Does President Obama like or loathe the two-year tax deal he has struck with Republicans? It was hard to tell from his grudging, testy remarks Monday and Tuesday, but perhaps that's because he realizes he is repudiating the heart and soul of Obamanomics as the price of giving himself a chance at a second term.
In accepting the deal to cut payroll and business taxes and extend all of the Bush-era tax rates through 2012, Mr. Obama has implicitly admitted that his economic strategy has flopped. He is acknowledging that tax rates matter to growth, that treating business like robber barons has hurt investment and hiring, and that tax cuts are superior to spending as stimulus. It took 9.8% unemployment and a loss of 63 House seats for this education to sink in, but the country will benefit.
In this sense, the political symbolism is as important as the policy. Mr. Obama is signaling that businesses must be encouraged to make profits again so they can hire more workers, that "the rich" he so maligns should be able to keep more of what they earn, and even that wealth built up over a lifetime shouldn't be confiscated wholesale at death. In policy if not in Presidential rhetoric, class war and income redistribution are taking a two-year holiday.
This is not to say the deal is optimal for economic growth, and Republicans should not pretend it is. A two-year reprieve is far better than an immediate tax increase amid a still fragile recovery, but it also means that the policy uncertainty is carried forward. In the Keynesian universe, "temporary" tax cuts are virtuous because they stimulate immediately while ostensibly allowing government to reclaim the revenue later when the economy is stronger.
In the real world, businesses make investments based on the estimated return on capital over time, including the expected tax rate. What matters is the overall cost of, and return on, capital. The temporary nature of the tax cuts will provide less incentive to invest than would permanent reductions in the cost of capital.
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In accepting the deal to cut payroll and business taxes and extend all of the Bush-era tax rates through 2012, Mr. Obama has implicitly admitted that his economic strategy has flopped. He is acknowledging that tax rates matter to growth, that treating business like robber barons has hurt investment and hiring, and that tax cuts are superior to spending as stimulus. It took 9.8% unemployment and a loss of 63 House seats for this education to sink in, but the country will benefit.
In this sense, the political symbolism is as important as the policy. Mr. Obama is signaling that businesses must be encouraged to make profits again so they can hire more workers, that "the rich" he so maligns should be able to keep more of what they earn, and even that wealth built up over a lifetime shouldn't be confiscated wholesale at death. In policy if not in Presidential rhetoric, class war and income redistribution are taking a two-year holiday.
This is not to say the deal is optimal for economic growth, and Republicans should not pretend it is. A two-year reprieve is far better than an immediate tax increase amid a still fragile recovery, but it also means that the policy uncertainty is carried forward. In the Keynesian universe, "temporary" tax cuts are virtuous because they stimulate immediately while ostensibly allowing government to reclaim the revenue later when the economy is stronger.
In the real world, businesses make investments based on the estimated return on capital over time, including the expected tax rate. What matters is the overall cost of, and return on, capital. The temporary nature of the tax cuts will provide less incentive to invest than would permanent reductions in the cost of capital.
More from the Wall Street Journal
5 comments:
Definetly the writing of a political hack. Like Obama or not, any objective observer would agree that this was a case of compromise (both the right and the left got most of what they wanted).
It's not about everybody getting what they want.
It's about the country getting what it needs.
Obamanomics is a FLOP. It has made things worse.
12:01, WRONG! Again whether you like Obama or not, the CBO and many economists agree that the measures put into place prevented a Depression. The question is how to continue to foster long-term growth. Neither party has the solution but each does possess some ideas that are proven to get us there. It's going to take compromise on both sides to put these ideas into play. If we can push the idealogues out of the equation on both sides of the aisle, I'm confident we can get er done!
Wrong capitalism will correct itself if government would get out of the way. Obama and the Dems not only created the depression they're impeding the recovery.
3:50,
Dopey, 100% purist capitalism did not get you labor laws, it didn't get you the modernized infrastructure needed to grow commerce, it didn't get you the scientific advances, or a host of other needs that allowed capitalism to grow in this country.
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