Saturday, March 06, 2004

Taxes and the Economy

At the end of January 1993, right after the inauguration of Clinton, the official unemployment rate was set at 7.3%. In October 1996, right before the election, the rate had fallen to 5.2%.

The centerpiece of Clinton's economic plan was his deficit reduction plan, which included both tax increases and a determination to restraint spending growth. The tax increase of 1993 raised top marginal rates from 31% to 39%. It removed the income cap on Medicare taxation. It also expanded the EITC for low income families. For the vast majority of taxpayers, the 1993 plan had zero effect on their federal tax burden.

At the time, we all remember, the Republicans predicted that the Clinton tax increases would bring on an economic armageddon. They didn't, but if the economy had tanked or failed to recover for whatever reason, in 1996 every Republican would have blamed it on the tax increases, because as we all know tax increases are bad for the economy. Whether deserved or not, that would have been the media narrative of the 1996 election.

When George Bush came into office in January 2001, the unemployment rate stood at 4.2%. Bush campaigned for tax cuts first because there was plenty of money to go around, and then because we were slipping into recession, and then because we were in recession.

The rate reached a high of 6.3% in June 2003, and has since fallen to 5.6%. Comparatively, that isn't particularly high - but the number itself masks a lot of other things which point to an extended period of a soft labor market.

It's clear the Bushies were pinning this campaign season on some good job numbers - if they get them they would "prove" that tax cuts were working, and they'd campaign for yet another round of cuts. Perfect in an election year. But, despite their hopes, the December, January, and February numbers were all quite disappointing. And, fortunately, the press is finally starting to get a wee bit smarter (except for Pravda on the Hudson) about the jobs numbers making it more difficult for the Republicans to spin them.

But, no matter what happens with the economy this year, the media will never allow the narrative to be "the Bush tax cuts caused the poor economy" the way "the Clinton tax increases caused the poor economy" would have been the narrative in 1996 if it had been the case. Why? Because, "we all know" that tax cuts are good for the economy and tax increases are bad for the economy. The media has internalized this as a basic fact, even though there's no reason to think it to be true. The golden years of the US economy, 1945-1973, coincided with the period of record high top marginal tax rates.

Did the Bush tax cuts "cause" a sluggish economy? It's doubtful, but what we can say with some certainty is that they spent a lot of money and don't have much to show for it. And, now, there's nothing more they can do. Greenspan can't lower rates anymore. Any further deficit spending would likely have fairly strong negative consequences, even if it were used for truly stimulative policies. It's likely the economy will lumber a long a little while longer and eventually start to improve. However, a sudden negative shock to the economy -- oil price shock, terrorist attack, natural disaster, international unrest -- could be much more disastrous than normal because the fiscal and monetary policy gas pedals are both pushed down all the way.

They gambled it all and so far they've lost. If double 0 shows up on the next spin we could be truly screwed.