Romney's economic approach: Growth or austerity?

On the surface of it, the statement by top Romney advisor Eric Fehrnstrom is utterly ridiculous. “[Romney's] position on the bailout was exactly what President Obama followed. I know it infuriates them to hear that.” Romney himself made similar statements just before the Michigan Primary last February. “The president finally came around to my own view that Detroit needed to go through managed bankruptcy, the auto companies needed to go through managed bankruptcy to shed their excess costs.”

That wasn’t the way Romney’s opinion piece in the New York Times came off in November 2008, however. At the time he was adamant that there was no role for the US government to write “a blank check” to save the US auto industry.

In the end this is a bigger story of how to manage the Depression we find ourselves in, no matter how the details are massaged for the purpose of a campaign. It’s a choice between austerity and forgiveness, the paths taken by Europe and the US respectively. For the campaign it’s a about a level of detail that takes far too much explanation.

The auto bailout itself has proven to be such a success that it’s only reasonable that everyone wants credit at this point. GM has paid back what they borrowed and Chrysler nearly so. The $80B package was first put together in the Bush administration but finalized under Obama. It probably save millions of jobs and definitely gave GM a new start to a successful path, making them profitable again. Chrysler is still struggling as a division of Fiat, who appears to see the arrangement as a chance to open up the US market to their cars once again.

Was this Romney’s idea in the first place? Romney did speak of a “managed bankruptcy” in 2008, but railed against giving the automaker a lot of money. The latest twist, that what went down is exactly what he was proposing, is very hard to square with what he said in the first place. How on earth could there be a “soft landing” for such a large company without the US Government guaranteeing the loans, at the very least?

The answer is that Romney never intended for things to go as they did, no matter how much he or his people claim it to be so. The “managed bankruptcy” they were proposing would have certainly resulted in a much smaller company that would have had to lay off many workers – much like the end result of what Romney did to many other companies at Bain Capital. This new GM would have been more focused on key markets and would have shed all of its legacy obligations like pensions, health care, and so on.

The term for this money-centered approach to creating efficient businesses is “austerity”. It is what has been applied by Tory PM David Cameron, who is facing growing criticism for the lack of economic growth. This has intensified now that the UK has tipped into a recession for the second time since 2008. This is also a hot topic in the French elections, now in their second round, where austerity has increased the unemployment rate to near 10%. There simply is not any growth in Europe as insistence on currency stability, for both the Pound and the Euro, has been the central focus over growth.

There has never been any real debate on this topic in the US. Congress did make some noise about austerity in August during the budget ceiling debate, but quietly backed off as soon as the teevee lights went down. The chosen path of the government has been inaction, leaving absolutely everything up to the Federal Reserve to sort out. The result has been not too bad, after all, so the wise politicians have been silent – except when they get a chance to take credit for the limited (but possibly growing) success.

The real problem that the Romney has is that his approach does not appear to be pure European-style austerity but something more nuanced. You have to read the 2008 op-ed piece several times before you get it. He does understand that the massive cloud of debt hanging over us will have to be forgiven through bankruptcy before we can move ahead. But he does not have much interest in the way we’ve usually dealt with too much debt in the past, which is to grow (and inflate) our way out of it.

At least, that’s what he appears to be saying. Once again, Romney seems to be a combination of George HW Bush’s hands-off capitalism and Mike Dukkakis’ wallowing in obscure details as he tries to explain himself. That’s not going to win him anything.

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Erik Hare

Copyright 2013 by Erik Hare. All rights reserved.