Jewish World Review May 7, 2004 / 16 Iyar, 5764

Robert Robb

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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.

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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 productivity growth.

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 improved.

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 premium.

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.


04/28/04: Arizona to become test market on immigration as a political issue
04/23/04: Accusations that the Bush administration has been shredding civil liberties are hyperbolic
04/16/04: Learning the limits
04/14/04: Aug. 6 memo is not even a water pistol, much less a smoking gun
04/11/04: Once 9/11 Commission's political theater ends, we must debate real security issues
04/09/04: Fact checking Kerry's federal budget plans
04/08/04: Should the transfer of sovereignty in Iraq be delayed beyond the current deadline?
04/02/04: Kerry's tax epiphany makes some cents
03/31/04: What could have prevented 9/11
03/26/04: Knock off the high-stakes blame game
03/23/04: McCain a ‘straight talker’? Who is he kidding?
03/17/04: Bin Laden makes distinctions?
03/12/04: In the dangerous neighborhoods, cause for hope, if not yet optimism
03/01/04: Greenspan view scary, but Dems in denial

02/27/04: How not to achieve a mandate

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