Most economists credit Bush's tax cuts in rebound
News analysis by Peronet Despeignes, USA TODAY
President Bush insists his tax cuts are a big reason for the economy's rebound.
"Tax relief was a vital part of this economic recovery," he said Monday at a window plant in Tampa, repeating a theme in many of his recent speeches.
Presidents often take credit for the good economic news on their watch. But can Bush legitimately claim his tax cuts sparked the economy's recent rebound and helped make the recession one of the mildest in postwar history?
The answer could affect this year's presidential race. The 2001 and 2003 tax-cut packages, worth about $1.7 trillion over 10 years, will be at the heart of the election-year debate on the economy. Bush wants to make the tax cuts, now set to expire in coming years, permanent. Democratic presidential contenders, including the front-runner, Sen. John Kerry of Massachusetts, want them repealed or scaled back, especially those for the wealthiest Americans.
Most economists say the tax cuts helped stimulate consumer spending and the economy in the short run. The economy grew at a rapid 8.2% annual rate in the third quarter of last year, when 25 million taxpayers received rebate checks of up to $400 per child. "The basic conclusion is that it's been a very important factor," Ed McKelvey, an economist at investment firm Goldman Sachs, says of the tax cuts.
These economists also say tax cuts were just one of several influences that helped the economy out of its slump, and it's hard to determine how they rank. The other factors:
•Alan Greenspan and the Federal Reserve. Beginning in early 2001, the Fed began a series of cuts in short-term interest rates, which influence borrowing costs for credit cards, home mortgages and car loans. Short-term rates fell from a nine-year high of 6.5% in January 2001 to a 40-year low of 1% in June 2003.
"We had the most pronounced stimulus from the Fed in modern times," McKelvey says.
As mortgage rates dropped to 30-year lows, a wave of home construction and refinancing generated more than $700 billion in purchasing power in 2002 alone through "cash outs" of home equity, according to the Fed. The refinancing boom helps explain the unusually persistent growth of consumer spending through the recession.
•Government spending. Washington cut taxes over the past three years, but it also sharply increased government spending on everything from the military and homeland security to education and health care. Government outlays grew 20%, from $1.79 trillion in 2000 to $2.16 trillion in 2003.
"At least half of Washington's contribution to stimulus was in the form of more spending," says Martin Barnes, an analyst at the Bank Credit Analyst, a Montreal-based economic consulting firm.
•The sinking U.S. dollar. The dollar lost more than 20% of its value over the past year, its biggest drop in more than a decade, as the Fed cut interest rates and investors became anxious about terrorist attacks and America's growing deficits.
A falling dollar makes U.S. exports cheaper abroad and imports less competitive, giving U.S. manufacturing a boost.
•The business cycle. More than 227 years of U.S. economic history suggests that the economy has always bounced back from a downturn, with or without Washington's intervention.
"There is a normal, self-healing adjustment process that the U.S. business cycle goes through. The pendulum swings one way, then the other. Businesses cut back from their earlier excesses to the point where they have to build up again," Barnes says.
The debate over which of the factors is most important goes to the basic uncertainties of economics.
"Economics is not a laboratory science like chemistry. We usually can't run controlled experiments and isolate the effect of any particular factor," says Benjamin Friedman, a Harvard economics professor who specializes in government spending and taxes. "There were so many things going on over the past few years. Disentangling them is extremely difficult — almost impossible."
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