Economy & Budget

Learn from the past: Get spending cuts first

Learn from the past: Get spending cuts first

So determined is President Obama to raise taxes next month on “the rich,” that he is willing violate his most oft-repeated pledge—not to raise taxes on “the middle class”—to do so. This tax hike, he says, will “get the economy growing faster.”

BUNK

The president’s tax hike will do just the opposite, according to the former chair of Obama’s own Council of Economic Advisers, Christina Romer.

The Office of Management and Budget estimates that Gross Domestic Product for FY 2013 will be about $16.3 trillion, so Obama’s $82 billion tax hike would represent about one-half of one percent of GDP. A 2010 paper co-authored by Romer found that a tax increase equal to 1 percent of GDP reduces output by about 2 percent to 3 percent over the ensuing ten quarters. Assuming that a tax hike half that size will have roughly half the effect, Obama’s tax hike should reduce GDP by about 1 percent to 1.5 percent. Extending the Bush tax cuts, on the other hand, “would boost real GDP by a little less than 1.5 percent by the end of 2013,” according to the Congressional Budget Office.

Wells Fargo forecasts that real GDP will grow at an annualized rate of just 1 percent this quarter. The company projected that last quarter’s growth would be 2.7 percent—an estimate that was right on the money, according to the latest revision from the Commerce Department’s Bureau of Economic Analysis. If Wells Fargo’s estimate for next quarter is equally accurate, the downward slide from 2.4 percent in 2010 to 1.8 percent in 2011 will continue, with growth for 2012 falling again, to 1.75 percent.

Starting 2013 at that level, then subtracting 1 percent to 1.5 percent over ten months (due to the “Romer effect”) would bring GDP growth down to just 0.25 percent to 0.5 percent through 2014—within a hair’s breadth of tipping back into recession.

That would take us right up to the 2014 mid-term elections. Even if voters blame Obama for continued poor economic performance (or even a double-dip recession), he will not be up for re-election—but Congress will. If those elections are anything like 2012, Obama and his sympathetic media will do their best to blame congressional Republicans, whether we go over the “fiscal cliff” or not.

Establishment Republicans are urging the GOP to “compromise” with Obama—signing onto his soak-the-rich scheme in order to shield the middle class-—in return for promises of spending cuts down the road.

Republicans will refuse, if they are capable of learning from history.

In 1982, establishment Republicans persuaded President Ronald Reagan to accept a similar “compromise”—hiking tax rates in return for a promise by House Speaker Tip O’Neill to cut spending by $3 for every $1 in new taxes. Reagan kept his word, delivering the tax hike, but the Democrats reneged, actually increasing spending. According to then-Attorney General Ed Meese, Reagan always said that his biggest mistake was accepting higher tax rates first, with a promise of spending cuts to come later. The lesson is: In any “compromise,” get the spending cuts first.

While going over the fiscal cliff may produce a short-term recession, in the long run it might be in the best interests of the nation. As the CBO put it, avoiding the cliff (and sequestration) would cause “a continued surge in federal debt during the rest of this decade and beyond” that “would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was allowed to take place as currently set by law.”

If Obama’s tax hike—even if it excludes the middle class—reduces long-term economic growth, Obama and the media will certainly blame Republicans—even if they are complicit. Since the GOP is going to be scapegoated anyway, there’s no reason not to do the right thing.

 

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