Posted by Brad @ 3:53 pm on November 24th 2008

Obama’s Economic Plan: Lower Taxes, Raise Spending

So it seems from his remarks today. Of note in the address:

1. He still means to lower taxes on that bottom 95% as a centerpiece. His tax hike on the top income earners sounds like it will be pushed off until those tax cuts expire after the 2010 fiscal year.

2. His stimulus package will be increased, probably two-fold, putting it at around 300 billion, though some are saying it could be anywhere as high as 700 billion. Most estimates guess 500 billion. I may wind up eating crow on that one, although most of what he’s proposing still strikes me as targeted and defensible. He sez:

Further, beyond any immediate actions we may take, we need a recovery plan for both Wall Street and Main Street – a plan that stabilizes our financial system and gets credit flowing again, while at the same time addressing our growing foreclosure crisis, helping our struggling auto industry, and creating and saving 2.5 million jobs – jobs rebuilding our crumbling roads and bridges, modernizing our schools, and creating the clean energy infrastructure of the twenty-first century. Because at this moment, we must both restore confidence in our markets – and restore the confidence of middle class families, who find themselves working harder, earning less, and falling further and further behind.

I have asked my economic team to develop recommendations for this plan, and to consult with Congress, the current Administration and the Federal Reserve on immediate economic developments over the next two months. I have requested that they brief me on these matters on a daily basis, and in the coming weeks, I will provide the American people and the incoming Congress with an overview of their initial recommendations. It is my hope that the new Congress will begin work on an aggressive economic recovery plan when they convene in early January so that our Administration can hit the ground running.

Which is just a rehash of what he’s been saying all along, save that it sounds like it might be bigger than advertised.

3. Curiously, Obama seems to be running to the right on bailouts, at least relative to most Democrats and most of the present administration (the actual Republican critics of bailouts at all are being relatively quiet these days). I am sure that bailouts are still in the offing, now that the federal government is apparantly in the bailout business, but he seems naturally a bit skeptical about throwing money around in the Paulson way, which is a good sign, and his team seem to be very focused on going through very carefully all the bailout-ish items on the agenda.

So, two competing take-aways:

A. Obama will indeed add to the deficit, as anybody could have predicted. The level at which he does so has risen, but is still less than, say, the last six months of the Bush administration. Nevertheless, Obama’s going to have a longer-term challenge of raising revenue. How he deals with the ensuing tax increases that are probably necessary and probably have been since the beginning of this decade will be something to watch, though he may be able to punt it until his second term.

B. I hate to say it, but even the spending doesn’t sound awful to me. Lower taxes and raise spending is pretty commonly accepted as the balance you have to strike when you’re in economic crisis-management mode, which I don’t think anybody doubts we are indeed in. His spending proposals, while they make my libertarian heart bristle, don’t sound nearly as bad as some alternatives, and seem to be mostly focused on short-term artificial economic padding that hopefully builds long term infrastructure. However, again, none of it sounds particularly institutional, i.e. we won’t be wrestling to disentangle the death-lock of these programs 40 years from now, as we do on entitlements. And, it sounds a lot better to me than just writing a blank check to industry.

So the plan seems to be to have progressive tax cuts, and then an injection of new spending not into the government (i.e. entitlements) as much as into the economy (i.e. “job creation”).

Anybody howling mad at this? Again, I’m trying to find reasons to object, and coming up a bit short. Not a libertarian ideal by any stretch, but on the whole sounds pretty reasonable to me.


  1. I don’t know enough about the details to get apoplectic about it yet. I reserve the right to do so later when things get less fuzzy around the edges.

    My main objection to what I’ve heard is that it seems to misidentify the nature of this particular crisis. Tax cuts and spending increases usually work because they pump more money into the economy. That isn’t going to work under conditions in which the principal problem is an absence of credit liquidity–the multiplier effect is going to be dramatically reduced or eliminated, so if you’re going to solve this problem by throwing money at it, it has to be a LOT of money.

    Which is, you know, a bad idea with US debt obligations being what they are, and a worse idea when you intend to intensify them later in your own term.

    It seems to me that, if this is Obama’s approach, he has to commit himself to making up the difference, deficit-wise, when the economy improves. If he believes in the Keynesian precept that the pump must be primed in situations like this, he needs to also endorse the converse–that in better times, money needs to be tucked away. Absent the latter, I can’t support the former.

    Comment by Rojas — 11/24/2008 @ 8:42 pm

  2. The problem is, if there’s a decent alternative to the Keynesian model here, nobody appears to be advocating it. I certainly haven’t heard it. There’s a small (read small) range of Keynesians—from Barney Frank and George W. Bush on one end of the spectrum to Barack Obama on the other—and…well, that’s it. At the very least, if you’re going to have somebody in charge of pumping money into the economy, I’d rather it be Obama and Summers and Geithner et al than the formers, present administration and Democratic congress included. That’s a small consolation, to be sure, but it is a consolation, as is the fact that at the very least none of Obama’s spending is institutional and self-perpetuating. In any case, sucks that there isn’t even the remotest of alternatives being presented save some faint “fuck ’em all bring on the depression” style rumblings.

    And of course the catch-22 in terms of deficit reduction where a liquidity crisis is concerned is you can’t really raises taxes to pay for it—taxable income and spending is shrinking rapidly as it is, so A. less money to tax, and B. taxing it more means further tightening liquidity.

    So, as you say, what you have to do is spend in the short term, hope you make it up on the back end with taxes. At the very least, we can count on whatever the Bush tax cuts sunsetting is good for.

    Comment by Brad — 11/24/2008 @ 9:53 pm

  3. My point, though, is that there IS an alternative which is perfectly consistent with Obama’s stated rationale. It is this: engage in spending now, but abandon previously formed plans to spend later, when the economy recovers.

    There is no Keynesian case to be made for increasing the deficit in times of both growth and recession. If Obama is going to make the “pump-priming” case for spending now, then ideological consistency dictates that he rein things in once the economy is in better shape. Otherwise, he reveals that his “stimulus package” was passed because he deemed it intrinsically desirable, not as an anti-recession measure.

    Comment by Rojas — 11/24/2008 @ 10:52 pm

  4. I would think that a good alternative to the Keynesian model would be the classical model. Or the Austrian. I would guess that both models would indicate we should do nothing. (I guess the classical one might try to increase the money supply).
    Keynesianism is bad economics.

    Comment by Redland Jack — 11/25/2008 @ 3:35 am

  5. Bad is subjective, excepting the last eight years of republican rule.

    Comment by thimbles — 11/25/2008 @ 9:59 am

  6. I sort of thought that Lucas took apart Keynesianism, but that may be due to the guy who taught my first class in macro.

    Comment by Redland Jack — 11/25/2008 @ 9:50 pm

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