The Obama administration put forward a stimulus plan that was a mix of tax relief and spending programs that even many of his supporters realized was, as Paul Krugman has put it, “far short of what was needed.” Many of Obama’s more liberal supporters pleaded for the administration to spend more to reverse the demand shock, but the Obama administration was more interested in passing health care reform than fighting the Republicans on spending.
Of course, there was another way to fight the fall in aggregate demand—one that would have garnered strong Republican support and probably guaranteed Obama a second term. (Watch: Obama vs. Romney: Who's Better for the Economy?)
Instead of pushing for spending, Obama could have aggressively cut taxes. Republicans would have been loathe to be seen as the party of higher taxes, which means that Obama may have been able get an even larger stimulus package.
Most of the professional economists who believe in the power of government stimulus (not all of them do) think that government spending is a more efficient policy than tax cuts. They argue that direct government consumption and public infrastructure investment can restore output faster than tax cuts of similar sizes. The Obama administration appears to have to have adopted this point of view.
The error in this way of looking at things is that it assumes that a tax-cut stimulus and a spending stimulus plan must be of the same size. That certainly was not the case in the latest recession. A tax-cut based stimulus plan could have been much, much larger than any spending based plan could possibly have been. The reason for this is simple: Republicans will more readily consent to tax-cut-based deficits than spending-based deficits.
The fact that this strikes some economists as irrational is a sign of the narrow-mindedness of the economists. There are plenty of non-economic costs to government spending programs that may outweigh the economic benefits.
Primarily the objection is that a larger share of aggregate demand comes through the government channel, which means the government’s influence grows. If you worry about the government being too influential in our economy and society, you might accept a slower economy to avoid this outcome.
The Obama administration, however, appears never to have seriously contemplated taking the tax cut road to seriously sizable stimulus. Even today, the administration fights proposals to cut taxes using class-warfare rhetoric.
The Obama stimulus plan did not work as advertised because it was too small. Ideological resistance to tax cuts prevented the President from doing what was necessary to repair the economy. If Romney wins in November, it will likely be because Obama let ideology stand in the way of good policy. (See: Busch: Three VP Candidates for Mitt Romney)
-- written by John Carney, Senior Editor, CNBC.com
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