Krauthammer Is Wrong This Time

[Editor's Note: This article has been corrected regarding the 2% payroll tax deduction.]

It's a rare occasion that I disagree with syndicated columnist Charles Krauthammer, but this time I am forced to. In a December 9th article, he dubs the recent deal that President Obama struck with Republicans as "the biggest stimulus in American history". But I don't see it that way.

Keep in mind here, that when I use the term "stimulus", I am referring to the classical definition of government fiscal policy which is designed "to increase aggregate demand in the economy". In other words, in order for government fiscal policy to be "stimulative", it must create incentives for a significant percentage of the population [hence the word 'aggregate'] want to go out and spend money [hence the word 'demand'].

For starters, this agreement has the Bush era tax cuts being extended for two years. These are NOT new "tax cuts" as Charles characterizes them. They are an extension of cuts that went into effect years ago. This agreement simply keeps things the same as they are today. And while it is safe to say that allowing the Bush era tax cuts to expire would result in the biggest tax hike in American history and have a disastrous effect on the economy, it does not follow conversely that maintaining the status quo will have a "stimulative" effect. How does NOT changing things stimulate the economy?

Second, the temporary nature of the tax cut extensions does not imply that the rich are going to immediately run out and start spending money like drunken sailors and stimulate the economy. On the contrary, they know and understand that the day of reckoning has simply been postponed for two years. Now, if the extension of the tax cuts had been permanent, that might have been "stimulative". Everyone could breathe a sigh of relief and get on with their lives. Postponing things until the next election cycle only adds to the sense of uncertainty, and uncertainty does not breed investment.

Third, this agreement has unemployment benefits being extended for another 13 months. Again, this is nothing more than maintaining the status quo. We provide unemployment benefits now, and we will continue to provide the same benefits in the future. And while it is safe to say that allowing those benefits to expire might have negative consequences for the economy, and especially for those who are unemployed, it does not follow that keeping things the same as they are today will have a stimulative effect on the economy. Again I ask, how does NOT changing things stimulate the economy?

Fourth, this agreement maintains the Obama tax cuts that were implemented as part of his "Stimulus Package" -- the American Recovery & Reinvestment Act. And I put the term "Stimulus Package" here in quotes for a reason. Clearly, it had little or no stimulative effect. Putting an extra $10-15 in a person's weekly paycheck will not stimulate the economy because it does not increase aggregate demand. The incremental difference in the weekly paycheck is so insignificant as to be almost undetectable. Maintaining this failed policy will not hurt the economy, but neither will it provide "stimulus".

Fifth, there is the one year 2% payroll tax deduction, that will theoretically allow people to keep more of their own money. Those who make $50,000 would be able to keep an additional $1000 per year in their pocket. Those who make $500,000 would be able to keep $10,000. [But that does not mean that this money is tax-free. Since the tax rates themselves are not changing, it means that employees will have less withholding taken out of their paychecks, but they will still have to pay taxes on that money at the end of the year. Smart families won't spend that money, but be careful to simply set it aside to pay the tax bill in April 2012.] This is perhaps the only part of the agreement that is actually stimulative.

And then there is the Estate Tax. This year it is zero. Next year it will jump to 35%. And while it is true that it would have gone to 55% without any intervention, how does raising a tax from 0% to 35% provide a "stimulative" effect? How does raising ANY tax stimulate the economy?

And then there are some add-ons like extending the Child Tax Credit, the Earned Income Tax Credit, and the tax credit for college tuition. Again, eliminating them might have had negative consequences for the economy, but maintaining them does NOT stimulate the economy.

And finally, none of these measures are paid for. ALL of this spending must be borrowed. More and more borrowing will improve neither the Federal Budget Deficit nor the National Debt. When will people wake up and realize that you cannot spend your way out of debt? Increasing our debt and deficit will NOT help the economy.

If passed as it now stands, I foresee this agreement being a total disaster. It merely maintains the status quo at great expense. It may prevent things from getting worse, but it will do little or nothing to stimulate the economy.

In order to do that, we need to make some major overhauls. We need to slash government spending, eliminate entire agencies and departments, repeal Obamacare and loads of other regulations. We need to cut corporate business tax rates, free up our energy resources like coal, oil and gas. We need to stop propping up failed businesses and banks whose bad leadership made bad decisions that resulted in financial ruin.

And we need to let the marketplace do it's thing. People have to stop thinking of "profit" as a dirty word. Profit = wealth. Wealth = savings, consumption, and investment. Savings produces lending. Lending permits investment. Investment and consumption create jobs. Jobs produce wealth. Wealth is good. Profit = wealth. Therefore, profit is good. Just sayin'.