Obama Plans Tax Cuts, Contra The West Wing

Ken AshfordEconomy & Jobs & Deficit, Obama Opposition1 Comment

Yeah, I know.  You're happy about this:

President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.

But you shouldn't be.

Listen, your economic problems are (or will be, if it hasn't effected you yet) a direct consequence of the nation's economic problems.  So the best way to help you in the long run is to help the national economy.

There are, in theory, two ways to get the life blood of the economy going.  One is government spending.  The other is tax cuts.

I'm overgeneralizing here, but typically, Democrats prefer government spending; Republicans prefer tax cuts.

The problem with tax cuts — giving money back to the people — is this: doing so doesn't necessarily help the economy.  This is explained, somewhat tongue-in-cheek, by this exchange from The West Wing:

Donna (secretarial assistant), as she and Josh (her boss and Asst. Chief of Staff) walk down a White House hallway: "We have a $32 billion budget surplus for the first time in three decades. The Republicans in Congress want to use this money for tax relief, right?"

Josh: "Yes"

Donna: "Essentially what they're saying is we want to give back the money. Why don't we want to give back the money?"

Josh: "Because we're Democrats."

Donna: "But it's not the government's money."

Josh: "Sure it is. It's right there in our bank accounts."

Donna: "That's only because we collected more money than we ended up needing."

Josh: "Isn't it great?"

Donna: "I want my money back."

Josh: "Sorry."

Later, they pick up the argument:

Donna: "What's wrong with me getting my money back?"

Josh: "You won't spend it right."

Donna: "What do you mean?"

Josh: "Let's say your cut of the surplus is $700. I want to take your money, combine it with everybody else's money, and use it to pay down the debt and further endow Social Security. What do you want to do with it?"

Donna: "Buy a DVD player."

Josh: "See."

Donna: "But my $700 is helping employ the people who manufacture and sell DVD players, not to mention the people who manufacture and sell DVDs. It's the natural evolution of the market economy."

Josh: "The problem is the DVD player you buy might be manufactured in Japan."

Donna: "I'll buy an American one."

Josh: "We don't trust you."

Donna: "Why not?"

Josh: "We're Democrats."

Donna, exasperated: "I want my money back."

Josh, snickering: "You shouldn't have voted for us."

The West Wing touched upon this again the following season.  Here Chief of Staff Leo McGarry is having a discussion with Charlie, President Bartlet's young personal aide.  Charlie has just completed his tax return and finds out that he owes money (he was expecting a refund).  The reason he owes money is because of a tax "rebate" that the government bestowed the prior year — a "rebate" intended to stimulate the economy:

LEO: Did you spend it?

CHARLIE: I paid my VISA bill.

LEO: We would have preferred it if you'd ate in a restaurant or travelled.

CHARLIE: Me too.

LEO: Well, in any event… [puts out his hand]

CHARLIE: What? [Leo starts wiggling his fingers] Oh, what are you – the collector?

PRESIDENT BARTLET [sticking his head in the doorway]: Leo.

LEO [to Barlet]:  He used the rebate to pay off his VISA bill.

CHARLIE: It wasn't a rebate; it was an advance.

BARTLET [to Charlie]:  A trip to Banana Republic would have killed you?

Those exchanges highlight the problem of tax cuts, rebates, etc.  They don't necessarily do what the Republicans hope.  Many people will use their tax cut to pay down their debt and bills, or, plop the money into their savings account, or, if they spend it, it may be on something foreign which doesn't stimulate the national economy (much).

On the other hand, government spending pumps money into the economy, and 100% of it goes there. 

It's not that tax cuts are bad.  Americans paying down their debt, for example, is good.  Even buying foreign products pumps some money into our economy.  But you getting a bigger bang-for-the-buck, economically speaking, with government spending (assuming the money is spent in America).  An infrastructure program (here in the United States, not in Iraq) will benefit American workers, small businesses, and other businesses which thrive off of those workers and businesses.  It is a direct rippling effect.

Everybody knows this — even Republicans — but Republicans are catering to what appeals to individual Americans the most (tax breaks, tax breaks, tax breaks), instead of doing what is necessarily the best, most responsible, thing for the country.  (The reason, a cynic like me would suggest, is because tax breaks will get them elected, which is more important to Republican politicians than doing what is best for the country).

So why Is Obama now proposing tax cuts?  Well, he did promise them in his campaign.  However, these particular tax cuts are beyond what was promised.  These tax cuts are a one-time economic stimulus to get us out the hole we're in.

The problem I'm having is that Obama's two-year economic stimulus package is 40% tax cuts(!) and 60% government spending.  Why is so much of that devoted to tax cuts?

There are probably two reasons to consider.

The first reason, which makes more sense, is that government spending is slow.  We need an economic stimulus now, and there are a finite number of "shovel-ready" projects on which to spend money.  Even if you use some government spanding for aid to the distressed (unempolyment benefits, etc.), it's still not going to give the economy the immediate kickstart which is needed.

But the second reason — the one most of the media is going with (see the blocked quote up top) – is that Obama is trying to placate Republicans so they won't grouse about the government spending.  You know, the whole partisanship thing.  I'm not sure why this is necessary; after all, Obama won.  Democrats won.  We don't have to placate.  (We don't have to be pricks either; there is probably a middle ground).

I'm hoping that the Obama economic team is operating under the first reasoning, and the "playing nice" with the GOP is just their front.  Because if we start trying to please congressional Republicans, we're never going to succeed, and nothing will get done.

UPDATE:  Robert Reich seems to be climbing on board.  That says something good for the plan, I guess.