Comment: On the precipice of a double dip recession

Steve Jackson

Elephant in the Room
with Steve Jackson

HONOLULU—Democrats and Republicans on Capitol Hill are debating whether to extend tax cuts approved by Congress in 2001 and 2003 during George W. Bush’s presidency. The tax cuts, passed during a time of budget surpluses, expire at the end of the year.

Last week, The Star-Advertiser reported on the arguments for and against granting an extension of those tax cuts only to the middle class. Both of the top 1st Congressional District candidates, Congressman Charles Djou (R) and State Senate President Colleen Hanabusa (D), weighed in.

Hanabusa said that the wealthy need no further tax cuts and that she would like to focus any proposed extension only on the middle class. In her opinion, Republican opposition to the tax cuts is hypocritical, given staunch opposition to anything adding to the deficit. She has a point: Tax cuts might add to the deficit and act as another stimulus to the ailing economy.

Djou argues that a tax increase would stifle the economy and hurt chances of a full recovery. He would extend the entire tax cut in the belief that the stability of the tax brackets would increase investment and provide the prospect of private sector jobs.

Hanabusa retorted that “you can’t have it both ways,” which is contradictory, given that she’s citing the deficit in her attack and promoting increased government spending as the means to improve the economy. She attacks Djou for his vote against increased government spending in the form of an extension of unemployment benefits, but denigrates Republican plans for economic expansion.

Democrats argue that government spending through programs like unemployment benefits props up the economy and stimulates commerce better than increased investment from the people who provide jobs.

Republicans argue that government spending does nothing to increase hiring or investment in America and does not provide sustainability to the recovery.

The two are the primary arguments between Democrats and Republicans on the economy today, played out in different arenas and through different avenues. This instance is just another one of those.

For the past two years, Democrats have had their way and have allocated billions of dollars in hopes of propping up the economy and stimulating economic growth. The economy is somewhat stable at 2.4 percent real GDP growth in second quarter FY 2010, although it is in decline since the expiration of many of the stimulus funds.

The first quarter of FY 2010 saw growth at 3.7 percent real GDP, according to the U.S. department of Commerce Bureau of Economic Analysis. To the regular person, 2.4 percent growth means that the economy is not growing jobs—it’s stagnant. Many of the jobs created by the stimulus were temporary, meaning that unless we spend money at the rate we have been, which is unsustainable, we have to find another way to move the economy forward.

There are two options that the government can use to assist in economic recovery: tax cuts or increased government spending. We’ve had government spending at extremely high levels in the past two years and have not been able to turn the corner.

Tax cuts are the other option, and have been successful before: JFK used them, Reagan used them, Bush used them. They are expensive options, but create confidence in the market for businesses who may be thinking of hiring. Our taxes are currently at the tax cut levels. Letting them expire would create the opposite effect at a time when we can’t afford it.

The OECD composite leading indicators report on August 6 suggests that our economy may have had a “possible peak” in economic expansion in June of this year. We may well be looking at a double dip recession. A promise of tax cut extensions could provide the catalyst and confidence the business world needs to rebound.