NCPA - National Center for Policy Analysis

TO STIMULATE THE ECONOMY, CUT TAXES

January 22, 2010

President Obama has saddled himself with several ideas about the economy and job creation that aren't working, either substantively or politically.  And he appears to be too ideologically rigid or stubborn to consider the evidence and jettison the failed ideas, says Fred Barnes, the Executive Editor of the Weekly Standard. 

Obama's failed ideas center on the myth that government spending is the most effective method of stimulating the economy, spurring strong growth, and generating new jobs.  The president needs to chat with Harvard University economists Alberto Alesina and Silvia Ardagna on this subject.  They studied dozens of examples of economic stimulation between 1970 and 2007 in 21 countries, including the United States.  Their findings are unequivocal, says Barnes: 

  • Fiscal stimuli based upon tax cuts are more likely to increase growth than those based on spending increases.
  • The current stimulus package in the United States is too much tilted in the direction of spending rather than tax cuts.
  • Obama's paltry tax cuts aren't the kind of across-the-board reductions in individual and corporate income tax rates that have revived sluggish economies by incentivizing private investment and stirring job creation. 

Another finding by the economists bears on a separate aspect of Obamanomics: deficit reduction.  According to Alesina and Ardagna: 

  • Spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns.
  • In fact, there are several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions. 

What Obama would learn from a chat with Alesina and Ardagna is pretty simple: Do the opposite of what you're doing now.  You want to stimulate economic growth and job creation, then cut tax rates across the board.  You want to reduce the budget deficit and slow growth of the national debt, then cut spending.  The economists have empirical evidence to support the effectiveness of this approach, says Barnes. 

Source: Fred Barnes, "Obama the Slow Learner," Weekly Standard, Vol. 15, No. 18, January 25, 2010. 

For text:

http://www.weeklystandard.com/articles/obama-slow-learner

 

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