GDP Growth Caused By Tax Cuts Has Never Happened

Mike’s post here got me thinking.  I’ll telegraph my conclusion.  He dramatically understated his case.

You can see the long range view of nominal and inflation adjusted GPD growth in Graph 1 of FRED quarterly YoY percent change data.

Graph 1 YoY growth Nominal and Inflation Adjusted GDP

Nominal GDP Growth was in a secular up-trend from 1960 through 1980.  However, inflation adjusted GDP growth quickly peaked after the Kennedy-Johnson tax cut, reaching a maximum value of 8.5% in Q4 of ’65 and Q1 of  ’66.  It then dropped dramatically for the next four years.  This peak value has been matched only once since: in 1984, during a sharp rebound from the double dip recession of 1980-82.

Since then, in the wake of numerous tax cuts, the rate of GDP growth has been anemic. To get a look at the rate of growth, I took an 8 year average of the annual percent change data presented above, and then plotted a 5 year rate of change for that data.  This is essentially the 2nd derivative of GDP, or GDP acceleration, as shown in Graph 2.

 Graph 2  GDP Acceleration

 Inflation Adjusted GDP acceleration peaked in Q3, 1966.   Fueled by the inflation of the 70′s, NGDP acceleration stayed high until Q1, 1980, then plummeted for 9 years.  It has been relentlessly negative since.

Inflation adjusted GDP acceleration has not done quite as badly in this disinflationary era, but has been below zero more than half the time since 1970.  This is a little bit worse than coasting.

This all might seem a bit abstract, but the message is clear.  If tax cuts were good for the economy, then GDP growth would be increasing.  In other words, acceleration would be positive and most especially so after a tax cut.  The data is not consistent with this notion.

Clinton’s famous tax increase preceded increased GDP growth by either measure, and an upturn in acceleration.  The Bush tax cuts preceded decreasing GDP growth.

I’m not going to get into a correlation vs causation discussion.  I’ll simply say that tax cuts over 5+ decades have been an utter failure at stimulating real economic growth in any inflationary environment.  Since the real world data correlation is counter to the received conservative wisdom, it might be worth trying an anti-conservative approach.

It might also give the NGDP targeting enthusiasts something to ponder.

Cross posted at Retirement Blues.

Tags: , , , Comments (16) | |