Scott Spiegel

Conservatives have been pounding their fists and screaming for decades that tax cuts stimulate the economy.  With lower taxes, investors and business owners can provide more capital for new ventures and engage in more hiring, because they know less of their profits will be confiscated to pay for things like solar panels at the White House.

Tax cuts don’t revive the economy the second they’re passed—no one, not even Rick Santelli, ever said they did.  They don’t do so a few weeks later; they don’t always do so in time for the next election.  But eventually they do.

Tax cuts trim government revenue temporarily, but soon increased growth from lower tax rates results in net revenue increases.

In contrast, tax increases—which is what the impending reversal of the 2001 and 2003 Bush tax cuts would amount to—shrink the economy by decreasing hiring and investment.  Regarding the Bush tax cuts, that’d be a combined tax increase to the tune of half a trillion dollars over the next decade.  (Pop quiz: If Rhode Island and Massachusetts’ tax structures were switched, would John Kerry still take the trouble to dock his yacht in another state, even though it would cost him half a million dollars a year in taxes?)

It’s really not that complicated.

Imagine that you run a lemonade stand and make $100 profit a day, and the Obama administration taxes you at 50%, for a government revenue total of $50.

Now imagine that the incoming Christie administration slashes that rate to 20%.  Instead of worrying about paying your bills and staying afloat, and resenting the government’s punishing your entrepreneurship, you hire more workers and eventually expand to five franchises.  At $20 in taxes per stand, you are now sending twice as much revenue to the government as before.

Leftists refuse to see the economy as dynamic and capable of expansion; they view it as a fixed pot that must be redistributed from oppressors to oppressed.

The 1990s were prosperous, not because Bill Clinton was a laissez-faire capitalist extraordinaire—though he was forced into the role of pseudo-free-marketer by Republican Congressional majorities after 1994—but because of the cumulative effect of Reagan’s policies throughout the 1980s.  Reagan campaigned on the idea of permanent tax cuts across the board and enacted them while in office; they remain largely in effect to this day.  The degree of certainty, stability, and flexibility that this consistent posture afforded investors and business owners over the next two decades should not be underestimated.

Reagan steadfastly resisted the call of Congressional Democrats and some Republicans to ramp up government spending during the early 80s recession.  Under his administration, deficit as a percentage of GDP never rose above 6.0%.  By 1987 it was down to 3.2%.

In contrast, the Office of Management and Budget expects the deficit-GDP ratio to be 10.0% in 2010 under Obama, and to barely decline in 2011.

During his presidential campaign, Obama was not shy about promising to let Bush’s tax cuts expire in 2011 if elected.  When Charles Gibson asked Obama why he would support an increase in capital gains taxes, even though raising them in the 1980s decreased revenue and lowering them in the 1990s and 2000s increased revenue, Obama insisted he would do it “for purposes of fairness.”  In other words, Obama feels obligated to make rich people suffer for the sin of being productive, even if that means poor people will suffer more in the long run.

In the spring of 2009, Obama and Congressional Democrats passed their poorly designed, massively irresponsible stimulus spending bill.  Before passage, Obama warned that without the $787 (now $862) billion bill, the unemployment rate might rise to 8.0%.

When unemployment hit 10.0% in 2010, Obama’s new tagline became, “Yes, but it’s not 12 or 13, or 15.”

Democrats’ halting efforts to offer targeted tax cuts to special interest groups as part of the stimulus bill were not convincing.  Giving a tax break to a “green” company that wouldn’t survive on its own does not create the wealth that a tax break for an independent, self-sufficient, productive company would.

Now that it’s become obvious to everyone except Paul Krugman that runaway government spending does not mysteriously create wealth, Federal Reserve Chairman Ben Bernanke has been caught admitting to the House Financial Services Committee last Thursday, 18 months after the stimulus bill has had a chance to work but failed, that extending the Bush tax cuts will strengthen the economy.

Bernanke was quick to walk back his statement and claim that extending the tax cuts is just one way to stimulate the economy.  (One way that works, he did not say in so many words, but give him credit for letting the genie out of the bottle.)

Since the end of last Thursday, the Dow Jones has rallied some 200 points to 10,500, after have troughed earlier in the week at just above 10,000.

Last month Obama economic advisor Christina Romer and her husband published a paper in The American Economic Review demonstrating that tax hikes hurt economic growth.  Their article included the following takeaway: “Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent.  The effect is highly significant.”

Over the weekend, Republican senators revived the idea of extending the Bush tax cuts.  Now even some Democratic senators are talking up the idea, including Evan Bayh, Kent Conrad, and Ben Nelson.

So I guess tax cuts stimulate the economy after all, according to our liberal president’s Federal Reserve chairman, his economic advisor, and multiple Democratic senators.  It used to be newsworthy when we discovered that Obama’s associates and cabinet nominees were terrorists, communists, and Maoists.  Lately the scoop seems to be that a few of his cronies, if allowed to speak freely, occasionally have some sane ideas about how to run the country.



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• If the Bush Tax Cuts Expire (online.wsj.com)
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Critics of Federal Reserve Chairman Ben Bernanke’s performance in his first term blame him for failing to recognize the threat of the looming subprime lending crisis; his supporters laud the aggressive policies he enacted in response to the crisis.

I fault him for both.

Before the crisis, Bernanke helped Fannie Mae and Freddie Mac executives cover up their scheme to hide trillions of dollars in junk mortgages and give themselves enormous bonuses.  In the process, he failed to address the growing housing bubble that precipitated the financial crisis.

His solution was worse.  Having learned the wrong lesson from the Great Depression—that the government prolonged it by not intervening more, rather than intervening too much—Bernanke radically expanded government’s power and “reinvented the Fed,” as Time magazine put it mildly in their recent cover story on Bernanke.

Time glowingly continued: “[H]e conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies… lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash… revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed’s balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation.”

“Conjured up,” “blasted,” “engineered,” “revolutionized,” “breathtaking,” “shopping spree,” “blew up,” “desperate improvisation”—somehow these don’t sound like particularly reassuring terms for investors in the world’s largest financial system.

Bernanke isn’t finished.  The Federal Reserve has been buying up Fannie and Freddie securities to try to keep mortgage rates artificially low and stimulate the housing market.  The program is set to end in March, but Bernanke is toying with the idea of propping up the housing industry indefinitely.  Sound familiar?

The question is whether the Senate will reconfirm Bernanke for another four-year term before his first term expires on January 31.

Dumb arguments for keeping Bernanke abound:

•    The Financial Times of London reports, “Economists warned that a rejection of Mr Bernanke could be seen as a threat to the central bank’s independence.  US Treasury yields were little changed but stocks fell more than 2 per cent” due to uncertainty regarding reconfirmation.

Come on—it’s at least as plausible that stocks plummeted last week because of Obama’s announcement that he was going to impose a new tax on banks to subsidize the Troubled Assets Relief Program (TARP).  (Especially given that the Dow Jones Industrial Average slipped 219 points while Obama was still giving his speech.)

After Bernanke’s prospects improved over the weekend, Obama’s boosters at the Associated Press helpfully divined the trend in the stock market for us: “Amid the news, the Dow Jones industrial average rose 24 points.”  Well, the Dow was down 3 points on Tuesday—I think this means Bernanke’s chances are dimming.  What say ye, Associated Oracle?

•    Mohamed El-Erian, CEO of bond investor Pimco, declared, “A No vote on Bernanke would be viewed by markets as adding yet another uncertainty in an already fluid economic and policy environment.”

Give me a break: Ben Bernanke-Tim Geithner-Larry Summers form the very Axis of Uncertainty.  The Obama administration has demonstrated that it is capable of deciding, in any given week and depending on its poll numbers, to announce any manner of blanket economic policy to try to shore up its popularity.  This is exactly what causes uncertainty in the market: whimsical manipulations from disconnected puppet-masters on high.  Sowing a little uncertainty about whether King Caprice’s minions will remain in office is the surest prescription I know of for assuaging the market.

•    Obama’s team “saved” the economy, so it’s best to keep the same leadership in place.

Obama’s team didn’t save anything—it wasted a trillion dollars and slowed down the real recovery.  Obama claimed that unemployment would reach 8.0% if we didn’t pass his stimulus bill last spring.  We did, and unemployment is at 10.0% and projected to increase.  The last people who should still be in charge of our monetary policy are the people who helped Obama implement his disastrous recovery strategy.

•    Chris Dodd, the Senate banking committee’s chairman, announced that booting Bernanke would hurl our financial system into a “tailspin.”

Chris Dodd certainly knows something about sending the economy into a tailspin.  Given his role in the subprime lending crisis, I say his vote on any financial matter from now until his retirement next January ought to automatically count as a vote for the opposite of whatever side he’s on.

•    Dick Durbin, Senate Majority Whip, pointed out that conditions that led to the financial crisis were in place before Bernanke took office.

Yes, and if Noah had deliberately drilled a hole in the bottom of his ark, I think he could credibly claim that conditions that led to the Great Flood were in place before his time at sea.  But that doesn’t mean he would bear no responsibility for having made things worse.

Paul Krugman, whom I never thought I’d quote (except mockingly), recently wrote, “Before the crisis struck, Mr. Bernanke was very much a conventional, mainstream Fed official, sharing fully in the institution’s complacency.  Worse, after the acute phase of the crisis ended he slipped right back into that mainstream.”  Granted, Krugman is only partly talking about Bernanke’s failure to head off the imminent lending crisis.  He’s also talking about Bernanke’s failure to push for cumbersome bank regulations and inflate the currency, goals Krugman seems to think worthwhile (we are talking about a New York Times columnist, here); but the general characterization still applies.

Krugman continues, “During the run-up to the crisis, as financial abuses proliferated, the Fed did nothing.  In particular, it ignored warnings about subprime lending…  Mr. Bernanke didn’t acknowledge that failure, didn’t explain why it happened, and gave no reason to believe that the Fed would behave differently in the future.”

I’m mystified as to why so many in Congress are reluctant to sack Bernanke for poor performance.  Perhaps it’s because they fear it will remind their constituents that they may apply the same standard to their elected officials.

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