Tax Cuts and the Length of Recessions – A Question for Believers
Based in part on a comment in another post by reader Peter Schaeffer, I started to think about the business cycle. I note that the President and his people have long insisted that there was a long recession whose effects were reduced by GW’s tax cuts.
For example, here are some comments made by Greg Mankiw a few years back:
“On the contraction end of the rope were the shocks that the U.S. economy had experienced over the preceding three years: the end of the high-tech bubble and the consequent effects on wealth, consumption, and especially investment; the revelation of years of wrongdoing at some corporations; and the impact of the September 11 attacks and the subsequent uncertainties surrounding the war on terror and the conflict with Iraq. Other contractionary forces came from abroad. Slow growth in many of our trading partners, notably Japan and much of Europe, depressed our exports, and it continues to do so today. Given these events, it was remarkable that the U.S. economy was not in worse shape in 2002 and entering 2003, but this fact was of little consolation to people looking for work or to retirees who had seen their savings depleted by the stock market decline.
Pulling hard on the other end of the rope were the expansionary forces of monetary and fiscal policy—the Federal Reserve’s series of interest rate cuts and the Administration’s tax cut in 2001 and the stimulus package of 2002.”
Anyway, long story short according to Mankiw, more tax cuts were needed to break this impasse, so the President wisely cut taxes again, and since then we’ve all lived happily ever after.
Mankiw went on:
“Had we done nothing, the economy would eventually have recovered from the recession. But the actions the President took made the recession less severe.
As the President has discussed, analysis done within the Administration has shown how his tax cuts have substantially offset the series of adverse shocks that have been buffeting the economy. Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP would have been about 2 percent lower in the middle of 2003. About 1.5 million fewer people would have jobs today. The job market is not what we would like it to be right now, but it would have been worse without the Administration’s actions.”
And this is the crux of an interesting question. Most of the rest of us would agree that the economy would eventually have recovered…. many of us think the economy might even have recovered somewhat faster with a different President and different economic advisor. 3 years seems an awfully long time for a contraction to be going on, larger contractionary hits from abroad have happened before with little adverse consequence to the economy (in fact, it may well be that some of those contractions abroad Mankiw mentioned were exacerbated by the US situation more than the other way around), and as to the War in Iraq…
Leaving aside the point PGL always makes, that a cut in tax rates that doesn’t reduce the debt is not a tax cut, it’s a tax postponement, we’re left with a few questions to ponder… if you were the President, and you continued to repeat these points several years later, or if you were Mankiw, how would you go about proving these claims:
1. Recessions come to an end faster with a tax cut
2. This particular slowdown would have continued to linger without not just one round, but two, of tax cuts
3. The economy is better off in the long run leaving the tax cut in place long after the slowdown has come to an end
Why am I putting the burden on Mankiw? Well, I am not a great student of what Mankiw says, but I know that at least one time, Mankiw did say:
“Finally, the President’s tax cuts did contribute to the budget deficit but they also are partly responsible for the robust economic recovery that we are currently experiencing.”
Now, we don’t all agree that the tax cuts contributed to the recovery, but we all do agree that it had some negative consequences. Thus, those who advocate the policy should be able to justify those negative consequences, and the only way to do it is to prove the positives are greater. So to folks like Mankiw and other tax cutting folks – what about it?
And while I think the responsibility for checking these claims lies with the Mankiws, at this blog we like to play with numbers ourselves… anyone have any suggestions for how to check the three claims above?