Opinion

Gregg Easterbrook

Tax cuts and giveaways won’t save the economy

December 8, 2010

“If we don’t take meaningful steps to rein in our debt, it could …  jeopardize our recovery.”

–President Barack Obama, January 2010.

“Next year [I will] start presenting some very difficult choices to the country” on debt reduction.

–Obama, June 2010

Bartender, giveaways for everyone!

–Essentially what Obama said, in so many words, December 2010.

Barack Obama pledged to reduce the national debt during his presidential campaign, but instead has added $2.7 trillion to that debt so far – more than the entire national debt in the year 1975. Throughout 2010, he repeatedly promised there will be no more treating the Treasury as a cookie jar. Now, suddenly, there will be $900 billion in new giveaways, financed entirely by borrowing.

Just a week ago the deficit reduction commission proposed wrenching cuts and tax increases that, best-case, would cut several hundred billion dollars from the deficit over the next few years. The deficit commission recommendations had only been out a week before the White House, most Republicans and some Democrats endorsed a giveaway of significantly more money than the wrenching cuts would save!

But don’t we need more giveaways to stimulate the economy?

First, there is little reason to believe this will work. Second and more important, constant additions to the national debt — coupled with the sense that Washington is out of control — may be the reason the economy keeps sputtering. The latest giveaway may cause more economic malaise, rather than cure it.

Won’t tax cuts save the economy?
The argument that extending the 2003 tax cuts is needed to boost the economy simply ignores that the economy declined with these cuts in place. Federal income taxes (for the working class and the middle class as well as the rich) were reduced in 2001 and again in 2003. Right after that, the economy began to sputter.

Maybe this would have happened anyway. But it’s incontestable that low taxes on the middle class and especially on the rich did not pull the country out of the recession of 2007-2009, or out of the slow growth of 2010. Reckless fiscal policy didn’t work. Now we’re supposed to believe that the same tax cuts that didn’t work before magically will work in 2011 and 2012.

Stimulus spending didn’t work either. George W. Bush supported $200 billion in stimulus spending in 2008. Obama added another nearly $800 billion in 2009, and about $300 billion rationalized as stimulus in 2010. All was backed by debt. Now we’re told $900 billion in additional debt will boost the economy — magically, though it didn’t before.

Of course everyone wants lower taxes. But federal income and corporate taxes are already at historical lows, while national debt keeps breaking records. The White House deal is transparently a package of giveaways. In the very worst of Washington traditions, a spending-spree mentality took hold — I’ll prove that I can give away more than you can! — with the negotiators emerging having agreed to hand out substantially more than the worst-case estimate when the talks began.

Will the latest giveaways harm the economy rather than help it?
If the White House plan goes through, national debt will have increased to nearly $6 trillion during the first term of the Obama presidency. Republicans are as much to blame as Democrats — no one has been more irresponsible with national finances in the last decade as Republicans. Regardless, you should be shocked by this number — almost as much debt taken on in four years as in the entire previous history of the Republic! And no plan to do anything about it.

Each time Washington increases the debt, it makes the United States less valuable — in the same way that each time you borrow against your house, you make your house less valuable. To you, at least. (The country, in this analogy, is becoming steadily less valuable to Americans, though more valuable to Chinese and Arab sovereign wealth funds.)

Since 2006, Congress and the White House, under leadership and presidents of both parties, have steadily made the United States less valuable via reckless fiscal policy.

This is a core reason the economy continues to sputter. Corporations are sitting on big piles of cash they won’t invest. Why invest in a country that keeps becoming less valuable?

Why innovate in hopes of future profit when systemic fiscal irresponsibility by both parties means either the United States will become a stagnant mega-Japan, or steep tax increases will be the only way out when panic sets in?

Corporations aren’t investing to spark new growth and create more jobs because they think Washington’s Democrats and Republicans alike are running the country into the ground. The new $900 billion giveaway provides evidence this view is correct. No one in the White House or in Congress is willing to act like a responsible adult. They’ve all got hands in the cookie jar, and future generations will suffer.

Bear in mind, when the early 1990s recession afflicted the country, President Bill Clinton did not back any form of giveaways. Instead he reigned in federal spending in order to reduce the deficit and create confidence the United States was becoming more valuable, not less.  This worked! The deficit declined and the decade that followed was the best-ever economically for the nation.

Maybe this week’s deal tells us Barack Obama is simply becoming yet another political phony — a depressing thought at many levels. Last January during the State of the Union Address, when Obama declared there would be strict fiscal disciple but not “till next year,” the transcript recorded that there was laughter. Suddenly it’s not funny.

But the worst fear is that the deal tells us the president and congressional leaders have no backbone: whenever an interest group squeals, it will receive a handout, regardless of harm to the country.

Cutting the debt, by taxes and by spending reductions, could pull the economy of out the quicksand. Increasing the national debt will likely make matters worse.

Comments
6 comments so far | RSS Comments RSS

I found myself wishing there was a way to cut up Obama’s and Boehner’s credit cards.

Well, there is, kind of — it’s called the 2012 elections. Problem is, even if the incumbents are replaced, will their successors be any more fiscally responsible? Many people thought Obama would be more responsible than W. … not so far, he hasn’t.

Posted by RayAnselmo | Report as abusive
 

Gregg,
[The argument that extending the 2003 tax cuts is needed to boost the economy simply ignores that the economy declined with these cuts in place. Federal income taxes (for the working class and the middle class as well as the rich) were reduced in 2001 and again in 2003. Right after that, the economy began to sputter.]

The economy began to sputter in 2003? According to what? GDP increased through 2008? The market was booming – what is your definition of sputtering?

[Corporations aren’t investing to spark new growth and create more jobs because they think Washington’s Democrats and Republicans alike are running the country into the ground]

Um, wrong, they aren’t investing in the government because they don’t know which industry Obama will attack next. They don’t trust him and when there is great risk in the markets its a safe bet to keep funds readily available. Also, the government has been driving GDP through its stimulus so the ‘true’ growth of the actual economy is impossible to see.

And this is my favorite:
[Bear in mind, when the early 1990s recession afflicted the country, President Bill Clinton did not back any form of giveaways. Instead he reigned in federal spending in order to reduce the deficit and create confidence the United States was becoming more valuable, not less. This worked! The deficit declined and the decade that followed was the best-ever economically for the nation.]

Actually Clinton strengthened the Community Reinvestment Act which required banks to lend. As we all know a few years later, the housing market crashed and the FHA began to bleed red. Banks went under, Fannie and Freddie are hundreds of billions in the red and counting. Clinton’s giveaway was to those who should not have had homes because they did not have any skin in the game and did not have the resources (INCOME) to own a home. The best example of shoty govt economics ever. “Best-ever economically” HA what a joke.

How do you like the economy now? Just because Clinton isn’t in office doesn’t mean he didn’t start the train down the mountain, and yes, Bush continued it, guilty party #2, but he’s not mentioned in your article – neither is the big picture. Taxes are a small piece of the pie here – Social Security and Medicare are the 10,000lb elephants in the room. And they need to be fixed. Forget tax cuts, lets fix entitlements.

Posted by BHOlied | Report as abusive
 

Why do we continue to shoot ourselves in the foot?

To save our economy – and our way of life, we must take steps to re-open our closed factories. There is nothing that is made overseas that cannot be made here, and I include the service sector which we so mistakenly outsourced to India and other foreign locations.

The expertise and training potential to get this done are available this very moment. a quality American product will sell, but we are running out of chances to get it right. Along with a rebirth of American manufacturing, there is the issue of a neglected and outdated infrastructure which must be addressed concurrently.

This is a nonpartisan issue.

Posted by Buzz123 | Report as abusive
 

Anyone who leads a strong challenge to this continued Bush-era tax policy will be the next president.

In the last few days – every Democrat and most Republican I know are astounded by this fiscal irresponsibility and all the Democrats will not vote Democrat in 2 years.

They feel duped by a smooth talking politician running a pack of weaklings.

Someone like Brazil’s Lula will start to emerge by this summer and become the hard left socialist party that will receive the majority of the votes in 2012.

Both

Posted by Butch_from_PA | Report as abusive
 

BHOlied is right about one thing at least, that Medicare and SS need fixed. In my view, according to what I see on a daily basis in my work, there is much waste in Medicare because there is much waste, overpriced and unnecessary services and products, in our so-called healthcare system. According to a comment by one CEO of a large healthcare complex in the Seattle area a few years ago, half of what is spent in healthcare in the US is a waste. That honest appraisal is from a person who was making his living on much of the high dollar services which are often overkill or unnecessary (think: spine surgeries, for a start). Think: Scooters. Think: home kidney care for those who took too much acetaminophen (Tylenol) for their headaches when things such as chiropractic care (only partially covered by Medicare) would serve them better.
Our “healthcare” system is just overpriced disease care for a country with unhealthy lifestyles, stuffed on processed “food”, thinking medicines are the way to be healthy while you smoke and eat as much as you want.

Social Security pays 50% benefit to a spouse who worked little or none, while the working spouse also collects their full benefit. On the other hand, those who are self-employed are actually paying double payments into SS, by having to pay both the employee and the employer amounts out of their income.

It is like this: I am self-employed as a sole-proprietor in a very labor intensive, equipment intensive occupation. Over 12% of everything I bring in goes to Social Security, for the employer as well as the employee contributions. This does not include employee and employer payments to Medicare. Yet, the person who maybe worked 2-4 years then became the household manager gets 50% SS benefits for not working 30-40 years like most of us do.

Payments to help support kids of deceased SS contributors are one thing, and a good thing. But payments to a spouse just because they did not work and stayed at home, while other people work AND do all of the things that need to be done at home? That is the crazy part, the fat part, that needs to be cut.

Posted by ayesee | Report as abusive
 

ayesee, thank you for your informative comments. I worked in the so called health care field for many years also, and I am appalled and embarrassed by what I see today.

Unfortunately, both parties have figured out how to milk the cow, no matter what “we the people” say at the polls.
After all. “We the people”, will jump on the entitlement bandwagon when goodies are offered, no matter what sort of politics they have spouted in the past.

The US Department of Health and Human Services seems to be made of Teflon. They are responsible for so much of the health care fiasco, and yet are rarely even mentioned.What is THEIR budget?

Posted by 2pesos | Report as abusive
 

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