Analysis: Romney lacks clear remedy for U.S. economy

Republican presidential candidate and former Massachusetts Governor Mitt Romney speaks at a campaign rally in Columbia, South Carolina January 11, 2012. REUTERS/Brian Snyder

(Reuters) - Mitt Romney, the frontrunner for the 2012 Republican presidential nomination, is promising Americans deep spending cuts, smaller government, trade penalties on China, a new Federal Reserve chairman and sweeping deregulation.

The bold economic strategy Romney has sketched out in his White House bid seems designed to appeal to the radicalized conservative base of the Republican Party enamored of the gold-standard ideas promoted by libertarian congressman Ron Paul and budget slashers in the populist Tea Party movement.
Romney needs their backing to eventually win his party's nomination to face Democratic President Barack Obama on November 6. The former Massachusetts governor has won the first two Republican state nominating contests and now has his sights set on the January 21 primary in conservative South Carolina.
Economists and political strategists are skeptical that his economic plan will remain so radical as the campaign evolves. It sits uneasily with his track record as a moderate, could alienate independent voters he would need to defeat Obama, and deep, rapid budget cuts would risk tanking a shaky economy growing at a 2 percent pace.

"I do think he is quite pragmatic," said Greg Valliere, political economist at Potomac Research Group.
Romney wants to create the image of someone determined to scale back Washington pitted against a big-government president in order to pick up enough voters to secure the Republican nomination quickly.
"He has latitude to move back to the center in time for November where the criticism that he is a moderate will be a plus for him" to win over independents, Valliere said.
Thomas Gallagher, a former Wall Street economist and principal at the business advisory firm Scowcroft Group, agrees.

"I don't think his economic platform is very predictive of what he would do in 2013."
By laying out a blueprint on his website that lacks much detail, it allows Romney to embrace touchstone issues such as a balanced budget amendment dear to Tea Party activists on the Republican right, while retaining the leeway to shift course later, Gallagher said.

This vagueness on economic policy also creates vulnerabilities.
"He is trying to play both sides of the fence which is what worries a lot of conservatives about him. That may play well in the election, but people want some authenticity in what their leaders are telling them," said James

Campbell, political scientist at State University of New York in Buffalo.
And if Romney fails to convince the right that his plan is sufficiently anti-tax and anti-big government, it could inspire an independent candidate who would splinter the Republican vote and weaken his chances of winning in November.


"The other dilemma for Romney is that if they are so adamant about not raising taxes, it cuts off leeway in dealing with the budget deficit. It doesn't hold together," said Joel Aberbach, professor of political science at the University of California in Los Angeles.

As a result, economists expect shifts in Romney's stance and have not yet run their macroeconomic models to evaluate the possible impact on growth. But the outline does give a clear sense of a Republican who favors a reduced role for government.
Romney promises to cut taxes on corporations to 25 percent from 30 percent, extend Bush-era personal tax cuts, abolish taxes on estates of the deceased and lower taxes on investment gains for the middle class.

The Tax Policy Center, a non-partisan think tank, says these cuts would cost the government $180 billion in revenues by 2015, increasing the already swollen federal budget deficit.
Romney does not detail how he would pay for the tax cuts, beyond saying he would cap federal spending at 20 percent of gross domestic product, down from over 23 percent now, hand government-run healthcare programs for the elderly and the poor to state governments and cut other types of federal spending by 5 percent.

These steps would shrink the federal government's role more than even former president Ronald Reagan managed 30 years ago when he turned many social programs over to the states. That scenario concerns liberal economists.
"If applied, these fiscal measures would be utterly draconian. The attacks on Medicare and Social Security would throw large portions of the population into poverty," said Jamie Galbraith, business professor at the University of Texas in Austin.

Mainstream economists worry more that neither Romney nor his Republican opponents are addressing the main drag on the U.S. economy - weak demand from American consumers still weighed down by debt.
The housing crisis has destroyed trillions of dollars in home equity, wrecked household balance sheets and reduced job market mobility for those with a home worth less than the mortgage, placing a big drag on consumer spending which drives two thirds of the U.S. economy.

The Federal Reserve in a paper sent to Congress last week pointed out that housing equity as a share of disposable income has slumped to 55 percent from 140 percent five years ago.
"What the markets are telling you is that the immediate problem is private-sector deleveraging. Budget and taxes are manana," Gallagher said, using the Spanish word for tomorrow.

Yet the election will be fought over the size of government. "Taxes is the seminal issue, almost a theological one," Valliere said.
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