Greatest Economy?

I believe that the correct conclusion to draw from this debate is that the 2003 tax cuts, specifically the dividend and capital gains cuts, have had a tremendous positive impact on our economy. It is hard to argue with the raw numbers that show tremendous economic gains after these supply-side, pro-growth tax cuts. While the economy also grew in the 1990s after a tax increase, tax policy is not the only thing that drives growth.
In the 1990’s there was a radical innovation called the internet that suddenly thrust our economy into the information age. This paradigmatic shift generated economic forces that were far more powerful than a change in tax policy. So the gains made in the 1990s were in spite of the government’s tax policy not because of it.
If we compare that economic boom with the current one, we do not find a corresponding innovation that has propelled the economy into prosperity. In fact the economy had several things stacked against it, including the threat of terrorism and increased regulations in the wake of Enron and other accounting scandals. Despite these negatives, the 2003 tax cuts unleashed a period of economic activity that rivals that of the 1990’s and other similar expansions.

Mark Thoma features this very good post. Over at Angrybear, I offer a few more observations. Well done Bruce!

I hear comments like RW's all the time, which is why I wrote this post. I am perfectly prepared to believe that the Bush tax cuts aided growth. I just want to see some serious analysis, some hard data, something other than mere assertion to support this argument. RW has presented none.

Bruce - I appreciate your comment over at Angrybear. I followed up by quoting Alice Rivlin's advice to Kerry in 2004. A bipartisan approach to reducing the deficit would involve us Democrats helping to find ways to curb spending as honest conservatives like you work to find ways to raise taxes at least a little.

Here you go Bruce. The data isn't hard to find. This is a great piece by Brian Riedl, available from the Heritage Foundation.

http://www.heritage.org/Research/Taxes/bg2001.cfm

Brian's article proves nothing except that the economy does poorly during a recession and eventually recovers. Any policy enacted near the trough of the recession can be made to appear to be responsible for the recovery. But this is just an example of the old logical fallacy, post hoc ergo propter hoc, which means that just because A follows B, B is not caused by A.

I suggest that RW review the history of business cycles here:

http://www.nber.org/cycles.html

The economy recovered from every one of them, usually without any government action whatsoever. It's incredibly stupid to talk as if we would still be in a recession if taxes had never been cut. Long experience tells us that the economy would have bounced back from the recession even if we did nothing. The burden of proof is on tax cut supporters to prove that we have done better than we otherwise would have done. I have seen no analysis from anyone to this effect.

I guess it's because AB set up a slightly left of center blog, but a lot of our readers are hammering Bruce with their own liberal views. Bruce - I'm in that fray sticking up for you. But over here we have RW - a free lunch supply-side true believer. Sorry RW - but Heritage spin is not up to speed when debating someone as knowledgable as our host here.

I see that I mixed up my logic above. I meant to write that just because B follows A, B is not caused by A.

Since PGL mentioned Heritage, I would just mention that this organization could produce proof of the value of the tax cuts if it wanted to. It has access to commercial macroeconometric models that can tell us exactly how the economy would have done without the tax cuts. Comparing those results to actual results will tell us precisely how much additional growth, employment and so on resulted from the tax cuts.

Brian did not do this in the paper cited above, nor has the Bush Administration. I suspect that reason may be that the results will show that the impact of the tax cuts was very, very modest. Positive, but nothing to brag about. They would prefer that people cling to the belief that a normal cyclical recovery was in fact caused by the tax cuts so that Bush's policies, rather than the economy's natural resiliancy, gets all the credit.

Bruce - interesting comment over at Angrybear, but I followed up with a comment re Carter and Reagan.