Wednesday, July 20, 2011

Nearly 10 Years Ago Today, The U.S. Began Borrowing Billions To Pay For The Bush Tax Cuts

As debates about deficit reduction continued to be heavily tilted toward cutting spending, which threatens to undermine a fragile recovery, rather than raising revenue from those who can afford it, it’s important to remember the budgetary impact of the Bush tax cuts.

ThinkProgress: Nearly 10 years ago today, on August 1, 2001, the Associated Press reported that the Treasury Department was tapping $51 billion of credit in order to pay for the budgetary cost of the first round of Bush tax cuts’ rebate checks. The AP reported at the time that Democratic Party opponents of the tax cuts worried that they’d return government budgets to “red ink“:

The opponents of the tax cut turned out to be right. The 2001 and 2003 tax cuts combined have blown a $2.5 trillion hole in America’s budget and created deficits stretching on for years.

As IHS Global Insight Chief Economist Nariman Behravesh told the Washington Post a year and half ago, “The problem is that the conservatives controlling the government during the last decade mismanaged the macroeconomy, and that got us in big trouble.” America and Texas has learned what life is like under a true conservative government. Controlling all branches of government during much of the last decade gave Republicans near absolute power to construct a conservative government agenda with little compromise or input from progressives.

In a position of virtually unchecked power during most of the last decade conservatives failed utterly at the most basic responsibilities of governing, leaving our nation weaker and our people less prosperous, less safe and less free. The Bush years may have been years of political and legislative victories for conservatives, but those years of political and legislative victories have resulted in disastrous conservative governance and a tremendous increase in the national debt!

The nation moved from an annual budget surplus of $300 billion, as Pres. Clinton left office to an annual budget deficit of $1 trillion, as Pres. Bush left office. Republican representatives in Washington fully supported and voted for Pres. Bush's tax cuts and increasing deficit spending without complaint.

Reagan's "supply-side" mythology that "tax cut stimulus works best" is alive and well and still promoted by conservatives today. If tax cuts are the most stimulative approach to creating jobs in the economy, as RNC Chair Steele claimed during his CNBC appearance, then the economy should already be racing, given the trillions of dollars in tax cuts President Bush and Republicans gave the nation between 2001 and 2008. Right? Wrong! Pres.
The U.S. Department of Commerce data shows that as Pres. Bush was preparing to leave office in the fourth quarter of 2008 the economy shrank at its fastest pace in nearly 27 years, sinking deeper into recession as consumers and business cut spending.

The government report shows a broad-based contraction across nearly every business sector with the gross domestic product, which measures total goods and services output within U.S. borders, in a near free fall 3.8 percent annual rate of contraction in the fourth quarter. That is the biggest drop since the first quarter of 1982, when output contracted 6.4 percent.

The Commerce Department report said that late 2008 consumer spending, which accounts for two-thirds of U.S. economic activity, fell 3.5 percent in the fourth quarter, after declining 3.8 percent in the third quarter, and Q4 spending on durable goods, like cars and furniture, plunged 22.4 percent, the steepest decline since Q4 of 1987. Investment by business also sharply declined at 19.1 percent, for the sharpest pull-back since the first quarter of 1975, and residential investment plummeted 23.6 percent too. Exports of goods and services plunged as well at a the rate of 19.7 percent, the biggest drop since the third quarter of 1974.

Added to the 0.5 percent contraction in GDP in the third quarter of 2008, the fourth quarter contraction rate of 3.8 percent yields the first consecutive quarterly declines in GDP since the fourth quarter of 1990 and the first three months of 1991.

Across all four quarters of 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent.
As Center for American Progress Senior Fellows Christian Weller and John Halpin noted in 2006, the outcome of the 2001 tax cuts was "the weakest employment growth in decades." The 2003 tax cuts didn't fare much better, resulting in job creation that was "well below historical averages."

When Bush's White House proposed the 2003 cuts, they promised that it would add 5.5 million new jobs between June 2003 and the end of 2004. But "by the end of 2004, there were only 2.6 million more jobs than in June 2003."

As Paul Krugman has pointed out, the belief that Bush's tax cuts successfully stimulated the economy is a form of mythology. CAP's Michael Ettlinger and John Irons wrote in September, "Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras" that followed Reagan's 1981 tax cuts and Bush's 2001 tax cuts.

Indeed, employment growth was much stronger post-1993 than post-2001. The average annual employment growth was 2.5 percent after 1993 and just 0.6 percent after 2001.

And, remember President Bush's $168 billion tax cut/rebate economic stimulus plan the United States Congress approved in February of 2008, to help stave off economic recession. That does not seem to have worked either. Martin Feldstein wrote in the Wall Street Journal that of course the tax cut stimulus didn't work:
Here are the facts. Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the pay down of debt. . .

. . .Although press stories emphasizing that the rebates induced additional consumer spending were technically correct, they missed the important point that the spending rise was very small in comparison to the size of the tax rebates. . .

The small rise in spending in response to these tax rebates is similar to what previous studies of one-time tax cuts found. It also corresponds to what both basic economic theory and common experience imply. Although someone who receives a permanent annual salary increase of $1,000 typically would increase his annual spending by an almost equally large amount, a $1,000 rise in wealth caused by a share price increase or a tax rebate would raise spending only gradually over a number of years.

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