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Obama Can Do a ‘Nixon Goes to China’ on Jobs

The economy is weak and the public is angry. What should President Barack Obama do? He could do what Richard Nixon did: Go to China.

[IMGCAP(1)]I don’t mean take a trip to Beijing. I mean do something unexpected and out of political character. In this case, listen to Republicans and the business community (and a few Democrats) and try using tax cuts to get the economy moving.

He could call for Congress to postpone the scheduled repeal of most or all of President George W. Bush’s 2001 and 2003 tax cuts and also call for a cut in the corporate tax rate, now second-highest in the world.

He also could call for a payroll tax holiday to encourage hiring and possibly win bipartisan support for some stimulus spending, daring Republicans to make a fuss about the danger of enlarging the federal deficit.

He could address the deficit in next year’s budget after the bipartisan debt commission comes up with a comprehensive solution at the end of this year, which should include tax and entitlement reform plus recommendations for new revenue sources.

Obama clearly is a Keynesian and so are his economic advisers. Their 2009 stimulus plan was heavy on government spending to fight the recession.

Obama claims it’s working, but the public doesn’t believe it. And, at the best, it’s creating only about 100,000 jobs a month — less than half of what’s necessary to bring the country back to 5 percent unemployment in 10 years.

The president, most of his allies in Congress and liberal outside economists — also devout believers in John Maynard Keynes’ “demand side” economics — think that more spending is the answer, plus some targeted tax cuts.

But, by 51 percent to 40 percent, according to a just-released Pew poll, the public prefers reducing the federal deficit to spending more on job creation.

Republicans are relying on that kind of polling to say “no” to new spending, or at least to demand that any outlays be offset with other budget cuts.

Enough conservative and moderate Democrats — or just nervous ones — are of the same opinion that there’s no chance of getting big spending through Congress, even if economists such as Paul Krugman and Alan Blinder of Princeton University, Columbia University’s Joseph Stiglitz, and Robert Reich of the University of California, Berkeley, say it’s necessary to ward off a 1930s-style economic failure.

So, what should Obama do? He should do as Harvard economist N. Gregory Mankiw recommends: have some intellectual humility and see if something else might work — namely, tax cuts.

Mankiw was President George W. Bush’s former chief economic adviser, but — writing in the current issue of the journal National Affairs — he does not come off as a doctrinaire “supply side” ideologue.

Rather, he admits that economists and policymakers “have no way of knowing for sure” if their economic models are correct in coping with a crisis.

But he makes a good case for trying tax cuts to see if they might have better results than Obama’s stimulus, which was sold on the basis that it would hold unemployment below 8 percent, whereas it’s now almost 10 percent.

Mankiw cites several academic studies — including one by Obama’s own chief economist, Christina Romer (written before she went to work for Obama), showing that tax cuts have a bigger growth “multiplier” effect than government spending.

That is, each dollar of tax cuts — particularly business and income tax cuts — produces (depending on the study) from $3 to $5 in economic growth, up to four times the effect of increases in government spending.

In a Nixon-goes-to-China move, Obama could adopt some of the recommendations made by the U.S. Chamber of Commerce last week at its Jobs for America Summit.

(Disclosure: I was paid to moderate a bipartisan Congressional panel at the conference.)

An “open letter” to Obama and Congress issued in conjunction with the conference asserted that “our precariously weak economy — and especially our all-important small business sector — simply cannot sustain [the] massive tax hikes” that automatic expiration of the Bush tax cuts will impose next year.

In 2011, the top individual income tax rate is scheduled to jump from its present 35 percent to 39.6 percent — and to nearly 45 percent including new Medicare taxes passed as part of Obama’s health care plan. Adding state taxes will put the rate above 50 percent.

Obama and Congressional Democrats intend to extend the Bush tax cuts for all Americans making under $250,000 a year — adding $2.3 trillion to the deficit over 10 years. Extending them for everyone would add another $700 billion.

The chamber letter called for “at least a temporary extension of all the tax relief passed in the prior decade,” plus reduction of corporate taxes.

Sen. Evan Bayh (D-Ind.) has endorsed a full extension of the Bush cuts. Sen. Ron Wyden (D-Ore.) has recommended a temporary extension in hopes it will impel work on tax reform as part of debt control.

What are the chances that Obama could “go to China”? Liberals will howl that he’s buying “voodoo economics,” going over to the “supply side” and benefiting the rich.

Supply-sider Rep. Paul Ryan (R-Wis.), the ranking member on the Budget Committee, told me that Republicans have quietly offered to help Democrats pass a two-year extension of the Bush cuts. “There are no bites,” he said. “The problem for them is that they would have to concede that lower top tax rates are good for growth.”

But it’s worth a try. And what’s better — ideological purity or a fast reduction in the jobless rate?

Correction: My column last week erroneously stated that the Congressional Budget Office in May increased its estimate of the cost of implementing the new health care law by $115 billion. I regret the error.

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