Alittle more than a month from elections, US President Barack Obama is slightly ahead of his Republican challenger, former Massachusetts governor Mitt Romney, and pollsters still rate the races for control of the presidency and the US Senate too close to call, with the House of Representatives likely to remain in Republican hands. The differences between the candidates are considerable, and highly consequential for US economic policy and the global economy, although enactment of their programs will depend on the makeup of Congress.
The most important differences between the two candidates can be summarized as follows:
Spending. Obama has dramatically increased spending. He would likely continue many of his temporary programs (as Milton Friedman once said: “There is nothing so permanent as a temporary government program.”); double down on having government pick winners and losers in green energy; expand spending on education and infrastructure; and substantially reduce defense expenditures.
Romney, by contrast, favors limiting overall federal spending, currently 24 percent of GDP, to 20 percent, and keeping defense at 4 percent. He wants private markets, not government, to choose winning firms and technologies.
Democrats oppose most nondefense spending cuts, arguing that reductions would cause the economy to contract. That case is strongest if the spending reductions are large and abrupt in a weak economy. If phased in over a multiyear period as the economy recovers, as Romney proposes, thrift would likely be expansionary. For example, federal spending relative to GDP fell by 5 percentage points from the mid-1980s to the late 1990s in the US, and by an even larger margin in recent decades in Canada — that is, through periods of strong economic growth.
Taxes. Obama would raise the top marginal tax rates on wages, capital gains, dividends, interest and estates, especially on higher-income individuals and small businesses. Yet he has never proposed comprehensive reform of either the personal or corporate income tax.
By contrast, Romney would reduce the US corporate tax rate (the highest in the Organisation for Economic Co-operation and Development) to 25 percent and tax US multinationals on a territorial, rather than a worldwide, basis in order to increase their tax competitiveness. He would also lower personal tax rates by 20 percent and make up lost revenue by limiting tax deductions and credits, particularly at the upper end, thereby raising about 18.5 percent of GDP, just above the historical average, at full employment. Romney’s fiscal plan thus reduces deficits sufficiently to decrease the debt-to-GDP ratio. He favors a balanced-budget amendment to the Constitution and hopes to balance the budget over eight years.
Obama, by contrast, would run larger deficits — his spending increase is much larger than his tax increase — which imply large tax hikes in the future. Moreover, he would run far larger debt ratios than Romney, because the main driver of the debt is entitlement spending.
Entitlements. Obama has remained silent about reform of Medicare and Social Security, whose long-run deficits are several times the national debt. US Vice President Joe Biden has even said that “no changes” to Social Security are to be made.
Romney supports gradually increasing retirement ages, a premium-support model for Medicare, and shifting Medicaid (health insurance for the poor) to the states via block grants. The Obama campaign is pummeling Romney on Medicare, and the Romney campaign is hammering Obama for his refusal to negotiate or even propose a solution.