Greatest Economy? II

David Altig read my first post and chastised me for ignoring business cycles. Being a Keynesian, that cut deep. But I've put up a couple of replies to this offering my own "back of the envelop" (David's marvelous term) attempts to think about long-run growth impacts. But the comparative static theory is really simply. If you pretend to give people their money back (Bush's term for his tax "cut") but then spend it anyway on new entitlements and wars, national savings fall. And Solow's 1957 paper says the rest.

Thanks Bruce for starting an interesting economist blog go round on this important topic and thanks for those links to papers that are definitely worth putting on the read pile!

I am not an economist and am clearly out of my league, but this is a great way to gain some knowledge.

Isn't it difficult to compare the economy of the 90s to that of the 00s when there are extrinsic factors that are difficult to quantify? Peace dividend vs. War. Dawn of the information age vs. Enron and Sarbanes Oxley.

Also, even if the measurable impact of the '03 tax cuts is minimally positive, it is still positive. Better to have lower taxes, no? It's not like you are suggesting a tax increase on dividends and capital gains would have created more growth. It is fairly clear that the deficits have much more to do with Bush's massive increase in spending than with decreased revenues.

Didn't Milton Friedman say that government's negative impact on the economy is better measured by the money it spends rather than taxes? Spending increases in the 90's were less than half what they have been under Bush. Maybe that accounts for the different growth rates?

My purpose is to rescue tax cuts from incompetent defenders, who rely more on assertion than serious analysis and factual data. Too many people implicitly say that because the economy did well following recent tax cuts then the positive economic conditions must have been caused by the tax cuts.

As I noted in my earlier post, exactly the same assertion could be made about the effect of the 1990 and 1993 tax increases. Since the economy did well after those actions, one can just as easily argue that tax increases caused the good economy of the 1990s.

Sorting out economic effects is hard, but economists do it all the time using econometric models that hold certain factors constant so that once can observe the impact of variables such as taxes. Economist Larry Lindsey did an excellent book called "The Growth Experiment" some years ago that tried to figure out the true impact of the 1981 Reagan tax. It would be really useful if someone would do a similar study of both the tax increases of the 1990s and the tax cuts of the 2000s.

BTW, your comment at Angry Bear regarding Bush being more liberal than traditional Republicans and Clinton being more conservative than traditional Democrats was spot on. I think Clinton's legacy benefited greatly by being held in check by a very conservative Congress versus the spendthrift Congress that bent over for Bush's every whim. The only problem Republicans have right now is there are 9 Bush's running for President and 1 Ron Paul who is unelectable.