It’s been awhile since John “Everything I wrote about economics for an entire year was wrong” Hinderaker has written about economics. The respite has been glorious. But now that Republicans in the House have passed a tax bill, ol’ John has to tell us that they will lead to glorious growth.
I have one word for him: KANSAS. Sam Brownback tried this over the last 5 years in his state and it failed. Miserably. For more on this, please see Menzie Chen’s writing over at Econbrowser.
But more to the point, the whole “tax cuts made the 80s the most amazing economic growth miracle since the beginning of time pure trope. Let’s look at the overall pace of growth:
Above is a chart from the FRED database (which John still can’t seem to locate) that shows the Y/Y percentage change in real GDP. On the really funny side, notice that the pace of growth under Carter was higher on a Y/Y pace than Reagan. John never seems to mention that. And yes, growth in the 1980s was good. But after the initial acceleration (which is more a function of statistics than actual numbers) growth occurred at/near/around its historical trend.
So, was this a function of tax cuts? The Kansas experiment tells us that, no, it probably wasn’t. Clinton raised taxes in the 1990s and the economy still grew. Bush II cut taxes and growth declined. Taxes were over 90% during the 1950s and 70% in the 1960s, yet we still had solid growth. So, between the pure experiment of Kansas and the historical record, we can say that tax rates don’t seem to have the impact we thought.
So, what caused growth? Let’s start with this chart:
Notice that when the Federal Reserve raises rates (usually to slow inflation), the economy slows. Imagine that. Its’ almost like there’s a relationship there or something.
And as for Saint Ronnie Reagan, remember that he loved to spend government money just like a real Keynesean. However, he liked to spend it on the military:
Ron primed the pump with a massive increase in defense spending. So, Uncle Ronnie loved to spend money just like the tax and spend liberals.
So, what really caused growth?
I present you with the labor force participation rate, a statistic that Republicans magically found during Obama’s presidency. Econ 101: potential GDP = population growth+productivity growth. More people + an increasing ability to produce more stuff equals how much we’re going to grow. During the 1980s and 1990s two demographic trends hit: the baby boomers began their prime earnings years and women increased their economic participation. The combination was powerful. It’s also why we’re now slowing: women are leaving the labor force and the baby boomers are retiring.
None of this matters to John. He’s been economically illiterate since the beginning of time and still continues to write about the subject. But for others, this data might be important.
The thing is, most people can check whether their beliefs on taxes are true. It isn’t particularly difficult. But people who believe in the magic of tax cuts never choose to look at the data.
I agree with you completely that tax cuts paying for themselves is nonsense.
When we reduced our highest bracket rates from 92% down to 70% in 1965, that reduction occurred just as the boomers were entering the labor force and beginning to pay income taxes. That combination of effects was at least neutral.
What President Reagan’s tax cuts did was cut to revenue and about double the annual deficit.
But I disagree with your explanation where it concerns the labor participation rate. That paragraph is far too simple.
From about 1965 the baby-boomers began setting up their own households. Remember what that was like? (The purchases of dishes, flatware, cookware, towels, sheets, blankets, and second hand furniture.) Demand increased.
The boomers were working the entry level low paid jobs. Married women began to work outside the home in larger and larger numbers. As they had children their spending had to increase. After each child was born, boomer mothers went back to work. Demand increased with each child.
By 1990 the boomers’ children were leaving home in significant numbers. They were setting up their own households. Some of the boomer wives began to leave the workforce. Perhaps enough of them to counter balance their children entering the workforce. Demand was still increasing but the amount of cheap imported goods was increasing.
Growth in the labor force participation rate stalled and stayed around 67% until after the 2001 recession when the rate fell and stayed around 66% by 2003. Explaining this is not as simple as wives leaving the workforce or retirements. How was demand decreasing? And as those wives began to leave the workforce why weren’t their children beginning to take up those jobs?
Then with the 2008 recession, the labor participation rate began to fall again. This time the fall continued until the rate was about 63% in 2013. Again how was demand decreasing? The boomers were not dying at that rate. And there was the matter of the boomer grandchildren causing increased demand.
No, the changes in the labor participation rate were being driven lower and lower by American corporations moving production to Mexico and China. Added to that, the Global Free Trade treaties brought more and more cheap imported goods into the US and that competition cost Americans their jobs.
Those two dynamics sent the labor participation rates lower and lower after 2000. There was a pause in the descent of the labor participation rate as American’s borrowed and spent but that ended in 2007. After 2007 US consumers were no longer able keep as many Americans working.
But none of this implies that tax cuts pay for themselves.
Democrats may borrow and spend. but republicans just borrow and spend.
Remember, the greatest accomplishment of the Reagan administration was to turn the US from the worlds greatest creditor nation to the worlds greatest debtor nation.