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WHITE HOUSE

Laffer Lines Drawn

Obama’s speech sets terms of economic debate: Cut-to-grow vs. “shared prosperity.”

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President Obama meets with bipartisan House and Senate leadership on fiscal policy, including (from left) House Minority Leader Nancy Pelosi and House Speaker John Boehner.(MANDEL NGAN/AFP/Getty Images)

Long before he chaired President Obama’s Council of Economic Advisors, back in his professorial salad days at the University of Chicago, Austan Goolsbee wrote a seminal academic critique of what economists call the “Laffer Curve” – the theory that cutting marginal tax rates for the wealthy boosts economic growth and, in turn, government revenue. He surveyed six decades of tax-cut data, and his conclusions were unkind. 

“The notion that governments could raise more money by cutting rates is, indeed, a glorious idea,” Goolsbee wrote in his final paragraph, adding: “Unfortunately for all of us, the data from the historical record suggest that it is unlikely to be true at anything like today’s marginal tax rates. It seems that, for now at least, we will have to keep paying for our tax cuts the old fashioned way.”

 

A dozen years after Goolsbee published that paper, the Laffer Curve retains canonical status among conservative economists. The broad idea that increased economic growth flows from cutting taxes and reducing government spending remains the cornerstone of Republicans’ economic plans.

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Obama's Vision vs. GOP's


Text of Obama's Speech

Obama Unveils Deficit Reduction Framework

VIDEO: Boehner: Raising Taxes Not an Option

Those are the policy beliefs that on Wednesday, in a speech outlining his plans for deficit reduction, Goolsbee’s boss derided as “just an article of faith”; this is the political and economic battleground that the president and his Republican foes are returning to for the 2012 election and the legislative skirmishes that will precede it.

 

Effective immediately, Obama and the GOP are resuming a long-running ideological fight over whether higher taxes always hamper growth, when and how government should safeguard its citizenry, and how much a society can ask of its wealthiest before the requests backfire on the economy at large.

And unlike in previous fights, which often ended in a borrowing-fueled “cut taxes, spend anyway” truce, the nation’s medium- and long-term fiscal realities demand that this one produce a clear winner.  

If the battle lines weren’t clear enough from the 2008 campaign, or the 2010 campaign, or the public shouting leading up to the recent spending deal averting a government shut-down, Obama’s speech and the GOP reaction to it left no doubt.

After a quick flick at Americans’ “faith in free markets and free enterprise as the engine of America’s wealth and prosperity,” Obama scorched the Republican economic vision. He targeted in particular the budget path set out by Rep. Paul Ryan, R-Wis., that includes hefty spending cuts, the eventual conversion of Medicare to a private-insurance voucher program and, notably, a package of tax cuts that Ryan’s economic analysts assume (in Laffer Curve fashion) will boost growth and revenue.

 

“The America I know,” Obama said, “is generous and compassionate. It’s a land of opportunity and optimism. Yes, we take responsibility for ourselves, but we also take responsibility for each other; for the country we want and the future we share.”

Later, he added, “I will not sacrifice the core investments we need to grow and create jobs.” And also: “Some will argue we shouldn’t even consider raising taxes, even if only on the wealthiest Americans. It’s just an article of faith for them. At a time when the tax burden on the wealthy is at its lowest level in half a century, the most fortunate among us can afford to pay a little more."

Republicans recoiled.

“President Obama doesn't get it: The fear of higher taxes tomorrow hurts job creation today,” tweeted Mississippi Gov. Haley Barbour, a potential GOP presidential candidate. Rep. Jeb Hensarling, R-Texas, called it “class warfare.” Ryan said he was disappointed. House Speaker John Boehner reiterated that any tax increase in a deficit plan would be a nonstarter with his caucus.

The battle is joined. Expect Barbour and his fellow hopefuls to protest more vigorously in the months to come as they court conservative Republican primary voters, to call anything that looks like a tax increase an assault on the economy. Expect Obama, in classic Democratic fashion, to paint the GOP as more concerned with millionaires than senior citizens.

Amid the din, though, keep one nugget from Wednesday’s speech in mind: Obama’s statement that “our debt has grown so large that we could do real damage to the economy if we don’t begin a process now to get our fiscal house in order.”

That’s a statement hotly contested by some liberal economists. It’s also the foundation for any “grand bargain” with Republicans on long-term budgets. Even if no one notices yet.

jtankersley@nationaljournal.com; Twitter: @jimtankersley

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