care, which is a commercial decision.
- Gingrich: Advocates replacing Social Security, welfare and Medicare with private sector solutions.
- Paul: Wants to cut spending on these entitlement programs.
- Romney: Reduce Medicare except for current seniors.
These proposals would reduce government spending, but also eliminate benefits to seniors and the unemployed, who can't get employer-paid health care insurance. These are important safety nets that buffer the severity of the business cycle's contraction phase.
- Gingrich: Supports a 15% flat tax rate and eliminating the capital gains tax.
- Santorum: Wants to simplify the tax code, but doesn't support the flat tax, or reducing the capital gains tax to zero.
- Romney: Was attacked for his wealth, and paying low taxes. Said he was proud of being successful and wasn't going to run from it. In favor of lowering the corporate tax rate to 25%.
- Paul: Reduce the corporate tax rate from 35% to 25%, and replace income taxes with excise and import taxes.
But research shows that tax cuts won't stimulate the economy and created jobs as well as other fiscal policies. For example, the Bush tax cuts created 4.6 jobs for every $1 million spent. On the other hand, the extension of unemployment benefits created 19 jobs for that same $1 million spent. That's because the unemployed will spend every dime of their benefits, driving demand and economic growth. Many people who receive general tax cuts have more income from their jobs. They might, instead, put those tax cuts into savings.
Tax cuts to corporations don't trickle-down to workers. Companies have reported great earnings over the last two years, but haven't created jobs because they are too uncertain about the economy. They are, instead, paying shareholders with higher dividends.
Increase Trade Between U.S. and Latin America
- Romney: More free trade agreements. Help people in Cuba enjoy freedom.
- Paul: Supports free trade and reduced military involvement overseas. "Strongly believe it's time we have friendship and trade with Cuba."
- Gingrich: Facilitate freedom in Cuba with non-military power.
- Santorum: Opposes Obama's policy in Latin America, especially with Honduras.
Free trade agreements boost economic growth for all signatories. The largest agreement, NAFTA, increased U.S. economic growth by .5% a year. The U.S. lags behind China, which has signed many free trade agreements in Latin America, Africa, and Asia.
Phase Out Fannie Mae and Freddie Mac
Right now, Fannie, Freddie, and the Federal Housing Administration make 90% of all home loans. Banks won't lend without the guarantee of the Federal government. Until the housing market is safely back on its feet, these agencies must stay involved. After that, it would be safe to analyze the proper role of government in the housing industry.
Is Romney or Gingrich closer to Reagan?
Romney and Gingrich were asked why they were closer to Reagan. Gingrich won since he was physically involved in the Reagan Administration. Both candidates propose tax cuts, a key part of Reaganomics. That worked well back in the 1980s when the maximum income tax rate was 70%. Tax cuts would actually hurt economic growth today because the top income tax rate is only 30%. Reduced tax revenue would increase the $15 trillion debt, deepening the debt ceiling crisis. Part of the success of the Reagan Administration was that government spending actually increased (mostly for defense), at around 2.5% a year. This ended the 1981 recession but doubled the debt. Reagan did reduce banking regulations, which led to the Savings and Loan Crisis of 1989.
What Was Missing From the Debate
None of the candidates had specific proposals to create the demand needed to boost economic growth. Supply-side economics works if the problem is on the supply side of the economy. However, during this recession, businesses are afraid to hire because consumers have cut back on spending, including the use of credit cards.
What's needed to boost demand? Focus government spending on creating construction jobs, the most cost-effective unemployment solution. Second, stop another wave of foreclosures that will hit in 2012. Homeowners feel poorer they've lost their home or at least equity in their home. None of the candidates proposed how to reduce the shadow inventory of foreclosures that overhangs the housing market. This problem must be solved to truly get the U.S. economy back on track.