Monday, February 23, 2009

Obama's Fiscal Chutzpah (and Confusion)


The White House has announced that it will be hosting a "Fiscal Responsibility Summit." This is a bit like Gilligan (pictured above left) hosting a summit on sound navigation practices ! Is this the same White House whose fiscal policies will bring us the largest deficit ever (over $ 1 TRILLION dollars !) in the coming year ? Indeed, the Treasury plans to borrow nearly $500 Billion in this quarter alone !

At the summit, the President, legislators, scholars and interest groups will supposedly explore ways to reduce the deficit that will result from the President's own fiscal policy. "On the table" will be reductions in spending in Iraq and Afghanistan and, you guess it, increased taxes on those individuals who create more wealth than others. How we will spend LESS in Afghanistan after dispatching an additional 17,000 troops there --- a deployment announced last week --- is a mystery to me. (Oh, and didn't candidate Obama promise to spend more on foreign aid in Afghanistan than the stingy Bush administration ?)

All kidding aside, the announcement raises the question of whether the current administration understands the rationale of its own economic recovery plan. The point of the stimulus package, we thought (and reported here), was to borrow hundreds of billions of dollars and then spend the proceeds on various projects that would "creat jobs" and thus put money in everyone's pocket. The plan also included a hefty helping of tax cuts and direct payments to individuals with no tax liability, on the hope that the recipients thereof would spend the proceeds. However, cutting spending elsewhere (including spending on, say, hazard pay for troops who return from Iraq, ammunition, and spare parts), or raising taxes, will of course offset at least some of the stimulus that results from the $790 Billion "emergency" package signed just last week. While individuals who earn over $250,000 per year may spend a slighlty smaller share of their income than those closer to the poverty line, they nonetheless spend most of it, with the results that, even under a static model, increasing their taxes will, other things being equal, slow down the economy. And, of course, the world is not static; those who anticipate higher taxes may work, invest (and create) less, thereby reducing the nation's long run productive capacity.

Recall in this connection that the U.S. GDP is about $13 Trillion. $800 billion in stimulus spread over two years would amount to less than two percent of GDP annually. $800 billion offset by significant spending cuts and tax increases may well amount to less than 1 percent annually. If the economic situation really is as dire as the Administration is telling us, will this be nearly enough to pull us out of recession ??
One more thing. Unlike much of the stimulus spending, the tax increases proposed by the President will likely be permanent with the result that the present value of such increases will be quite high and perhaps offset entirely the amount of the temporary stimulus. If so, then the President's economic plan has much more to do with redistribution than stimulus.