The Bush Tax Cuts and Economic Growth
Tuesday, November 30, 2010
Economist's View
economistsview.typepad.com
The editors at MoneyWatch asked me to talk about:
The Bush Tax Cuts and Economic Growth ( moneywatch.bnet.com )
They also asked me to answer the question, "If the tax cuts didn't result in economic growth, then where did they go?"
COMMENTS:
economistsview.typepad.com
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anne said...
Looking to the Clinton and Bush expansion, non-residential domestic investment increased at a yearly rate of 6.4% through the Clinton expansion as opposed to 2.0% during the Bush years. The growth of non-residential investment during a typical expansion from 1945 on was 3.7% yearly. *
* cbpp.org
anne said...
"Why does the quarterback get all of the glory (and
blame)?"
Interestingly Clinton had to repeatedly battle a wildly hostile Congress while Bush had a remarkably accepting Congress:
bls.gov
bls.gov
The Bush experience in monthly job creation has been,
19,200 x 96 months = 1.84 million jobs created in all;
the Clinton experience was,
240,310 x 96 = 23.07 million jobs created in 96 months;
enough job creation to keep up with civilian work force growth would have meant,
140,500 x 96 = 13.49 million jobs created in 96 months.
Min said...
Question: To what extent did our two wars affect economic growth, and how?
In general, wars are wasteful of resources, as they are destructive. Still, war is sometimes said to be an engine of economic growth. A draft can lower unemployment, but we have fought these wars without a draft, instead taking people in the National Guard away from productive work in the domestic economy.
So what's the story? Thanks. :)
anne said...
"Question: To what extent did our two wars affect economic growth, and how?"
bea.gov
January 30, 2010
National Defense Consumption Expenditures and Gross Investment, 1992-2010
(Billions of dollars)
1992 ( 376.8)
1993 ( 363.0) Clinton
1994 ( 353.8)
1995 ( 348.8)
1996 ( 354.8)
1997 ( 349.8)
1998 ( 346.1)
1999 ( 361.1)
2000 ( 371.0)
2001 ( 393.0) Bush
2002 ( 437.7)
2003 ( 497.9)
2004 ( 550.8)
2005 ( 589.0)
2006 ( 624.9)
2007 ( 662.3)
2008 ( 737.3)
2009 ( 771.6) Obama
2010
Qtr1 ( 796.3)
Qtr2 ( 813.0)
Qtr3 ( 830.8)
Goldilocksisableachblonde said...
"... As noted by former Reagan economic advisor Bruce Bartlett, “the (2001) Bush plan was a hodge-podge of tax gimmicks designed more to win the support of various voting blocs than stimulate growth.” After listing the various elements of the tax proposals he then concludes that “The only supply-side element was a modest reduction in the top statutory income tax rate from 39.6 percent to 33 percent..."
"However, the second round of tax cuts under Bush in 2003 was a bit more faithful to the supply-side cause. The second round involved a reduction in the tax rate on both capital gains and dividends to 15 percent, with the dividend cut being particularly large....."
"To the extent that tax cuts are used for something other than investment, economic growth will be lower."
"Economic theory helps us to determine which types of taxes are best in terms of efficiency, but the equity of taxes - who pays them and whether it’s fair - also matters. Questions of equity must be resolved in the political arena, economics cannot help here...."
.......
Bartlett and MT seem to agree here that tax policy should "target" investment for efficiency purposes , i.e. , standard supply-side economics. Whatever can be said about the Bush tax cuts as to how they might have been improved in that regard , they were a supply-side wetdream , and were touted as such at the time of enactment and afterwards. They hugely favored the capital class , and when viable investment opportunities exist , the capital class has a long history of making those investments.
The failure of Bush's policy to result in productive investment points to the choice of the wrong "target". The world has not suffered from a lack of investment capital for a long time , and for a time preceding Bush's term altogether. Sources of demand have been the missing link , and debt bubbles - facilitated by asset bubbles ( housing and , to a lesser degree , equities ) - provided that missing link. We now know that was the wrong solution to that particular problem.
MT says economic theory can tell us about efficiency , but not equity. Current economic theory does neither , but it could do both , at the same time , with a little effort.
The most efficient tax policy in our economy today , one that is 70% consumption-dependent , is one that facilitates a broader distribution of income gains , which would alleviate the demand problem while not restricting the supply side. In other words , the opposite of Bush policies. This also turns out to be more equitable. An economic theory of any worth would show why and when those two things - equity and efficiency - go together. If we all had equal incomes , there would be no incentive , we get that. Similarly if a single person gets all the income. It's a lot like the Laffer curve - where's the sweet spot ? - and economics doesn't say much about what the proper balance should be , but when it does , the thumb is on the scale for the rich.
MT missed a chance to do more with this article.
joe said...
The constant focus on investment as the cure all doesn't make sense. First, investment in equipment and software is increased substantially the past 4 quarters (14.6% 20.4% 24.8% 16.8%). Lack of investment isn't the problem right now. Second, after tax income isn't the primary source of business investment. You have borrowing (interest rates are low) and accumulated wealth (top 10% hold 50% of the nation's wealth). So the negative impact any tax increase has on investment is not clear. Third, Non-residential investment is 1.5 trillion. You need 450 billion of growth (3%) before unemployment starts to fall. You're not going to get that from investment. You'd need investment to increase 30% before you'd see unemployment come down. That's not going to happen when you have commmercial real estate inventory high. It would have to all come from equipment and software. In other words, you need investment in equipment and software to grow at 45% since it's 1 trillion. Not going to happen so investment clearly isn't the sole solution to the economies problem.
anne said...
measuringworth.com
February 22, 2010
Annualized Growth Rates
Clinton
1993 to 1996 Real GDP = 3.44%
1993 to 1996 Real GDP per capita = 2.22%
1997 to 2000 Real GDP = 4.44%
1997 to 2000 Real GDP per capita = 3.26%
1993 to 2000 Real GDP = 4.01%
1993 to 2000 Real GDP per capita = 2.81%
Bush
2001 to 2004 Real GDP = 2.62%
2001 to 2004 Real GDP per capita = 1.68%
2005 to 2008 Real GDP = 1.75%
2005 to 2008 Real GDP per capita = 0.79%
2001 to 2008 Real GDP = 2.31%
2001 to 2008 Real GDP per capita = 1.36% |
