Policy and the Economy: The Good, The Bad, and The Ugly

Oct 25, 2010   //   Economy

Summary

Since 1977 there have been a total of 5 complete Republican presidential terms and 3 complete Democratic presidential terms.  All five of the Republican presidential terms employed supply-side tax cut policies.  The three Democratic presidential terms employed progressive tax rate policy.  Job creation was stronger during Democratic presidential terms having a median of 11.2 million jobs/term (range 10.3 – 11.5) versus a median of 2.6 million jobs/term (range 0.0 – 10.8) during Republican presidencies.  Time to sustained jobs growth following recession in both supply-side periods was prolonged (12 and 22 months) as opposed to 6 months after this recent downturn following the passage of the Stimulus legislation.  When expressed as a fraction of our economy, federal gross debt was reduced under all three Democratic presidential terms and was substantially increased under all 5 Republican presidential terms.  Regarding actual gross debt, it increased 36.4% under Republican presidencies and only 4.2% under Democratic presidencies.  Supply-side tax cut policy was supposed to stimulate the economy by increasing investment; yet growth in real investment during the Clinton years was more than 3 times greater than that produced under either the Reagan/GHW Bush or GW Bush administrations.  Additionally, average annual real median household income and wage levels both did better during the Clinton presidency than either of the Republican supply-side tax cut periods.  The Pledge to America involves the same policies that substantially drove up debt and produced weaker economic growth during Republican presidential terms.  Based on historic performance, supply-side tax cut policy has not delivered its promise to stimulate the economy and employment, but has consistently driven up national debt at a rate that outruns economic growth.  The choice of policy in this upcoming election is not only important in correcting our economic difficulties, but the radical right’s anger that is becoming less focused and more likely to claim minorities like gays, Latinos and Muslims as collateral damage will not likely stop until the economy is on firmer footing.

Introductory Remarks

I recently saw an interview of Eli Wallach, now 95 years old, and was motivated to watch one of his hit movies again, The Good, The Bad and the Ugly.  In a sense, the title of that film is appropriate for what will be addressed in this article.  The Good: policies associated with strong jobs creation, strong economic growth, and debt reduction.  The Bad: policies associated with lower jobs creation, lower economic growth and increased debt.  And The Ugly: the unfocused rage of the radical right during these difficult economic times that is finding its way to minorities including gays, Latinos and Muslims, who are being scapegoated.

The central issue in this upcoming election is the economy, especially jobs creation.  Although we have had a higher debt/GDP ratio in this country following WWII, we reduced debt over time with progressive tax rate policies and by growing our economy.  Since 1981, however, we have introduced a different tax model known as supply-side, or trickle down, policy.  That policy notably reduced taxes to the benefit of the most wealthy with the intent of increasing investment that would, in turn, stimulate the economy.  When first introduced by president Reagan in 1981 this policy was supposed to produce a balanced budget by 1984 as the tax cuts would pay for themselves (ref).  The partisan divide between progressive tax rate systems and supply-side advocates is deep.

In listening to politicians and partisans defend their positions, I often think of the Groucho Marx line: “Who are you going to believe, me or your lying eyes”.  We can now put our eyes to the test as we have the opportunity to view historic performance data from both policies.  Since 1977, we have had 8 complete presidential terms, 5 Republican (all employing tax cut policy) and 3 Democratic (all employing progressive tax rate policy), and we can compare jobs creation, GDP growth, debt, investment growth, household income and wages between them.  Did the tax cuts under supply-side tax cut periods pay for themselves as we were told they would?  We can examine what has happened to debt.  Did supply-side policy stimulate economic growth more than the progressive tax rate system?  We can examine job creation and GDP growth under both policies.  Did Americans do better under supply-side policy?  We can examine household income and wages under both policies.

Job Creation by Presidential Term

Job creation is the central issue this election cycle.  How did the two policies do regarding job creation?  Table 1 provides a display of total nonfarm payroll employment by presidential term since 1977 (ref).  Nonfarm payroll employment is the measure of jobs growth most frequently used in the media and by economists.

Table 1:   Job Creation by Presidential Term

*in Millions

With the exception of Reagan’s second term where jobs creation was roughly equivalent to that during the Carter and Clinton administrations, jobs creation (both in terms of numbers of jobs created as well as average annual increase) was stronger during Democratic administrations.  Median job creation/term under Democratic presidential administrations was 11.2 million (range 10.3 – 11.5) versus a median of 2.6 million/term (range 0 – 10.8) under Republican administrations.

Another useful statistic regarding jobs creation is the time to sustained jobs growth following the end of economic downturns.  This can give insight as to the effectiveness of policy in stimulating employment.  Figure 1 displays time to sustained jobs growth from the last three recessions (ref).  During two of these recessions, the July 1990-March 1991 and the March 2001-November 2001 downturns, supply-side tax cut policies were in place.  The recovery from the current ‘Great Recession’ followed passage of the Stimulus Legislation.

Figure 1:

Following both recessions where supply-side policy was in place, time to sustained jobs growth was prolonged.  After the 1990-91 recession ended, the economy lost nearly 300,000 additional jobs in the 11 months that followed.  And the 2001 recession, which was relatively brief and shallow (ref), was followed by a so-called jobless recovery that lasted for nearly two more years.  These data, in combination with the lower job growth numbers under presidential terms where supply-side policy was in place, would argue against that policy being a strong stimulator of employment.  Regarding the current recession, the worst downturn since the Great Depression,sustained job growth occurred just 6 months following the end of the recession.  This argues in favor of the effectiveness of the stimulus legislation that put a floor on this recent economic downturn.  Time to sustained jobs growth following the end of the Great Recession has been cited as the strongest recovery our country has seen in decades (ref), although the road back from this recent massive loss of employment will not be achieved quickly.

GDP Growth

Was supply-side tax cut policy associated with stronger economic growth?  The standard measure of our economy is the Gross Domestic Product; it is a measure of our overall economic output (ref).  Overall, between 1978-2005 our Gross Domestic Product experienced greater growth under Democratic presidencies than Republican presidencies, 12.6% vs. 10.7% (ref).  The results from different presidential terms are displayed in the reference.  Ranking the presidencies having the strongest to weakest GDP growth: Clinton, followed by Reagan, followed by Carter, followed by GW Bush, followed by GHW Bush.  These data argue that there was no advantage associated with supply-side tax cut policy versus progressive tax rate policy in growing the economy.

Debt by Presidential Term

Did supply-side  tax cuts pay for themselves?  Economic commentators have noted a pattern between changes in US national debt and US presidential terms over the last few decades.  These commentators observe that changes in US national debt have been correlated with the party-affiliation of the US president (ref).  It is the president who proposes the budget and Congress can change it, although Congress rarely appropriates more than what the President requests.

Figure 2: Change in Gross Federal Debt/GDP by Presidential Term

During every Republican presidential term since 1977, our gross federal debt increased when expressed as a fraction of our economy.  During every Democratic presidential term since 1977, our gross debt was reduced when expressed as a fraction of our economy.  Regarding actual gross debt, during the period 1978-2005 it increased 36.4% under Republican Presidents versus only 4.2% under Democratic presidents.  These results should not be surprising as there is no evidence that tax cut policy delivered its promise to grow the economy (previous section) and thus increase tax receipts to off-set the loss of revenue from the cuts.

An analysis of the 2005 deficit has been published (ref) and is displayed in figure 3 below.  This time point is of interest because it gives a picture of the deficit from the Bush tax cuts when the economy had recovered from the 2001 recession and is also pre-economic crisis.

Figure 3:

The size of the deficit in 2005 was $539 billion dollars.  Tax cuts (48%) and increases in defense/homeland security/international (37%) were the major contributors, together amounting to 85% of the deficit.  The analysis states that in the absence of legislation enacted since 2001 that the country would have had a surplus that year.  These figures and causes will be important when we consider the recently published Republican plan, the Pledge to America, in the Discussion section.

Other Economic Factors

Economic analyses have been performed comparing the two Republican supply-side tax cut periods (1981-1992, 2001-2008) to the period of the Clinton administration (1993-2000) where supply-side policies were reversed (ref).

Real Investment Growth during the Clinton years was 10.2% versus 2.8% for the Reagan/GHW Bush years and 2.7% for the GW Bush years.  This greater than three-fold difference in investment growth is important in that this measure is central to supply-side theory.  The authors of the above referenced article conclude that without better investment growth being associated with the supply-side tax cut periods, it is difficult to draw any plausible connection between tax cut policy and any observed positive economic performance during the periods that policy was in place.

Average Annual Real Median Household Income Growth was greater during the Clinton years (2.0% annual increase) versus 1.4% during the Reagan/GHW Bush years and only 0.3% during the GW Bush years.

Wage Levels did better during the Clinton years than either of the tax cut periods.  Average real hourly earnings during the Reagan/GHW Bush years fell at an annual rate of o.1 percent and during the GW Bush years rose at an annual rate of only 0.3%.  During the Clinton years average hourly earnings grew by 0.9%/year.

The 1990s, when a progressive tax rate policy was in effect, has been cited as the longest period of economic growth in US history (ref).

Discussion

In examining actual economic outcomes data between the years 1977-2008, there is no evidence that supply-side tax cut policy offered any advantage over progressive tax rate policy in growing our economy and creating jobs.  In fact, supply-side tax cut periods tended to underperform progressive tax rate periods in jobs creation, GDP growth, real investment growth, median household income and hourly wages.  Most notably, when expressed as a fraction of our economy, all five Republican presidential terms were associated with a substantial increase in gross federal debt whereas all three Democratic presidential terms experienced reduced debt.  Without the promise of increased tax receipts from enhanced economic growth being realized from supply-side policy, it would take substantial cuts in federal programs to balance the budget.

It is little wonder that politicians will not engage in specifics when asked where the cuts will come from to balance the budget under supply-side tax cut policy.  Our 2009 federal budget consisted of the following (ref):  Social Security (20%, $683B), Medicare/Medicaid/CHIP (22%, $764B), Defense (19%, $663B), income security (15%, $534B), Interest on the Debt (5.4%, $191B), Education (2.2%, $78B), and other miscellaneous items.  Based on the 2005 deficit (pre-economic crisis), the size of the cuts that would have to be made to support tax cut policy is roughly equivalent to our expenditures in Social Security, or Medicare/Medicaid/CHIP, or Defense.  Even the Tea Partiers feel that Social Security and Medicare are worth the cost to taxpayers (ref).  And with the Pledge to America (ref) calling for a fully funded missile defense program (increased military spending), and with tax cut advocates calling to make the ‘Bush tax cuts’ permanent, we are right back to the same deficit problem that existed during the GW Bush years.  Notably, the Pledge to America does not mention education, one of the key investments we can make to secure our future competitiveness, even though our students are lagging behind their foreign counterparts.

Getting back to the theme of this article, I believe we have seen The Good and The Bad.  As historic data reveals no evidence of enhanced economic benefit associated with supply-side tax cut policy, as it has consistently been associated with marked increases in federal debt, and as there is no clear picture as to where substantial cuts to our federal budget would be made to balance the books (no less produce surpluses to help pay down the debt), this writer concludes that it is time to deep-six this policy and move back to policies that have had a positive record of growing our economy and reducing debt.

A word of caution however.  As our economy is 70% personal consumption, caution must be exercised in addressing the current deficits too quickly during this still fragile recovery.  I would advocate that stimulus funding remain in place (perhaps even augmented in a targeted fashion) and that the recent expanded tax cuts to 95% of America (the consumer being the key driver of our economy) remain in place until we are on firm footing.  Two major economies, the US in the 1930′s and Japan in the 1990′s, attempted to correct deficits during recovery and both economies took a second leg down.

Now, for The Ugly.  Frank Rich in a recently published NY Times Op-Ed piece entitled “The Rage Won’t End on Election Day” (ref) discussed that the ‘radical right’s anger is becoming less focused, more free-floating and more likely to claim minorities like gays, Latinos and Muslims as collateral damage’.  We are witnessing a rash of hate crimes, some too awful to describe, against groups who have been scapegoated during this economic downturn.  Quoting from his article: ” Don’t expect the extremism and violence in our politics to subside magically after Election Day — no matter what the results. If Tea Party candidates triumph, they’ll be emboldened. If they lose, the anger and bitterness will grow. The only development that can change this equation is a decisive rescue from our prolonged economic crisis. Not for the first time in history — and not just American history — fear itself is at the root of a rabid outbreak of populist rage against government, minorities and conspiratorial ‘elites.’” I recommend reading Mr. Rich’s article.

Much is at stake this election.  Choice of policy is critical to correcting our economic, social and political difficulties.  I intend to make an information-based choice, and I do not believe my eyes are lying.

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