Jewish World Review May 7, 2004 / 16 Iyar, 5764
It wasn't Bush's recession nor Bush's recovery
The Bush administration is taking credit for the economic recovery.
That's perhaps understandable. After all, Democrats were blaming Bush for a
recession that began after he had been in office just two months and before
any of his economic policies were enacted.
And if the sun rises on their watch, politicians instinctively take credit.
More troubling, however, advocates of growth-oriented tax policy in general
are tending to make the same claim. Last week, the Wall Street Journal had
an editorial that pretty much said the Bush tax cuts caused the recovery.
In the first place, that's not a fair reading of recent economic
developments. As importantly, it takes the discussion of growth-oriented
tax policy in the wrong direction.
The narrative of the recession and recovery can be told as a classical
business-cycle story, with little reference to underlying fiscal policy.
In the late 1990s, businesses overinvested. That was in part to avoid the
threat of equipment failures when the calendar turned to the year 2000, and
in part an overestimation of consumer demand.
In any event, profits evaporated, business investment came to a screeching
halt, and businesses were stuck with fairly substantial inventories.
That's pretty much what caused the recession. The recession itself,
however, was relatively shallow and short, just a couple of quarters.
Since then, growth averaged about 2.5 percent until the third quarter of
last year, when it began averaging 4.5 percent.
By historical standards, that's not a bad run. Certainly not the worst
economy since Herbert Hoover, as Democrats were claiming.
Unemployment has been high compared to the 1990s, but not particularly high
compared to other periods.
Businesses obviously don't hire people or renew making investments until
they are making money and anticipate sustained consumer demand that cannot
be met with existing resources.
That has only recently happened. Business profitability recovered last
year, and appears particularly strong right now. Business investment is up.
And hiring began expanding last fall.
So, businesses overinvest, retrench, recover profitability and begin
expanding. A classic business cycle story, stretched out by the 9/11
terrorist attacks, the buildup to the Iraq war and pushing the edges of
The Bush tax cuts contributed to economic growth during this period.
Anytime more money is left in the private economy, it will perform better.
The primary short-term effect of the Bush tax cuts thus far has been to
improve after-tax family incomes. This did help boost consumer spending,
although that wasn't much of a problem to begin with.
And the faster depreciation provisions affected business investment
decisions at the margins, although business investment has just recently
But contributing to the recovery is not the same as causing it.
Moreover, growth-oriented tax cuts are not primarily about short-term
fiscal stimulus. They're about improving the long-term economic trajectory
by increasing incentives for productive economic activity.
In reality, there was much more social policy than pro-growth provisions in
Bush's tax cuts. Millions of lower middle-class individuals now no longer
owe any income taxes at all, the rate reductions in the lower brackets were
proportionately larger, and middle-class families benefited substantially
from reducing the marriage penalty and increasing the child credit.
The growth-oriented provisions were relatively modest. The top income tax
bracket was only reduced from 39.6 percent to 35 percent, compared to the
28 percent level that was achieved in 1986. Lowering the tax on dividend
income did reduce the ludicrously punitive tax treatment of companies that
actually make a profit and distribute some of it to shareholders.
Although modest, these growth-oriented tax cuts have improved economic
efficiency. More companies are now distributing dividends, dividends are
higher, and companies that distribute dividends are trading at a slight
But much more is needed. Individual income tax rates are still economically
unproductive, the corporate income tax structure is internationally
uncompetitive, and the tax treatment of dividends still unduly favors
companies that grow over those that actually make money.
Excessively claiming credit for short-term results sets up growth-oriented
tax cuts to be discredited when the business cycle inevitably turns again.
And it implies that the growth-oriented tax agenda has been substantially
implemented when, in reality, it has barely been touched.
JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.
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