Axelrod: Obamanomics to the Rescue

Latest emanations on tax and economic policy from the President-elect’s camp is a bit worrisome. According to the AP:

A top adviser to President-elect Barack Obama said Sunday that the country’s slowing economy won’t keep the new administration from fulfilling its plans for a middle-class tax cut.

This is a bit odd — when would a slowing economy ever cause an administration to consider waiting on implementation of a tax cut? Obviously, the incoming administration is using the term "tax cut" as a code for tax shifting. There may be a net tax cut effect — time will tell — but obviously there’s more to it, given the apparent apprehension about implementing it.

"We feel it’s important that middle-class people get some relief now," Obama adviser David Axelrod said. Middle-class tax cuts will be part of the new administration’s stimulus plan, Axelrod said. "This package will include a portion of that tax cut that will become part of the permanent tax cut that he’ll have in his upcoming budget," Axelrod said.

The incoming administration is considering tax cuts of $1,000 for couples and $500 for individuals that will be delivered by reducing the tax withheld from paychecks. That plan has been estimated to cost about $140 billion over 2009-2010.

A quick aside: describing only the "cost" of a tax relief measure is a real pet peeve of ours. Every tax has costs to some and benefits to others, with net effects that are incredibly complex — and thus every tax relief measure has benefits to some and costs to others. All tax measures should be described in terms of their costs and benefits, and who they are likely to accrue to.

Pet peeves aside, here’s the frightening part of Mr. Axelrod’s comments:

"People need money in their pockets to spend," Axelrod said. "That’ll get our economy going again."

Let’s see…people’s wealth has fallen dramatically, and is set to fall further as unemployment rises, but a one time shot of $500 to $1,000 per household (assuming every household is entitled to it, which is far from certain) is going to "get our economy going again." That’s not just foolish, it’s dangerous. But wait, there’s more!

The slowing economy also means that it’s more important than ever to eliminate President George W. Bush’s tax cuts, Axelrod said. "It’s something we plainly can’t afford moving forward," he said. "Whether it expires or we repeal it a little bit early we’ll determine later but it’s going to go. It has to go."

"It"?!? What is "it"? There were many different pieces to the 2001 and 2003 tax plans, and if the next administration is going to treat them as an amorphous blob that "has to go", without looking at what did and didn’t work, and what it indicates about proper tax policy going forward — i.e., tax policies that will induce private sector hiring and investment — then the U.S. economy will be in for even more trouble than is currently expected. Hopefully they won’t be as abrupt or as foolish as some of Mr. Axelrod’s comments were.

In the meantime, if they don’t rein him in soon, he could undermine the much hoped for "honeymoon rally".

URLs:

http://www.google.com/hostednews/ap/article/ALeqM5ipdn0FNrjQiJHNZhPb8JW5bWWmbQD95BUSV00 

http://elsa.berkeley.edu/~cromer/draft1108.pdf