Monday, December 13, 2010

The Obama-Republican Tax Compromise

by Richard Crews
It seems that President Obama has let the Republicans bully him into a second round of economic stimulus. It will be fascinating to see how this plays out in the next couple of years.

Two years ago when the U.S. and World economies headed into a severe recession, the U.S. Congress passed an enormous economic stimulus package. This involved borrowing several hundred billion dollars to create jobs by funding infrastructure, green energy development, education, etc. But it was not enough. The economy staggered to its feet but lagged and sagged; unemployment stalled at just under 10%.

Another round of government spending was needed, but had become politically unpopular and Obama did not have the political capital to push it through the legislature. However, tax cuts are the other way of putting money in the hands of consumers, and consumer spending is the backbone of economic growth. Granted, two onerous parts of the present package favor the very wealthy--a special tax break and a cap on the estate tax. These represent "trickle-down economics," a Reagan-era invention which has been discredited as inefficient. But after all, what do wealthy people do when they get money? They buy stocks and bonds. This provides business financing. And more significantly, the "compromise" involves substantial tax breaks for the middle class, a reduction in payroll taxes, and an extension of long-term unemployment benefits, all of which directly feed into consumer spending.

The timing and politics are also fascinating. One can expect the economy to stagger to its feet again and start up the hill over the next two years, just in time to fortify Democratic prospects for the 2012 presidential election. And the Republicans clearly are to blame for forcing this renewed explosion of the national debt.

One can almost hear Br're Rabbit's refrain: "Oh no, boss! Please don't throw me in dat briar patch!"