Economic Growth and the Bush Tax Cuts, by David Leonhardt, Economix: In a detailed look at the Bush tax cuts in the current issue of Bloomberg Businessweek, Peter Coy writes:
They were supposed to promote long-term growth by realigning incentives. On that score their legacy is hard to measure because there’s no way to know how the economy would have fared without them. Many companies instituted dividends to take advantage of the tax break, but whether that induced more investment is unclear. What’s indisputable is that deficits grew while the U.S. economy rumbled along in slow gear: Growth averaged 2.3 percent a year from the end of the 2001 recession through December 2007, at which point the economy tumbled into the worst downturn since the Great Depression.
I agree there is no way to know for sure how the economy would have fared without the tax cuts. But the evidence we have does not suggest the cuts were especially good for growth. The expansion that began in 2001 and ended in 2007 had average annual economic growth of 2.7 percent. That was the slowest of any expansion since World War II.
Some of this is a reflection of slowing growth in the working-age population. If you control for these demographic changes, the 2001-7 expansion compares favorably with the 1970s, but that’s not exactly high praise. No matter how you examine the numbers, the Bush expansion was significantly weaker than the expansions of the 1990s and 1980s. It’s hard to see how the cuts induced a lot of additional investment or persuaded a lot of people to enter the work force.
Of course, the stronger expansions of the 1980s and 1990s were also not followed by terribly deep recessions. Looking at the full business cycle makes the past decade appear even worse. Might it have been even worse without tax cuts? Sure. But the burden of proof certainly seems to rest with anybody who tries to make that case.
Much of the growth that was observed during the Bush years was due to the housing bubble. That growth was illusory, and if we were to adjust for the illusory component of the growth that shows up in the measurements cited above, the Bush years would look even worse.
Originally published at Economist’s View and reproduced here with the author’s permission.