Jeff Frankel also thinks government is dragging down the economy

He is very clear in this interview that sequestration is one of the causes of the slowdown to 1.8% in the first quarter. Menzie Chinn also looks at the forecasts, which indicate 0.6% growth in the second quarter, and argues that this is: "no time for either contractionary fiscal or monetary policy."

Goldman and Chinn discover the accelerator

Steve Bannister (where have you gone Joe Di Maggio?) pointed out this nice post by Menzie Chinn on the "puzzle" (sic) of the slow investment recovery during the crisis. Note that it is actually not a puzzle at all. Chinn cites a study by the Vampire-Squid (Goldman Sachs), that concludes that (wait for the surprise) "the accelerator model generally fits well." Chinn also finds that lending conditions and "slow GDP growth (attributable to fiscal drag) are important determinants of low nonresidential fixed investment." Is rain wet?

PS: Lending conditions (which is actually a measure of liquidity) might actually be caused by the level of activity and investment rather than the other way round.

Romney's economic plan and the confidence fairy

Romney's economic plan is out, and not surprisingly is all about confidence fairies. Glenn Hubbard, one of the co-authors (with John B. Taylor, Greg Mankiw and Kevin Hassett) argues in the Wall Street Journal that the recession has been caused by uncertainty. In his words:

As a consequence, uncertainty over policy—particularly over tax and regulatory policy—slowed the recovery and limited job creation. ...  the Obama administration's large and sustained increases in debt raise the specter of another financial crisis and large future tax increases, further chilling business investment and job creation.

So too much regulations and spending is what is causing the slow recovery. This is interestingly enough what the manuals of Hubbard, Mankiw or Taylor would say (all are supposedly New Keynesian economists, whatever that means), which still present the simple Keynesian model in which spending determines the level of output (the old 45o degree Hansen model, which encapsulates the logic of the multiplier).

So what is the solution for these GOP New Keynesians? Four points:
growth and recovery first, and it stands on four main pillars:

• Stop runaway federal spending and debt. The governor's plan would reduce federal spending as a share of GDP to 20%—its pre-crisis average—by 2016. This would dramatically reduce policy uncertainty over the need for future tax increases, thus increasing business and consumer confidence.

• Reform the nation's tax code to increase growth and job creation. The Romney plan would reduce individual marginal income tax rates across the board by 20%, while keeping current low tax rates on dividends and capital gains. The governor would also reduce the corporate income tax rate—the highest in the world—to 25%. In addition, he would broaden the tax base to ensure that tax reform is revenue-neutral.

• Reform entitlement programs to ensure their viability. The Romney plan would gradually reduce growth in Social Security and Medicare benefits for more affluent seniors and give more choice in Medicare programs and benefits to improve value in health-care spending. It would also block grant the Medicaid program to states to enable experimentation that might better serve recipients.

• Make growth and cost-benefit analysis important features of regulation. The governor's plan would remove regulatory impediments to energy production and innovation that raise costs to consumers and limit new job creation. He would also work with Congress toward repealing and replacing the costly and burdensome Dodd–Frank legislation and the Patient Protection and Affordable Care Act. The Romney alternatives will emphasize better financial regulation and market-oriented, patient-centered health-care reform.

In short, reduce taxes (the effective corporate income tax is well below 25% and several corporations do not pay much or anything in fact), which mainly helps the wealthy, and has little impact on income, cut spending (contradicting what they teach), cut and privatize Social Security and health programs, and more deregulation. The non sequitur with cutting welfare programs or the craziness (or dishonesty) of arguing for deregulation (eliminate Dodd-Frank) even if they call this disingenuously 'better financial regulation' is astonishing. And yes the idea is that somehow all these measures would create an environment in which job creators would feel safe to invest.

Brad DeLong and Menzie Chinn do a great job debunking this terribly poor and dangerous economic plan.