Barack Obama

Now that Barack Obama has been re-elected President, he’s going to have to deal with the mess he inherits. That was the chuckle James Taranto of the Wall Street Journal had at the expense of the results last week.

As goes messes, there have been two of them in our times of trouble. The first was George W. Bush’s, the sharp and nasty 2007-09 recession. But the second has been all Obama. This is the poor recovery since early ’09, the worst since the New Deal stall-out of the late 1930s.

Explanations for the sluggish recovery that are favorable to the president abound. A big one is that the federal stimulus program of early in Obama’s term was too small. Another is that it takes a long while for recovery from “financial crises” (which apparently we had), as opposed to other types of recessions.

There are fallacies in these explanations, diagnosed many times by able minds over the last few years. But a question now arises, on account of the President’s own latest moves and rhetoric: does Barack Obama believe them in the first place?

As for the stimulus having been too small, in order for the president truly to set store in this, now that we have an election behind us in which the opposition shed power and influence, it would only make sense for the president to plow forward with another stimulus, this one done right, nice and big.

But of course the president is doing no such thing. He is actually doing rather the opposite, insisting on tax increases in the name of deficit reduction. In his own way, President Obama is now discrediting his own effort at recession-fighting from back in 2009.

If, on the other hand, the president adheres to the notion that a recovery will indeed come, but after a longer while than usual, then he must expect that at this point in time the stronger stage of recovery will be coming soon. After all, this spring will mark the fourth year of sluggish recovery. Obama’s second term will be not the “recovery summer” that the administration had inaptly hailed in 2010, but rather the recovery term.

Yet if the president believes that recovery is around the corner, then he must also hold that the budget deficit is going to be lessened in turn. Nobody, and certainly not this administration, disputes that substantial economic growth leads to substantially greater governmental receipts, if not lessened spending—in other words, lower deficits.

Therefore it is reasonable to ask, why is the president going to the wall immediately after the election to get the lame-duck Congress to enact tax increases on high earners? Certainly if he believes recovery is coming, there is no reason for such an unusual move. There is the matter of the expiry of the old tax cuts on January 1, but Congress “patches” things like this in the tax code all the time, in order to buy time for deliberation in the future. Why not settle for a patch now, especially since the new Congress will be more Democratic?

You see the problem. If economic growth does in fact come, say in 2013, as Obama presumably believes it will, there had better not still be top income tax rates of 35% and capital gains and dividend rates of 15%. Because that would show that the Bush-era tax rates were not inconsistent with recovery. And all the while the deficit would be shrinking, because that is what happens with economic growth.

Thus even though just re-elected, President Obama may well feel the heat of pressure. He has to get those tax increases and fast, just in case a recovery dignifies the holdover Bush rates. Yet it makes no sense to go for long-term tax policy with a lame-duck Congress, especially one more oppositional than the new one coming in January. The fear, probably, is that if things are patched now and dealt with in time next year, the recovery may already have arrived.

Bill Clinton played a similar game back in 1993. He inherited both the initial stages of recovery and a deficit problem. He also knew that defense spending was in the process of falling like a stone: the Cold War and the Gulf war had recently been concluded under his predecessor’s term. Surely the plummeting in this huge chunk of federal outlays would zero out the deficit, given any further recovery, under the tax-rate status quo.

Immediately after he was inaugurated, Clinton rushed through an 8% increase in the top income tax rate, even though the Democratic Congress was skittish and would have liked more time. There weren’t enough votes. Clinton had to strong-arm a freshman into getting the last one, and thereafter her political career was ruined.

Sure enough, the surpluses arrived, as defense fell all the way to 3% of GDP from over 6%. You see why Clinton raised taxes so quickly: the process of serious deficit reduction was already underway, and he wanted the credit.

Now contrary to many memories of the Clinton years, the economy didn’t do so well in the wake of that tax increase. Growth shed half a point in 1993, falling to 2.9%, and didn’t get seriously going on a regular basis until 1996, when it was clear that the now Republican Congress was going to stare down Clinton on any tax or spending-increase initiative, if not get its way with tax and spending cuts.

As goes Obama, he probably believes neither rationalization for his first-term shortcomings—neither the excuse that the stimulus was too small or that our kind of recession takes more time for recovery. Therefore, by pressuring Congress for high taxes while it is still heavily Republican, for these eight weeks, he is likely to get more “obstructionism.” Thus when real recovery still fails to materialize in his fifth year, Obama can rely on thatwarhorse—G.O.P. obstructionism—as his excuse of choice.

It really is something to behold, President Obama’s scrambling to take care of his legacy, even as by rights he should be on a second honeymoon. Smallness of vision is one thing, but in the context of real problems that need to be solved—the sad recovery from the Great Recession—it confirms that inadequate leadership is the curse that has beset the United States in the years since the American Century.

Books on the topic discussed in this essay may be found in The Imaginative Conservative BookstoreOriginally published at the essay is reprinted here with gracious permission of Brian Domitrovic.

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3 replies to this post
  1. The premise of this post is that Democrats think like Republicans–that tax policy drives economic performance. The trouble is, that's not what Democrats think; it's what Republicans think. Democrats think that tax policy does not much affect economic performance, but does directly affect fiscal balance. Ergo, Obama's desired tax policy has little to do with his broader economic agenda. It has to do with one small piece of it: his desire to address worries about the budget deficit by raising taxes (which he assumes will not much affect economic growth).

    The centerpiece of Obama's economic growth strategy is the jobs bill that he proposed two years ago and that Congress ignored–the mixture of tax incentives for business hiring, aid to states to retain teachers, police and firefighters, and investment in infrastructure spending. That's not what most conservatives consider a good plan for economic growth–it's Keynesianism 101–but it is Obama's plan.

    In sum, Obama does believe in his economic plan. He thinks that raising taxes on the wealthy will be a step toward balancing the budget, and he is prepared to accept some spending restraint that Republicans insist on (mostly in the out-years) in order to get the higher taxes. Separately, he wants the jobs plan as a modest stimulus to boost the economy in the short run (plus other measures like renegotiation of underwater mortgage loans through Fannie and Freddie). Once the economy is moving, the budget moves toward balance from three directions: more revenues, less spending, and economic growth.

    There are two standard criticisms of this. The liberal argument is that it's not enough stimulus–that the problem with the economic is slack demand caused by income inequality (i.e. most Americans aren't getting raises so can't increase spending). Businesses aren't investing because demand isn't growing. So that's the "smallness of vision" critique.

    The standard Republican critique is taxes are bad, regulation is bad, and government is bad and should get out of the way. But this is tired and irrelevant stuff. Sure, taxes and regulation restrain economic growth, but not as much as inadequate demand does. Under Clinton, the economy grew a lot more with higher taxes on everyone and stricter regulations.

    Isn't this why you want to be "imaginative conservatives"–to escape from that box? You haven't done it yet.

  2. "The standard Republican critique is taxes are bad, regulation is bad, and government is bad and should get out of the way. But this is tired and irrelevant stuff."

    Those three in excess are bad, not unto themselves. Too many taxes drains people, too many regulations micromanages creativity, and government should be accountable to the people which support it through their tax dollars.

    I also think you missed a lot of Brian's points, but certainly made a great one concerning a conflict of visions. That's why process is so important, as is fiscal accountability. The balance is never going to be balanced in one fell swoop, or taking more from the wealthy. Sacrifices must be across the board.

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