President Obama and his supporters are portraying the failure of the Super Committee to slash the budget deficit by $1.2 trillion over ten years as endangering the already weak economic recovery. This is absolute sophistry.
A deal acceptable to Democrats would have raised taxes on the wealthy and corporations by $25 to $50 billion, annually, and cut spending, disproportionately on defense but some other programs too by $50 to $75 billion, for a total savings of about $100.
Apparently, according to liberals, raising taxes on folks they believe the government spoils—millionaires and corporations—and cutting spending they deem unnecessary—defense and other civilian programs—doesn’t reduce overall spending by consumers, businesses and government, and hence, demand and GDP. Nowhere in the textbooks or journal articles economists read, is such a proposition demonstrated. In fact, the reverse is true: Super Committee spending cuts and tax increases would have slowed growth.
In the next breath liberals argue the failure of the Super Committee to reach an acceptable compromise ensures Congress will not extend the two percentage point Social Security tax holidays beyond the end of the year, and that endangers prosperity too.
The Social Security tax holiday is a separate legislative issue and could still be enacted, but let’s suppose it is not. Had the Super Committee succeeded and the holiday consequently extended, spending would have been cut and taxes raised for some people—slashing demand—and the taxes cuts extended for others—boosting demand. Overall, the net impact on GDP is close to zero.
What is really going on is the president is going about his old tricks. The economy is not performing and unemployment remains too high—and with conditions in Europe as they are, the whole global economy may be headed for another recession in 2012.