October 2011

More Stimulus Spending and Tax Increases are Policy Mistakes

By John Hendrickson

President Barack Obama has recently announced his next economic plan in order to not only attempt to get the economy growing again, but also reduce the 9.1 percent unemployment rate. President Obama’s new proposal is titled the American Jobs Act, which is a continuation of the Administration’s Keynesian-style stimulus spending. The American Jobs Act is a “$447 billion package of spending initiatives and tax cuts to boost economic growth.”[1] The $447 billion stimulus proposal is a continuation of the $850 billion stimulus that was passed by Congress in 2009. The proposal also calls for the creation of an infrastructure investment bank to spur spending on infrastructure projects, continuation of unemployment benefits, employee and employer payroll tax cuts, and more federal support to state and local governments.[2]

In addition to the American Jobs Act the Administration has proposed a deficit reduction plan that “uses entitlement cuts, tax increases, and war savings to reduce the federal deficit by more than $3 trillion over the next ten years.”[3] The deficit reduction plan proposes “$1.5 trillion in tax increases, primarily on the wealthy, through a combination of letting the Bush-era tax cuts expire, closing loopholes, and limiting the amount that high earners can deduct.”[4] The President’s tax increase plan is named after the businessman Warren Buffett, who has been advocating more tax increases on the wealthy. The plan also calls for “$580 billion in adjustments to health and entitlement programs, including $248 billion to Medicare and $72 billion to Medicaid,” while also “saving $1.1 trillion” from reducing the nation’s military involvement in Iraq and Afghanistan.[5]

Both the American Jobs Act and the deficit reduction plan will not resolve high unemployment nor will it lead to economic growth. Michael Tanner, a Senior Fellow at the Cato Institute recently wrote:

The President’s plan barely makes a pretense of reducing spending. The Obama administration claims that its proposal would reduce future budget deficits by roughly $4.4 trillion. But that includes $1.1 trillion in savings from troop draw-downs in Afghanistan and Iraq that were already going to occur. This is an old trick by which the President gets to ‘save’ money that was never going to be spent. The President also reaches back to include $1.2 trillion in savings from the debt-ceiling deal that was signed into law last month. And, he includes $430 billion in savings from lower interest payments as a result of the reduced debt.[6]

Tanner also argues that the plan fails to seriously address entitlement reform and the “actual cuts total less than $580 billion over the next ten years.”[7] The plan fails to address the spending issue which is driving the $14 trillion, and rising, national debt as well as the continuation of trillion dollar deficits that the federal government has been running over the last few years. The deficit for this year alone is expected to be at least $1.5 trillion. In addition, calling for tax increases during a weak economic recovery only adds to the uncertainty that is hanging like an albatross over the economy. The uncertainty is caused by the massive increase in spending, regulation, and the Patient Protection and Affordable Care Act, along with the possibility of significant tax increases.

“With an economy on the front end of another recession, President Obama’s tax attack on the folks who are most likely to succeed, invest, start new businesses, and create jobs is nothing short of staggering,” wrote economist Larry Kudlow.[8] A recent report by the Tax Foundation argued that:

The American Jobs Act is intended to be an ambitious proposal to spur new hiring and generate economic growth. But the economic research suggests that its core tax incentives will have little, if any, impact on either job creation or improved GDP growth. Moreover, whatever meager benefits come from these temporary provisions will be swamped by the long-term impact of the permanent tax increases that are nearly twice the size of the tax cuts.[9]

The rationale for the same tax and spend policies of the Administration is rooted in their devotion to Keynesian-demand style economics, which were also utilized in the 1930s by President Franklin D. Roosevelt. Some liberals and progressives also argue that the American Jobs Act is not large enough, but rather President Obama should offer a bolder economic plan such as calling for a new Works Progress Administration or Civilian Conservation Corps.[10] The President’s tax plan or the “Buffett Rule” of implementing a tax increase on the wealthy was also a policy that President Roosevelt called for during the Great Depression, but as the historical record demonstrates stimulus spending, regulation, and tax increases did not solve the unemployment problem or the Depression.

With Republican control of the U.S. House of Representatives it is unlikely that the American Jobs Act or the tax increases will be passed through Congress, but policymakers must consider an economic plan that will create economic growth. A pro-growth economic plan should consist of both spending cuts and tax cuts, but also a major reform of regulations is needed, including the repeal of both the Patient Protection and Affordable Care Act and the Dodd-Frank financial reform regulations. Policymakers must also consider true tax reform, which means reducing tax rates across-the-board and considering implementing a flat tax or a national sales tax plan to replace the current tax code that is not only too complicated, but also hinders economic growth.

In the 20th century Presidents Warren G. Harding, Calvin Coolidge, and Ronald Reagan all faced serious economic problems and all three administrations focused on pro-growth solutions, especially Harding and Coolidge when it came to cutting government spending. Policymakers should study and learn from the policies of these administrations and the periods of economic growth that occurred because of their devotion to a philosophy of limited-government. “That Obama would again try to promote stimulus makes clear that his big-government ideology, progressivism, is intellectually broke,” wrote Jim Powell, a historian and Senior Fellow at the Cato Institute.[11]

John R. Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Carol E. Lee and Naftali Bendavid, “Obama’s bid to spur growth: President asks Congress for $447 billion in cuts, spending; tepid GOP response,” The Wall Street Journal, September 9, 2011, <http://online.wsj.com/article/SB10001424053111904103404576559062901863074.html> accessed on September 9, 2011.

[2] Ibid.

[3] Helen Cooper, “Obama offers plan to cut deficit by over $3 trillion,” New York Times, September 18, 2011,

<http://www.nytimes.com/2011/09/19/us/politics/obama-plan-to-cut-deficit-will-trim-spending.html> accessed on September 21, 2011.

[4] Ibid.

[5] Ibid.

[6] Michael Tanner, “Still Spreading the Wealth,” National Review Online, September 21, 2011,

<http://www.nationalreview.com/articles/277805/still-spreading-wealth-michael-tanner> accessed on September 21, 2011.

[7] Ibid.

[8] Larry Kudlow, “The Liberal-Left Ideologue in the White House,” Real Clear Politics, September 20, 2011,

<http://www.realclearpolitics.com/articles/2011/09/20/obamas_bizarre_tax_attack_111403.html> accessed on September 20, 2011.

[9] David S. Logan, Academic Research Suggests that the American Jobs Act Will Produce Few Jobs, Tax Foundation Fiscal Fact, No. 283, Tax Foundation, Washington, D.C., September 19, 2011,

<http://taxfoundation.org/news/show/27632.html> accessed on September 20, 2011.

[10] Robert Reich, “President Obama needs a bold jobs plan,” San Francisco Chronicle, August 28, 2011,

<http://articles.sfgate.com/2011-08-28/opinion/29934406_1_jobs-bill-job-market-jobs-initiative> accessed on August 28, 2011.

[11] Jim Powell, “How Obama’s last stimulus bill became a comedy of errors,” Cato.org, September 20, 2011, Cato Institute, Washington, D.C., <http://www.cato.org/pub_display.php?pub_id=13690> accessed on September 21, 2011.