Tax Cuts as Scientology
Fred Thompson, the actor who occasionally plays a Senator on C-Span and hopes to play a president sometime soon, recently tried his hand at satire — an easy feat when conservatives write on tax policy. He wrote a piece on the Bush tax cuts for the oracle known as the Wall Street Journal: The results of what he called “the experiment” of the tax cuts of 2001 and 2003, he wrote, “are in. […] Treasury statistics show that tax revenues have soared and the budget deficit has been shrinking faster than even the optimists projected. Since the first tax cuts were passed, when I was in the Senate, the budget deficit has been cut in half.” To be in on the joke, of course, one’s memory would have to rear back a bit further than 2001 and 2003, which is not always the case with American memories, even less so with senatorial ones.
Back in 2000, of course, there was no budget deficit. There was a pretty hefty surplus. There was one in 2001, too, and had Bush not been elected president—had Al Gore been elected, and had he enacted his tax plan—there would have continued to be many more surpluses, all of which would have continued to cut into the national debt. Instead, as the Thompson joke has it, deficits reached record proportions ($412 billion in 2004), deficits that are only now edging back down to non-record, but still massive, proportions.
Still, Thompson and the Journal’s humor can’t let go: “Case Closed: Tax Cuts Mean Growth,” Thompson’s peace was entitled. He wants the Bush tax cuts made permanent. He wasn’t finished with the jokes: “This issue is particularly important now because massive, unfunded entitlements are coming due as the baby-boom generation retires,” Thompson wrote. “We simply cannot afford higher taxes if we want an economy able to bear up under the strain of those obligations. And beyond the issue of our annual federal budget is the nearly $9 trillion national debt that we have not even begun to pay off.” Incidentally, the debt was just over $5 trillion when Clinton left office. It will be nearly double that by the time Bush leaves office. Of course tax cuts mean growth—when you borrow the hell out of your economy and use the federal reserve to manipulate interest rates to near zero, thus enticing homeowners to borrow the hell out of their own assets, too, by refinancing, buying bigger, cashing out equity. The whole thing isn’t just a house of cards. It’s been a housing bubble of cards, and the bills will soon come due.
To make the point, Daniel Altman, who writes the Economic View column for the Sunday Times, polled 177 members of the National Bureau of Economic Research’s program on economic fluctuations and growth. He asked them which factor was the most important for the economic growth from mid-2003 through the end of 2006. Of the 49 economists who responded, just five said the Bush tax cuts could get the credit. A couple of more sensible answers: “I can’t believe you left off the list: superlow interest rates caused by the Federal Reserve,” wrote Alan S. Blinder, a Princeton professor who was vice chairman of the Fed in the mid-1990s. Paul M. Romer of Stanford echoed Professor Blinder’s sentiments. Robert J. Gordon of Northwestern University added: “I hope others tell you that your question is absurd, because it leaves out the most obvious cause — an unprecedented period of negative short-run interest rates that fueled spending on housing, made possible consumer cash-outs through mortgage refinance, and also supported consumer spending more generally.”
Keep in mind, too, that growth was a lot more robust, and job production positively outlandish, in the second half of the 1990s, after the Clinton tax increases of 1993, which were said by conservatives, back then, to presage the end of the world as we know it. Clinton-era growth far outstripped anything the Bush years has produced—including in tax revenue, if you were to adjust for inflation and cumulative effects, as well as in job productivity gains, as well as in the net gains, in wealth, of Americans, as well as in the downward trend of poverty (it’s been going back up since Bush), and many other economic indictaors. So to get back to the original question: did the Bush tax cuts have anything to do with what growth has been experienced in the last few years? Of course not. Not if you believe in the business cycle. Not if you believe in what one economist said quite convincingly: the tax cuts may well have hurt the economy and restrained it from growing to its full potential: “The tax cuts, by increasing uncertainty about how impending fiscal imbalances will be resolved, probably hurt growth, if anything,” said Christopher A. Sims of Princeton.
Make the Bush tax cuts permanent? If you’re into the kind of science fiction scientologists love to peddle, maybe. But exploitation ought to have its limits in the real world.