Why Obama's 'Balanced Approach' Doesn't Work

We hear a lot from freshly re-elected President Obama about the importance of a "balanced approach" to dealing with the USA's mounting debt crisis and the upcoming fiscal cliff that America faces in 2013.

Bob Woodward's latest book, The Price of Politics, shows that the president laid out his balanced approach many times during the debt-ceiling crisis in 2011.  This proposal involves varying mixes of spending cuts (that appeal to the right) and tax increases (that appeal to the left).  Since his re-election, Obama has doubled down, saying that he will not accept spending cuts unless they are accompanied by tax increases, at least on the wealthy.

The phrase "balanced approach" is a dangerous one about which conservatives need to be on their toes.  Balance is seen as a synonym for "moderate" by many in the electorate, and this seemingly centrist stance is bundled up with what appears to be common sense.  We have a deficit between what we spend and what we bring in, therefore we should increase our revenue, and we decrease our spending.  Seems to make sense, right?

Indeed, Obama proclaimed a few weeks ago:

On Tuesday, we found out that the majority of Americans agree with my approach -- that includes Democrats, Independents, and Republicans.

This may be the case, but economic truth is not determined by a majority vote.

The problem is that Obama's plan doesn't work, nor does it deal directly with the crisis at hand.

The strategy the president offers sees the national deficit as the problem and seeks to fix it by raising revenues and cutting spending.  But the deficit is not the problem -- it is merely the symptom of the underlying crisis of spending and the fact that the American economy is stagnating with minimal growth (although admittedly strong by European standards).

To fix the first problem, Obama is right to call for spending cuts -- that is, whenever he actually does call for them.  Yet as our left-wing Keynesian friends such as Paul Krugman, and even John Maynard Keynes himself (in The General Theory), pointed out, government spending is stimulative to the economy, and so to decrease that spending will (in the short and medium term at least) place a drag on the economy, exacerbating the growth problem even more.

Therefore, in a sluggish, overspending economy, there needs to be a stimulative measure to counteract the lag that comes from the reduction in spending.  The obvious stimulative answer to this is tax cuts -- deep and across the board, affecting employers and employees alike, that encourage both private spending and job-creation.

Yet what President Obama proposes to do instead is to increase taxes by, at the very least, allowing the Bush tax cuts to expire.  This does not stimulate, but rather depresses the economy further, as it takes money out of the pockets of consumers and job-creators and uses it merely to feed the yawning mouth of the deficit.  Therefore, the "balanced approach" first depresses the economy by decreasing spending and then depresses it further by raising taxes.

This approach makes zero economic sense, and from a purely economic analysis, it is clearly not truly balanced -- as instead of using a balance of stimulative measures to counteract the depressive, it doubles down on the depressive measures.

When Barack Obama says that his approach is "balanced," what he means is that it is politically balanced, as it is brings economic fetishes from the left and right together, not that it is balanced from an economic perspective.  Yet by trying to combine left and right economic outlooks, what Obama creates is a Frankenstein monster of economic schizophrenia.

One needs only to look to Europe to see proof of this, where European heads of state caught up in the political bubble have also misdiagnosed the crisis as one of debt and not of spending. 

Greece has engaged in a battery of so-called "austerity measures" combining spending cuts and tax increases, yet the depressing effect that this has had on the Greek economy has caused growth to stay flat and the economy to remain perilous.

Even economies less crisis-ridden and more like the American economy have fallen into the same trap.  Across the Atlantic in England, the ruling coalition government of the center-right Conservative Party and the left-wing Liberal Democrats has led to a similarly "balanced" approach, whereby spending has been cut (in relative terms) and the country's high tax rates have remained, accompanied by an increase in the already high national value-added tax from 17.5% to a peak of 20%.

Great Britain's method is almost exactly the same approach as what Obama wants, only without the increase on the tax rates of the rich that the president calls for, and yet growth in Britain is deathly slow, unemployment remains high, and there seems to be no way out of stagnation any time soon.

Greece, Spain, Portugal, France, and Britain are all examples of economies that have confused a spending crisis for a debt crisis and that mistake political consensus for economic consistency.  Yet political bloviation about "balance" and "fairness" are not economic principles, and these politicians confuse what sounds good in the halls of Westminster, Athens, and Washington with what produces financial prosperity in reality.

If America wishes to get back on the path to prosperity, it must embrace an approach that cuts spending and cuts taxes and, by doing so, solve the spending crisis while keeping growth at a sustainable level.  The current path that Mr. Obama is proposing may cut spending initially, but by hiking taxes, it will shrink growth, counteracting any good that the spending cuts will do.  This is especially true if Obama's plan is wedded to increased taxes, which will serve only to destroy growth further. 

Republicans and conservatives must have no truck with economic illiteracy and should advocate an approach that is economically, not just politically, balanced.

Adam Shaw is a British-born freelance writer currently living in New York City.  He can be contacted at adamchristophershaw@hotmail.com.  Follow him on Twitter: @ACShaw