The document proposes a fiscal policy memo for Romney focused on reducing taxes, government spending, and the national debt. It recommends cutting corporate taxes to 20% and federal spending by eliminating departments and subsidies. It argues this approach would boost private investment and economic growth while reducing the debt-to-GDP ratio over 10 years. However, it acknowledges short-term impacts like higher unemployment. The memo stresses the need to transparently explain the plan and its trade-offs to the public to gain support for short-term sacrifices leading to long-term gains.

1. Fiscal Policy for the Long‐Run
Instructor: Kent Smetters, The Boettner Chair, Business and Public Policy
SUGGESTED POLICY MEMO TO ROMNEY, AND ROAD MAP TO SELL THIS PLAN TO THE PUBLIC
My policy memo to Romney would be along the line of thought of Austrian economics for sure, coherent
to what Mr Friedrich Hayek and Mr Ludwig von Mises taught us – I purposely didn’t mention Obama, nut just
Romney, because Obama would clearly not endorse my plan of course. In order for America to come back to
what it was and to drift away from the path to a bigger and slower state that has nothing of “welfare” in it, it
must reduce taxes, bureaucracy, corporativism, the size of the government, and stimulate private investments.
The battle that the USA and Europe are facing is ultimately between pragmatism and populism, and not
between heartless conservatives and altruistic democrats as is wrongly perceived by many. This misconception
couldn’t be more wrong. Populism killed most of Europe, Latin America, and will certainly kill the USA if
conservative economic policies are not implemented soon. Ironically, as Mr. DioGuardi well pointed‐out in his
excellent lecture, the generation that is protesting on the streets of all these countries, from Greece to OWS
here, is the generation that is going to end‐up paying for all this fiscal largesse that short‐term oriented
irresponsible politics are implementing to please the masses as an inconsequential father. Nevertheless, I have
to recognize that t is encouraging to see that many youngsters are supporting Ron Paul – unfortunately, and
surprisingly to me, not at Wharton though. The table below summarises the policies I would suggest to Romney
in order to achieve a sustainable 75% debt/GDP ratio within the next 10 years:
Policy How? Comment
Cut Spending Eliminate cabinet departments; Cutting US$1tri in deficit in one year as Ron
abolishing corporate subsidies; cut Paul intends may be too tough, but over 3
foreign aid; end foreign wars; cut years the short‐term negative impacts would
federal workforce; cut congressional become more tolerable perhaps.
pay and perks
Lower Taxes Reduce corporate tax rate to 20%; Making the USA more attractive to
allow repatriation of foreign capital investments is paramount to creating jobs,
without additional taxation (would growth, and the to the public accounts
bring trillions od new investments!)
Foster private End taxes on personal savings Allow families to create some cushion and
savings curb a little bit the propensity to consume
that was induced by populist politics in the
past
Stop QE and Let Bernanke go…try to bring Bill Gross QE is benefiting only investors and propelling
extremely dovish or Tim Bond (details on last page of commodity inflation on fears of LT inflation, a
monetary policies this memo) self‐fulfilling prophecy with little benefit to
poor consumer pockets
In the short‐term, the budget deficit could even widen a bit, but as private investment grows and
expenses cuts kick‐in the budget deficit would gradually start declining. At the same time GDP growth would
pick‐up, making the debt/GDP ratio fall constantly. The short‐term disruptions in growth would be more than
offset by long‐term gains in many aspects. The congressional committee wants to cut just US$1.5 trillion over a
ten‐year period. This is nothing. Cutting this much over a two‐year period would be meaningful. Of course, it
would have short‐term negative impacts on growth as the cuts in spending should be much larger than the cuts
in taxes. However, this bitter medicine is what swollen states desperately need. The unemployment rate would
certainly go up in the short‐term, so the most difficult task of this policy memo is to show how to explain this
needed sacrifice to the population, in a simple, open, sincere and charismatic way. It is not easy, not to say a
very inglorious and altruistic political task. The truth is that the economy is going to start working properly only
when politics embrace such altruistic moves indeed, and turn a blind eye to short‐term objectives. My budget
proposal would look very similar to the one suggested by Ron Paul (see chart below from Ron Paul’s official plan
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2. Fiscal Policy for the Long‐Run
Instructor: Kent Smetters, The Boettner Chair, Business and Public Policy
description from his website). It would inevitably generate short‐term dissatisfactions, hence the important
need to address the issues with the population in a very transparent way, but at the same time demonstrating
compassion and tenderness.
Therefore, I would suggest
Romney to engage directly into the
debate about the complaints from
the OWS movement for instance. He
should do it openly, trying to explain
to them the trade‐offs involved in
their requests, and the longer‐term
consequences. Trying to hide and
pretend nothing is going on will not
help. The population need to be
educated in basic economics to the
extent possible, and the candidate
has to show compassion and
understandment at the same time. I
found it picturesque that In October
last year, the “Occupy Wall Street”
movement literally occupied
Wharton. Although I feel very sorry and saddened for those who are going through financial difficulties, and
despite the fact that capitalism is naturally harsh at times, it is still the best system by far, the only capable of
fostering innovation and of propelling the human kind forward. If the protesters were complaining about the
banks bailout ONLY, I would actually be “occupying” with them
as well. The “free call” banks get since the repeal of the Glass
Steagall Act provision in 1999 (i..e since the division between
investment banks and commercial banks was lifted) is indeed
unfair with taxpayers’ money and deposits. Nevertheless, to
criticize capitalism and “corporate greed” is to criticise the very
same spirit of entrepreneurship that has been the bedrock of
this country since the brave pioneers arrived in the Mayflower
in the late 17th century. “Occupiers” and its “intellectual
supports” probably forget that if it weren’t for this “evil greed”
most of the iphones the protesters themselves use to film their
choirs wouldn’t even exist. Foster class warfare to tax more the
corporations and they will go to other countries, as simple as
that. Tax more the rich and gradually fewer entrepreneurs will
blossom given the worse “bank for the buck” in losing 100
hours per week working.
To those who at Wharton who liked the OWS presence
inside our building, I recommended the reading of an
ECONOMIST cover article from January of last year, whose title
is “The Rich And The Rest: What To Do (And Not Do) About
Inequality”(http://www.economist.com/node/17959590). I
think this article sums up everything very well. The sad thing for me is that even the most educated forgot how
wealth is created, and started taking it from granted. People seem to have forgotten what economy is all about:
allocation of scarce resources (labour, capital, technology) to the highest ROA activities. We now believe that
government expenditure can and should drive economic growth. Resources are now direct to very low ROA
activities, governments build debt over and above 40% taxation... and we call it: welfare state! The developed
world allowed governments to move from being 10% of total resource allocation in the economy to become
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3. Fiscal Policy for the Long‐Run
Instructor: Kent Smetters, The Boettner Chair, Business and Public Policy
above 40! To make it clear: the welfare state of today was created by entrepreneurs, who developed technology
and put capital and labour to good usage and allowed surplus economic output to be created. It looks to me that
people in social democracies want to label anyone against taxation as an enemy of the welfare state. It couldn’t
be further away from the truth! Those like me who do not like government and taxation do so because we want
resources to go back to high ROA activities and wealth to be created ‐ and consequently the welfare of society to
be guaranteed. OECD countries are taking development and welfare for granted. My neighbour country,
Argentina started a similar "welfare driven" process with Peron in the 40s/50s in the name of the
"descamisados", and the result was: the world's 5th largest economy in the beginning of the 20th century is not
even relevant within Latin America (it is not even considered an emerging market anymore, but a frontier
market). This was a wake call to Europe, and now it should be a wakeup call for all of you Americans as well. I
tell this to all my American colleagues here at Wharton: “Dear Americans, do not let it happen here...it would be
a pity, and make Benjamin Franklin turn in his grave for sadness.”
So the strategy I would suggest to the President to sell a conservative and austere plan to the public
would be along these lines above. I believe the gist of the President’s speech to the general public should touch
on these examples I gave above. I would suggest the President always tried to draw a parallel between the
origins of the American political view and the libertarian ideas. Equally important, any conservative speech
should address clearly a pervasive misconception: the nonsense perception that conservative ideas are heartless
and don’t ‘care for the poor. The conservative candidate speech has to make clear that a smaller government is
NOT contradictory with “welfare state” and with the well‐being of the overall population. The president may
have to sincerely admit that sacrifices may have to be done by everyone in the short‐term, but always making
sure to emphasize that such sacrifices are similar to necessary drugs administered terminal patients, envisioning
a much‐needed longer‐term benefit. The president strategy to sell this to the media and to the public opinion
who does not understand enough of macroeconomics must be to show in a simple and clear way that kicking
the can down the road will just make the disease of the patient become worse, and ultimate culminate with a
much more painful treatment. The analogies with human health and diseases are very useful for bridging this
gap of knowledge in economics. This is the best way to didactically show that deficit spending and debt will
destroy the US if bold action is not taken against populist candidates who just want to deceive and lure the
population. The proposed cuts in low‐income entitlements by Ron Paul, for instance, are difficult to sell, but
could be explained by showing block‐granting entitlement programs would actually save them, not shred them.
It is paramount to prove to the population with numbers, with facts, that the US will face a bankruptcy and a
major financial crisis that will destroy the entire social safety net unless bold action is taken now. Luckily the
quality and the education level of the American voter is much better than in emerging economies, so such
speech with a slightly more technical connotation may indeed find fertile ground if honed with candor and
charisma. In my country, Brazil, unfortunately we don’t have this luxury of being able to address these economic
issues in political debates, and the pitch to the ignorant voters must still be made around the “bread&circus”
promises only, as if there were only “progressive social‐democrat” candidates…
I am not saying that the Romney should tell the public that NO STATE AT ALL is the best option. Of
course there must be someone creating “fair rules for the parties” to maximize the wealth of the society, the
TOTAL economic surplus. Republicans and economists who believe in Austrian economics (Hayek, Misses) DO
NOT disagree with this, nor do I. The government should indeed have a great oversight on the regulatory aspects
(anti‐trust laws, insider trading, etc), tackle negative externalities (environmental, issues, etc) and also perhaps a
strong role in investment in education. But unfortunately this is NOT what the OWS movement or the Greece
protesters want. There are some very specific investments that just a government can make, but they often are
(or should be) “one‐offs” in history (which may require “some” maintenance in the future), but these
investments with taxpayer’s money usually should not be the rule. At the risk of generalizing to try to simplify, I
stick to the ROA rule of thumb, arguing that investment in education, for example, is also actually an extremely
HIGH ROA investment that governments does for the whole society. As the cover article of The Economist I
suggested mentioned: “First, governments need to keep their focus on pushing up the bottom and middle rather
than dragging down the top: investing in (and removing barriers to) education, abolishing rules that prevent the
able from getting ahead and refocusing government spending on those that need it most”. I agree with this, but
sadly this is far away from the bulk of expenses carried by the government.
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4. Fiscal Policy for the Long‐Run
Instructor: Kent Smetters, The Boettner Chair, Business and Public Policy
In order to deal with the “moral” side of the income distribution, that is the unwanted and unavoidable
“side effects” created by capitalism, I personally believe that the mitigation should come along the lines of
individual altruism and charity (not forced though). I believe that the great majority of politics just care about
their terms, allies, and their popularity, and not about the real long‐term benefit of the society they live in. This
should be told to voters by Romney in a very transparent and aggressive way. This is only way I can see him
gaining credibility with democratic voters. I am very sceptical about politics (perhaps because I come from
Brazil? The point from conservatives around the world has indeed a lot to do with pragmatism, and this exactly
the point that I believe Romney should make in his campaign, with something along these lines: “I am an
compassionate and sincere CEO for America, but I am also responsible and pragmatic, as a father who looks
after this children long‐term well‐being”. Whoever is the republican candidate should put a bit of emotion and
compassion in his speech.
This should be the
bedrock of his speech in
my opinion. I would show
charts such as this one on
the left (from a ML
research report as of
11/Nov/2011) to the
population, showing that
the US is dangerously
similar to Europe, and
arguably going towards a
Japanese zombie‐like
economy
As per the
monetary policy part of
my Policy Memo, I would
argue that bad money
Source: Bofa; IMF. Notes: buble size = public debt in US$ trillions
drives out good. As Bill
Gross well mentioned in a
recent FT article on Dec/19/2011, a liquidity trap will certainly be formed if the perceived perception of risk in
credit markets don’t subside, hampering inactive of lenders to expand credit at zero interest rates: “At the zero
bound, banks no longer aggressively pursue deposits because of the difficulty in profiting from their
deployment….Conceptually, when the financial system can no longer find outlets for the credit it creates, then it
de‐levers. The point should be understood from a yield as well as a credit risk point of view….all central banks
should commonsensically question whether ultra‐cheap money continually creates expansion as opposed to
destroying liquidity, delivering and obstructing recovery. Gresham as opposed to Keynes may become the
applicable economist of this new day”. I agree completely with the remarks from Bill Gross, and I would love to
see him replacing Bernanke. Among the set of articles and texts that would make Romney read is one from Tim
Bond, who also wrote for an FT column, on Oct/12/2011, showing that even from a political perspective the
gargantuan monetary easing may have been bad: “From a political perspective, the policy also worsened the
already unusually inequitable distribution of national income in developed economies. The initial boost to equity
prices was good for the wealthy but the subsequent inflation was bad for the middle classes….QE2 did more
harm than good to both the economy and the polity. The underlying defect in QE is that it stirred investors’ fears
of monetary inflation, whilst stimulating the wrong sort of inflation in the wrong places. The early positive
economic effects were subsequently overwhelmed by a negative inflationary blowback that played a key role in
the disrupting recovery.” These two sets of excerpts from FT columnists illustrate precisely what my thoughts to
Romney would be regarding the current monetary policy.
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5. Fiscal Policy for the Long‐Run
Instructor: Kent Smetters, The Boettner Chair, Business and Public Policy
I would like to finish by quoting a great thought from this Economist article I mentioned previously:
“Several prominent economists now reckon that inequality was a root cause of the financial crisis: politicians
tried to counter the growing gap between rich and poor by encouraging poorer folk to take on more credit”
Source: Bofa; Bloomberg
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