Republicans often point out that Democrats are spending our way into oblivion, that the Stimulus hasn't worked, and nationally unemployment remains high. Meanwhile, Democrats like to remind Republicans that under President Clinton, the budget was balanced and a Republican administration inherited a surplus, which was eviscerated, in part, by the Bush tax cuts; Republicans complain about the deficit while struggling to keep taxes for the rich low.
Neither picture is necessarily wrong or the whole picture.
There are two commonly cited approaches to stimulating the economy under consideration: 1) pump money into the economy in the form of a stimulus, and 2) to reduce taxes. There are other ideas such as lowering the interest rates or printing more money, but let's focus on that which is being talked about the most by politicians and pundits.
The question that we wonder is: which is the better way - tax cuts or stimulus spending?
It's actually not the case that one works and the other doesn't; in fact, economics suggests that both ways work, albeit under specific conditions. The problem is that either way is going to have a bit of blowback to it.
The Stimulus is a large experiment in government spending "intended" on invigorating the economy, which, however, is also going to increase the deficit. Stimulus spending is a good way to get money flowing in an economy again, provided jobs are being created. We have all heard by know that the Dems' spending is contributing to a swelling deficit, but what of tax cuts? What are its benefits and consequences?
More Dems are warming up to the idea of tax cuts for the wealthy. The question is if this is due to the impending November election or because they believe it is good policy. What is little known is under the ARRA - the Stimulus - Obama passed one of the largest tax cuts to small businesses in history. Despite having done this, Obama has been very bad at messaging this policy and has, so far, allowed Repubs to appear as though they are the only friend in Washington, D.C., to small business. But Dems have been pushing tax cuts, too.
On Sept. 14, Senate Dems ended a months-long GOP filibuster of a bill to provide new loans and tax breaks for small businesses after two Republicans broke with their party. The bill would create a $30 billion fund that community banks can access for loans to small businesses and provides some $12 billion in tax relief - both attempts to get small and midsize companies to hire more workers.
One of the boldest proposals that Obama has unveiled would allow businesses to deduct the cost of investment against their taxes which would encourage them to invest. Also a permanent tax credit for research and development is good for the economy in the long run - macroeconomic policy tells us that the only way to have sustained output increases over time is through technological improvements and advancements. The recent $50 billion stimulus spending on infrastructure proposed by Obama would be paid for by eliminating tax breaks for multinational and oil and gas companies. However, why these companies would want to do business in the U.S. is up for debate. Six of one, half a dozen of another - there is no perfect option.
All that said of the Dem advances for tax cuts, it should be noted that the Congressional Budget Office has estimated that the costs of tax cuts over 10 years will be $1.7 trillion added to the deficit. However, if President Obama gets his way, renewing tax cuts for all but the wealthy would save as much as $700 billion, which is still a net addition to the deficit of $1 trillion.
Dems should, however, be wary of caving into pressure to support more tax cuts if they don't believe it is the right thing to do; tax cuts with the current levels of federal spending would make the national deficit swell more than anticipated and Repubs can later use this against them. The news magazine "The Economist" reported on Sept. 4 that anxiety about the deficit is making consumers and businesses tighten their purse strings, which is bad for economic growth. And Repubs had better come up with a better mantra than "let business take care of it" since it seems as though it was Wall Street's business as usual (leveraging loans 30:1, for example) that got us into this economic crisis in the first place.
At the end of the day, we should be careful about what we ask for. No matter what Repubs or Dems tell us, all things being equal, both approaches - stimulus spending and tax cuts - contribute to an increased deficit, which will have to be dealt with eventually.
PAUL HEROUX of Attleboro holds a master's from the London School of Economics and is a candidate for a master's in public administration at Harvard University's JFK School of Government.