Time to Side-Step the Obstructionists and the Mis-Informed

Over the past two days, more than 60,000 jobs have been eliminated by companies like Sprint (8,000), Home Depot (7,000), Texas Instruments (6,000) and Caterpillar (20,000), making it abundantly clear that the recession is plowing on, and that the economy has yet to bottom out. But as President Obama and Congressional Democrats work to pass an $825 billion stimulus package, it has been equally clear that the Republican opposition is intent on waging an ideological war for their party's universal cure-all: tax cuts. As Nobel Prize-winning economist Paul Krugman explains however, it is spending that is needed; not more tax cuts:

Let’s lay out the basics here. Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.

But what about tax cuts as long-term strategy? GOP Congressman Dave Camp, for one, says that he believes they must be part of our planning for the years to come:

“The planning for 2010 in a business sense is happening now,” said Representative Dave Camp, Republican of Michigan. “So it isn’t too soon to talk about making permanent the Bush tax cuts.”

Mr. Camp, who serves on the tax-writing Ways and Means Committee, added: “I think that has to be part of the discussion. It can’t simply be what gets us through the next quarter. It has to be what gets us through the next decade.”

That certainly seems reasonable - even proactive - so let's look at the effects of tax cuts over the past two administrations and see what the data actually tells us. Since 1992, the largest increase in employment to population ratio (the percentage of the populace that has a job) occurred after President Clinton's tax increases of 1993. By contrast, President George W. Bush's tax cuts - the very hallmark of his administration - appear to have reduced employment if they have had any effect at all:

In fact, by any objective measure of their effect on job creation, the Bush tax cuts were a miserable failure, not only missing their stated goals, but, it can be argued, making things worse:


But if tax cuts can't be tied directly to stronger employment, isn't it true that they are the foundation of pro-growth economics? Actually, not so much. Author Larry Beinhart decided that he'd check into the accepted wisdom of tax cuts, and found some very startling things:

• Large income tax cuts are followed by a bubble and then a crash.
• High income taxes correlate with economic growth.
• Income tax increases are followed by economic growth.
• Moderate income tax cuts are followed by a flat economy.
• All of this is especially true as applied to the top tax rates, the amount paid on income that exceeds the highest bracket.

Mr. Beinhart describes his results in the following manner:

These are the brute facts.

I call them that because there doesn't appear to be any theory to explain them.

A noted conservative (a sane one, not William Kristol) recently wrote to me in a private eMail exchange on this subject:

"I am unaware of any (or many) respectable economists (maybe I've missed some) who have suggested that higher taxes have proved to be a formula for better economic growth."

Actually, I am too.

Even now, in the midst of the Bush disaster, I constantly see and hear tax cuts, particularly at the top, described as "pro-growth." So I went and looked at the numbers - tax rates, tax cuts and tax hikes - and placed them alongside job growth, the Dow Jones, growth in the GDP and median income.

The brute facts say the opposite of the myth.

I realize that this will be controversial, but data is data - we're not (or we shouldn't be) arguing philosophy. If tax cuts don't effectively boost the economy in the short term, as we desperately need any stimulus to do, and if they aren't linked to employment growth, or longer-term success, why are we still talking about them? For that matter, why are we still listening to Republicans when it comes to economic policy?

As the New York Times demonstrates in a review of economic performance across Democratic and Republican administrations, we probably shouldn't be. Looking at metrics for gross domestic product (GDP), treasury debt, inflation, S&P 500 performance and employment, it is undeniable that the country has very simply done better under Democratic stewardship than it has with Republicans at the helm. (Click each chart to enlarge. Originals here.)


What then of Republicans in Washington? Right wing performance artist Rush Limbaugh, for instance, has made it clear that he believes conservative true believers should want President Obama to fail. Unquestionably, there is some percentage of Republicans in government who feel the same way, and who will obstruct Mr. Obama's recovery efforts at every turn, no matter what the consequences to the country. In the meantime, members of the opposition working in good faith - but who genuinely believe that tax cuts are the right thing to do both now and in the future - are wholly unsupported by historical data or an understanding of economics, and cannot be relied upon to contribute to a solution.

The president is to be lauded for his efforts to heal America's political rifts, but if only as a matter of pure pragmatism, now is no time to risk the interests of the nation in the service of obstructionist ideologues and the chronically misinformed. Mr. Obama will need to act quickly, with or without Republican support, and we must hope he learns that lesson sooner, rather than later.