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It’s the Economy, Stupid

Obama plans to raise taxes anyway.

Aug 23, 2010, Vol. 15, No. 46 • By STEPHEN F. HAYES
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Barack Obama understands that it’s bad economics to raise taxes in a recession. It’s “the last thing you want to do,” he said almost exactly one year ago.

In early August 2009, the president visited Elkhart, Indiana, to tout his $862 billion stimulus plan. Less than 20 percent of the stimulus had been spent and White House officials, infused with Keynesian confidence, were bullish about a strong recovery. NBC’s Chuck Todd talked to Obama about the recovery and posed a question submitted by an Elkhart resident named Scott Ferguson. “Explain how raising taxes on anyone during a deep recession is going to help with the economy.”

Obama was blunt: “Well—first of all, he’s right. Normally you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is—his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”

Todd interjected: “But you might for health care. You might for the high—for some of the wealthiest.”

Obama responded: 

We have not proposed a tax hike for the wealthy that would take effect in the middle of a recession. Even the proposals that have come out of Congress—which by the way, were different from the proposals I put forward—still wouldn’t kick in until after the recession was over. So he’s absolutely right, the last thing you want to do is to raise taxes in the middle of a recession because that would just suck up—take more demand out of the economy and put businesses further in a hole.

Technically, a recession is two consecutive quarters of negative growth. The United States emerged from its latest recession in the third quarter of 2009, when GDP grew at 1.6 percent. The economy grew over the next three quarters—at 5.7 percent in the fourth quarter of 2009, at 3.7 percent in the first quarter of 2010, and at 2.4 percent in the second quarter.

But growth is slowing. In mid-July, the Washington Post’s Neil Irwin wrote that the “bottom is falling out of analysts’ estimates of how fast the economy grew from April to June,” as several forecasters projected that the original 2.4 percent estimate would be revised downward. Last week, first-time jobless claims rose unexpectedly, and the Department of Commerce reported a trade deficit of $49.9 billion—much higher than analysts had anticipated. 

Last week, the Federal Reserve affirmed what had become increasingly obvious: Economic growth “has slowed in recent months.” The Fed warned “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” The economy grows at approximately 3 percent on population growth and productivity improvements alone, so levels of growth below that are effectively negative. Concerns about a double-dip recession, once voiced primarily by professional skeptics, are on the lips of pretty much everyone these days. And prominent economists have said that allowing all the Bush tax cuts to expire could cost the U.S. economy a further 1 to 3 percentage points next year.

All of which presents a difficult question for the White House: If it is bad economics to raise taxes in a recession, is it wise to do so in a stagnating economy?

The obvious answer is no. But inside the White House gates it’s still the “Summer of Recovery.” Treasury Secretary Timothy Geithner told NBC’s David Gregory last month that he does not believe we’re headed toward a double-dip recession. And while he acknowledged that the recovery could take a while, he was quite optimistic. “You are seeing recovery. You’re seeing private investment expand again, job growth starting to come back.” When he was asked specifically about raising taxes on top income earners, as is scheduled to happen on January 1, 2011, Geithner said, “The country can withstand that. The economy can withstand that. I think it’s good policy.”

It was an interesting word choice: “withstand” a tax hike? So the U.S. economy is strong enough to endure the additional constraints the Obama administration wants to place on it in pursuit of its redistributionist goals? This is the triumph of ideology over economics. 

No one knows whether the economy will grow at an anemic pace or continue its slide into recession. But it’s certainly the case that raising taxes in January—on anyone—makes a slide more likely. Does the Obama administration really want to take that risk?

—Stephen F. Hayes

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