Is President Obama’s Recent Proposal an Economic Stimulus?

by Ro Marie in Economics, December 11, 2010

President Obama has given up the Democratic position of demanding an end to the tax cuts for the wealthy. He feels that trading extended tax cuts for extended unemployment benefits is worthwhile in order to improve the economy. Will this really work, or does extending tax cuts hurt our economy?

Average unemployment for the United States was recently reported at 9.8%, with some areas much higher. Over 15 million Americans are currently unemployed. Fox News estimates the cost of extending unemployment benefits at $56 billion.

Democrats believe that unemployment benefits return almost $2 for every $1 spent. This is due to the unemployed being far more likely to turn around and immediately spend their unemployment benefits on items which also boost the U.S. economy. On the other hand, $56 billion is a pretty large number to add to a federal budget already deeply in debt.

What about those tax cuts? Extending the tax cuts for another two years could cost the US $500 billion in revenue, $250 billion per year. $250 billion looks quite a bit larger than $56 billion from here. The proposal would result in a net effect of not reducing the deficit by more than $300 billion next year.

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In this time of economic hardship is reducing the deficit really that important? Yes, yes, and yes. Most people agree that keeping the debt snowball rolling will just aid in the quick devaluation of the U.S. as a world power. Eventually, the ball will be too heavy to hold up and will crush us. Unfortunately, there is great disagreement about whether increasing taxes really helps increase government revenue. Historically, reducing taxes has actually increased the national economy, and increased revenue. Higher taxes encourage people to stop earning (translate as stop investing, producing, and hiring), and stop paying.

Really, President Obama’s entire proposal is all about stimulating the economy, which is why he is promoting it as such. Unfortunately, it does not address the giant snowball we are trying to keep from rolling out of control down the hill. Budget cuts really do need to be made before we are caught up in the debt sphere taking us down to 3rd world status. If not increasing taxes, and not ending unemployment, where?

No one wants to lose benefits of any type, but some things are just going to have to go. Look for my next article for a list of budget items I feel most worthy of dropping and why.