Tag Archives: economic growth

Making Sense of Obama’s Tax Compromise

Marc Seltzer © 2010

By Marc Seltzer; originally published at care2.com on December 8, 2010.

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The Obama compromise, which renews existing tax rates for middle class and wealthy Americans and continues tax incentives aimed at speeding economic recovery is not as simple as it seems.

At first it appears that the President allowed wealthy Americans, who have done exceedingly well in the past decade and generally survived the economic crisis with losses, but not foreclosures or unemployment, to win a battle in class warfare.  It is true that letting the Bush tax cuts (for Americans earning more than $250,000) expire would have forced the wealthy to contribute significantly more to the public budget when high unemployment and underemployment were causing a great deal of stress and suffering to middle and lower class workers. In a simple contest over redistribution of wealth, wealth won.

In the larger context, the President’s compromise may have been a significant achievement.  The President is working to stimulate the economy to speed economic recovery.  The best way that he could have done this without continuing tax cuts for upper incomes would have been to let those tax cuts expire and separately to provide a major new stimulus to the economy.  This could have taken the form of a half-trillion dollar infrastructure program or multi-year green-energy committment to make American energy consumption more efficient and take a leadership role (now held by China) in developing green-energy technology.  However, there was not enough support in Congress, let alone the public at large, for such a major new stimulus program.

Without new stimulus spending, the higher tax rates, as Bush tax cuts expired, would have taken money out of the private economy.  This money would go as tax revenue to pay down the deficit, but would not create new public spending or jobs without additional stimulus legislation.

This is the real problem.  The economic recovery is not yet fast enough or strong enough to endure, without harm, tax hikes, absent a corresponding increase in stimulus from another source.  Yet no other stimulus was politically available.

This put the President in the position of having to accept a renewal of all the Bush tax cuts, to keep the economy from losing steam, at least while the economic recovery was weak.  The two-year tax-cut extension was the estimate of that vulnerable window of time.

Importantly, the high-income tax cuts were not the whole deal, they were only the Republicans’ bargaining chip.  As David Leonhardt reports in the New York Times, the President got unemployment benefits extended, a cut in the payroll tax and some business taxes and college tuition tax credits in addition to continuing the lower tax rates for middle income earners.  The President’s package amounts to significant new stimulus over and above continuing the Bush tax rates.  Economists like Paul Krugman and Christina Romer have said, since the financial crisis, that more stimulus was needed to keep the economy growing and to support employment.  The fight in Congress and in the general public has been about how much to spend on stimulus, in light of the deficit and the Republican preference for free-market solutions and lower stimulus spending.

Seen in this light, the President was able to provide significant governmental support for economic and job growth, at the cost of lower tax rates for the wealthiest two percent of Americans than was the President’s preference.  The President ran for office asserting that wealthy Americans should pay a greater share of the nation’s tax burden to insure that all Americans could afford health care and the continuance of social safety-net programs.  However, the economy was not yet in crisis, the unemployment rate not near 10%.  In the current circumstances, the President must focus first on supporting the economy with stimulus and spending, even in the face of the deficit and his stated belief that wealthy Americans should, in the long term, contribute more.

As the growth rate improves, and unemployment comes down, it will be appropriate to cut spending and raise taxes to balance the budget and make decisions about fair contributions from different income earners in society.  For those that believe in a more progressive income tax with higher earners paying more than the historically low levels they pay today, the real fight will be in two years’ time, when the economy is stronger, and the primary consideration of a tax hike on the affluent will be social justice and the great disparity in incomes between rich and poor, rather than the impact on the overall economy.

Economists will still argue about how much impact tax hikes on wealthy Americans will have on the wider economy and politicians will continue to argue about the social justice goals of a progressive tax system, but the context should be quite different.  Hopefully, substantially more of the millions of unemployed Americans will be back at work and the growth rate will have continued to improve.

UPDATE DECEMBER 11, 2010:  Bill Clinton discusses tax compromise

Marc Seltzer is also a contributor to SupremePodcast.com, a weekly U.S. Supreme Court case review podcast.

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Employment Poised to Turn Positive

Job losses Reported Through November 2009

By Marc Seltzer; originally published on December 4, 2009, at  care2.com.

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Despite doom and gloom in Republican talking circles, the overall jobs data is right on track in reflecting a rebound in economic activity.  Just released unemployment numbers show the lowest number of monthly job losses in two years, down to 11,000.

When Republicans handed over the Presidency to Barack Obama in January 2009, the monthly losses were 741,000.  If the automobile companies had folded, as they would have in the Spring without government support, another  million-plus people would have been thrown out of work, sending the monthly number over 1,000,000 for several months in a row.

It would have been preferable if private business activity had caused employment to improve.  But the financial freeze robbed businesses of their confidence and their financial capital, so businesses have shedded jobs, delayed plans, and closed down.

The government rescue gave money to states to stop layoffs at schools and police departments.  In other ways, from the Fed’s low interest rates to funds for infrastructure, education grants, promoting green technology and the like, the government injected money into the economy.  Job losses in September of this year were down to 139,000 and in October, 111,000.  The stimulus is working, despite Representative Boehner’s (R-Oh) claims of failure.

Jobs are a lagging indicator, which means that new business planning, funding and activity happens first, and then the hiring of employees occurs many months later after confidence improves, and opportunities require new staffing.  The growth rate for the economy as a whole was around three percent for the quarter ending in September, in line with the positive growth rates that the U.S. hopes to sustain for long-range growth, although more is desired now to make up for negative growth during the recession.

The goal is for employment to come roaring back and for private business to take over for public support of the economy. However, businesses large and small are still shell-shocked by the financial freeze and destruction of wealth that it wrought.  They must also adjust to lower spending as consumers behave more responsibly and unemployment remains significantly elevated. Fortunately, there is still a lot of stimulus money left to power infrastructure projects before the handoff to the private sector takes place.

The government has done the lion’s share.  It still needs to implement sound financial reform legislation, giving the public and financial industries confidence in a sound and fair system.  In addition, health care reform in the public and private sectors could free up wasted money for productivity in other areas that serve American business, such as exports.

Insurance regulation and universal coverage, already contained in proposed legislation, will spread the burden of costs more equally.  However, systemic overspending in health care robs families of wages and businesses of profits that could be put to better use.  Following evidence-based medicine rather than custom and practice and market-driven medicine could go a long way to giving us more for our money.  Malpractice reform, consistent with evidence-based medicine, would also eliminate waste.

Look for December or January employment numbers to finally turn positive and fourth quarter growth to remain healthy.  This will be welcome news to the unemployed and businesses, and should give the country more confidence that we are, in fact, on the road to recovery.

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December 8, 2009 UPDATEBloomberg Economics podcast of Dec. 7, 2009.  Tom Keen’s interview with Steven Wieting, Managing Director of Economics and Market Analysis reflects on the jobs data and recovery.   It’s technical, but provides some thoughtful observations.

(The original publication of this story contained an older employment graphic; this version has been updated).