$1.8 Trillion: The Most Important Number in Economics

If you want to understand the debate about the economy, weak job growth and what to do about it, focus on this number: $1.8 trillion. In short time, the statistic that S&P 500 companies are sitting on a record $1.8 trillion in excess cash has become a microcosm of the entire macroeconomic melee. One side looks at the number and says: companies aren't investing because consumers aren't buying. Another side looks at the number and says: companies aren't investing because they're nervous about making big plans while the government's fidgety hands keep changing health policy, energy policy, finance policy, tax policy...

I'm waiting on a few conversations with conservative economists, but until then, let's talk about why it's unfair to blame President Obama for uncertainty about tax policy.


Our huge debt obligations will require, among other things, higher taxes. That's not Obama's choice to make, it's just the reality he has to deal with. The wars in Afghanistan and Iraq, the Bush-era tax cuts and the recession are the main drivers of this year's deficit. Today, the wars costs have stabilized and started to go down, and the recession is easing, slowly. What's left is the Bush tax cuts. Any person in the Oval Office would feel political and economic pressure to let parts expire in December. And the logical place to begin to recoup money is by letting them expire on the richest earners who took home most of the tax cut.

Some economic commentators, looking to protect both the fragile recovery and our long-term solvency, have suggested that we extend the entire thing for two years and then begin to phase it out. But even this could have drawbacks. First it will increase the deficit. Second, by Greg Mankiw's logic, it wouldn't stimulate much anyway, since households would just sit on their money in expectation of a larger tax hike later.

In short: it doesn't make sense to blame the sitting president for inheriting a recession, a deficit, and an expiring tax cut in successive years. The year 2011 was going to be tough for taxes no matter who sat in the Oval Office.