Clinton and her Democratic competitors have a big problem. The facts don’t support their negative characterization of the Bush tax cuts. Indeed, everything Bush’s opponents said would happen after taxes were reduced didn’t happen.
What is the problem with what the Dems said? Simple:
Recall that supporters of marginal-tax-rate reductions argued that the lower rates would induce individuals and firms to work more and take more risks. This heightened activity would lift the economy and, over time, even help the Treasury recapture a good bit of the revenue lost when the rates were initially cut.
Opponents warned that increased deficits would limit or even overpower the effects of the tax cuts by driving up interest rates.
Hassett’s view… both sides were wrong. Republicans were wrong in predicting the deficit wouldn’t increase, and Democrats were wrong in predicting interest rates would rise. Seriously. This is what he’s arguing.
If the economy slows and employment softens, policy makers will be inclined to ease monetary policy to stimulate aggregate demand.
And apparently he isn’t aware of the fact that despite the massive cuts in interest rates, real growth… even cherrypicking the starting dates (GW likes to start with third quarter of 2003) has been, at best, and I repeat – at best, ordinary.
So here’s my attempt to restate Hassett’s argument:
GW’s dectractors underestimated the decline in growth and how ineffective the Fed’s monetary policy would be at fixing GW’s mess. Therefore, they underestimated the degree of the downward pressure on interest rates that the Fed would exert and the length of time for which the Fed would exert that pressure. Therefore, these detractors are at least as wrong (if not more so) than the people that predicted that the tax cuts were going to usher in a new era of booming growth and diminishing debt.
Yup, that’s how to score things, big guy.
And given Hassett’s track record, this can only be encouraging (unless Republicans win):
This means if Democrats win, despite the utterances of the presidential candidates, the deficit is going to go up as tax dollars are steered toward health care and other Democratic favorites. Taxes will go up, too, as the Bush tax cuts expire, and the economy will suffer.
If, on the other hand, Republicans win, then they will extend the Bush tax cuts, and the deficit will go up. The extension of the low marginal tax rates will provide continued economic benefits.
Either way, you can be sure that the Bill Clinton-era dogma about deficits and interest rates will be a thing of the past.