Obama's Rock and Hard Place

Christina Romer:
This is a short bio: http: //blogs.wsj.com/economics/2008/11/24/who-is-christina-romer/This article discusses the relationship between tax cuts and government spending; (it is not what you think): http://http//elsa.berkeley.edu/~cromer/draft708.pdf.

And here are three small conclusions of her research:
1. Each 1.0 percent rise in the federal tax burden leads to a 1.8 percent reduction in economic growth.
2. Each 1.0 percent rise in the federal tax burden leads to a 1.14 percent decline in national employment. In the employment model more than 40 percent of the growth in new jobs is explained by the federal tax burden and changes in oil prices.
3. Christina D. Romer and David H. Romer in “ the Macroeconomic Effects of Tax Changes": They considered the announcements of tax changes, rather than the proportion of GDP taken in taxes. They find that an announced tax change equivalent to one percent of GDP causes a three percent reduction in GDP over the next two and half years, which would indicate that we are approximately at the Laffer maximum where changes in the tax structure, up or down, do not influence revenue gained by the government, only changes the relative status between the general economy and the state economy to the state's advantage although the net result for both is negative.

This study implies that taxation has a direct effect on the productivity of a nation, that taxation reduces national wealth, and that the recipients of the tax largess are net losers as are the taxed. This research is from one of Obama's (former) advisers and, if taken seriously by the Washington powers that be, gives an insight into Obama's problem. They believe that government spending causes growth, causes employment and production. (Ignore the broken window theory for the present). With that mindset they face the unemployment problem--a problem most believe is the Achilles' heel of any politician running for reelection--with only a few options. If they do not trust the private sector to rebuild the economy their only option is to spend. If they believe Romer, they know raising taxes to offset the spending will contract the economy but still think that spending will expand it.

So what are their options? Deficit spending.