"I think we’ve got to take a look and see where the economy is. I mean, the economy is weak right now," Obama said on "This Week" on ABC. "The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers, indicates that we’re fragile."
This is an example of why ideas matter. From a Reaganite or Chicago School perspective, what Obama’s saying makes perfect sense. Individuals almost always (always is the key word here) make better decisions of what to do with their money than governments do. Lowering taxes is thus always a good thing, providing basic government services such as police are maintained. During a recession the last thing you want to do is raise taxes.
But if you’re a Keynesian, or a liberal of any variety, this is nonsense. In fact, what the rich did with their money over the last decades was spend it on bubbles like the dotcom bubble, on derivatives and on driving up housing and commodity prices. The majority of their money did not go to "creating new jobs" in the US and it didn’t go to consumption (which, if the US made what they consumed and if there weren’t a supply bottleneck in commodities, might help the US economy.) It went, then, either into secondary securities markets or into derivatives and commodities. The problem with the US economy is not that the rich aren’t rich enough.
So leaving the rich money, not taxing it, won’t do the economy much good because the rich won’t spend it in particularly useful ways. On the other hand, if the government taxed them, 100% of the money they took could be used for, say, a big green economy buildout. Or part of it could be used as relief for the poor, which provides 100% stimulus effect, since money and aid given to people who need relief is spent immediately. If you want to fix the US’s economy, taxing and then spending on what’s needed (to reduce oil dependency) makes sense.
In fact, I wouldn’t even cut taxes on the middle class and poor. Yes, yes, it’s economic heresy, but right now, stimulus (and a tax cut on people who will spend is stimulus) will just go to inflation which is why only relief should be given, not stimulative "tax rebate" checks.
I don’t bring this up to bash Obama. As usual, McCain is even worse than him. But the problem with Obama’s economic philosophy is that fundamentally it’s not a liberal economic philosophy. That statement indicates Obama really believes that taxing rich people (or any people) is bad for the economy. There’s very little reason to believe this (at least not at the taxation levels in the US right now), but Obama believes it nonetheless. His heart is in the right place, he wants to tax the rich more because he doesn’t like inequality, but he doesn’t believe, intellectually, that taxing them is also good for the economy. To Obama, increasing taxes is a bad thing to do, an evil, that may be necessary to get some goods.
This is why ideas, philosophies and theories matter. They determine what decision-makers consider possible and impossible, useful and disastrous. In the 60′s everyone may have been a Keynesian, but today, almost no one is, despite the fact that Chicago School economics has failed every major test it’s ever been put to.
Presidents often learn on the job. Roosevelt got rid of most of his original economic advisers for a new pack when he decided he needed new ideas. Hopefully Obama will have the same intellectual flexibility. But first we’re going to have to do too many of the wrong things, yet again.