By fnord12 | January 22, 2008, 12:53 PM | Liberal Outrage | Link

Democrats offer slightly better alternative.

When we face a recession, the government should increase spending in ways that will create jobs, even if it means deficit spending. Public works/infrastructure investment is the best way to go. The idea is that you are creating stability in the job market, increasing the number of people who have reliable jobs and cash on hand. People with money and the assurance that they will remain employed will pump that money back into the economy. This has the short term benefit of keeping people employed, the medium term benefit of stimulating the economy once the newly employed people start spending or investing their money, and the long term benefit of improving our country's infrastructure (forget just repairing our crumbling roads and bridges, which would be nice enough, and imagine a program to create a major public transportation system or install solar panels and greywater systems into all our public buildings).

Bush's solution to a recession is an income tax cut, favoring the wealthy. Actually, even calling it a solution is being generous and naive. Bush wants to use the excuse of a recession to call for a tax cut. He was just as happy to call for a tax cut when the economy was doing well and the government was running a surplus of revenue. The real purpose of his tax cuts are to reward the Republican party's true constituency and cripple the government so that it doesn't have the revenue to even respond to emegencies, let alone do anything to actually improve the country, thus increasing the perception that government is always inefficient.

But let's pretend to take Bush's 'solution' seriously. Where an increase in public spending results in the benefits listed above at the cost of running a decifit, a tax cut puts more money into the hands of individuals, and in Bush's proposal it puts most of that money in the hands of individuals who already have a plenty of money. Unlike the assurance of a stable job, a one time windfall or even a permanent decrease in tax rates is not going to encourage people to spend more. In the face of a recession, people are more likely to hang on to money for emergencies, or, for the wealthy, wait for a more stable time period to invest. This second part is important to emphasis, as proponets of Bush's tax cuts claim that if they have extra money on hand, business leaders will engage in private investments as a more efficient substitute for government's public investements. Business leaders do not invest during a recession. If the economy is looking bad, business leaders do not increase hiring, replace private infrastructure, or invest in new businesses. Even if you have money, if the economy is looking unreliable, it is not a wise time to be taking risks. This is worth constrasting with the public spending strategy, which makes long term investments specifically when private industries are pulling back on their investments.

So while a tax cut may put a little more money in people's pockets (unless they get laid off), it doesn't really provide any of the benefits that public spending promises. So even if we were to take Bush's motives at face value, there is no reason to take a tax cut proposal seriously.

The Democrats see things differently, of course. Chuck Schumer, in proposing an alternative to Bush's tax cut, has come up with a different tax cut, based the payroll tax instead of, or in addition to, the income tax. Make no mistake that this would be better than Bush's proposal. It will expand the scope of the tax cut to lower and middle income families that can really use the help. But it is still just a tax cut, which means it will have none of the benefits of public spending. Worse, it legitimizes the idea that a tax cut is a solution to a recession. Schumer's proposal accepts Bush's framing of the debate that a tax cut is the only legitimate response to a recession, leaving only the question of what kind.

There was a time when the public spending strategy would have been the mainstream response to a recession (It is based on Keynesian economics, not Socialism.). However, there has been a gradual rightward shift in the politics of this country based on Republicans making outrageous claims ("Tax cuts increase revenue.") and Democrats responding in befuddling ways that accept the basic premise ("Well, tax cuts do increase revenue but we need to ensure that they benefit everyone."). This is why the Democrats have been so frustrating. They are being dragged around by the Republicans, their attempts at resisting are in fact legitimizing right-wing economic ideology, and they are making no bold attempts to move in the other direction at all. The current front runners in the Democratic primaries have all exhibited this pattern.