Saturday, April 16, 2011

Business cycles and the Bush tax cuts

"Anonymous" recently wrote in the Comment section:

"Sorry, but I must disagree. Before the Bush tax cuts the economy was NOT booming. How can you forget the 2001-2002 recession? That's why the tax cuts were enacted in an effort to kickstart the economy."

This is correct. What I should have said is that, at higher tax rates, the economy during the Clinton years was generally very strong if not "booming"; however, starting near the end of Clinton's second term and the beginning of the first Bush term, there was a recessionary period generally considered to be part of a normal business cycle ( growth - leveling off - recession - recovery). Bush, like most Republicans, was not a Keynesian, but he did enact some of the most costly tax cuts during this first term. (Moderate tax cuts and increased government spending are generally part of the Keynesian prescription for ameliorating the recessionary parts of the business cycle.) It is also interesting that these cuts were "temporary" -- there was politics as much as economics involved in their size, distribution and timing. Nevertheless, they were followed by one of the weakest "recoveries" (beginning of a new cycle) in modern times, followed by the worst recession and unemployment since the Great Depression. The Bush Tax Cuts, far from creating a robust economy and new jobs, as the conservative economists -- perhaps disingenuously -- predicted, were part of a disastrous economic policy whose consequences are still being felt. Of course, this disaster was not due solely to the tax cuts, since deregulation of financial speculation, especially in the mortgage industry, played an even larger role; unfunded wars and an unfunded prescription drug plan designed by Big Pharma didn't help either. In fairness, the deregulation, as I have pointed out earlier, was partly Clinton's and his economic advisers' fault.

So, in the context of the normal business cycle, I think it is fair to say that the Clinton years, in which taxation was at or higher than that of Bush I's term, was a period of robust growth and balanced or nearly balanced budgets, while the period after the Bush II cuts saw weak growth then rapid and prolonged downturn, accompanied by a rapid accumulation of debt.

(None of this had anything to do with Obama or health care, incidentally.)

1 comment:

  1. So if Obama just raises tax rates back to Clinton-era rates, then we will return to the go-go 1990's and get out of this mess?? Raising rates will cause businesses to hire more and get unemployment back down to mid-single digits? Very funny. Your basic point on that previous blog was that the economy was fine prior to the tax cuts and then was screwed afterwards, implying that it was the tax cuts that caused today's problem. That was pretty dishonest, or shortsighted to say the least. Don't you think? But at least it makes a good talking point. If you look historically, there's little correlation between tax rates and tax revenues.

    The economy was actually losing jobs in the year-and-a-half period prior to the 2003 tax cuts and GDP growing at a very anemic rate as we were still trying to get out of the recession. In the six quarters following the 2003 tax cuts, job growth turned positive and GDP growth also increased strongly. You'll probably say it was a coincidence but I believe that people respond on the margin to changes in their tax rates.