The 2003 Tax Cut and Economic Growth – Donald Duck’s Theory

Has Donald Luskin been taking writing lessons from Peggy Noonan?

According to the National Bureau of Economic Research, the official end of the last recession – and the origin of the current expansion – was November 2001. It’s true that since November 2001 lots of economic indicators have markedly improved. Real GDP has grown by 14.8 percent … Those are big numbers. But what catalyst triggered their birth in November 2001? All I can think of is what happened the prior month – the 9/11 attacks on the World Trade Center and the Pentagon. Terrorism causes prosperity? How’s that for an economic theory? That might not be as far-fetched as it sounds. Many economists believe that wars can trigger economic booms, so why should the war on terrorism be any different? But I have a better theory. It depends on using a different date for the end of the recession and the beginning of the expansion. Let’s see what happens if we use April 2003. I’m going to throw a lot of numbers at you here, but try to follow along. It’s going to be worth it. In the 17 months from November 2001 (NBER’s official recession end-date) to April 2003 (my proposed recession end-date), real GDP grew 3.2 percent. But in the 36 months from April 2003 to now, real GDP has grown much more: 11.3 percent.

“Those are big numbers?” Good grief. But don’t you just love this Post Hoc Ergo Propter Hoc nonsense? A 11.3% increase over three years equates to a growth rate equal to 3.6% per year.

I have another big number for Donald Duck. During the Clinton years, real GDP grew by 33.8%. OK, that was an eight year period, which means the average annual growth rate was 3.7%. Now some bone head liberal might use this data to suggest increasing tax rates led to the faster growth. After all, Post Hoc Ergo Propter Hoc.

But to be fair to the bone head liberals of the world – there is a theoretical basis for suggesting fiscal restraint leads to more national savings, more investment, and higher long-term growth. But let’s see if Donald Duck could explain to us how reducing national savings increases long-term growth. In the meantime, could someone tell Donald his incredibly stupid op-ed has been done over and over by some of those other free lunch ducks. Quack, quack.

Update: Donald Duck has been trumped by another character from Toon Town: Robert Novak:

RNC Chairman Ken Mehlman met with Republican members of Congress this week to impress upon them just how bad the opinion polls are looking for them, and warning that they face a possible catastrophe in November. This warning contributed to GOP determination to pass a tax reconciliation bill that will extend the 2001 and 2003 tax cuts beyond their current expiration dates at the end of the decade … Despite all the media coverage given to the issues of immigration and “corruption,” polls show that the issue currently concerning voters the most – even more than immigration – is the wasteful spending by the Congress.

There are two ways to read the panic driven push for another tax “cut” (more properly tax shift) – (a) pandering; or (b) Novak’s claim that tax cuts are equivalent to spending cuts. Via Kevin Drum comes a regression (for whatever it is worth) provided by William Niskanen that suggests Novak’s starve the beast theory has not applied during the Republican Administrations of the last generation. So pandering, it is!