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Wednesday, June 20, 2007

Bruce Bartlett: Tax Cuts and the Not So Great Economy

Bruce Bartlett says if conservatives want to argue for lower taxes, fine, do so. But do it honestly and leave the exaggerated claims about tax cuts and tax increases out of the debate:

Greatest Economy?, by Bruce Bartlett: For an interview with a reporter about the state of the economy, I looked up a few numbers that are interesting. I compared the state of the economy today to where it was at the exact same point during the previous business cycle. Thus, according to the National Bureau of Economic Research, the most recent recession ended in November, 2001. If you count forward 21 quarters to the first quarter of 2001 [2007], we see the following:

Real gross domestic product: Up 16.4 percent Real gross private domestic investment: Up 10.2 percent Payroll employment: Up 5.3 percent Standard & Poor's 500 stock index: Up 34.2 percent

Viewed in isolation, these numbers don't seem too bad. For example, real GDP has risen at a 3.1 percent annual rate since the end of the recession. But in areas such as this, there are no objective criteria for saying what is a good performance from a bad one; only experience can guide us. Thus it is interesting to look at the same numbers above counted forward the same number of months from the end of the previous recession, which the NBER tells us ended in March, 1991:

Real GDP: Up 17.9 percent Real investment: Up 51.2 percent Payroll employment: Up 10.8 percent S&P 500: Up 82.2 percent

It is obvious that by every standard, the recovery and expansion after the 1990-91 recession was significantly better than that after the 2001-01 recession. Recognizing this fact is important for several reasons.

First, when Bill Clinton ran for president in 1992, he repeatedly said that the economy was the worst since the Great Depression, and he continued saying so well after he took office--two years into the recovery. In other words, the recovery from the 1990-91 recession was so anemic that voters elected a new president in order to get the economy moving. Therefore, we are not comparing today's economy to one that was historically robust, but one that was widely viewed as being exceptionally weak.

Second, the data raise serious questions about the role of taxes. Republicans are convinced that the Bush tax cuts saved us from doom. But there is really no evidence whatsoever to support this claim. Unless one believes that there would have been no recovery at all and that we would still be mired in recession without the tax cuts, it is hard to find any positive evidence of their economic impact. Investment stinks, employment growth has been mediocre, and even the stock market increase is nothing to brag about.

Third, it is worth remembering that Clinton raised taxes right out of the box in 1993. Every Republican opposed it and virtually every conservative economist predicted disaster. Yet it is hard to find any evidence that the tax increase had any negative effect whatsoever. One can easily argue the opposite based on the economic results.

I am not arguing for a reversal of the tax cuts or in favor of a tax increase. I am just saying that one has to do more than mindlessly repeat mantras about the benefits of tax cuts or the horrors of tax increases if you want to be taken seriously in this debate.

I also wish the mindless repetition of false mantras would end, but I don't expect it to change much. In the media, the commodity being sold is entertainment, not information, so it shouldn't be too surprising that the two will come into conflict even on shows labeled as news. Still, I would have thought there would be more market discipline than exists now. There seems to be little penalty for providing false or misleading information (even if it leads to war) so long as the entertainment value is high enough (unless you count even more bookings and more exposure in the media as a penalty). I wish I knew how to bring the information and entertainment objectives into better alignment, we need it, but I don't know what the answer is. But one area that could stand improvement is the level of competition in the market for news and entertainment. We need to ensure that robust competition is present in this marker so that whatever market discipline does exist with respect to the presentation of accurate information and informed analysis has a chance to fully express itself.

    Posted by on Wednesday, June 20, 2007 at 03:42 AM in Economics, Press, Taxes | Permalink  TrackBack (1)  Comments (78)


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    In my previous post, I made some provocative points in hopes of stimulating further research. In the interest of furthering debate, I have dug around and found a couple of studies that may illuminate the discussion.First is a business cycle analysi [Read More]

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