Fast One

By

When the news broke last week that the economy had grown at a 7.2
percent annual rate last quarter, it didn't take long for President
Bush and his supporters to spring into action. "The tax relief we
passed is working," gloated the president in an Ohio speech.
"democrats won't give bush credit for gains," accused a Washington
Times headline. "Notwithstanding the third quarter's 7.2% growth
boom, Democrats seem undaunted in attacking President Bush's
economic policies," scolded a Wall Street Journal editorial. This
argument has just enough surface plausibility to be taken seriously
by the mainstream media. "Is it time for skeptics to admit they
were wrong about President Bush's tax cuts?" wrote New York Times
economic reporter Edmund L. Andrews in an October 19 column. "To
the surprise of many naysayers, economic data from the past several
months suggests that the $350 billion tax-cut package may indeed
have jolted the economy." Take that, you lousy skeptics!At this point, it's worth recalling what us "naysayers" actually
said. First, we protested that Bush's 2001 tax cut, and the two
that followed, were highly regressive. Certainly nothing has
happened to weaken this case. Second, we predicted the tax cuts
would leave the government strapped at a time when it needed to
prepare for the baby-boomer retirement. With deficits projected to
total $5 trillion over the next decade, I'd say we've been
vindicated on this point. And, finally, we argued that, in the long
run, higher debt would harm the economy. By "the long run," I
should note, we didn't mean "the third quarter of 2003."

Alas, it was inevitable that the first quarter of rapid growth,
whenever it came, would bring demands that tax-cut critics repent.
Yet it's not as if Bush has brought about a particularly fast
recovery. We've endured three years of subpar growth--the longest
stretch since the early '80s. People have been predicting a
recovery for more than a year. ("the hot-and-cold recovery could
warm up soon," one BusinessWeek headline forecast twelve months
ago.) So the mere fact of a recovery--assuming we're in one--tells
us little. Every economic downturn in the history of the United
States has ended at some point. That's why they call it the
"business cycle." I suppose it would be possible for the downturn
not to end, but that would basically require our civilization to
disappear from the face of the earth, like Sumer. To credit Bush
with avoiding this outcome sets the bar awfully low.

Now, did the tax cuts hasten the recovery? Almost certainly they
did. But, again, few suggested otherwise. Allow me to quote myself.
"This is not to say Bush's tax cut wouldn't boost consumer demand
at all," I wrote in these pages last June. "It would." The debate
wasn't over whether the tax cut would boost the economy; it was
over how best to do so. Bush and his allies thought the economy had
a long-term problem (high Clinton-era tax rates were discouraging
investors and entrepreneurs from innovating and investing) that
required a long- term solution (permanently cut upper-bracket tax
rates and eliminate the estate tax). Democrats thought the economy
had a short-term problem (consumer demand was too low), so they
countered with a short-term solution (put more cash in people's
pockets immediately through middle-class rebates, temporary
business- investment credits, and aid to states). The tax cuts
Congress passed ended up combining both elements but included far
less short-term stimulus than liberals wanted. But, again, that we
could have ended the slowdown sooner was the secondary objection.
The main objection was that we could have done so with short-term
measures that didn't mortgage our economic future.

Indeed, the tax cuts are buying relatively little gain considering
their enormous price. Earlier this year, Economy.com, a nonpartisan
forecasting group, calculated the "bang for the buck" of various
stimulus proposals. Those favored by Democrats tended to have high
scores--for instance, extending emergency unemployment benefits by
a dollar would boost GDP by $1.73. Those favored by Bush tended to
have lower scores--a dollar spent reducing the dividend tax would
raise GDP by nine cents. The administration's Council of Economic
Advisers predicted the tax cuts would produce 1.4 million new jobs.
Given the tax cut's $700 billion or more ten-year cost, opponents
pointed out, this came out to some half a million dollars per new
job. And, even if employment picks up, as it should, we probably
won't get a million new jobs, which would drive the dollars-per-job
figure even higher.

It's therefore a bit galling that Bush and his allies are performing
a victory dance. But it's not terribly surprising. The Bush
administration has elevated the non-falsifiable argument into a
kind of comic art form--witness the president's claim that violence
in Iraq means we're winning. Nowhere is this more true than in the
defense of its tax cuts. In 1999, Bush put forward his tax-cut plan
as an "insurance policy" for a booming economy. In the two years
after it passed, he lambasted skeptics on the grounds that "raising
taxes in the midst of a recession is wrong economic policy." His
new line is that, "just as the economy is coming around, some over
in Washington say now is the time to raise taxes."

Since neither the administration nor its supporters would ever
concede any real-world circumstances under which the tax cuts could
be said to have failed, allow me to set out the circumstances under
which they should be said to have succeeded. If the economy grows
at a faster sustainable rate at the peak of this business cycle
than it did during the last business cycle because newly
incentivized high-income households worked more, if tax revenue
reach the level they were projected to reach before the tax cuts,
and if the share of federal taxes paid by workers at the middle and
bottom of the spectrum doesn't rise, then I'll admit the tax cuts
worked. But one good quarter hardly cuts it.

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