It’s The Tax Cuts, Stupid – Part Two
Donald Luskin, in a story briefly remarked upon by one of my commenters, makes a persuasive case that the current economic boom flows directly from the Bush tax cuts. Luskin first notes that, under ‘official’ definitions, the last recession ended in November, 2001. The real growth, however, began when the Bush tax cuts were enacted into law:
In the 17 months from November 2001 (NBER’s official recession end-date) to April 2003 (my proposed recession end-date), real GDP grew 3.2 percent. But in the 36 months from April 2003 to now, real GDP has grown much more: 11.3 percent.
From November 2001 to April 2003 the unemployment rate actually went up — from 5.5 percent to 6 percent. And 1 million payroll jobs were destroyed. Talk about a jobless recovery! But from April 2003 to now, the unemployment rate has fallen to 4.7 percent and 5.1 million payroll jobs have been created.
From November 2001 to April 2003 the S&P 500 fell 18 percent. Some bull market! But from April 2003 to now, it is up 51percent. Now that’s a bull market.
From November 2001 to April 2003 corporate earnings grew a paltry 7 percent. But from April 2003 to present they’ve grown a stunning 56 percent, and are now at all-time highs.
From November 2001 to April 2003 manufacturers’ new orders fell 5 percent and private sector non-residential fixed investment fell 1 percent. Not exactly a big vote of confidence in growth. But from April 2003 to now, new orders have swelled 38 percent and fixed investment has surged 35 percent.
From November 2001 to April 2003 federal income tax receipts fell 11 percent, contributing to record government budget deficits. But from April 2003 to present, tax receipts have exploded by 26 percent, and now stand at all-time highs. In fact, it was reported this week that tax money is pouring into the Treasury at such a torrid pace that our government now holds a record $94 billion in excess cash.
Sure, economists at the NBER can trot out their own numbers and make November 2001 look like the turning point. But I’m not buying it. Today’s booming economy was born just after April 2003. The numbers that really count — the ones I’ve listed above — prove that beyond the shadow of a doubt.
So what caused it? What happened in the world just after April 2003 that triggered so much prosperity?
Haven’t you guessed? It was the 2003 tax cuts on personal income, dividends, and capital gains. They were enacted into law in May 2003. The rest is history. Very prosperous history.
If the Republicans want a winning message for 2006, here’s one staring them in the face: campaign on the platform of prosperity. Make the Bush tax cuts permanent…
UPDATE 4:11 p.m.: A contrarian could note, however, another event at about that precise time: the invasion of Iraq (we know wars can be economic boons, don’t we?)…
UPDATE 2 4:54 p.m.: Either way, Bush can claim credit! A new justification for the war…my readers in the White House can feel free to borrow it…
Luskin’s always the funniest when he takes on the former advisor to Enron, Paul Krugman. Like watching a kid torment a trapped animal in a cage, just poking it with a stick.
Mark, I’m a scientist who knows little about economic theory. My problem with these pronouncements is that there seems to be no way to conduct a controlled experiment. This experiment would be: split off the universe into two states, one in which the tax cuts occur, one in which they don’t. At some later point in time, measure the economy — with some standard economic metric that we can hopefully all agree on — and see which method had a better outcome. This is obviously a very impracticle idea for an experiment. But without this sort of control, it is very hard for me to believe that the tax cuts are statistically correlated to (what appears to be) a thriving economy. It could as well be correlated to a fed rate change, the release of a new ipod, or gamma ray bursts from the center of our galaxy .
I’m sure there may be some well-known techniques used by economists. If you can refer me to them, I’ll be happy to read up.
One other reason I remain skeptical is that I certainly don’t remember thinking in 2003, ‘Wow, the tax cuts were just enacted, I think I’ll go spend more and work harder’. I realize that I’m only one person and it’s the collective dynamics that would respond to a tax cut.
I also find it funny that Luskin keeps pointing to April 2003 as the rise point, yet he says the law wasn’t enacted until May, 2003. Maybe I should rethink cause and effect. (Seriously though, I don’t recall the timeline to all this, so I’ll give him the benefit of the doubt.)
policaster, it’s a valid criticism. Economic models are notoriously complex, because, of course, literally hundreds of billions of variables are involved in even a small time frame – i.e., all the little transactions that basically form the entirety of human existence. Yet another reason it’s known as the dismal science.
I also noted that May, 2003 versus April thing (it’s a pretty glaring flaw, I think, and one Luskin should have addressed better). I suppose he would say that the fact that the cuts were anticipated began to influence participant behavior. It is true, however, that tax cuts do affect economic decisions.
While you or I don’t say, hey, a tax cut, I’m going to buy that Xbox 360 I’ve been waiting on, folks with money – enough money to have tax consultants – WILL, in fact, change their behavior if, say, capital gains are taxed at a lower rate, or if the estate tax is placed under suspension, by ‘realizing’ gains that may have been held on to otherwise – thus, actually increasing tax receipts, because many of these investment vehicles are not taxed until they are sold…
One example among the hundreds of thousands.
Conclusion: yes, you’re right to be skeptical about grand pronouncements – but the fact remains, we have a really strong economy, at a time when general voter satisfaction is extremely low. Something has to have caused that – and increased income from lower taxation is surely a factor, if not necessarily the conclusive one…
[...] It’s been a long time since honest believers argued that tax cuts pay for themselves. When you have extremely high rates of taxation — say, 70 percent-plus — there may be something to this claim: When rates are that high, the rich go to extraordinary lengths to evade taxes and aren’t motivated to earn more, so it’s not crazy to argue that tax cuts might boost tax receipts. But you have to go back to the 1970s to find tax rates that high. When the top income tax bracket is in the 30 to 40 percent range, nobody serious believes that tax cuts change behavior enough to pay for themselves. “Nobody serious believes”…that is the entirety of his arguement on this score; and yet, as Donald Luskin has shown, the facts themselves are against Mallaby. [...]