Obama or Romney: Whose debt reduction plan does history favor?

Both Romney and Obama embrace the long-term goal of deficit reduction. Economists estimate that the US is already experiencing some "fiscal drag" on growth, as various stimulus efforts expire. For much of next year, the stance of fiscal policy could shave 1.5 percentage points off the pace of economic growth, due to tax hikes in Obama's health-care reforms and the likely expiration of temporary payroll-tax breaks, analysts at the investment firm Goldman Sachs estimate. The drag would become much worse if Congress fails to address the fiscal cliff.

Lesson No. 3: Heal the financial system

The banking industry and federal policy on money supply aren't popular topics on the campaign trail, but they are big ones for economists who study how nations get in and out of trouble.

Exhibit A here is the Great Depression of the 1930s. Tight monetary policy was a major cause of the Depression, researchers generally say. And in 1937, a rebound turned into a deep second dive for the economy, again with tight monetary conditions as a cause.

The lesson of 1937 appears simple. When your economy is weak, don't have the central bank take actions that make it harder for credit to flow. An addendum for today: If a debt burden is part of the challenge, with pressure to fix government deficits, then loose monetary policy can be a vital cushion against recession.

In a related lesson of history, when a central bank is trying to fuel a revival by opening the money spigot, private-sector banks are important as conduits of new credit. Many analysts attribute Japan's doldrums in the 1990s partly to "zombie banks" that were allowed to keep bad loans on their books, rather than acknowledging losses and restructuring.

What Lesson No. 3 means now

Obama and Romney differ on policy toward banking and the Federal Reserve, although Romney hasn't defined his positions very thoroughly. Obama reappointed Ben Bernanke, the architect of unconventional efforts as Fed chairman to loosen monetary policy further once short-term interest rates had already fallen to zero percent. The Romney campaign has criticized the Fed's most recent round of Bernanke-led bond purchases, or "quantitative easing," as ineffective.

Romney has said he would not reappoint Mr. Bernanke in 2014, and has voiced support for "monetary stability" – a suggestion that the Fed has been too loose, and a signal Romney views other steps (not monetary policy) as keys to strengthening the recovery.

On banking, Obama's signature policy is the Dodd-Frank financial reform act, which among other things calls on big banks to hold more capital, and will limit their ability to do risky trading alongside traditional lending.

Romney calls for repealing Dodd-Frank, calling it regulatory encroachment on the private sector.

Many mainstream economists say banking reforms were necessary after the financial crisis. Some, while endorsing elements of Dodd-Frank, agree with the Romney view on parts of the law. Others say the law doesn't go far enough toward ending the problem of bailouts when "too big to fail" banks get in trouble.

On monetary policy, many economists give a nod of approval to the Bernanke Fed. In a recent survey, about 60 percent of those who work as business forecasters said US monetary policy currently is "about right."

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