Obama Has No Reason to Advocate for Cutting Spending

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POLITICS JULY 22, 2011

Obama Has No Reason to Advocate for Cutting Spending

I have to admit that I haven’t followed the ins and outs of the negotiations over raising debt ceiling. But, since they began, I haven’t seen a single proposal that wouldn’t do more harm than good to the country. And, from what I’ve read—from the original Biden proposals down to President Obama’s attempt to mollify the Tea Party—the plans have actually gotten worse, not better, as far as the country is concerned. What would I have the politicians do? Here are my guidelines:

1. There is no need whatsoever to cut spending now. We’re in an economic slump similar to the 1930s. If we cut spending and reduce the deficit, we will be reducing effective demand for goods and services. We will be prolonging the slump, and will end up increasing the deficit.

2. At some point, it will make sense to reduce the deficit due to the risk of inflation, higher interest rates, and the value of the dollar, but that will come when there is less idle capacity and unemployment. Budget cuts and tax increases should be triggered by reduction in the unemployment below, say, six or seven percent, not by an abstract calendar date.

3. In a slump, the only spending cuts and tax hikes that make sense are ones that would have the effect of transferring demand from less to more potent spenders. For instance,   wealthy taxpayers are more likely to save than to spend their income and capital gains. If taxes were raised on them, and the revenue used to fund infrastructure or to give the less-wealthy a tax cut, that would benefit the economy. Similarly, if tax subsidies to overseas investment were transferred to the domestic economy. Nothing else makes any sense right now.

As far as I can tell, the proposals being weighed by our president and the speaker of the House violate all three of these guidelines. Yes, an agreement will prevent a government default, which could have catastrophic consequences, but the president and Democrats should be fighting for an agreement that won’t make a weak economy still weaker. If they have to compromise, it should be with this approach rather than with the weak tea that the president seems to favor. 

John B. Judis is a senior editor of The New Republic and a visiting scholar at the Carnegie Endowment for International Peace.

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