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Media's Latest Stimulus Push: Spend Now, Tax Later

When New York Times columnist and Nobel Prize-winning liberal economist Paul Krugman insisted back on June 28 the only way to avert a “third depression” was to open up the spigots of government stimulus, many dismissed the plea as Krugman doubling-down on his Keynesian ideology.


However, what Krugman may have done, intentionally or unintentionally, was reframe the debate about how much stimulus is needed and how should it be financed by new taxes.


One of those new taxes that has been publicly proposed by White House economic adviser and former Federal Reserve Chairman Paul Volcker was the value-added tax (VAT), which prompted a stern reply from Sen. Orrin Hatch, R-Utah, who rebuking the idea late in June.


Still, the VAT has managed to remain in the public purview for several months now. But that is just one of the potential new taxes being considered as a fix for future deficits that has gained steam with some of the talking heads in the media.


In other words, Krugman’s dire warnings prompted some media talking heads to suggest there could a be a grand compromise between proponents of more Keynesian interventionism and deficit hawks, despite a lackluster performance of the $787-billion stimulus passed in 2009.



The Spend-and-Tax Push: More Government Stimulus + New Consumption Taxes


Even though Krugman has often issued a panicked called for massive government spending: In 2009 he criticized the $775 billion (it later grew to $787 billion) stimulus plan for being too small. He also said that “we probably have $10 trillion of running room” when asked how much the government could spend to turn the economy around back in 2008. Yet, some are taking Krugman’s latest alarm seriously.


On CNN’s July 4 “Fareed Zakaria GPS” went through the motions of supplying two perspectives from his guests, Krugman and Harvard historian Niall Ferguson who argued there must be spending constraints from not just the United States, but all nations. Zakaria also offered his own solution.


“I have a proposal, a kind of grand bargain,” Zakaria said. “Have a second stimulus that is targeted, temporary and effective and most important – announce the second stimulus coupled with an announcement from the president of a 10-year plan to tackle the budget deficit.”


The problem: Zakaria offered the tired and failed argument of tackling government waste and new consumption taxes that would hit middle-class consumers, in addition to the taxes they already pay. Such taxes would almost certainly violate Obama’s already broken pledge not to raise taxes on the middle-class.


“This would include significant reductions in entitlement spending, cuts in wasteful subsidies like agriculture and a new gas tax and a small national sales tax,” Zakaria continued. “These measures would dramatically adjust the budget deficit, and they would assure markets that the United States has gotten serious about living within its means in the medium-to-long run.”


But Zakaria wasn’t the only journalist who offered an idea like this up as a sort of compromise, which entailed a combination of more government spending and new taxes. On the KCRW’s syndicated July 2 “Left, Right & Center” program, Matt Miller, a Washington Post columnist and senior fellow at the Center for American Progress, suggested a compromise that would include private tax cuts and public sector stimulus.


“Here’s what I would do,” Miller said. “I think we need a serious payroll tax cut. I would include a corporate tax cut because the way to create incentives for job creation is to lower the cost of employment.”


But here’s the catch – these tax cuts would come under the condition that new taxes would be phased in once GDP growth resumed and hit a certain level.


“At the same time, I would phase in now – and put aside whether this is going to happen in Washington this year, but let’s think bigger – we should phase in now, say that starting you know starting three years from now or when GDP growth is a certain level, we will be phasing in a value-added tax or a higher energy tax so we’re signaling to the markets that the increase in the deficit beyond what we already have, which is big, done by these tax cuts will be part of a long-term package to get back to fiscal responsibility only once we’re on a serious growth path with job creation and put those metrics in when the taxes get triggered, not until then,” Miller said.


And not to leave out – there would be a so-called public works component to his plan, which was promised in the 2009 stimulus but left even Obama’s strongest media allies wondering where and when the American public will see that part.


“At the same time – that’s the private sector growth component and I would add a public sector component which is in the meantime when you got 14-15 million people unemployed and a lot of underemployed do more stuff to put people to work in the public sector in the short-term,” he continued. “Not in some answer, Tony [Blankley] – it’s not a socialist grab, but as a way to get people working and do that now and put in the fiscal thing afterward – to legislate it now to show the world and the markets we’re serious once job growth and economic growth are back to get the deficit down.”


In fact, a July 2 Wall Street Journal editorial warned us this was exactly how the Obama administration would approach the economy. According to the editorial, this timing of the White House lobbying for more spending, has come at the same time that same White House has found religion about budget deficits. The Journal advised GOP leaders not to fall for this “tax trap:”


"'Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits step up. Because I'm calling their bluff."

That was President Barack Obama, the heretofore unknown deficit hawk, all but announcing the other day the tax trap that he's been laying for Republicans. From what we hear about intra-GOP debates, more than a few will be happy to walk right into it.

You don't need a Mensa IQ to figure this one out. Mr. Obama's plan has been to increase spending to new, and what he hopes will be permanent, heights. Then as the public and financial markets begin to fret about deficits and debt, he'll claim that the debt is "unsustainable" and that the only "responsible" policy is to raise taxes.


 

The Zandi Approach: Stimulate, then Rollback the Bush Tax Cuts


Fool me once, shame on you. Fool me twice, shame on me. Moodys.com chief economist Mark Zandi is going to try again anyway.


During the 2009 stimulus debate, one of the most vocal proponents of that Keynesian approach was Zandi. And while the aforementioned outside-the-box-approaches may sound good, one of the more politically likely scenarios would be what Zandi detailed on the July 6 broadcast of CNBC’s “Fast Money.”


Zandi once again said it was do or die time for government intervention, with almost the same sense of urgency as the previous stimulus. This time Zandi proposed an $80-billion plan; $75 billion of that would be used for so-called stop-gap measures for state and local governments.


“Well, I think if we don't do it, we’ve got – the consumer will have a great deal of difficultly, particularly unemployed workers who don't have benefits and state and local governments have to slash payrolls and raise taxes,” Zandi said. “Small businesses won't get as much credit, so I think by doing these things, I think it will help the economy in the second half of this year, early next when the economy needs it most.”


But eventually, tax rates would be raised, perhaps not as soon as Democratic members of Congress would like to see, but the Bush tax cuts won’t be made permanent in Zandi’s view. He was asked where he saw that debate going in the coming months.


“Yeah, I think that's a reasonable concern and it's baffling to me we're not discussing this more,” Zandi replied. “Those tax cuts expire for everybody at the beginning of next year and that will be very counterproductive. My sense is at the end of the day that what will happen is the tax cuts will be extended for longer and then – the tax increases will be phased in for the two upper income groups later in 2011, 2012-13 when the economy could more reasonably digest it. But I do think it's very important for Congress and the administration to nail this down pretty quickly, because it is creating some uncertainty. It’s one of the reasons why people are so nervous.”


Zandi went on to say his models suggested that even without another stimulus, the economy would probably avoid a double-dip recession. So why his push for more government intervention?  “Prudent risk management,” Zandi said.


However, following the Zandi interview, “Fast Money” panelist Anthony Scaramucci said there are data that show stimulus spending affects consumer behavior by telegraphing an inevitable tax hike.


“There are studies out there that show when we do these stimuluses, taxpayers are anticipating a tax hike, as a result of the stimulus, a result of which they slow down their spending,” Scaramucci said. “So, there is a paradox in the stimulus. You just need to factor that in into the equation as well.”


But, whether or not a second stimulus is politically feasible, with midterm elections right around the corner, since Krugman’s call to action, a number of opinion makers have come out in favor of another stimulus.


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