EGTRRA arrived in the middle of a recession, but that was an accident. It was devised in 1999, when the economy was booming, to defend Bush’s right flank against Steve Forbes. During the 2000 campaign, Bush sold it as a way of returning budget surpluses to the people, with not a hint that it had something to do with fighting recession. The recession story was an after-the-fact reinvention. And EGTRRA didn’t seem to help all that much. Formally, the recession ended in late 2001, but most labor-market indicators continued to worsen into mid-2003. JGTRRA, which mainly cut tax rates on capital gains and dividends, was followed by a real recovery. And the Bushies naturally claimed the credit. But the real source of the expansion was the housing boom, which had very little to do with the tax cut.
Krugman’s claim that “EGTRRA didn’t seem to help all that much” has been sort of picked up by the free lunch supply-side school of utter BS. Even though they were for the 2001 tax cut then, they now claim this was someone else’s idea – not theirs. So let’s focus on JGTRRA, which the supply-side kiddies claim was the Nirvana – or something like that.
While we have provided three graphs, focus on the first for a moment. Each graph is taken from NIPA table 1.1.3, which can be found here, and shows real GDP in index form with the 2000 level = 100 (side note directed at CoRev – when trolls accuse me of lying and/or not providing links, please don’t back their BS). Business investment (Inv-b) tanked after 2000 and not surprisingly did recover somewhat (second side note to CoRev – if you wish to dub the investment led recession which I have often talked about the “Y2K” effect, fine by me). But notice something – real business investment as of 2007Q3 was only 12.6% higher than it was as of 2000. And even with the rather anemic overall real GDP growth over the past 7 years, real GDP as of 2007Q3 was still 18.9% higher than it was as of 2000. This was not exactly a business investment led recovery. Now one could say that consumption has increased relative to real GDP. But as far as domestic private spending, Krugman is right about residential investment demand leading the way through 2005 and the very early part of 2006. Since then, we have seen a sharp drop in residential investment demand.
Our second graph shows real exports and real imports. During the lean years, export demand actually fell but has recovered nicely. Both export demand and import demand are now about 32% higher than they were as of 2000.
Our third graph shows the three components of government purchases. State and local (S&L) spending growth has been quite modest and might be seen as a drag on aggregate demand growth. Real nondefense Federal purchases (Nondef) have grown at about the same rate of real GDP. But notice the sharp growth in defense spending (Def), which now stands at 38.8% of its 2000 level. If this wasn’t part of the aggregate demand stimulus – what was? Then again, wasn’t this the point made by Menzie Chinn about a year ago?