In contrast to historical debates, little in-depth exposition of ideas ever takes place in a modern U.S. campaign debate. However, the Oct. 11 debate in New Hampshire among Republican presidential contenders focused on the economy, so a reality check is useful.
BAILOUTS
Everybody is against them, but Mitt Romney wisely left himself wiggle room. He argued that the Federal Reserve perhaps should act when necessary to save the nation’s financial system as a whole, but not to aid any individual company. Exactly how that could be done is a mystery to me and, I think, to most other economists. But Romney wins the realism test on this one.
Those with opposing views would have greater credibility if they said, “I know it could lead to an enormous recession, but we have to bite the bullet sooner or later and let some big companies die.” Or perhaps, “I would break up any firms so big that their failure would threaten the economy as a whole. Then there would never be a need to bail anyone out.” But to imply that the Fed or Treasury should never intervene in a financial crisis and that the economy would sail along demonstrates extreme naivete.
ENERGY POLICY
Rick Perry says he would remove all limits on domestic oil drilling by executive order. This would make economic sense only if there were no external costs, like pollution, associated with greater drilling. If Perry proposed a market-compatible strategy for dealing with such external costs in a way that is more economically efficient than existing policy, he would garner kudos. That is nowhere in sight.
CHINA
The debate took place as the Senate pondered a bill to punish China for its foreign exchange policy. Like past candidates from both parties, Romney talked tough on China, saying he immediately would issue an executive order branding it as a currency manipulator and imposing sanctions.
Jon Huntsman, the former U.S. ambassador to China, urged caution. Most economists would agree. But the question probably is moot. Whoever gets elected will have to govern in the real world, where military, foreign policy and other interests will predominate.
THE FED
Newt Gingrich is highly critical of Ben Bernanke and says that, if elected, he would replace the current Fed chairman with someone else. This might be problematic. Bernanke’s current appointment runs into January 2014, a year after the next inauguration. His term as a governor runs to 2020. There is nothing in the law that says the president can fire the Fed chairman and none has ever been fired.
In 1969, Richard Nixon privately told Fed Chairman William McChesney Martin to step down so that he could appoint Arthur Burns. Martin demurred and stayed on through January 1970, when his term as a governor ended. Nixon was angered but did not press the issue. The same might happen to Gingrich.
Ron Paul and others criticized Federal Reserve loans to financial institutions that were in trouble, including some based outside the United States. Paul, a Texas congressman, cited $5 trillion of such loans and claimed credit for the Fed’s being forced to disclose them.
Limits on the Fed’s statutory authority to make such loans are fuzzy and should be clarified. But critics need to acknowledge that the amounts they cite include enormous multiple counting of successive short-term loans to the same institutions when the financial crisis was at its height in 2008-09.
As of last week, all of the items on the Fed’s balance sheet that could in any way include loans to private banks, foreign and domestic, as well as other central banks total less than $200 billion. This is a lot by historical standards, but tiny compared with the height of the crisis.
TAXES
Businessman Herman Cain’s 9-9-9 proposal dominated the discussion. As most analysts say, it would sharply reduce taxes for higher-income households and sharply raise them for lower-income ones. It probably would not raise the revenue he promises, and it would not spur output and employment as he promises. But it does raise interesting questions about tax simplification and taxing consumption rather than income. And it certainly would move the country in the direction of a European-style value-added tax.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
