Bush Tax Cuts: Where Was the Growth?
I say kudos to Erick Erickson for not simply relying on lazy anti-tax rhetoric and actually attempting to delve in and make the case that the Bush administration’s tax policies led to; good macroeconomic outcomes. Unfortunately, this kind of analysis doesn’t tell you very much: “More crucially, after the 2001 initial tax cuts, the annual growth rate went from 0.3% in 2001 to 2.5% in 2002. By 2004, GDP growth was the highest in 20 years.”
It’s true, Bush took office at the tail of a recession and then the recession ended and the economy was growing. But as my colleague Michael Ettlinger and EPI’s John Irons detailed in their excellent September 2008 paper “Take a Walk on the Supply Side” if you compare the Bush era to the relatively high tax Clinton era it looks quite bad:
One frequent thing to do is to measure economic activity from business cycle peak to business cycle peak. And we see that the era during which Bush’s tax policies prevailed was the first in which median household income declined:
In essence, we’re looking at the worst peak-to-peak economic performance ever, followed immediately by the worst recession since World War II.
50 Responses to “Bush Tax Cuts: Where Was the Growth?”
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July 27th, 2010 at 1:48 pm
It seems to me that supporters of Keynesian fiscal stimulus ought to be opposed to letting the Bush tax cuts expire. True, tax cuts might not have as much stimulative effect as more government spending, but they have the advantage that you could get Republicans to go along with a tax cut stimulus whereas they won’t go for more government spending.
July 27th, 2010 at 1:50 pm
Btw, accepting this argument doesn’t require you to believe that the tax cuts were a good idea to begin with.
July 27th, 2010 at 1:59 pm
Why is it so hard, even for convervatives (not normally the brightest lights in the room) to understand that the best guarantor of long-term economic growth is to have a large and growing customer base that is able to buy and consume the things you produce? And that one of the quickest and easiest ways to do that is to have a progressive system of taxation?
July 27th, 2010 at 1:59 pm
I would say that they best way would be what I heard a Moody’s analyst say on television yesterday which was to let the Bush tax cuts expire slowly instead of repealing them all at once. I think that maybe you might get at least a few Republicans on board that way. If you want more politics and policy check out my blog: http://wwwstangblog.blogspot.com
July 27th, 2010 at 2:00 pm
We are, blackadder. The Democrats are pushing a bill to extend most of the Bush tax cuts past January, just as they held off on implementing Obama’s proposal to raise taxes on the top 1% of earners, because of the economy.
As for “getting Republicans to go along,” that’s why the deficit-reducing plan to allow the cuts to expire for the very rich is included. I’ve been told that Republicans hate deficits. We’ll see.
July 27th, 2010 at 2:00 pm
These charts remind me of the .com bubble, don’t know if thats why the trends were so high in the 90s, but thats what it reminds me of.
July 27th, 2010 at 2:07 pm
It’s true, Bush took office at the tail of a recession
No, it’s not true. Cheney kind of famously very early on tried to lead with a meme that Bush “inherited” a recession – however the NBER called the 2001 recession as beginning in March 2001 and lasting through November 2001.
Bad enough when the Bushies try and rewrite history – but now MY??
July 27th, 2010 at 2:22 pm
Looking at household wages and not total compensation, i.e. not including the amount of wages people receive as health insurance instead of cash, is worthless.
July 27th, 2010 at 2:24 pm
Actually, yeah, supporters of Keynesian stimulus do support tax cuts, but for the poor and middle class — you know, the people who will actually put the money back into the economy immediately rather than the rich who invest it for benefits 20 years from now.
July 27th, 2010 at 2:29 pm
It’s true, Bush took office at the tail end of a recession…
Not it’s not true. According to the NBER’s Business Cycle Dating Committee, US business activity peaked in March 2001, and thus it pegs March 2001 as the start of that recession — therefore, the recession had not even begun when Bush assumed office. He didn’t preside over it’s tail end, but over its beginning.
I suppose this mistake shows how hard it is for even well-informed liberal bloggers not to fall prey to a constantly repeated lie….
July 27th, 2010 at 2:32 pm
I see andy got there before me….
July 27th, 2010 at 2:34 pm
andy, you’re right, and Matt shouldn’t have said “took office at the tail of a recession”.
But given the inertia of the economy we can probably guess that the recession was pretty much inevitable — Bush didn’t somehow cause it by any of his actions between late Jan. and early March. He shouldn’t be blamed for the 2001 recession, though he should be blamed for the highly regressive character of the recovery from that recession, and for the collapse of 2008.
July 27th, 2010 at 2:49 pm
someone is seriously trying to make a case that the bush tax cuts were a success? when they never met their own forecasts? i’m not talking about some meany pointy-headed liberal moving the goalposts: i mean they never met their OWN forecasts.
how can anyone defend this?
July 27th, 2010 at 3:00 pm
I was with you until the last line – I always get suspicious when I see comparisons to median household income. It seems to me the most substantial investment most Americans have made in the last 35 years is in their personal independence – comparing the median nuclear family w/children income to present day households is apples to oranges.
July 27th, 2010 at 3:00 pm
“someone is seriously trying to make a case that the bush tax cuts were a success? when they never met their own forecasts? i’m not talking about some meany pointy-headed liberal moving the goalposts: i mean they never met their OWN forecasts.
how can anyone defend this?”
Much like the “stimulus.”
July 27th, 2010 at 3:04 pm
as a matter of fact, brad, that’s not the case: what was wrong in the stimulus projections was an incorrect (overly optimistic) view of how low the bottom would be.
as study after study has demonstrated, the stimulus did deliver on its goals: it lifted gdp and employment by the amounts promised. it simply (and dramatically, and entirely as an own goal, without question) misread where the start point would be.
this wasn’t the case for the bush tax cuts: they had specific expectations of job growth and gdp growth that were not met period, having nothing to do with the starting line.
July 27th, 2010 at 3:07 pm
Swedish and Finnish supply side reforms in the 1990thies seem to have worked quite good
.
July 27th, 2010 at 3:12 pm
Say what?
July 27th, 2010 at 3:23 pm
Popi had it right the first time with that whole VooDoo Economics comment and an insistence that the Bush tax cuts “worked” is as absurd as the insistence that the Obama stimulus worked. Judging by their own markers they both failed.
Clinton got lucky with a tech bubble and getting out just as it began to seriously drag the economy.
Bush got lucky with 9-11 which allowed for horribly bad economic/foreign policy which nonetheless pumped tons o’ money into the economy and enabled the real estate bubble.
Obama needs a war, a real war, and Iran is on the horizon.
We are doomed.
July 27th, 2010 at 3:37 pm
I never noticed that every decline in median household income was followed by a recession, and every recession followed a decline in median household income. These periods of decreasing median income were not necessarily periods of increasing unemployment. Sometimes unemployment declined along with income.
July 27th, 2010 at 3:48 pm
I agree, though I wouldn’t hold him completely blameless in the timing of the recession.
Six months before the 2000 election, I sold the bulk of my stock indexed funds and bought bond indexed funds and waited for the crash. I didn’t have much confidence in Bush or Gore (though I greatly preferred Gore). I think confidence that Clinton was competent delayed a recession. The fact that most people – Republicans included – believed we were getting a significantly less competent president regardless of the results affected the timing of the economic decline. It would have happened eventually, but if people were confident that Clinton’s successor was going to be suitable for the job, it might have been delayed further.
July 27th, 2010 at 4:01 pm
Yeah, as always, when you leave out a huge and rapidly growing part of the compensation picture, you end up with a misleading story. Maybe liberals like to be lied to, and Matt serves a useful purpose. In any case, I expect all these stupid metrics will go away soon enough, because in every single case the current president is demonstrating that there’s no floor below which he can’t sink.
July 27th, 2010 at 4:07 pm
All of which is part of a long term trend – in the immediate aftermath of WWII, the US was the only economy left standing – after that peak, there was nowhere to go but down.
Having said that, watching the left ignore the abject failure of “stimulus” and “change” would be amusing, if it wasn’t for all the damage being done.
July 27th, 2010 at 4:07 pm
Boy, hourly earnings sure take a dive halfway through Clinton’s term. Bush has 9/11 and the credit crunch reflected in his graph. Clinton has nothing but good times and smooth sailing. I wonder what happened?
July 27th, 2010 at 4:21 pm
shooter242, at least try and read graphs accurately. there is a period of “dive” in hourly earnings during the ’80s; there is a period of “dive” in hourly earnings during the ’00s; there is no “dive” in hourly earnings during the ’90s, simply a period of “levelling off” followed by a dramatic “rise” in hourly earnings.
so unsurprisingly, the rest of your comments make no sense….
July 27th, 2010 at 4:32 pm
That’s the rate of increase, shooter. Wages are the graph on the right.
Wages didn’t decline until 2000, and they didn’t decline much.
Let me guess, on the weekends you work part time as a pinata.
July 27th, 2010 at 4:50 pm
“brewmn” You’re a dim bulb and those like you are going still flickering in the burning of our country by Obamanomics. I’ll put it in terms even a liberal can understand….. you can’t redistribute wealth by taxation or in other terms, robbing from the rich to give to the “Poor”. This might have worked in the mythical tale of Robin Hood, but doesn’t prove out in real life. The liberals started giving away money back in the 60’s and have been increasing the amount each year. The poor aren’t any richer and many refuse to work because they’ve learned to live on the government dole. A flat tax is a fair tax, but fair is a dirty four letter word to you libs!
July 27th, 2010 at 4:53 pm
I read Ericksen’s piece at Redstate today while looking for something else, and I was shocked, shocked to find that he either is terrifically ignorant of his subject mater or a bald-faced liar.
I’ll give one example: he says (and yes, he DOES ignore the Buch cuts not meeting any one of their own metrics for success) that after the Buch tax cuts, “the rich paid more taxes than ever,” ignoring or eliding the facts that both their incomes in dollars and their share of the national income went WAY up during the Bush years. Of course, this is all solely about federal income tax, which is a misleading view in the first place.
Yes, they paid more taxes; because they made much more money. Yes, they now pay larger percentage of the tax revenue dollar flow, because they make a much larger share of the total national income. Well, duh.
But Ericksen touts it as the success of the Bush plan. And, in a way, it is.
July 27th, 2010 at 5:47 pm
Yeah shooter, except for totally misreading the graph, you nailed it.
July 27th, 2010 at 7:12 pm
to elaborate on howard’s point, the left-hand graph is the rate of change, which is positive throughout Clinton’s term. The right-hand graph is hourly earnings, which go up throughout Clinton’s term, though they would level off somewhat after the five-year period that is shown.
July 27th, 2010 at 10:39 pm
Clinton got lucky with a tech bubble and getting out just as it began to seriously drag the economy.
Why didn’t his administration and the Democrats in Congress while Bush was president, create the tech boom, like FDR, Ike, and JFK/LBJ created the tech boom of the 50s, the 60s, the 70s, and the more sluggish boom of the 80s?
And Gore was promising a tech energy boom for the 21st century, but that was opposed, and Obama has been trying to get by the Republicans for an energy tech boom.
And don’t bitch about energy tech costing too much money, the tech boom was delivering products that cost more than the standard way of doing business, and it required massive amounts of capital investment.
Think about this: how much did your father or grandfather pay for cell phone service? How much for broadband access?
Very few people needed to spend the huge amounts of extra money for cable, then broadband, for cell phones. And the earliest of all of these cost a lot of money compared to what they replaced.
The motor car cost a lot more to society because they placed new demands on infrastructure – where roads were dirt roads suitable for horses, cars caused drastic increases in investment in roads which cost everyone, even those who couldn’t afford to replace their horse with a motor car.
The conservatives have been blocking energy technology innovation because they are like their peers who were passing laws to block the use of motor cars or requiring that motor cars have a man with a warning flag precede the car as it drove down the street.
But the important point is that the tax hikes of Bush and Clinton in 1990 and 1993 either boosted employment growth, or didn’t harm it. The many Bush tax cuts in 2001, 2002, 2003, 2004, 2006, 2008 either slashed payrolls or did nothing to prevent the job losses.
But if we look at the 80s, Reagan took office with job growth going on for six month until he signed his 1981 tax cut, and employment feel for 16-7 months until Reagan signed the first of 5-6 tax hikes, and employment grew steadily after and while he was hiking taxes.
Hoover and FDR hiked taxes multiple times in the 30s, with the top rate going up to 70% and then 90%, and yet employment increased well over 5% annually, a rate of job creation that hasn’t been seen at any time since 1950.
The chart that should have been included above is the employment rate chart, or a job rate loss and creation rate chart from the time of the tax cut or tax hike.
From an employment standpoint, nothing justifies tax cuts as having positive economic value.
July 27th, 2010 at 10:55 pm
What does it matter what president did what to whom. We had a dot.com bubble in the 90’s that burst, we had a housing bubble in the 00’s that burst. To argue for Clinton tax policy now is plain ignorance. The world was quite different then. Russia was falling apart, China was still backwards, and India had no roads. We had no Internet or even Cell phones really. Money can move all across the world now. We do not have a revenue problem, we have a spending problem. To raise taxes without cutting spending big time is a waste of good paper and votes. Liberals just keep arguing for bigger govt. You are not only destroying the country, but the entire world with it. Also, the point made earlier that house hold income is not a valid metric is right on. There is nothing consistent about this number from week to week, let alone decade to decade. And if the rich were making so much money, why didn’t average household income actually go up? It is a stupid metric. I’m not clear what the metric should be, but certainly not the one that was used. The bottom line is liberals are jealous of the rich. Tax them, tax them high. Does it really matter that the top 1% sees their taxes raised and everyone else gets their’s cut? What does that accomplish except for liberals to feel so good about themselves. Maybe it buys a little more vacation time for the Commander in Chief.
July 27th, 2010 at 11:02 pm
Another good point: As baby-boomers retire, which they have been over the past decade in greater numbers their family incomes drop. Gosh, maybe that is why GWB is being blamed by the author for his failure to raise all boats. If Dems raise taxes they are done. If they don’t raise taxes they are done. I guess they are just done.
July 28th, 2010 at 6:18 am
Re: The world was quite different then. Russia was falling apart, China was still backwards
In 1995 I briefly attempted to boycott Chinese-made goods because of China;s awful human rights record. I couldnlt do it. Even back then there were whole classes of goods for which you could not find anything not made in China.
Also, the dot-com bust was very different fropm the housing bust. The dot-com bubble was based on solid growth, on a major technological transformation; it was simply froth on the top– but yes, the late 90s economy did overheat, and there had to be a reckoning. (One reason for this was the Y2K hysteria which had companies throwing huge wads of cash at a legitimate but middling problem– they used up their investment seed-corn for the next several years). What’s more, just about every other sector of the 90’s ecobomy boomed along with tech. The housing bubble, besides being massively larger, gave us a bunch of housing we realy did not need and merely masked weakness throughout the rest of the economy.
July 28th, 2010 at 9:18 am
Real world data, available to all, clearly show Erickson is
making stuff up:
http://krugman.blogs.nytimes.com/2010/07/28/tax-cut-truthiness/
July 28th, 2010 at 9:31 am
You write “It’s true.” No it’s not. GDP growth reached 2.5% in 2002, but in 2004 it was not the highest in 20 years. Watch out. Paul Krugman sent me here.
I propose a reverse Breitbart, and suggest you cut off Erickson’s false claim (which I would have thought was obviously nonsense).
July 28th, 2010 at 9:35 am
Mr. Yglesias conveniently forgets that Clinton went center right after the Dem trounce of 1994. Thereafter, Bill Republican commandeered the Conservative agenda; which led to controlling welfare, reduced spending, etc. Bill became quite conservative to save his political skin–a net gain for the American economy. And, yes, tax cuts do stimulate the economy. You left out the Reagan tax cuts and the prosperity that followed. Remember the “decade of greed”? That was sound policy, which led to prosperity–what Democrats call greed, when fostered by Republican action. Tell me I’m wrong.
July 28th, 2010 at 9:37 am
Does it really matter that the top 1% sees their taxes raised and everyone else gets their’s cut? What does that accomplish except for liberals to feel so good about themselves.
It accomplishes more money for everyone but the top 1%. Jeezum crow. I’d ask if you were retarded, but that’d be an insult to retarded people.
July 28th, 2010 at 9:51 am
[...] Tax Cuts: Where Was the Growth? (Think Progress) Matt Yglesias argues that, contrary to some conservative claims, economic performance during the [...]
July 28th, 2010 at 10:00 am
Yes, kudos to Erick for making a case with numbers. Of course, as Paul Krugman explains today, his numbers are fraudulentm but at least he took the time to lie about his numbers…
July 28th, 2010 at 10:13 am
Directed at anyone who thinks we should use “total compensation” not income.
I understand the point about total compensation vs. income argument. Total compensation seems like a reasonable measure. But medical costs have exploded, and thus, our health insurance contributions have exploded too. What you’re saying is that the explosion in medical costs has made us much much richer. “hey look! it costs way more to get health insurance which means we’re all rich!” is a pretty silly argument.
I assume you’re actual argument is that medical costs have exploded and we’re so much richer that we’ve managed to pay for them. Or, in a sense, you’re saying, “you’ve actually gotten a bunch of huge raises, its just that every last cent of it went to your medical insurance provider.”
Well, gee, heck of a raise there boss. Thank you. it seems like money is just being funneled through me. It seems more like I’m laundering funds than getting a raise.
Quick anecdote. I had a job in Canada. My employer paid $600 per year to buy me into the provincial health care system as a foreigner. Back in the US, my employer pays something like $1,700 a year for my insurance (I think…not sure). By your account, I made $1,100 more in the US, when really, its just that US health care costs are much higher. To conflate those higher costs with my income seems improper. Yet you say that anyone who doesn’t is “lying”. Thats a bit of a stretch for sure.
Its also hard to convince me that that higher insurance burden from my US firm should be considered an increase in income for me. In Canada that $600 paid for everything when I got sick, whereas in the US, I had to spend $5,000 out of my own pocket, despite my insurance, to pay my medical bills. That $1,100 in “extra” compensation didn’t seem to buy me anything but a $5,000 medical bill. Please don’t tell me that I was actually making more money in the second case.
July 28th, 2010 at 10:53 am
This line:
“It’s true, Bush took office at the tail of a recession and then the recession ended and the economy was growing.”
Should have read:
“It’s true, Bush took office being handed a recession by the previous administration and then 8 months into his first year 9/11 happened.”
As far as the economy goes, the recession Clinton handed to him was minor compared with the attacks on 9/11. Lefties seem to want to forget what a major blow they were to our economy. They fail to give Bush and the GOP credit for enacting tax cuts and other stimuli that helped us recover.
July 28th, 2010 at 11:02 am
In order to understand the conservative mind on economics one has to reject the core truth of economics: That, no matter how an economy is organized, an economy is only successful when it serves the needs of the majority of the population which adopts it.
Conservatives act on the notion that economies only serve those who have no conscience, no filters to how they go about making money, and that society has no rights to impose a moral code on or to expect fair participation in the national economy.
July 28th, 2010 at 11:05 am
If the “stimulus” was supposed to reduce unemployment to 8% but it is nearly 10%, Obama argues “well it could have been 12%.”
So whatever the growth fueled by the tax cuts was (and it wasn’t bad coming off 9/11), will liberals accept their own side’s argument that without them things could have been worse?
July 28th, 2010 at 11:15 am
As I believe I am the only conservative and an Economist (I am working towards a PhD.) I will argue that these graphs are ineffective because they are using time series which shows predictive power not causation/correlation. There are several omitted variables such as the fact the the US was outsourcing at a higher level than ever before. In order to show whether tax reductions stimulate growth you would need to regress growth on taxes holding constant all other factors in order to make a definate conclusion about causality. My Equation would include GDPi= c+TaxRatei+ui. This would be a panel model with multiple country GDP growth on overall tax rate world wide. If the issue is taxes let’s solve this cookie once and for all; meaning lets actually adjust for state and time fixed effects and show the effects of tax rates on average as more of a rule than a matter of speculation.
July 28th, 2010 at 1:48 pm
Your analysis (as well as Erick’s) is myopic, ignorant to the point of idiocy, and transparently partisan.
Is your personal economic situation at this moment entirely, or even mostly, the result of events that occurred within the last 4 years? Mine isn’t. No one’s is. And neither is the overall economic situation of the entire country. The economic conditions at any point in time stem from causes stretching back decades.
How would the history of the year 2008 have been different if Glass-Steagall hadn’t been repealed in 1998? If there had never been a mortgage interest tax deduction? If the United States had never funded the Mujahideen in Afghanistan or invaded Iraq in 1991? If the Smoot-Hawley tariff had never been enacted?
We can be a little more empirical about debating the merits of this or that policy. But the idea that we can look at economic data during Democratic administrations and compare it to economic data during Republican administrations and from there conclude that one or the other party has a better economic policy, that the economic conditions in year N are mostly attributable to the policies favored by the president elected in year N-4, is an oversimplification. It is every bit as asinine as the idea that cutting taxes raises revenue. If you find yourself buying it, slap yourself. You’re not convincing anyone. There are a thousand better ways to criticize Bush.
July 28th, 2010 at 2:45 pm
These graphs look pretty fact-based to me. When did the Republican Party stop using facts to support their opinion?
And, bwt, as a former Republican (B.B.) —
Whose “brilliant” idea is it to have Andrew Breitbart welcomed onto the stage with the head of the National Republican Party????
July 28th, 2010 at 3:39 pm
Despite what Feudalists want to believe, 9/11 had very little long term economic effect. http://www.fas.org/irp/crs/RL31617.pdf.
July 28th, 2010 at 5:54 pm
#44 – EJM, most agree the tax cuts helped the economy but the Republicans claim much more than that. They claim they paid for themselves and attribute all the economic growth to the tax cuts.
July 28th, 2010 at 9:02 pm
Blackaddr )1, 2): the tax cuts are unrelated to economic stimulus at this point (Romer & Romer notwithstanding). The tax cuts’ impact is on the upper part of the income spectrum. That group doesn’t spend money that it saves through reduced taxes. (Snide comment: The very upper echelon tries to park that money in offshore UBS accounts, or ‘donate’ it to family trusts.)
Tax cuts for the lower end would be effective at stimulating growth, though not that much since the unemployed don’t pay too much in taxes. (I’m not sure at what point EIC comes into play.) But better by far would be a significant increase in unemployment benefits, where the money will immediately spur the economy since the unemployed are usually getting much less than they need to even pay current bills. Unemployment benefits would go directly into the economy.
Letting the tax cuts expire WILL reduce future public debt, which is a significant benefit at this point. This would not normally be the time to focus on reducing the debt. But since the tax cuts won’t by themselves grow GDP, and stimulus spending is unlikely, may as well reduce the debt load as we can.
I am concerned that a wind-down of the wars in Iraq and Afghanistan will result in a net reduction in spending, which could reduce growth. But of course, it is a moral question that can’t be equivocated. But perhaps we could shift the money from buying explosives (which don’t contribute to future growth) to infrastructure….