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Richmans' Trade and Taxes Blog
It Is "Across-the-Board" and a Tax Increase; It Is NOT "Over-the-Cliff"
In 2011, Congress and President Obama could not agree on how to reduce the federal deficit. After much wrangling, Congress passed and Pres. Obama signed the Budget Control Act of 2011, which effectively “kicked the can down the road” and provided that it would become law on January 1, 2013. The phrase “over-the-cliff” has been popularized by the media, giving the impression that the proposal if allowed to become law would cause another recession. The media bought hook, line, and sinker the Keynesian nonsense of Federal Reserve Chairman Ben Bernanke that in the country’s current economic situation trying to balance the federal budget by reducing expenditures and raising taxes would plunge the economy into recession. It was he who first uttered the cliche, “over the cliff”.
The Act called for across-the-board cuts in federal government discretionary expenditures and for allowing the Bush and other tax cuts to expire. To Keynesian economists, cuts in government expenditures and raising taxes would slow the recovery and depress the economy. By this false reasoning, the federal debt can never be reduced. For the past four years, the federal government has been pursuing Keynesian policies, spending trillions of dollars on foolishness and the result has been massive unemployment and stifled growth and a national debt that is out of control. Millions are working part-time and other millions have dropped out of the labor force.
Keynesians have succeeded in portraying Pres. Franklin D. Roosevelt as having successfully overcome the depression when, in fact, his Keynesian economic policies prolonged the depression. Although government war expenditures and improved exports due to the war ended the depression, it was not until after the government started restoring balance to the budgets that private investment which produced the post-war recovery. New private investment in passenger airplanes, autos, home appliances, television, and computers led the way to decades of growth. More recently as government expenditures increased as a result of Lyndon Johnson’s profligacy, the U.S. rate of growth declined.
The fact is that there would be no need for additional tax revenue if Congress and the Administration could agree on what expenditures should be cut. Conservative Republicans would like to reduce expenditures and not raise taxes but even they are unwilling to make the specific expenditures to be cut known. The budget problem is that expenditures need to be cut but neither political party is willing to alienate any group in the electorate by significantly reducing expenditures. And the Keynesian Democrats, led by President Obama want to increase government expenditures and to reduce the budget deficit by raising taxes on the rich.
While the federal government has constitutional authority to finance public schools, to create a department of housing and urban development, to finance and subsidize wind and solar energy, etc., the beneficiaries are important groups in the Democratic coalition. The across-the-board cuts are made necessary because of both parties’ unwillingness to make specific cuts. The difficulty with across-the-board cuts is that junk programs are cut too little and good programs are cut too much. But the compromise that resulted in the passage of the Budget Control Act of 2011 cuts discretionary spending an inadequate amount and makes it necessary to restore the Bush tax cuts if the budget deficit is to be significantly reduced.
The budget problem is excessive government expenditures, not inadequate taxes. The Obama administration wants additional taxes because it wants to increase expenditures which is the policy recommended by the Keynesian economists consulted by it, a policy which is at odds with reality. Allowing the tax increases and cuts in government expenditures to take place would cause an economic downturn temporarily. But reducing government expenditures would stimulate an offsetting increase in private investment. We need to get back to the real work of producing more goods and services and creating jobs.
The Congressional Budget Office estimates that allowing the Bush tax cuts to expire and the cuts in discretionary spending to take place would reduce the expected 2013 budget deficit from $1 trillion to $641 billion. Shouldn’t taxpayers bear some of the burden of dealing with the mistakes of people they elected? The CBO predicts that GDP would decline -0.5 percent and unemployment would rise to 9.1 percent. We disagree because the CBO is not taking into account the stimulative effects on business investment of reducing the deficit.
Expanding the public sector as Keynesians recommend is a drag on the economy. It is the cause of the slow growth of the U.S. economy. A study by economics professor Valerie Raimey of the University of California at San Diego has shown that increases in government spending (1) lower private spending; (2) lower unemployment; and (3) raise government employment but not private employment. That is exactly what has happened as a result to the Keynesian policies the administration has pursued. The U.S. needs increased private investment to put the millions of unemployed back to work. There will be little private investment so long as government maintains and increases its wasteful expenditures. To make matters worse and to show his dishonesty in the recent negotiations between Speaker Boehner and himself, the President has requested an appropriation of hundreds of billions of dollars for a Keynesian “economic stimulus”. He never intended to negotiate a cut in spending.
The Republican representatives who opposed the Republican Speaker’s “compromise” were right in their opposition to a tax increase whether it takes the form of an increase in rates on the very wealthy or limiting their deductions. Tax laws should apply to all taxpayers not to selected groups. But given the size of the public deficit, the across-the-board cuts barely make a dent. The urgency of reducing the federal deficit makes the restoration of the Bush tax cuts necessary
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