Today while listening to the Sean Hannity show on my way home I hear him say something to the effect (I’m paraphrasing as I was driving and couldn’t write it down),
“Lower taxes and raise revenue, always happens.”
The basic idea is the old supply-side chestnut that lowering taxes will stimulate economic activity and that the new economic activity will generate enough in taxes to offset the loss of tax revenue due to the decrease in the tax rate.
The only problem with this is that it is only true under certain conditions. Those conditions are when we are on the right hand side of the Laffer curve. Then and only then will a decrease in taxes increase revenues. If we happen to be on the left hand side of the Laffer curve then a decrease in tax rates will only decrease tax revenues.
Is the U.S. currently on the right hand side of its Laffer curve? Tough question to answer as there is really no way to estimate the Laffer curve itself. The only thing that one can do is look at what happened with the decrease in tax rates vs. the change in tax revenues. Did tax revenues rise as rates fell? No. At least not right away. Tax revenues fell for 2001, 2002, 2003 and 2004 and didn’t start to rise again till 2005. What makes this really hard in determining the impact of taxes on the economy is that there was also a recession at the time. However, the recession ended in November of 2001, hence it took quite some time for the tax cuts to have an impact in terms of tax revenues if they did at all. You see, while many conservatives will rightly point to the recession as a reason for the decline in tax revenues, they wont point to the expansioin and the lack of increase for nearly 3 years (basically they want to have their cake and eat it on this one).
Another way to try and guage the impact of the tax cuts on the economy is to look at the employment situation (and note that employment is a lagging indicator). However, even here the picture isn’t nearly so rosey either. The payroll survey as I’ve noted has been, on average, doing pretty badly. Looking at the unemployment rate, and we see that even that took quite some time to come around. The unemployment rate didn’t start to decline (i.e. a downwards trend) until after June of 2003, or around a year-and-a-half after the end of the recession.
Another thing that Hannity mentioned was the impact of 9/11 on the economy. He used the standard refrain that its impact was pretty bad and by golly thank God we have George Bush in office otherwise who know what would have happened…another Depression probably. Well okay, he didn’t get that silly, but doesn’t the man know when the recession ended? It ended about 1 month after 9/11. Granted it took awhile for the National Bureau of Economic Analysis to date the end of the recession, but that had to do with the presistently sluggish labor market more than anything else, IMO.1
And the last bit of Bravo Sierra was that Bush inherited the Clinton/Gore recession. Of course, nevermind that the actual data for the begining of the recession is March of 2001. There has been some discussion of possibly changing that start date to an early time due to new data from the Bureau of Economic Analysis, but so far the dating committee at the NBER haven’t moved the date.
Now this doesn’t mean the the Clinton/Gore expansion (or more accurately the previous expansion–I hate linking expansions and recessions to Presidents as they actually have little control over the economy…thank God) was going great. It was a very old expansion, and the economy was starting to soften. The unemployment rate actually started its upward trend in January of 2001. Also, new data show that there was significant negative growth for one of the last quarters of the Clinton/Gore term. But calling it the Clinton/Gore recession is about as honest as calling the last recession the Bush recession.
Which is why I’ve titled this post as I have. Back during the recession and until the NBER dated the end of the recession there were plenty of liberals who were writing and saying some of the dumbest things like calling it the Bush recession, that Bush’s tax cuts made the recession worse (news flash, this last recession was actually considered shallow), I even saw one comment on a website about how tax hikes can end a recession. This kind of spin of the economy is so common and pervasive that it really sets my teeth on edge, no matter who does it.
Update Below the Fold
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1Note that the mandate of the NBER is not to provide the date for expansions/recessions quickly, but accurately. As such, they can take a very long time to date the end of a recession, end of an expansion, etc.
Commenter Bithead is defending the Conservative position and is siting this NRO article by Luskin. Luskin writes,
The claim that the last recession started under Clinton is absolutely true. To deny this is not only to blame Bush for a problem he didn’t cause, but to deprive him of the credit for fixing it with effective policies — which is exactly why the Left is so eager in this case.
Partisan Hack Alert. Part of the point of my post is that President’s are to a large extent at the mercy of the Business cycle. President Bush (the first one) got hammered by a recession and sluggish recovery that cost him the election. Granted his tax increase didn’t help, but the expansion that was underway when he came into office was quite old, I doubt there was much he could have done to stop it even if he had perfect foresight in seeing it coming. Clinton was lucky in that he came into office when the expansion took off (a good time for a mild tax increase, in that the growing economy can probably absorb the shock) and lasted throughout his Presidency. The current President Bush was unlucky in that almost immediately after he sat down in the Oval Office the economy went into recession–i.e. there wasn’t much he could do to stop it. The problem with Luskin’s premis is this: It posits a set of policy tools that can minimize if not eliminate a recession. But if this is true, how come President Bush (the first one) didn’t use these tools to resolve the recession and go on to win re-election?
At best Presidents have imprecise tools to deal with a recession and there is no guarantee that they will work. A more effective tool might be the interest rates set by the Federal Reserve, but the Chairman of the Federal Reserve and the Federal Open Market Committee. Presidents can influence spending and taxes, but these kinds of things can take time and it might even be the case that by the time tax cuts or increased spending actually take effect, the recession is over.
In any event, Luskin points to a graph of real GDP growth to support his assertion that the recession started in 2000. However, I don’t see where he got that data. I downloaded the data on the percentage change in GDP from the preceding period (in this case quarterly data) and here it is.
While growth in GDP wasn’t great in 2000, it wasn’t horrific either. For that matter, growth wasn’t horrific in 2001 either. It was weak, but growth was negative in only 2 of the quarters for 2001. From the graph we can see why the last recession is considered mild. Similarly with unemployment, while unemployment increased, by historical standards for a recession it wasn’t at all bad.
Setting the end/start date for expansions/recessions is not a simple thing. In fact, it is more art than science (by quite a bit), but the economy probably not in recession in 2000. It was weakening (with the benefit of hindsight), but the case for recession is harder to make.
Luskin also writes,
In fact, NBER has been on the verge of changing the recession’s start date for this very reason.
Yeah, it has been on this “verge” for over two years.
Luskin then does the “Quick, look over there at the Liberals!” thing,
Liberals have never felt constrained by NBER’s “official” dates. For example, last year in a New York Times Magazine article, ultra-leftist economist Paul Krugman cited dates for the economic expansion during the Reagan administration that not only didn’t correspond to NBER’s dates, but didn’t even correspond to Ronald Reagan’s years in the White House!
Well, since the Liberals aren’t constrained by the NBER dates, why should Conservatives like Luskin?
The way I see it is that Bush inherited a weakened economy. It might very well have been that a recession, by the time Bush got in the Oval Office, was inevitable. But the idea that he inherited an economy already in recession is much more dubious. I know it is a favorite Conservative talking point, but using it certainly calls into question one’s intellectual honesty, IMO.
