The Rock and the Hard Place on the Deficit, by Christina Romer, Commentary, NY Times: Dealing with our nation’s gaping budget deficit is going to hurt. So here is a question for policy makers: What would hurt more, raising taxes or reducing spending?
The Republicans who walked out of budget negotiations the other week think they know the answer. They insist that higher taxes would threaten our fragile economic recovery and do serious long-term damage. Better to cut federal spending, they say.
President Obama pressured Republicans last week to accept higher taxes, in addition to reduced spending, as part of a plan to pare the deficit.
The economic evidence doesn’t support the anti-tax view. Both tax increases and spending cuts will tend to slow the recovery in the near term, but spending cuts will likely slow it more. Over the longer term, sensible tax increases will probably do less damage to economic growth and productivity than cuts in government investment. ...
"So here is a question for policy makers: What would hurt more, raising taxes or reducing spending?"
That's an appropriate question to ask about the long-run, though the question is really about the size and role of government, but not in the short-run. In the short-run we should be doing everything we can to bolster the recovery, or at least not make it harder to recover through demand/deficit reduction policies. Why are we even taking a chance on making things worse than they already are?
What this shows is how thoroughly the debate has been tilted toward Republican arguments, and the president has to shoulder a lot of the blame for this. Paul Krugman explains:
From today’s radio address [from the president]:
Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.
Yep, the false government-family equivalence, the myth of expansionary austerity, and the confidence fairy, all in just two sentences.
Christina Romer notes that there are other paths we might pursue:
All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. Far better to pass a plan that phases in spending cuts or tax increases over time.
But that argument has already been lost thanks, in no small part, to the president's acquiescence to Republican ideas. Once the president bought into the belt-tightening arguments, there was little hope of avoiding a belt-tightening outcome. The only issue to be decided was who would be asked to do the tightening.
Which brings up a question: If household's have to tighten their belts, how come that doesn't apply to wealthy households who have ample room to tighten? When we talk about belt-tightening, why does it have to involve cutting programs that hurt the poor rather than tax increases directed at the wealthy? The very best outcome we can expect, according to reports, is for less than 15% of the budget reduction to come from tax increases:
even if Obama were to gain all the tax-law changes he wants, new revenue would make up only about 15 cents of each dollar in deficit reduction in the package. ... But substantively, budget experts note, the plan would still be dominated by cuts to government programs, many of them longtime Democratic priorities...
Obama once targeted the wealthiest Americans, the top 2% who earn beyond $200,000 a year, proposing to cap their income tax deductions.
But weeks of closed-door talks have diminished that goal. Now, even a deduction cap on those Americans earning beyond $500,000 a year — just 1.3 million Americans, fewer than 1% of all taxpayers — has been dashed.
If we're going to make the stupid belt-tightening argument, it should at least be applied equitably across households of all income levels.
We can do better than this, but it takes leadership and a willingness to fight rather than acquiesce, traits that are far too short in supply in the current administration.