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Another Spineless Sunday: The Economics of Tax Cut v. Spend

25 January 2009 6 Comments
money1This Sunday morning’s chatterfest was filled with deep and informed discussions about the relative merits of cutting taxes versus spending tax money as a way to get the economy on track.
OK I’m lying. From one gasbag to the next politicians and their economic enablers were allowed to make rather grand statements without worry of being confronted with any facts about what history has shown to be most effective.
On Fox News Sunday Senator John McCain said, “We need to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes. We need to cut payroll taxes. We need to cut business taxes.” Host Chris Wallace moved on.
The idea that tax cuts (especially the ones on the high-income Americans that Bush got through early in his first term and are set to expire shortly) will stimulate the economy as well or better than direct government spending has been refuted by a wide range of economists from the liberal to conservative end of the spectrum.

That being said we’re the first to admit economics is obviously not a science and one can find a tenured economist to support virtually any whacky idea one might want to espouse.
Still how hard would it have been for Wallace to at least push back a little on this bit of conventional Republican wisdom that is simply not true? Maybe he didn’t see one of the most important, simple, and telling charts any publication has created in years.
If you missed the Business section of the NYTimes on Friday you missed the kind of clear demonstration of facts that all the economists in the world spewing all their mumbo jumbo can’t cloud. In two of the only really important measurements of the economy — growth and job growth (because otherwise what’s the point of having an economy, right?) — the last eight years have been the worst since Dwight David Eisenhower was sworn into office in 1953.
Did the huge tax cuts President Bush pushed through at the beginning of his term cause this? If economics was that simple they wouldn’t give out Nobel Prizes for it.
Indeed there are many explanations given — 9/11, tech bubble bursting, expensive war spending — but compare how the US economy has grown and how many jobs were created in the last 8 years with the same stats for other eight year periods and then look at what was happening with taxes during those eight years. This helpful chart shows the Federal tax burden as a share of the Gross Domestic Product (it’s the bright blue line).
Here’s what history shows (leaving Eisenhower out of this since tax rates were adjusted frequently in the belief that that was a good way to fine-tune the economy): When the relative tax burden decreases by a modest amount (Reagan, Kennedy) the economy has done well. When the relative tax burden has increased the economy has done well (Clinton, Carter). But when the relative tax burden has been substantially cut (Nixon, GW Bush) the economy has underperformed.
Why can’t we ever look at past experience as a guide to how our actions will effect the future?
The Sunday Washington Post seems to have skipped history class as well and David Gregory was no tougher on Meet the Press with his guest Republican House Minority Leader John Boehner who stuck to the same theme and then attacked the idea of sending Federal money to the states: “But providing $300 billion of this package to states–$166 billion in direct aid to the states, another $140 billion in education funding–this is not going to do anything, anything to stimulate our economy, to help the–our ailing economy. And so at the end of the day, it has to be targeted. It’s about preserving jobs and creating new jobs.”
That stunner went unquestioned by Gregory. Here are some helpful facts: The Center on Budget and Policy Priorities reports 45 states are now facing budget shortfalls meaning either program cuts or tax hikes. Cuts would mean further layoffs. Tax hikes would, according to many of the same economists unhappy with the stimulus package proposal, further hurt the economy. Both Republican and Democratic governors have said Federal help is necessary to prevent these outcomes.
So when Boehner says in one sentence the state aid won’t do anything to help “our ailing economy” and in the very next breath says the stimulus has to be about “preserving jobs” Gregory lets him get away with complete head-spinning hypocracy.
Of course it’s also worth asking why Democrats are intent on telling the states exactly how to spend the money (if Albany wants to spend money on family planning and Birmingham doesn’t isn’t that their business?) and ABC’s George Stephanopoulos had the chance to do just that in his “exculsive” interview with House Speaker Nancy Pelosi.
STEPHANOPOULOS: Hundreds of millions of dollars to expand family planning services. How is that stimulus?
PELOSI: Well, the family planning services reduce cost. They reduce cost. The states are in terrible fiscal budget crises now and part of what we do for children’s health, education and some of those elements are to help the states meet their financial needs. One of those – one of the initiatives you mentioned, the contraception, will reduce costs to the states and to the federal government.
STEPHANOPOULOS: So no apologies for that?
PELOSI: No apologies. No. we have to deal with the consequences of the downturn in our economy. Food stamps, unemployment insurance, some of the initiatives you just mentioned. what the economists have told us from right to left. There is more bang for the buck, a term they use, by investing in food stamps and in unemployment insurance than in any tax cut. Nonetheless, we are committed to the tax cuts because they do have a positive impact on the economy even though not as big as the investments.
No apologies? George, this isn’t a Nirvana songfest. Why not at least ask her, if economists “right and left” say spending is more effective than tax cuts, why Democrats have shifted the stimulus package to be nearly 40% tax cuts? Obviously it’s to get Republican and blue dog Dem support but make her say that.
Where’s Russert when we need him?
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