Arnold Kling  

Jobs and Tax Cuts

Measuring Employment... Why Are Saving Rates Declining...

Noam Scheiber argues that the Bush tax cuts in fact were stimulative.

Liberals in Congress and at places like the Economic Policy Institute complain that the Bushies should have targeted the bulk of their tax cuts toward the working poor and middle class, who were more likely to spend their tax savings than more affluent beneficiaries were...

...[However] there is evidence that affluent people spend a higher proportion of their income than economic models have traditionally predicted. And, Democrats' complaints notwithstanding, the tax cuts provided plenty of stimulus when it counted. In all, according to Stephen Roach, Morgan Stanley's chief global economist, the tax cut provided about 1.5 percentage points of economic growth last year (which amounts to about $150 billion in a $10 trillion economy).

That is why I think that President Bush deserves a decent grade on his macroeconomic report card. The complaint that the tax cuts went to "the wrong people" simply does not fit the macroeconomic facts. The problem with the economy is not a shortfall of consumer spending. The biggest mystery is not that there is a high savings rate (there is no such thing), but that there is a large gap between output growth and employment growth.

Scheiber points out that the gap between output growth and employment growth is "good news," because by definition it is productivity growth. Whatever the explanation for that gap, it has nothing to do with giving tax cuts to "the wrong people."

UPDATE: Brad Delong writes,

A fiscal policy that redirected tax-cut-for-the-rich money to the states, that compressed the deficit and delivered more short-term stimulus, and that did target more tax cuts at the non-rich would have had no trouble delivering twice as much stimulus.

I'd like to see him spell this out in terms of specific dollar amounts, and run it through a macroeconomic model.

For Discussion. What essays have you read that make a convincing argument that alternative fiscal policies could have produced a stronger recovery?

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COMMENTS (21 to date)
Lawrance George Lux writes:

Roach's credit of 1.5% growth due to Bush's economic stimulus does not even keep pace with the inflation rate. It does this at the cost of $500b in deficit for $150b in growth. This says something, but maybe not a B+ or A for Bush.

I am still of the belief that the real impact of the Clinton 1993 Tax increase was to shift the tax impact upward, bringing a lower Income increase of spending--the true cause of the Boom. Every Bush Tax Cut has shifted the tax impact downward, and reduced lower Income spending--itself bringing the Recession. To those who say the Recession started under Clinton, remember Clinton backed off from the 1993 Tax package, allowing the tax impact to be shifted downward--though to much lesser degree than the Bush Tax Cuts.

The Jobs issue is another element. Important questions need be asked about the Bush Tax stimulus: Has Management weekly hours increased or decreased? Has the Marketing dollar budgeted increased or decreased in comparison to the Production dollar, since the Bush Tax Cuts? Has Bush exemptions to Business on such items as medical insurance and pension benefits for Workers increased or decreased total services provided? Jobs express Bush-inspired Business reduction of Service industry usage, for both Employee and Consumer. It reflects Bush-allowed tax exemptions and credits for outsourcing.

Bush may not have been able to do better, and the Democrats may have done worse, but Someone has to get something right soon. lgl

pmmcneany writes:

Are you saying that the current $500B estimate of the deficit is strictly due to tax cuts ?

Dave Sheridan writes:

Arnold - I think Brad is arguing from the same theoretical framework that you are, but implicit in his statement is that transfer of Federal dollars from high earners to state budgets would put the money into more consumption-prone pockets. Incidentally, imprecision about who "the rich" are is a persistent flaw in analyses like his. With the bottom 50% of tax filers paying only about 2.5% of income taxes, it's getting pretty hard to cut taxes at the low end of the income scale. Transferring money to the states is also a shell game. States have their own means of capturing federal tax savings, and it's bad policy for the Federal government to act as a conduit for no-strings money.

Robert Schwartz writes:

I am so glad that Delong knows where the tax burden falls. To me it is not so clear.

If the world consist only of Rich Dudes and towel boys (sya John Edwards is right) and the tax on Rich Dudes is reduced, it may very well be that the Rich Dudes will bid up the wages of Towel Boys. meaning that the beneficiaries of the tax cut were the Towel Boys not the Rich Dudes. This is just the opposite of the famous case of the Luxury Yatch tax which was borne by the proletariat not the idle rich.

Furthermore after a century of trying to create a tax system that would bring distributional justice into this cycle of reincarnations. I am ready to claim that it cannot be done in any economy that allows a modicum of freedom in in setting wages and prices; and, further that redistribution can only be accomplished by Mugabbiying an economy and the entire society.

Donald Lacombe writes:

In an earlier post on Professor DeLong's blog, he seemed to be saying that the tax cut went to the "wrong people", i.e. those making over $300K a year. I assume this means that he believes in some version of the paradox of thrift. Is this correct? Comments?

Eric Krieg writes:

I have one thing to say to Brad DeLong.

Prove it!

He is full of you know what.

It is time for real economists (as opposed to mere political players like Paul Krugman) to put their money where their mouths are. Put your policy recomendation into a non-partisan econometric model like the FAIR model and see if what you say is true.

According to the FAIR model, the Bush economic policy is extremely stimulative, and is probably the main reason that the unemployment rate is only 5.6%.

Luke writes:


Your assessment (you admit it is a "belief") of the Clinton Tax Package of 1993 is entirely false, and the slanted view you take on it is only remotely accurate from the benefit of hindsight. You also contradict yourself.

You say that Clinton backed off the 1993 tax package, allowing the tax impact to be shifted downward. So shouldn't this have caused a recession under Clinton, just as you say it would under Bush?

Even Clinton's own budget documents in 1995 projected a net DEFICIT of $200b over the next 10 years, not the surplus as promised from the 93 tax package. This is because during the time, additional spending kept eating up what should have been the surplus.

The surplus years didn't begin until after the capital gains tax cuts and spending reductions. But I think even more important was the technological boom caused by the dot-com bubble, and the rapid adaptation of internet commerce leading to huge economic growth and therefore large increases in tax revenue. (One of the few times in our history we've been able to produce so much that even the federal government couldn't spend it fast enough.)

You are right that a democrat would have done worse, and you're also right that Bush has not done great. But it's not his tax policy that he fails on, it's his spending allowances to congress.

Lawrance George Lux writes:

The tax impact shift of 1993 was real, a number of Economists recording it at the time. The expansion of lower Income spending was also noted at the time. You would also have to look hard for the material, but I said basically the same at the time, as in this discussion.

The period when Clinton backed off and allowed the tax impact to shift downward was in 1997-8. Given the normal lag of policy implementation, the alteration would begin to show up in late 1999 and 2000. Real impact of the shift would express in the next Tax period. This Delay period is also why economic resurgence did not show fully until 1995-6 from the 1993 Tax shift. lgl

Mcwop writes:

When did the economic resurgence show from the Bush I tax increases in 1991?

Lawrance George Lux writes:

Sorry for doing this, but I think it is the best way to explain my position.


Politician and Economist, whatever their Conservative or Liberal mode, all accept unchallenged the conventionalism of Keynesian stimulus as promotion of economic performance. Few have been the economic studies to actually prove the existence of such benefit to the Economy. Most Economists admit to the existence of other factors generating economic performance in addition to the studied Keynesian stimulus package utilized, but fail to differentiate the degrees of impact between the factors. Keynesian stimulus thus reigns without essential proof or vindication by hard statistical numbers. The trouble enters with political use of the dogma, leading to great quantities of deficit, while the benefits have yet to be concretely established.

An alternate view of Keynesian stimulus can be proposed, and should be studied by economic model. Consider Resource Supply by establishing a normal Bell curve, with Quantity supplied under the Curve. The Bell curve is established by the fact of Cost of Production limiting Resource Supply on the left half of the Bell curve, in the face of inadequate Price to generate production of product. The right half of the Bell curve is established by the limitation of Ore and Recovery equipment. Any Economist will relate this Resource Supply Curve will never resemble a natural Bell curve in the Short-term, but will eventually develop a Bell curve formation over extended period–where more Years are added to the Production duration. The Bell curve proposed can be quartered at this point, as is done in normal statistical analysis. Keynesian stimulus can be analyzed at this point.

Speculation can be advanced that Keynesian stimulus will only provide a geometric effect, if and only if, Resource production actually resides within the first Quarter of the Bell curve formed by the Quantity/Price possibilities, the following Quarters all construed as normal Production levels–unrestricted by low Price values canceling Profitability of Supply. Keynesian stimuli in these later three Quarters seem likely to supply only arithmetic effect–or the addition of Government consumption of Resource. It is necessary to examine this Contention for plausibility.

Position in the initial Quarter of Production assures undercapitalization of Resource Recovery, due to the fact the Price values generated are inconsistent with provision of advanced Equipment and Labor because of lack of Profitability. Equipage is outdated and outmoded, while substantial Labor assets will have already been laid off, or non-hired. The Second Quarter already reflects introduction of Profitability to Resource supply, because of the rapid increase of Quantity supplied. Capitalization and Lobar retention have already proven desirable. The Third Quarter begins to express the difficulties and limitations of extraction, which result in eventual diminishment of supply. The Fourth Quarter expresses inabilities to extract greater amounts of material. The Curve travels along an axis set by Price for the Product supplied.

Government spending for Resources will obviously generate Capitalization, hiring of Labor, and enhanced Profits within the First Quarter, thus providing geometric stimuli to the Economy as a whole. Government spending in the following Quarters, though, will only provide additional Profits to the Resource Recovery, and arithmetically push Supply into the Third Quarter from the Second Quarter. There will be no more than the standard capitalization and employment of Resource recovery, or only an arithmetic increase in business ventures; otherwise put, simple extension of business enterprise without impact on the greater Economy. Government spending, on the other hand, faces the same constraints on Resource Recovery, as does the Private Sector. Government spending comes into direct competition for Resource with the Private Sector, with the Curve sloping downward because of the increasing difficulties of Resource supply in greater quantities.

Keynesian stimulus by deficit spending provides direct favoritism for Government spending within this competition in the latter three Quarters. Government is allowed unfettered purchasing power, while the Private Sector must operate within the boundaries of Profitability for operation. Government spending by advent of Taxation would have withdrawn Demand for Resource from the Private Sector, but deficit spending leaves Private Sector Demand unaffected. The Private Sector immediately starts practices of eliminating unnecessary Costs, Downsizing, and raising their Product prices to meet the increased competition for a shrinking provision of Resource.

Economic study of Keynesian stimulus must be originated, without predispositions that it is always beneficial to Economic performance. It could provide far more Inflation than economic performance. A real possibility exists that Keynesian stimulus actually retards levels of Business profitability, due to the unfettered competition Business must face from the Government. Excess Government deficit spending almost assures suppression of Employment, in order for Business to minimize expense. The additional deficits create Money, through injection of funds into Industries, such practice altering their Production and Profit schedules in the worst direction, a general bias against their Private Sector Consumers. There need be reevaluation of current belief in Keynesian stimulus.


StickYourMoney writes:

Are you guys sticking your money where your mouth is?

As of one month ago -- I've shifted my assets to foreign currencies, short-dated euro bonds, commodities and cash.

The faux Bush growth is entirely fueld by lighter fluid: one-shot tax cuts and deficit spending. Y'all have lit barbeque before: lighter fluid makes for a great ball of fire that the kids will love -- but what really matters if your coals are lit.

In this case, the coals are twofold: more jobs and a reverse in the current account numbers. As long as job growth is stalled and our current account grows *not* in our favor, ANY so-called growth is just lighter fluid.

And y'all know what happens when the lighter fluid runs out and the coals aint lit? You get a bunch of really unhappy kids.

Bush's econ team are flat-out amateurs at guiding the economy. They have lost credibility on their budget numbers (Medicare drugs: +$100B in one week!!!), John Snow couldn't negotiate with the Central Bank of Chad, forget China.

BTW, I am going to laugh when my assets appreciate and you suckers are wonder what happened.

James Stephenson writes:


The tax increase did not cause the boom of the 90's. Were you living in a cave?

Unrealistic expectations with dot.coms lead to that boom. People were throwing money at the Dot.coms. The Dot Coms were spending money willy nilly, Stadium names, Superbowl commercials, young people getting CEO/CIO salaries.

They in turn spent that money as quickly as they got it for the most part. Actually without the Tax Increase, I would imagine the boom would have been bigger. But when those bills came due, late 1999, early 2000, there was going to be a bust. And guess what there was. Somehow Bush gets the blame because people started realizing they were throwing their money down a bottomless pit and they were never going to get their money back. I am in the Computer Industry and stayed as far away from these Dot Coms as possible. Why? As soon as the boom started I was looking for the crash.

Now, I do not know much about the data in your second post, but your first post was pure mularkey.

Eric Krieg writes:

>>Bush's econ team are flat-out amateurs at guiding the economy.

What should they have done? Try to give examples that have a snowball's chance in hell of actually being implemented (not, for example, negotiating with the Central Bank of China.)

Boonton writes:
With the bottom 50% of tax filers paying only about 2.5% of income taxes, it's getting pretty hard to cut taxes at the low end of the income scale

This is only true when you restrict yourself to income taxes. The bottom 50% also pay payroll taxes which are not included in the 2.5% but real nevertheless.

The tax increase did not cause the boom of the 90's. Were you living in a cave?

Unrealistic expectations with dot.coms lead to that boom.

Actually Clinton's tax increase probably did ignite the boom. Banks were heavy on 30-yr Treasuries at the time & with projections of uncontrollable deficits over the horizons there was a danger of a meltdown. Clinton's tax increases, by signalling that the gov't would control the deficit, lowered long term rates which results in a double win for the banks. The banks enjoyed windfall profits AND the lower Treasury rates provided them with an incentive to start making loans again rather than reinvest them in Treasuries.

It's understandable to think the the 90's were some type of collective illusion when you saw the dot com world up close; That just isn't the case. While the dot coms and Enron captured the headlines the fact is real GDP did grow & despite the slowdown there has been maybe one quarter with negative growth. That means the economy of the 90's is still with us today.

Eric Krieg writes:

>>Clinton's tax increases, by signalling that the gov't would control the deficit, lowered long term rates which results in a double win for the banks.

If this is so, why didn't it occur under Bush I? He raised taxes way back in 1991!

Steve writes:
Roach's credit of 1.5% growth due to Bush's economic stimulus does not even keep pace with the inflation rate. It does this at the cost of $500b in deficit for $150b in growth. This says something, but maybe not a B+ or A for Bush.

Of course lets also ignore the fact that the tax cuts account for about only half of the deficit.

Also the inflation rate isn't that much higher and if you are using the CPI there is the issue of bias.

Mcwop writes:

Don't bother Eric. I always ask the same question to which the response is eerily silent.

Interest rate on 10 year bond in Jan 2000 was just under 7%. 10 year bond yield today just over 3.7%.

Lawrance George Lux writes:

I do not know why Everyone claims the 1990s were the result of the tech boom. This never employed more than about 6% of the Labor force, and never absorbed even a third of the investment capital of the Period. Production expanded throughout the Economy during the Period, and seemingly did not even originate in the tech industry.

Study of my Post on Keynesian stimulus will reveal I doubt the stimulus effect of any Government deficit spending, and have high doubts of the stimulus value of Tax Cuts. lgl

Eric Krieg writes:

The 1990s were not a result of the tech boom. But 1997, 1998, and 1999 (and up to March of 2000) certainly were.

Boonton writes:
If this is so, why didn't it occur under Bush I? He raised taxes way back in 1991!

I've cited Stigletz's Atlantic article before. The early Clinton years were a 'perfect storm' in reverse. With banks heavy in bonds, getting the deficit under control was a double whammy but a positive one. Double because lower interest rates spurred spending (the refinancing boom) and created a windfall for the banks so they could jump start lending.

Bush I may have raised taxes but every indication was that the deficit would not be controlled for the future. He is also very straightforward regarding the distinction between good policy and good timing. Deficit control is good long run policy but circumstances were such at the start of Clinton's term that it was also an excellent policy.

festa writes:

We are ignoring the role of the federal reserve during the early Clinton era. The Clinton deficit reduction package was a combination of contractionary fiscal policy and expansionary monetary policy. In short, Clinton raised taxes to close the deficit. On its own, this would have had an adverse effect on GDP. However, Greenspan was at the same time pursuing monetary stimulus. So the net effect of this was to keep output about where it would have been, with the hopes of controlling spending.

To the extent that spending was put under control, we have to thank the failure of the Clinton Health care package which would have sent spending into a new stratosphere.

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