Back in May, the Congressional Budget Office (CBO) issued a stark warning to Congress that tax hikes scheduled to happen at the beginning of the year could trigger another recession. Since that time President Barack Obama and Senate Democrats have refused to act on extension of all current tax rates, which is the position of House Republicans. Instead, they’ve only pushed for one-year extension for individuals making $200,000 and families bringing in $250,000.
But yesterday, the CBO once again stressed that the looming tax hikes could hurt the economy if the stalemate doesn’t end:
In a fresh warning about the so-called “fiscal cliff,” the nonpartisan CBO reiterated that the U.S. economy will go into a recession next year if the Bush-era tax cuts expire and automatic spending cuts take effect. Read the CBO report.
In its latest report, the CBO predicts that the U.S. economy will grow at a 2.1% clip in 2012, but fall by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 under the fiscal cliff scenario.
Previously, the CBO said growth would be 0.5% in 2013 under the fiscal cliff. In its new report it said the “underlying strength” of the economy is weaker.
The CBO said unemployment would jump to around 9% in the second half of 2013 from its current 8.3% if the tax increases and spending cuts play out.
Shortly after the 2008 presidential election, historian Michael Bechloss gushed with praise for President-Elect Barack Obama, declaring him to be “probably the smartest guy ever to become President”, and raving that his IQ is “off the charts”. When interviewer Don Imus inquired as to what Obama’s IQ is, Bechloss admitted that he did not know, but that did not keep him from gushing effusive praise. We are left to take a historian’s word for it, because Obama has steadfastly refused to release his college transcripts, and his policies while in office certainly do not lend credence to the claims of his brilliance. In fact, if we had to judge the president by the effectiveness of his policies, Obama would be the functional equivalent not of the class valedictorian, but of that weird kid that sat in the corner and ate paste while talking to himself.
On matters of the economy, the president and his advisors seem to be particularly clueless. Consider some statements from the administration of late:
In a recent video clip making the rounds, Obama responds to a question about the near $1 trillion “stimulus” package and its effect on the economy by laughing and then declaring “ ‘Shovel-ready’ was not as shovel-ready as we expected.” This is, you will recall, the same stimulus package that Obama demanded must be passed immediately if we were to stem the possibility of another Great Depression. We were promised (by Christina Romer, the first chairman of Obama’s Council of Economic Advisors) that if we passed it, unemployment would stay below 8%. Well, we DID pass it, and we have been rewarded with unemployment levels between 9-10+% for well over two years. Now, we have high unemployment AND staggering quantities of additional debt crippling the economy.
President Barack Obama made another pitch for his latest latest “stimulus” plan yesterday in the Rose Garden at the White House, once again calling for Congress to pass it quickly. But this lastest gimmick isn’t likely to win much support from Republicans since Obama is planning to pay for his temporary tax cuts with long-term tax hikes:
The prospects for President Barack Obama’s $447 billion jobs plan grew dimmer Monday as he unveiled the fine print of how it would be paid for—primarily through tax increases that Republicans said would destroy jobs, not create them.
Mr. Obama proposed limiting itemized deductions for families with taxable income of $250,000 or more a year, ending tax breaks for oil companies and corporate jet owners, and cutting out a tax break for investment-fund managers. The White House says the tax changes would take effect in 2013 and estimates they would raise $467 billion in additional revenue over 10 years.
Republicans in Congress, who had been striking a more conciliatory tone about backing at least parts of the proposal the president unveiled last Thursday, disputed the White House contention that the plan would cause no additional job losses for the struggling economy.
This is just poor policy. These tax cuts and credits are gimmicks that won’t do much, if anything, to create jobs. In fact, the tax hikes will only contribute to the uncertainty that continues to hamper the economy. This a conclusion that even Obama’s former economic advisor, Christina Romer, once noted (emphasis mine):
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” - John Maynard Keynes
In case you haven’t heard, President Barack Obama replaced Christina Romer, who recently resigned her position as an economic advisor in the administration, with Austan Goolsbee, an economist from the University of Chicago.
Don’t expect him to recommend any big tax cuts. Goolsbee is extremely skeptical of supply-side tax arguments, calling the Laffer Curve a “fleeting figment of economic imagination.” Indeed, he may have influenced Obama himself, who in his 2008 book, “The Audacity of Hope,” says he doesn’t buy the theory that the Reagan tax cuts changed investment or labor incentives. He does, however, think it would not be a bad idea to lower corporate tax rates if there were also fewer credits and deductions.
Realizing that tax hikes will hinder an economic recovery, Peter Orzag, who until recently served as President Barack Obama’s budget director, is calling for a two year extention of the Bush tax cuts:
In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.
The sentiment is shared by Christina Romer, another one of President Obama’s ex-economic advisers, who warned that tax hikes in a recession will only hinder economic growth while tax cuts “have very large and persistent positive output effects.”
No proposal currently exists in Congress to extend any of the tax cuts set to expire at the end of the year, either for the middle class or to extend all of them. President Obama has only offered tax credits and rebates, which are direct spending as noted by Zach yesterday and largely do nothing to spur economic growth.
In a farewell speech given yesterday, Christina Romer said that the United States averted a depression thanks to actions taken by the Obama Administration:
Christina Romer, the departing chairman of President Obama’s Council of Economic Advisers, is to say in a farewell speech today that the administration’s responses to the economic crisis it inherited averted “a second Great Depression” and kindled a slow recovery, according to excerpts released on Wednesday morning by the White House.
Ms. Romer’s last day as a member of Mr. Obama’s economic team, and its only leading woman, is Friday, which coincides with the release of unemployment figures for August that are expected to show joblessness still hovering above 9 percent. And she returns to California in a campaign season in which Republicans insist, and many voters believe, that administration policies have failed, despite nonpartisan analyses to the contrary.
“I am proud of the recovery actions we have taken. I believe they have made the difference between a second Great Depression and a slow but genuine recovery,” Ms. Romer will say, according to her speech draft. “And the passage of health care reform and financial regulatory reform are accomplishments that will be with us long after the recession is over.”
As the Wall Street Journal noted back in July, there is no way to know what would have happened without the bilions upon billions of “stimulus” dollars pumped into the economy, which haven’t done much other than drive up budget deficits:
Brace yourself for a shocking revelation. The New York Times called for Congress to let those evil tax cuts for the evil “rich” to expire:
Americans need to hear a serious debate about how the country can meet the twin fiscal challenges of supporting the weak economy now and taming the budget deficit as things improve. That debate is not happening in Washington, and it is certainly not happening on the campaign trail.
The Republicans are insisting on extending each and every one of the tax cuts forever. It is impossible to square that demand with their calls to reduce the deficit, so they do not even try.
President Obama is right when he says the country cannot afford to extend all of the tax cuts. He wants to let the tax cuts expire on the top 2 to 3 percent of American households (couples making more than $250,000 a year, individuals making more than $200,000) and permanently extend them for everyone else. The problem is that a permanent extension of the so-called middle-class tax cuts is also unaffordable.
It makes sense to extend them temporarily, because the weak economy needs the boost. But more revenue will be needed in years to come to keep rebuilding the economy and meet health care and other obligations to retiring baby boomers. That means more Americans — and not just the rich — are going to have to pay more taxes. For all the politicians’ talk about deficits, no one is saying that.
Did you catch that? Not only is the editorial board pushing for the cuts for the “rich” to expire, which I would submit to you includes the job creators in our economy, they are also advocating that the tax cuts for the middle class also be allowed to expire.
Speculation broke that last night that Christina Romer, the White House chief economic advisor, plans to leave the Obama Administration:
Romer, an economics professor at the University of California (Berkeley) before taking the key admin post, did not respond to repeated calls to her office.
“She has been frustrated,” a source with insight into the WH economics team said. “She doesn’t feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president.”
“She is ostensibly the chief economic adviser, but she doesn’t seem to be playing that role,” the source said. The WH has been pounded for its faulty forecast that unemployment would not top 8% after its economic stimulus proposal passed.
Instead, the jobless rate is 9.5%, after exceeding 10% last year. It was “a horribly inaccurate forecast,” said Bert Ely, a banking consultant. “You have to wonder why Summers isn’t the one that should be taking the fall. But Larry is a pretty good bureaucratic infighter.”
Romer was one of the architects of President Barack Obama’s stimulus program, which was the first step in Democrats effectively taking ownership of the economy.
President Barack Obama and his economic advisors claimed that this spending would keep unemployment under 8% (pg. 5), claiming that it would rise to 9% without such action. As of today, the unemployment rate sits at 9.5%.
Tom Coburn (R-OK) and John McCain (R-AZ) have released a report documenting 100 of the most wasteful projects funded by the so-called “stimulus” bill, which President Barack Obama and his economic advisors claimed that this spending would keep unemployment under 8% (pg. 5), claiming that it would rise to 9% without such action.
As of today, the unemployment rate sits at 9.5%, Christina Romer, Obama’s chief economic advisor, told us months ago that the stimulus has already had its biggest impact and businesses are sitting on cash because they are worried about the economic climate.
Here is video from their press conference on Monday:
Here are some of the more egregious projects:
As we continue to debate the impact of the economic stimulus package passed in 2009, and subsequent “jobs bills,” we should look at what Barack Obama’s own economic advisor, Christina Romer, once noted about tax cuts as an effective tool to fight a downturn (emphasis mine):
Underlying the debate is a long-running argument about how much of a lift the government gets from spending more or taxing less. Keynesians argue that when the economy is distressed, a dollar spent by the government multiplies in value. It gives a worker income the private sector has failed to produce, which he spends, creating demand for goods and services.
Ms. Romer argued last year that this “multiplier” for government meant every dollar spent created about $1.50 worth of demand.
Some economists say that’s too high. Valerie Ramey of the University of California at San Diego, initially thinking as a Keynesian, developed doubts after sifting through historical examples. During the military build-ups of World War II, the Korean War and the Reagan era, a dollar spent added roughly a dollar of growth, she says. Although Ms. Ramey supported stimulus in 2009 because the economy was so weak, she doesn’t advocate more now. “We just don’t have enough evidence to prove that it’s good.”
Robert Barro, a Harvard economist, found even smaller multipliers: A government dollar spent creates about 80 cents worth of growth, or possibly less, he says. Government spending, he says, crowds out private sector spending that would otherwise be taking place.
Keynesians say other things were happening at the same time as military build-ups that muddy the results. During World War II, for instance, consumer goods were rationed and Americans were exhorted not to spend.