America needs a turnaround

And why Mitt Romney is the best person to deliver it
                                                                                                                                            

Albert Beardow.

It would be unfair to judge Obama solely on economic performance over the past four years. It takes several years following a balance sheet recession for a return to strong economic fundamentals, as households and corporations slowly pay off excessive debt. Coupled with the Eurozone crisis, there is little a President can do to improve the economy over such a four year period, save having the government spend more to boost GDP.

More worrisome is the direction in which Obama is sending America over the next decade.

According to the World Economic Forum, under Obama’s presidency the United States has fallen from the first to the seventh most competitive economy in the world, entirely due to a drop in its own score, rather than increases in those of other countries. The overall score understates the shockingly low rankings the US has in areas where government has the most impact – the quality of its institutions ranks 41^st, whilst it takes 76^th place for wastefulness of government spending. The three most problematic factors for doing business? Inefficient government bureaucracy, tax rates and tax regulation.

Does Mitt Romney have what it takes to turn the US around? Certainly he is not perfect, and many wonder what his true convictions are, given his frequent changes in position. (Though changing one’s policies to better match those one represents should hardly be controversial in a democracy). Nevertheless, the biggest divide between Obama and Romney is clear: Obama believes in a bigger federal government, Romney believes in a smaller one. Perhaps more importantly, Mitt Romney has a career history full of executive competency, whilst in four years Obama has failed to show the bold leadership that is needed to make America the hope of the world once again.

Still, Obama’s supporters have many achievements to tout, so let us examine exactly how Obama’s policies demonstrate failed leadership and lead to declining competitiveness.

The response to the financial crisis

Just as one can’t blame Obama for today’s poor economic figures, one can’t credit his stimulus with rescuing the country from depression. That credit goes to the Federal Reserve, which, having learned Milton Friedman’s lessons from the 1930s depression, prevented a catastrophic collapse in the money supply. Yet cheap money can only buy time for governments to let the economy restructure, before its own side effects start to have effect. A recent paper by William White demonstrates how ultra-easy monetary policies “create malinvestments in the real economy, … encourage governments to refrain from confronting sovereign debt problems in a timely way, and redistribute income and wealth in a highly regressive fashion.”

By stimulating and bailing out the parts of the economy that need to restructure, Obama is at best pushing the US towards the “stationary state”, where businesses inadequately prepared for the modern global economy survive on cheap money and continue using resources inefficiently. At worst, he is actively picking winners and losers, taking influence away from the people in deciding what ought to be produced, and leading to heavy public losses when bad investments are made, as in the case of Solyndra. CNN found that Obama’s $787 billion stimulus created only 300,000 jobs at a cost of about $262 000 per job. And whilst the American economy is that much deeper in debt as a result, the British economy has been creating jobs at an equally fast pace, whilst implementing an austerity programme. The fact that GDP growth has at the same time been much slower in the UK is simply a reflection of the fact that GDP numbers don’t take into account the quality of that growth – whether it is sustainable, and whether it delivers society with the goods and services they want.

The world has changed. Obama is not one to shy away from this fact, and yet his policies are designed to rebuild the same uncompetitive industries that existed before the crisis. Mitt Romney, on the other hand, has started campaigning for “change we can believe in”. Whilst Mitt Romney repeatedly makes his claim that he has experience in delivering change, it is often forgotten just how pioneering Mitt Romney’s early career was.

When Mitt Romney finished his MBA at Harvard, the American economy was also becoming ever more stationary, and losing out rapidly to Japanese competition. Rather than join and work his way up the ranks of a traditional industrial company, as was typical of many MBA students, Mitt Romney chose to join Bruce Henderson in his attempt to overturn the outdated and stagnant management practices that were blocking the success of US businesses. At Bain Capital, Romney was somewhat innovative for his time in using practices from strategic consulting to turn around businesses and make them create value more efficiently, rather than simply applying financial engineering as had often been the case in private equity.

This is the change that Romney has delivered, in addition to his accomplishments running the 2002 Winter Olympics and as Massachusetts governor. And at a time when globalisation and technological change are creating seismic disturbances within developed economies, Romney is well placed to once again lead businesses and society in adapting to and benefitting from these opportunities.

Financial market reform

It is easy to score political points by blaming the crisis solely on de-regulation and the policies of Bush. However, this misses the longer-term contributions from both the Reagan and Clinton years, which created a complex and flawed financial regulatory system that failed to live up to its purpose. Obama’s contribution was to let Christopher Dodd and Barney Frank draw up a 2,319 page act of horrendous complexity, able to be fully understood only by those banks who can afford to hire armies of lawyers. It is perfectly understandable to want to prevent the activities that caused the crisis from recurring – but simply blocking the symptoms of the underlying institutional degeneration can often contribute to the disease itself.

On the other hand, Romney understands correctly that, whilst the majority of regulations on their own have some merit to them, when added up, the costs of compliance often end up outweighing the benefits of the regulations themselves. He has promised to run a cost-benefit analysis of every regulation Obama has put in place, and do away with or reform those that don’t pass this test. He will also look to ensure the cumulative burden of the regulations – the costs when added together – don’t outweigh their collective benefits. This is the way Romney operates, and what he does best – looking closely at the data and developing solutions based on the emerging patterns and results. Importantly, it also shows a trust and faith in the people – faith that entrepreneurs will be able to make their own judgements on how to run their businesses without damaging their surroundings.

Healthcare

Obama had the opportunity to lead a serious bipartisan discussion about how to confront rising costs and inadequate coverage. Instead, he allowed his allies in congress to force through a one-size-fits-all bill that the majority of the public disapproved of. Though admirable in its intentions, it fails to confront the drivers of America’s high healthcare costs – including the inflated costs of medical staff, and the larger pool of money spent on insurance when this is linked to employment.

Of course, as has often been pointed out, a key blueprint for the ACA was Romney’s own healthcare system in Massachusetts. Yet the differences are in many ways more important than the similarities. Romneycare was 70 pages long; Obamacare, 2,074. There was an opt-out provision for the mandate in Romneycare; with Obamacare, your only alternative is to pay a penalty. Romney built consensus with an 87% Democrat legislature to craft a bill that received strong popular support, whereas Obamacare is disliked by half the nation.

It has been remarked on many times during this campaign that divisions like these are symptomatic of the two Americas that currently exist. Yet the political system is constructed such that there can be 50 Americas – for the America you find in California is very different from that in Michigan, Connecticut or Texas. The crucial point about Romneycare was that it was a state level solution in a highly diverse country where federal one-size-fits-all policies are rarely as effective. Romney understands that the size of the federal government makes it cumbersome and more inept at meeting the demands of individual Americans – and that the ability for policies to be effected at a state level is one of the beautiful elements of the United States.

Foreign Policy

Finally, there tends to be a consensus that Obama has at least been successful in the foreign policy sphere. He did get bin Laden, after all. Yet it is surprisingly difficult to define Obama’s overall foreign policy strategy. He did nothing to support the green revolution in Iran, and then equivocated whilst Hosni Mubarak was being overthrown in Egypt. In spite of his assertions, he failed to take leadership on Libya and Syria, leaving the former to Britain and France and ceding too much initiative to Russia on the latter. He lost the credibility of the Israelis and failed to gain that of the Palestinians.

Those who think Romney a warmonger have missed the fact that his foreign policy stances were to Obama’s in the third debate. If war comes it will come from Iran’s actions - whoever is in the White House won’t make a difference, because both candidates know that a nuclear arms race in the Middle East is more unpalatable than a pre-emptive military strike. Instead, the key difference between Romney and Obama in foreign policy is that Romney believes America does have a role in leading the free nations of the world, and ought to be a more visible actor on the world stage, uncompromising on the principles of liberty.

Forward?

So much for what the President has done – more significant is what he hasn’t. For the biggest threat to America isn’t external at all, but the internal decline in competitiveness. One crucial symptom of this is the unsustainable growth projected in federal spending and debt. Not only has Obama ignored this over the last four years, but continues to offer no solution to the biggest driver of government costs – social security and Medicare, which will soon cover close to 50% of federal spending. Even when Obama had the opportunity to lead on this issue by accepting the recommendations of the bipartisan Simpson-Bowles deficit reduction commission, and make the Republicans look irresponsible, he failed to show any seriousness about this issue. Former Clinton Chief of Staff Erskine Bowles reportedly said of Obama’s budget for fiscal year 2013: “I don’t think anybody took that budget very seriously. The Senate voted against it 97 to nothing”.

Romney has a plan to reduce the costs of Medicare to preserve the programme over the long run, and by selecting Chairman of the House Budget Committee Paul Ryan as his running mate, has shown that he is serious about the country’s long-term fiscal health. Bowles said of Paul Ryan’s budget for 2013 “It is a sensible, straightforward, honest, serious budget and it cut the budget deficit… by $4 trillion.”

Of course, the Democrat outlook is generally that a significant part of deficit reduction should come from tax increases. Yet few people seem to remember that, at 35%, the US has the highest rate of central corporate taxation in the OECD. Though Obama sensibly plans to cut this rate, when combined with state taxes, an average corporate taxation rate of 32.1% would still put the US above every OECD country except Japan, Belgium and France. And this fall would largely be negated by Obama’s plan to increase the top tax rate on dividend income from 15% to 43.4%.

The verdict on US taxation more broadly is poor. According to the WEF, the US has the 103^rd lowest overall tax rate on profits, higher than countries such as Denmark, Finland and Norway. Forbes even ranks the US behind France and Sweden in terms of the impact of the overall tax burden. Romney, far from the caricature of him giving away tax breaks for the rich, would look to tackle the real problem with US taxation – the unenviably complex tax code and vast number of deductions which cost more than $1 trillion annually.

The trouble with Obama’s America is that it would look much like California does today. Sure, California has a lot of great things – Hollywood, Silicon Valley, green jobs, some of world’s most renowned companies. But it also has unemployment over 10%, bankrupt cities away from the coast, and rising crime. House prices in the main employment centres are becoming rapidly unaffordable, whilst houses in smaller towns have been subject to devastating booms and busts. Government spending is excessively wasteful. And ever higher tax rates are needed to compensate for the fact that people can’t find decent jobs.

For those who want a better understanding of Romney’s core principles and beliefs, perhaps the best outline comes from an article more often cited by the Obama campaign: “Let Detroit Go Bankrupt”. Beyond the title, the article itself displays the deep level of insight into wealth creation that Romney has gained over a career in business, and an understanding of how efficient and competitive production will determine America’s long-term success. Moreover, it is highly reasonable in suggesting that executive pay is reduced from excessive levels, and in its strong support for government funding of early-stage research, as opposed to large commercial operations.

“Detroit needs a turnaround, not a check.” The same is true of America. More government spending and quantitative easing can paper over the symptoms, but are no substitute for reinvigorating a nation’s competitiveness. Obama has failed to display leadership on this issue over the last four years. Romney has a life record of showing leadership where it matters. He is a data-driven man who has made a living out of analysing organisations to see how they could be better run and create more value. This is exactly the sort of person we need in the White House.