Paul Krugman: Is Obama Relying Too Much on Tax Cuts?

[flpoljunkie]

January 5, 2009, 7:48 am

Is Obama relying too much on tax cuts?

I don’t know yet. But news reports this morning certainly raise questions.

Let’s lay out the basics here. Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.

That said, there’s a problem with a public-investment-only stimulus plan, namely timing. We need stimulus fast, and there’s a limited supply of “shovel-ready” projects that can be started soon enough to deliver an economic boost any time soon. You can bulk up stimulus through other forms of spending, mainly aid to Americans in distress — unemployment benefits, food stamps, etc.. And you can also provide aid to state and local governments so that they don’t have to cut spending — avoiding anti-stimulus is a fast way to achieve net stimulus. But everything I’ve heard says that even with all these things it’s hard to come up with enough spending to provide all the aid the economy needs in 2009.

What this says is that there’s a reasonable economic case for including a significant amount of tax cuts in the package, mainly in year one.

But the numbers being reported — 40 percent of the whole, two-year plan — sound high. And all the news reports say that the high tax-cut share is intended to assuage Republicans; what this presumably means is that this was the message the off-the-record Obamanauts were told to convey.

And that’s bad news.

Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they’ll demand 100%. Then they’ll start the thing about how you can’t cut taxes on people who don’t pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they’ll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid — which would undermine that part of the plan, too.

OK, maybe this is just a head fake from the Obama people — they think they can win the PR battle by making bipartisan noises, then accusing the GOP of being obstructionist. But I’m really worried that they’re sending off signals of weakness right from the beginning, and that they’re just going to embolden the opposition.

http://krugman.blogs.nytimes.com/2009/01/05/is-obama-relying-too-much-on-tax-cuts/

[Thrill]

1. hmmmm sounds more like Obama's people leaked this early

to put pressure on Repukes

[flpoljunkie]

2. Let's hope so, but agree with Krugman 40% sounds hig and R's cannot be assuaged on tax cuts.

[Pale Blue Dot]

3. History will judge Obama poorly. nt

[flpoljunkie]

4. It's way too early for such a prediction.

[Pale Blue Dot]

5. No, it isn't, unfortunately.

But I'll let you continue with your false hope.

[Thrill]

6. Wow before you're even sworn in. History is written for you

lol

[MadBadger]

10. Meh, your a giants fan. Which means you are prone to being a moran.

[uponit7771]

12. WTF?!?! He's 15 days away from being prez!!!!

[BeyondGeography]

7. History already tells us you're being foolish

[Occam Bandage]

13. History will judge the 54th president poorly.

Don't ask me how I know. I just know.

[Cha]

20. Yeah right. Sorry, you're so bitter.

We have your word on that before he gets inaugerated 'cause you're so all knowing.

[FrenchieCat]

23. Is this line of thought from you is to be taken seriously?

Please give us more info on this incredible claim of yours. Sounds more like our wish, and a whole lot of flimflam.

[dionysus]

27. bitter baby needs banky;

[blue_onyx]

8. 40% does sound high

I think we need to use the stimulus to prepare the country for the future (infrastructure, transportation, energy, etc) and put people to work ASAP. I understand his desire to bring the GOP on-board but they were voted out of office for a reason...their ideas weren't working. So I hope Obama doesn't give in too much in order to get GOP support.

[flpoljunkie]

17. Yes, it does. The total figure of up to $775 billion also may not enough to turn economy around.

[Uzybone]

9. Ummm, didnt he campaign on huge middle class tax cuts?

I love Krugman but it seems he still fights the primary wars sometimes.

[glinda]

11. Where do people on fixed income figure in??????

It sounds like Businesses and Working People. I am tired of businesses being able to write off this and that as well as the wealthy. Our income has decreased by nearly $1000/mo. in just the last four months due to our taxes being raised 2x, utilities and Insurance raising and the fact that my husband's meds are not covered by Medicare at all. Guess he doesn't buy enough drugs to merit it even though the cost is killing us. I rarely hear anything at all from Obama on older people. We will have to sell our home which is not even paid for.

[FrenchieCat]

18. His plan is not yet complete.

Do you pay income taxes or payroll taxes? just curious.....when you speak of your fixed income.

[glinda]

21. Retired=fixed income.

Taxes are taken out when he receives his checks and I cannot work until I raise money for surgery. If he took out his retirement IRA or what he has, he would loose about half of that in taxes also. Our income tax rose even though nothing has changed. Our property taxes have near doubled in only two years of being here. Every bill we get has raised. Some nearly 40-50%. So I wonder exactly whenever I hear something about "FAMILIES WITH CHILDREN" or "BUSINESSES" or 'WORKING PEOPLE' being the focus, exactly where does he think people in our age bracket-situation and low income bracket fall??? I never hear anything and that is something that has me really really concerned. Not everyone has a paid for home or great insurance from their jobs, etc....

[FrenchieCat]

22. IRAs can be used in case of unforseen Medical expenses

and one will not be penalized on the withdrawal...although, yes, taxes would have to be paid on that. However, the Income Tax tables will be lowered according to Obama's tax plan (that's is how he will be leaving more money in people's checks) and that includes the tax table on all income, even if not earned (such as an IRA distribution). Also, he will be proposing barring taxes on Social Security income, and reducing taxes on seniors who generate 50K in income or less to zero.

As for Property taxes, if you haven't yet, you might want to look into a reassessment via your county, especially if your property value has dropped (as it has in most of the US). Most states offers this as a way of reducing your property tax bill.

Obama has not yet taken the helm, and his plan has not yet being implemented, but my understanding is that it will be ratroactive as of 1/1/09.

[glinda]

26. If true some of that would defintely help us BUT

provided that a law is issued that disallows all the utility, Insurance Companies and Counties from taking advantage of that. Otherwise I have no faith it will help us. We lost our whole "stimulus check" to everyone raising everything. Now we are left with having to attempt to come up with funds to pay their hikes every month.I used to be positive about things but I do our bills and have absolutely NO FAITH unless this is addressed. With MN being in major deficit right now,No doubt they are drooling to grab any extra money people have.
As far as assessment to our property. I did call. The response that I received is that our Township was the only one in the County that values went up. LOL! They lied. We may have to sell our home-which is no great shakes in looks btw-because we may no longer be able to afford it. And we moved here because taxes were lower and it was in between parents in location and you got more for your money. Recently some huge mega homes have been built up the road also. We suffer from that also. So with facing losing our small equity in our home because it will be sold at lower than we paid for and also "closing costs" eating up the rest, we will be screwed.

[FrenchieCat]

29. That is tragic, the part about your property being raised in value due to new construction.

However, I'm not sure if that will continue....as I have to imagine that the refinancing, and the sell and purchases of those mega homes will end up with property values going down sooner than later. I think that there is some things that will be of relief to you and your economic situation if you are able to hang in there long enough...which of course, is always the key. That is part of the reason that passing Obama's stimulus plan ASAP is dire....otherwise, Deflation will set in, and the depression could become quite unmanagable.

That's why Krugman says that time is of the essence...and although he has no real faith that the GOP will play Obama's game, at the end, I think they will...due to Obama's power at the bully pulpit, in particular starting January 20th.

Anyways, I hope that you can hold on till relief arrives, and like I said, there will be something to your benefit within his plan.

[glinda]

32. It raises on paper and in taxes but in reality loose thousands if/when we sell.

Or stay and go deeper into debt. Loose loose now. Sucks after working so hard.

[paulk]

14. I think Obama is making a huge mistake in reaching out

to Republicans.

Bill Clinton passed his first budget, rescinding the Reagan era wealthy tax cuts, without a single Republican vote. Even though it cost many Democrats their seats in the next election - it was still the right thing to do.

I sometimes think that Obama seems more worried about the political implications of his actions rather than doing the right thing -

This "hold hands and sing kumbaya" bullshit that Obama has been pushing since day one is a recipe for a 2nd Carter presidency. The Republicans need to be kicked to the curb and once there, kicked again.

Obama has a mandate - he needs to use it.

[glinda]

15. Agreed. Unfortunately.

The Republicans have shown without any doubt that they intend to fight Obama the majority of the time and do everything in their power to smear him to the American people. They only focus on takeovers and never the people or sensible solutions. This is to me the main reason that I agree. It is one idealistic thing to really try to work with them but in their version of "compromise" it means going backwards, more planetary destruction, more Religious trappings. I feel it is now morally wrong to take the position of "compromise" on their terms.

[FrenchieCat]

16. Y'all are sad.

And Krugman also didn't believe that Obama would become President.

So his pronouncing that "Republicans are not going to come on board" is his take......but then, he's not a politician.

[rockymountaindem]

24. And you have faith in Republicans?

Read the story of how the Republicans put together the Bush tax cuts. That will show you what they are all about. Republicans in Congress and the Senate only care about the top 5%, or maybe even only the top 1% or 2%. When they had the upper hand they rammed through exactly what they wanted and look where we are now. We need to move equally hard in the other direction to restore equilibrium, and I can guarantee you that the Republicans have not changed their stripes since 2001 and 2002. If anything, they are extremely bitter and want nothing more than to see Obama fail utterly. Don't hold out much hope for McConnell et. al. to offer us any support without extracting an inordinate amount of concessions.

[FrenchieCat]

28. I think that you are overestimating the Republicans and underestimating

Barack Obama.

Obama understands what the Republicans want, including his failure. That doesn't mean that is what they will get.

Certainly, I understand why you believe what you are saying and the fears that you have that Obama will not come through. I just don't get why so many are getting in line to say "whatever it is that Obama is doing just won't work".

The naysayers, because of how things have turned out in the last years, are prejudging not based on anything that is happening currently, but rather based on past bad experiences under Bush (and even under Clinton, who lost the 1994 Congress precisely because he didn't sway the GOP's constituency on the outset, and got his budget through with not a single vote from the GOP, who then blamed Clinton and all who voted for the Budget which included tax increases, not tax cuts); in otherwords, naysayers judging via pre-prejudice.

It's ok then. Just makes Obama's uphill climb that much more difficult due to so much lack of faith, but will make his success that much sweeter in the end.

[Vinca]

19. If Krugman has a solution for this mess, he owes it to his country to speak up.

He's acting like a Republican in this piece: criticizing, but offering no other ideas.

[rockymountaindem]

25. He is offering a solution in that piece

He's arguing for the counterfactual. If too many tax cuts are bad, then an increased emphasis on infrastructure spending is good. I thought his message was quite clear.

[FrenchieCat]

30. But the catch 22 is that if the GOP tries to hold up the package,

Deflation will have a chance to catch up, and the stimuli will be less effective.

So, in otherwords, Obama is using the tax cuts (which he did promise anyways) as a way of keeping the GOP from stalling, so it is worth the tax cuts being offered, even if they are a bit more than would normally be more fiscally sound. Considering that these tax cuts won't come in the form of tax rebates, and so the question as to whether the money will be spent back into the economy (which is the main argument against tax cuts actually working in stimulating the economy) is not going to have the same answer as Bush's tax rebate scheme did. Obama is proposing permanent changes to the Income Tax tables, which means an increase in household income based on how often folks get paid. This would help the budget of Americans' monthly spending, but yet be too small of a sum (unlike rebates which are a lump sum) to "save". Folks are no longer living off of their home equity credit line or their credit cards, so this additional income would be welcomed in most Middle and lower wage earner's budget outlook.

[uponit7771]

31. I put my money on the GOP wanting a VERY VERY slow econ improvement and doing everything to

...stop a faster (less than 2 year) recovery. There are few economic moderates in the GOP, they are either all trickle down all the time or fundie nuts.

I do trust that Obama see's this though and has learned from Clinton that when the GOP see's even the hint of a hint of blood they start acting like rabid sharks (blago).

A well organized public campaign will stop the GOP in their tracks, I think I can put even more money on Obama pulling this off seeing how well his campaign and transition has gone.