Saturday, May 26, 2012

President Obama's Rejection of Economic Science

Thought the Earth was Flat

Thinks Tax Cuts Slow the Economy

Embraced Economic Science for the Common Good

A recent survey (discussed here) finds that Conservatives are losing faith in Science.    Remarks by President Obama in Iowa earlier this week (reported here by USA Today) suggest that he, too, has abandoned some basic tenents of science, in this case, economic science.  In particular, the President accused Republicans of clinging to policies that would, in his words "double down on some of the policies that didn't work and got us into this mess in the first place."  According to the report in USA Today, the President "cit[ed] in particular proposed tax cuts for the wealthy" as examples of such policies that caused the current downturn and would, if maintained prevent recovery.  The "tax cuts for the wealthy," of course, referred to the 2001 across-the-board reduction in tax rates advocated by President Bush and passed by Congress.

Perhaps USA Today has mis-reported the President's remarks.  If not, the President has apparently decided the repudiate basic science.    There is simply no plausible economic theory or evidence supporting the President's claim that tax cuts for the wealthy or  tax cuts for anyone else, result in an economic downturn.  On the contrary, tax cuts put more money in the pockets of consumers, including rich consumers, who in turn spend a portion of this new wealth, thereby increasing aggregate demand and national output.   See N. Gregory Mankiw, Macroeconomics, 296 (7th Edition 2010) (explaining how tax cuts increase aggregate demand and thus increase national output).   This result is a basic scientific fact, taught annually to thousands of college freshmen annually across the country.  Indeed, the nation's unemployment rate remained below 5.0 percent for all 24 months in 2006-2007, compared to a peak of 5.7 percent the year Congress enacted the tax cuts the President Obama has decried.  (Of course, there were other sources of fiscal stimulus during the first term of the Bush Administration, including increased military spending, such that the tax cuts were not the sole source of economic stimulus.) There is only one circumstance in which tax cuts will not increase output and employment, namely, when the economy is already at full employment.  While tax cuts (or spending increases) will increase aggregate demand in these circumstances, national output will remain the same, because society is already employing all of its resources in their highest-valued uses, with the result that national output is at its maximum.  No one argues that the current economy is at or near full employment.

The President's rejection of scientific fact and theory in this context is particularly odd.   After all, the centerpiece of the President's economic recovery program entailed a so-called "Stimulus Package" of nearly $800 Billion (discussed previously on this blog), spread out over five years, a portion of which included tax cuts.  The logic of the stimulus package depends upon the very same economic models establishing that tax cuts, even tax cuts for the rich, stimulate aggregate demand and national output.

It is also noteworthy that President Obama's attitude toward economic science stands in stark contrast to the approach taken by President Kennedy, pictured above with Dr. Walter Heller, who chaired the Council of Economic Advisors during the Kennedy Administration.  As previously explained on this blog, President Kennedy advocated across-the-board tax cuts as a means of "getting America moving again," the theme of his 1960 presidential campaign.  In so doing, he followed the advice of Heller and others who understood that across-the-board tax cuts would stimulate the economy, not get us into a "mess" as President Obama now claims.

Of course, across-the-board tax cuts are not the only means of stimulating the economy.  The national government could also rely upon spending increases and/or an expansive monetary policy.  Moreover, the government could reduce taxes for lower income and middle income workers.  Nonetheless, any claim that extending such cuts to "the rich" will cause an economic downturn is akin to the claim, by Thales of Miletus, pictured abouve, that the earth is flat.