Deficit Hawk

Obama needs to enforce fiscal discipline. If he keeps throwing money around, the economy will implode.

It’s always good to know that Washington, DC is focusing on what matters most to the welfare of the country. The scandal du jour seems to be longtime White House correspondent Helen Thomas, who offered the uncharitable thought the other day that Jews living in Israel should “get the hell out of Palestine” and return to Germany or Poland. Israel will survive Thomas’ slur. It has bigger problems.

So does America, which seems to have a penchant, not uncommon to teenagers facing a dreaded final examination, of simply spacing out, whether it’s focusing on Thomas or Debrahlee Lorenzana, the curvy Citibank employee whose nubility drove her bosses to distraction and, ultimately, to fire her. Maybe the Obama administration can offer her a political job. With all the revelations of the positions that the administration has been dangling to get candidates out of political races, it’s beginning to seem as if the only jobs it’s creating are in the executive branch. Obama has become our chief headhunter.

Even as the jobs report indicates that hiring only went up because the government doled out positions working for the census, one of the most frightening dates in American history is beginning to come into sight. That date is January 1, 2011. What’s so significant about it? It’s the day the Bush tax cuts are set to expire.

The marginal federal personal income tax rate will rise from 35 percent to 39.6 percent. The capital gains rate will go from 15 percent to 20 percent. The estate tax is set to rise to 55 percent. In today’s Wall Street Journal, Arthur Laffer acts as a kind of fiscal Paul Revere, shouting “The tax hikes are coming, the tax hikes are coming!”

Indeed they are. If Congress and the Obama administration don’t act to delay them. And if the GOP doesn’t try to cut some kind of deal with the Democrats.

No doubt Laffer, the author of supply-side economics, went more than a little astray in claiming that cuts would pay for themselves. But it’s also true that tax cuts can help to stimulate the economy, even if Democrats don’t like to admit it. In fact, the standard trope from the Democrats is that the Bush tax cuts were never meant to be permanent, and thus that their expiry doesn’t amount to a hike. But after almost a decade, it would certainly feel like an increase. And the markets would certainly react as though an increase was taking place. Laffer notes that state and local taxes are increasing and that payroll taxes are slated to rise in 2013. He predicts that “the economy will collapse in 2011.”

Maybe. It looks as though the world economy, and the American one along with it, is already collapsing. Greece is bankrupt. Hungary might be too. World stock markets are tanking. The Euro is in a downward spiral, which is bad for American exports but good for deficit spending since it keeps the interest rate on T-bills low. Job creation figures are abysmal for May. Meanwhile, Bloomberg News reports that President Obama will become the biggest-spending Democrat of all time. The question facing investors will be whether the U.S. Treasury will eventually default. Who’s going to bailout the bailer outers? Bloomberg says that the total debt owed by the government is $13 trillion and “the amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund.”

If Republicans make gains this fall in the Senate and House, Obama will actually be in a stronger position to try and enforce fiscal discipline—if he wants to. His advisers know that it’s necessary, but it would require entitlement cuts that Democrats are loath to consider, coupled with selective tax hikes. But to raise taxes now, during what looks like a double-dip recession, would be fiscal hari-kari. In addition, Obama would have to abandon his pledge simply to tax the wealthy, who already bear a wildly disproportionate share of the federal tax burden.

Sound impossible? No, it isn’t. Desperate times require desperate measures. If Obama doesn’t act, the quiet desperation in America is going to become very loud indeed.

Jacob Heilbrunn is a senior editor at The National Interest.