Monday, December 13, 2010

Getting the Obama-GOP tax cut story right

I usually like Neil Macdonald's reporting for the CBC, but I thought his latest story for the National and a column on about the Obama-GOP tax deal, fell flat. He doesn't seem to try to accurately represent the current American economic debate.

Macdonald thinks the current U.S. budget predicament is simple: Americans know the budget has to be balanced, but they don't want to give anything up to do it, so they do nothing. He understands the tax deal Obama just worked out with Republicans in the same way.

This narrative contains elements of truth, but it's only one part of the story. Many economists, particularly the sort of economists a Democrat like Obama would be receptive to, point out that the crises level of near 10% unemployment is the result of shock-induced low demand. The best way to fill this demand gap and reduce unemployment is through government spending, but short of that, getting money to regular people to spend themselves - tax cuts, helicopter drops, or whatever - would work too. Tax cuts for the very wealthy won't have the same stimulative effect because the rich won't immediately go out and spend the extra money, but giving the high income tax cut to Republicans was the only way to get the middle class cuts, plus a bunch of other stimulative stuff, like an extension of payments for the unemployed. Ezra Klein has a graph illustrating the deal the president got:

All of this, of course, will have to be paid back, but history has proven the best way to reduce overall debt is by growing the economy. Economic growth should be the current priority. Balancing the budget is important in the long run, but right now, Keynesian economics says making sure the budget isn't balanced is more important.

Macdonald thinks U.S. debt is approaching unrepayable levels, yet interest rates for government bonds are very low. He thinks the Fed is recklessly printing money, yet inflation is near zero. Apparently the markets disagree with him on both fronts. How could it be that such a good journalist would leave these crucial facts out?

Macdonald is right that what happens to the U.S. economy affects the rest of the world, Canada especially. All the more reason to get the story right.

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