12-30-05, 9:07 am
It is common wisdom on the political right that tax cuts stimulate economic growth. President Bush and the Republican-dominated Congress insist that the nearly $900 billion in tax cuts (overwhelmingly aimed at the nation’s richest households) enacted since 2001 have saved the country's economy from deeper recession. In fact, they insist that the almost $1 trillion hit to the federal treasury directly caused by these tax cuts matters little compared to the economic growth they supposedly stimulated.
Such claims, however are shown to be baseless in a new report from the non-partisan Economic Policy Institute (EPI). By comparing past economic cycles with the post-2001 'recovery' and examining employment and income trends, the EPI report concludes that tax cuts for the wealthiest have actually slowed the pace of recovery and created serious long-term problems for working people.
Economist Lee Price in the recent EPI report titled 'The Boom that Wasn't' highlights a comparison of the periods following the 1991-1992 recession and the 2001 recession. This comparison is important because in each case two different tax policies were adopted. A 1993 tax increase aimed at the highest income earners (for which Republicans developed a deep and abiding hatred of President Clinton unmatched by current anti-Bush sentiment) is contrasted by Price with Bush's tax cuts for the rich between 2001 and the present. As the report clearly shows, the 1993 recovery that followed the tax increase for the wealthiest segment of the population was among the strongest in US history, far outshining the Bush-led fiasco we are struggling through now.
Two major indicators of total economic health are the gross domestic product (GDP) and gross domestic income (GDI). In the 4-1/2 years of 'recovery' following the 2001 recession, GDP has grown by 13.5% for an average annual rate of 2.8%. This falls well below the average 3.8% GDP growth rate of the previous five recovery periods of equal length after a recession.
Additionally, job figures haven't lived up to expectations. Even when accounting for the disaster after Hurricane Katrina, the US has only 1.6% more jobs than it did in March of 2001, at the beginning of the 2001 recession. By comparison, the previous recovery periods after a recession averaged about 9.3% more jobs at this stage of the recovery. The lowest rate of past job growth during a previous recovery was about 6 times higher than what it has been since 2001.
Despite the fact that the unemployment rate has become a poor way to estimate economic strength, because it fails to count those who have left the job market, the fact is that the unemployment rate remains 1.5% lower than it was in March of 2001.
When you look closely at numbers, it is plain to see that Bush's economy has simply failed to create jobs at a normal pace.
In fact, in 2003 the Bush administration and the Republicans promised that tax cuts would create 5.5 million jobs. Without tax cuts, Bush estimated that only 4.1 million jobs would be created between mid-2003 and now. So far, only about 2.6 million jobs have materialized in that 18-month period. This clearly shows, as the EPI report states, that 'by the Bush Administration's own analysis, the 2003 tax cuts failed to create more jobs than would have been expected without the tax cuts.'
In addition to poor job growth and general economic sluggishness, the EPI notes that in the 4-plus years since the 2001 recession wages and incomes, as well as spending and and investment, simply have not kept pace with past business cycles, and by significant amounts. For the bulk of the population – working families – real incomes have declined.
One exception has been in housing investment. A significant growth in 'residential investment' since 2001, EPI points out, has been unrelated to tax cuts. Changes in the tax code since 2001 have reduced the 'effective value' of deductions a tax filer can claim for mortgage interest rates. This means that while the Bush tax cuts lowered incentives for increasing residential investments, this is the one area where investments have actually grown.
Overall, the stimulus to the economy promised by the Bush administration and supporters of tax cuts and the 'trickle down theory' simply hasn't materialized. In comparison to other periods of economic recovery, under the Bush administration and the Republican-controlled Congress, wage earners and their families have experienced stagnant wage growth, job growth, and general economic sluggishness.
The most noticeable effect the tax cuts have had – also contrary to the promises of tax-cut proponents – has been dramatic increases in the size of the budget deficit and federal debt.
Contrary to the evidence of their own eyes, so-called fiscal conservatives insist that government spending is the real source of the huge deficits and the massive public debt. To give them some credit, they have a minor point. Bloated pork-barrel spending where Republican congressional leaders have handed over hundreds of billions of dollars to corporate supporters for useless projects and unnecessary tax breaks has surely played some role. For example, former House Majority Leader Tom DeLay inserted a $1.5 billion dollar no-strings grant in this past summer's Energy Bill to Halliburton, which maintains corporate offices in DeLay's district.
Further, the $229 billion spent so far on the war on Iraq (not including the tens of billions more earmarked for it) might have been saved if the administration had not repeatedly lied about the reasons for war.
So yes, some government spending is indeed partially to blame for the country's financial troubles.
A reasonable fiscal policy would aim tax cuts at working families (middle and lower income), as opposed to high income earners, and target increased federal spending toward education, poverty elimination, provision of health care, housing, public transportation, infrastructure development, small business growth, and education.
Results of a study published by Economy.com has shown that the GDP grows at a much faster rate with targeted tax cuts and social spending aimed at working families than with tax policies aimed at the wealthiest portion of the population.
Tax cuts for millionaires have undeniably failed as economic policy. How many times do we have to suffer from the effects of such tax cuts before we decide that, although Paris Hilton and Tom DeLay's corporate sponsors might benefit from them, they are bad for the rest of us?
--Joel Wendland is managing editor of Political Affairs and may be reached at jwendland@politicalaffairs.net.
