What Tax Cuts Helped Economy?

July 14, 2007

Editor

BARRON’S MAGAZINE

Other Voices Submission

J.T. Young’s “Other Voices’ (July 16) essay, “Tax Cuts Helped Economy Stay Afloat,” is but a repetition of what has become the Bush Administration’s mantra: “…cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.” (as originally coined by economist Milton Friedman). Simply put, Young’s assertion that the 2001 (and 2003?) tax cuts “produced the best recession/recovery cycle of the past 60 years” was given the lie by the 2006 elections, in which much of the Democrats success was attributed to voters’ dissatisfaction with the economy.

There is almost no dispute among economists that the 2001 recession was one of the shallowest in history. But that was mainly due to the fact that the Fed dropped interest rates too low for too long—a policy that resulted in the printing of limitless amounts of money that powered the greatest housing boom on record (and bursting of the subsequent housing bubble), as well as a credit bubble based on fraudulent subprime loans that is bursting as we speak.

But the strength of the recovery is another matter. Most Americans did not benefit, just the top 10 percent of income earners—i.e., those who now control almost 80 percent of the wealth of this country. These numbers are corroborated by everyone from the Federal Reserve Bank to the Congressional Budget Office, to the international Organization for Economic Co-operation and Development (OECD).

Nobelist Joseph Stiglitz and fellow economist Peter Orszag said it best in a Business Week essay of that time: “The administration’s (tax cut) package largely ignores the central feature of a recession: lack of demand. The primary problem is that the nation’s firms face a reduction in demand for their products—not that they lack available workers, equipment, or anything else needed to produce goods and services. Indiscriminately injecting cash into such firms through tax breaks, without linking the tax breaks to new activity, would do little if anything to address the underlying difficulty.”

What did Drs. Stiglitz and Orszag recommend? They recommended a temporary extension of unemployment insurance and cut in income taxes for salaried workers, which directly benefits those who spend the largest portion of their income. This is classical Keynesian economics, of course.

Supply-side economists (conservatives one and all), on the other hand, swear by Say’s Law that says demand is never the problem, only an adequate supply of goods and services. Let wages fall where they may (though wage levels are the major determinate of aggregate demand). Allow workers to work for next to nothing, in other words, and eventually any economy will recover!

That certainly happened during this administration. By not giving tax cuts to those who could most use it—rather than investment tax breaks on capital gains and dividends--real average household incomes for working age households under 65 fell 5.4 percent 2000-2005, after inflation. Incomes have only begun to recover over the past three quarters, too late to prevent the lowest personal savings rate since the Great Depression. Consumers’ personal savings rate has been negative for more than 2 years.

The conservatives’ tax cuts were in fact a calculated shift of wealth from the lower and middle classes to the already wealthy and their supporters. The massive resulting Federal budget deficits have pushed us back to inequality levels last seen in the 1920s—at the expense of a decent health care system (and our veterans), and declining educational system (our elementary and high school children rank lower in math and reading skills than those in Japan and other developed countries).

These results are confirmed by scientific studies. U.S. citizens now have much longer working hours than in other developed countries, fewer benefits including paid vacations and sick leave, a greater incidence of major diseases, shorter life spans, and higher infant mortality than in some developing countries (including Cuba).

What should be some remedies that a majority of Americans already advocate, but that recent administrations and a congress beholden to lobbyists have not had the courage to adopt? Spend more tax dollars on domestic programs than the military, for starters. Our defense expenditures now make up half the federal budget. And military expenditures only benefit the military-industrial complex (and its supporters) when we are already the sole military super-power.

Then use some of those savings (military spending is notoriously wasteful) to take health care out of the hands of the HMOs, drug, and insurance companies, and replace it with a national health care system for all U.S. citizens, like every other industrialized country in the world!

The current policy of lavishing our tax monies on the military ignores the economic advantages our neglect of domestic spending has given Japan, Asia and our European allies who use their tax monies more wisely. They choose to invest their citizens’ money in improving their human capital, which after all, is the real basis of any nation’s wealth.

Otherwise, continuing such blatantly unworkable tax policies means not only will we fall back further in the competitive global race for economic supremacy, but winning hearts and minds in the global war on terror as well.

“Cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible,” is really a formula for disinvestment in people. It puts the United States of America on a dangerous course of decline in both status and the power to influence worldwide events.

Harlan Green, Editor

PopularEconomics.com