As we heard again last night in the Republican presidential debate, the GOP continues to treat lower taxes as a magic button to be pressed whenever more economic growth is desired, which is to say, always.
The same dogma is being trotted out today, as Republican leaders attack President Obama’s jobs bill, which pays for an immediate boost to the economy in part by reducing future tax loopholes and deductions for the wealthy.
“Not only does it reveal the political nature of this bill,” Senate Minority Leader Mitch McConnell said, “it also reinforces the growing perception that this administration isn’t all that interested in economic policies that will actually work.”
Is there any validity to that charge, or to the Republican belief that tax policy is the single most important factor in determining economic growth and job growth? Let’s turn to history to find out.
Yesterday, I dug out the February 2002 annual report by President Bush’s Council of Economic Advisers, chaired at the time by R. Glenn Hubbard. It makes for interesting reading, particularly with the power of hindsight. For example, the report acknowledges a federal budget deficit in 2002, but predicts that “with spending restraint and pro-growth policies, (the budget) is projected to return to surplus beginning in 2005.” That’s not exactly how things played out.
The report also lauds the recent deregulation of the financial industry, predicting great benefits as a result. “Partly because of increased competition arising from reductions in banking regulations, banks have greatly expanded the financial services they offer customers, including important new tools for diversifying risk,” it claimed. “Together these price declines and quality improvements across a range of deregulated industries have yielded substantial economic benefits.”
As we now know, those “important new tools for diversifying risk,” better known today as derivatives trading, proved to be an economic time bomb.
The report also included a projection of job creation that would occur as a result of the Bush tax cuts adopted in 2001 (another round of cuts would be enacted in 2003). The authors of the report assured readers that the projections were conservative, and likely to be exceeded in actual practice:
“The administration believes that the economy may be able to grow faster than assumed in the budget, once the new tax policy is in place. The reductions in marginal tax rates are expected to lead to increases in labor force participation and increased entrepreneurial activity. The budget, however, uses economic assumptions that are close to the consensus of forecasters. As such, the assumptions provide a prudent, cautious basis for the budget projections.”
So let’s take a look at what the CEA projected would happen as a result of the tax cuts, compared to what actually happened.
The Bush CEA predicted that tax cuts would produce so much growth that by 2010, total nonfarm employment would reach 153.9 million. The actual number was 130.3 million, almost 24 million fewer jobs than projected. In fact, job growth from the end of 2002 to the end of 2010 was so tiny as to not be noticeable.
Even before the Great Recession began, job growth was 10 million below what the CEA had predicted.
Now let’s make another comparison. In 1993, President Clinton passed a significant tax-hike measure that was opposed by every single Republican in the House and the Senate, with Vice President Gore casting the tie-breaking, decisive vote in the Senate. Clinton argued the tax hike was needed to reassure Wall Street that the deficit would not be allowed to go out of control, butNewt Gingrich, among others, predicted disaster as a result.
“I believe that that will in fact kill the current recovery and put us back in a recession,” he said. “It might take one and half or two years, but it will happen.”
Here’s what happened to employment in the nine years after the Clinton tax hike.
The lesson to be drawn is not that tax increases drive job growth, or that tax cuts harm the economy. Such statements both exaggerate the importance of tax policy and grossly oversimplify a complex, multi-faceted international economic system affected by everything from the weather in Argentina to fiscal policy in Greece. They offer the illusion of easy answers when there are none.
– Jay Bookman