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View Full Version : did bush's tax cuts help the economy


Wesley Clark
01-21-2004, 10:16 PM
after reading this admittedly biased site

http://www.theangryliberal.com/05-02-03.htm

concrete evidence that the tax cuts were met with higher unemployment was given (its hard to find concrete evidence in politics). Plus there is net job loss in the US last time i checked.

However the economy supposedly grew at a very rapid pace this quarter.

obviously i dont know much about economics, im just looking for info on what bush's tax cuts did to the economy. Did the wealthy actually reinvest their money, leading to growth and job creation (no jobs have been created as far as i can tell) or did they just spend it in ways that didnt benefit the economy.

Sam Stone
01-21-2004, 11:16 PM
They were probably responsible for an extra point or two of GDP growth. The stimulus from deficit spending was probably responsible for another couple of points. Without them, the economy would still be growing, but not at as fast a pace. Maybe a little over half.

On the other hand, at some point that money has to be paid back. And the way it will be paid back will be at the expense of GDP growth at some time in the future. There are no free lunches. It's an open question whether or not it was a wise decision to trade off future growth for immediate stimulus.

That's my SWAG, anyway.

Knorf
01-22-2004, 01:48 AM
I agree. It seems to me the present growth of the economy has the following features:

1) It is the result of a spectacular increase in government spending rather then the result of tax cuts.

2) It has benefited primarily those of whose interests Bush is most concerned with promoting: large corporations, their stockholders, and extremely wealthy people in general. I see no evidence that the so-called improving economy is significantly helping anybody who makes, oh say under $50000 per year. People liek me.

For such a large growth increase of the economy, people should be concerned that this has not coincided with a significant increase in hiring (especially after such a spectacular series of severe quarters of job loss) but that it does coincide with a record increase of the budget deficit.

If this POTUS were a democrat, the conservatives would be screaming for his head over issues like this. Clearly, power and wealth are more important to these poeple than ideals or the long-term health of the U.S.

China Guy
01-22-2004, 02:38 AM
The main driver of the US economy post internet bubble has been mortgage refinancing. This is a function of low interest rates and was the design of the Greenspan fed. Mortgage refinancing pumped a huge amount of money into the US economy over the past few years.

Tax cuts on the other hand did jack for the majority of the US consumers. Many of whom refinanced and therefore had more money to consume with.

Voyager
01-22-2004, 10:59 AM
I'm sure the tax cuts helped some - you can hardly avoid improving the economy after you dump so much money into it. The real question though is whether another policy would have helped more. There are quite a few that might have - more money for infrastructure improvement, tax cuts targeted at people who would actually spend the money, etc. There seemed to be a lot more improvement from the piddling rebate checks last year than from the first round.

I know the mantra is that increasing investment will improve the economy, but when the bubble burst the problem was over-capacity. When half your factory is sitting idle you're not going to invest in more machines - not until you get more customers. In any case, the machines you do invest in might be in China, which isn't helping consumption either.

Anyone thinking the tax cuts were the best solution should divide the amount of the cuts by the number of jobs created, and see what you get. And that is optimistic, since many of those jobs would have come back without the cuts. John McCain called the Republican policy "tax cut and spend" last night on the Daily Show. That sounds about right.

Rashak Mani
01-22-2004, 01:14 PM
One factor no one mentioned that might be responsible for the economic upturn is the devalued dollar... which certainly helps exporting business and reduces imports.

As for the tax cuts... I doubt they directly fueled the expansion. Businessmen might be investing more figuring out future tax cut gains though...

laigle
01-22-2004, 01:25 PM
Sure, they stimulated the economy. In the same way a bunch of uninformed day traders dumping their life savings into Yahoo will stimulate its stock price. The question is whether the deficit spending will stimulate the economy enough (both in percentage growth and duration) to override the interest on the debt incurred, which won't be paid off for a long time judging by past results.

athelas
01-22-2004, 01:44 PM
I'm no economist. But there was great economic improvement after Kennedy's tax cut, and Reagan's tax cut, and now after Bush's tax cut. coincidence does not imply causation, but still. Shrug.

Knorf
01-22-2004, 02:33 PM
Wasn't the big recession during Bush I's administration a direct fallout from Reagan's buildup of the deficit? I think the economy under Reagan grew for similar reasons to those we're facing now: a spectacular buildup of government spending, especially military contracts.

Also, the economy expanded consistently through Clinton's administration, despite the lack of tax cuts and despite his successful efforts to balance the federal budget.

jshore
01-22-2004, 03:20 PM
I'm no economist. But there was great economic improvement after Kennedy's tax cut, and Reagan's tax cut, and now after Bush's tax cut. coincidence does not imply causation, but still. Shrug.

Well, it's worse than that...Correlation particularly doesn't imply causation when it is done very selectively. I.e., if you are sloppy about exactly what time lag is for example. And, if you ignore the extent to which economic cycles play a roll. After all, if tax cuts are generally made at the time of a recession, then growth will follow for much the same reason that some magical pills that I am willing to sell you at a very high price come with a money-back guarantee to alleviate your cold symptoms within 5 to 7 days!

And, then if you ignore counter-evidence like the Clinton increases on marginal tax rates on the wealthy, which were followed by a few super-charged economic years where even the lower part of the economic spectrum made some significant gains for probably the first time in ~20 years, then that helps your argument too. [It would be fun to trot out the WSJ editorial page predictions for economic catastrophe that were no doubt made at the time that Clinton did this!]

That said, when the economy is running "slack" during a recession and you can thus stimulate it without causing inflation or pushing up interest rates, then sure, throwing more money into the economy can't help but stimulate it some! Bush has done this with both tax cuts and spending increases and it is hard to deconvolve one effect from the other. But, I think Voyager put it exactly right...Was this the best policy? I would argue that the tax cuts were about the lowest bang-for-the-buck that you could have possibly created both because the tax cuts went to the wrong people (i.e., too much to the wealthy who don't necessarily go out and spend it right away) and because they are not temporary and thus the costs over time go through the freakin' roof! [And, something in the way they were structured may also be contributing to the fact that the recovery is so strong on GDP and profits but not jobs...Or, it may have to do with structural changes and time lags. At any rate, I predict that these tax cuts will lead to the wealthy's after-tax incomes doing much better than the median's over these next few years.]

At any rate, I think any attempt to do the math on the number of jobs that would be created by these tax cuts (even if you believe the claimed numbers of jobs that would be created...which don't seem to be coming through so far) show that these tax cuts were a very inefficient way to create jobs relative to, say, hiring people directly onto the government payroll. No doubt, this will go down in history as the most expensive economic recovery program ever.

Knorf
01-22-2004, 08:50 PM
By the way, wasn't one of the single greatest drops in stock market history during the Reagan administration? Does anyone besides me recall what happened on Oct.17, 1987?

The DOW dropped 23% that day. It was Wall Street's worst day, ever.

Some reasons given are contained in a quote from this (http://www.pbs.org/newshour/bb/economy/july-dec97/crash_10-17a.html) website:

Indeed, between 1985 and the summer of 1987, the Dow doubled but the bulls turned tail and began to retreat in mid August for various fundamental reasons: the weakening U.S. dollar, lower retail sales, the trade deficit and inflation, both on the rise, and then, the Federal Reserve raised short-term interest rates for the first time in three years. Most observers felt that these economic fundamentals were the reason the market dropped some 215 points from its peak in August through Tuesday, October 13th. Then came more bad news for Wall Street, from a new rise in interest rates to Congress debating a bill to squelch corporate takeovers. In the next three days, the Dow shed another 260 points.
Do these circumstances sound familiar? We don't have much in the way of inflatation, yet, but give it time. What Reagan didn't have to face was the precipitous loss of jobs that has characterized Bush II's time in office. That these jobs are not being recovered could make a crash like Monday, Oct. 17, 1987 have more dire consequences for ordinary Americans than it did then.

Of course Congress and the President mind corporate takeovers a lot less now that was the case then. I'm not saying the situation is exactly the same. But there are some clear parallels, no?

pantom
01-22-2004, 10:44 PM
The Financial Times called it "Crude Keynesianism" in one of their editorials, and that's about right.
The Fed almost immediately got on the case as far as the recession that Bush inherited is concerned, as has been pointed out already. See chart:

Fed Funds Rate from 1998 to Today (http://www.economagic.com/em-cgi/charter.exe/fedstl/fedfunds+1998+2004+0+0+0+290+545++0)

But a mere recession wasn't the biggest problem Bush inherited. That would be this:

The Rapidly Deteriorating Current Account Deficit (http://www.economagic.com/em-cgi/charter.exe/fedstl/bopbca+1990+2004+0+0+0+290+545++0)

If you look at this closely, you'll see the real trouble began around 1998, right around the time of the Asian Crisis. Growth in Asia stalled, and the US was left as one of a very few rapidly growing economies. In that situation, we'll have a decline in our balance of payments, because the rest of the world isn't a very good customer for our exports, but we were still a good customer for theirs.
As can be seen, after a short time early in the Bush Administration when the deficit improved some, it began to deteriorate again. This is due to the fact that the US is once again growing quickly while Europe, for instance, is still stuck in neutral. Our competitiveness is also being deliberately undermined by management of currency levels by Japan, China, India, and others (which helps to explain the jobs situation, as this directly affects outsourcing (China and India) and the trade deficit in goods and services (China, Japan, Malaysia, and others)). The Bush Administration should be aggressively going after this latter problem, but isn't. It should also be jawboning the hell out of the Europeans to lower their interest rates and do whatever else it takes to get out of their slump, but once again, not much is happening there either. The US does exercise considerable influence, and if the government decided to make both of the above big issues with our trade partners, something would have happened by now.
Of course, our credibility is not helped by having a fiscal deficit piled on top of this current account deficit that's also running at half a trillion, which is where the tax cuts come in. Not good. Actually, downright stupid, since whatever savings the US generates, which would normally have gone to covering the current account deficit, are being sucked up by this gaping fiscal hole. So IMO, the tax cuts are not only not doing any good, they are actively making the situation worse.
So, not only is nothing being done to solve either deficit, both are getting worse under this Administration, and they don't seem to be much concerned about it either.
This could end well, especially if Europe finally gets out of its own way, or it could end badly. The outcome will mostly be decided by luck, since the Administration seems to be incapacitated by its tax-cutting ideology.