The heaviest lifting by far in response to the recession and sluggish recovery has come from lower interest rates. But what the Bush policies failed to fix is only half of this story. Zandi makes the point that better policies could have given us 2.6 percent higher GDP in 2003 and two million more jobs in 2004. Economic performance that vigorous would have, in turn, cut our current fiscal deficit in half. As an engine of growth and jobs, the administration's policies have clearly been second-rate.
The Bush administration can't possibly believe its own rhetoric that any and all jobs created are due to the tax cuts. After all, the administration's own regular forecasts since early 2002 have consistently shown that employment would be growing even without any change in policy. Nor have tax cuts been the only policy response to the recession; as Zandi points out, extraordinarily low interest rates (thank you, Federal Reserve Board) have led to stronger housing and auto sales, high levels of cash-out mortgage refinancing, and more business investment.
At the Economic Policy Institute, we have wrestled with how to gauge the success of the last round of tax cuts proposed by the Bush administration and passed in May 2003. We decided that the administration's own projections, which were used to sell Congress and the country on the tax cuts last year, were the best yardstick to use. We track actual employment gains against the administration's projections and post the results regularly on JobWatch.org.
The president's Council of Economic Advisers (his economics staff) projected in February 2003 that passing the administration's tax cuts would result in the creation of 5.5 million jobs by the end of 2004 -- 306,000 new jobs each month, starting in July 2003. Of that number, according to the CEA, over two-thirds would have been generated even without a tax cut.
Thus, if the tax cuts had performed as projected over their first year, 3,672,000 jobs (306,000 a month for 12 months) should have been created. In fact, the administration fell more than 2.2 million jobs short of its own 12-month projection. Job creation failed to meet the administration's projections in 10 of the past 12 months; only in March and April 2004 did total jobs created exceed 306,000.
The new Economy.com analysis, which allows us to assess what has driven recent growth, is not encouraging for advocates of tax cuts for the rich. All policy changes combined generated an additional 3.5 percent of GDP growth in 2003. Of that, 63 percent came from cutting short-term interest rates from 6.5 percent in early 2001 to 1 percent by 2003 (the lowest rate in four decades). Greater defense spending added 0.4 percent to growth, accounting for 11 percent of the overall effect of “policy.”
What about the tax cuts? Those going to high-income taxpayers boosted GDP by just 0.1 percent in 2003, just one-fourth of the effect of war spending. The business tax breaks also had a minimal 0.1 percent impact on GDP in 2003. The tax cuts aimed at the middle class, such as the expansion of the child-care tax credit and the lowering of the threshold for the 10 percent income tax bracket, added 0.5 percent to GDP, an effect more than twice as great as the high-end tax cuts and business breaks combined. Yet nearly twice as much tax cutting went to high-income families and businesses. Zandi's analysis thus shows how little economic bang the Bush administration policies got for their buck.
Zandi's estimates confirm what was well known during last year's tax cut debate. Here's what ten Nobel Prize winners in economics declared in a publicly released statement in early 2003:
“The tax cut plan proposed by President Bush is not the answer. Regardless of how one views the specifics of the Bush plan, there is wide agreement that its purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near-term. The permanent dividend tax cut, in particular, is not credible as a short-term stimulus. As tax reform, the dividend tax cut is misdirected in that it targets individuals rather than corporations, is overly complex, and could be, but is not, part of a revenue-neutral tax reform effort.Zandi also analyzes the impact that a better policy response would have had, one that focused on immediate creation of more spending and jobs. His alternative package would have taken effect in the fall of 2001 and included a payroll tax holiday (50 percent of the package), a one-time family tax cut (22 percent of the package), extended unemployment insurance (11 percent of the package), and state fiscal relief (17 percent of the package). This alternative package would have cost the same over three years as the administration's policies, roughly $300 billion over the fiscal years 2002-04. Yet this policy approach, which directs temporary tax cuts toward lower- and middle-income families, would have had a much larger economic pay-off. Had it been enacted, we would be enjoying two million more jobs and much higher GDP this year. This greater growth would also have led to more revenue and less spending, thereby lowering the fiscal deficit in 2004 by roughly $200 billion, or 45 percent, from what we now expect this year. With good policy we could have been in a much better economic situation now.Passing these tax cuts will worsen the long-term budget outlook, adding to the nation's projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.
The progressive policy package that Zandi examines would have had another huge advantage. Its temporary alternative tax and spending measures would raise the deficit only in the first year -- unlike the Bush administration policies, which create a large and permanent deficit long into the future. Compared to Zandi's temporary fiscal stimulus package, the permanent Bush fiscal plan is the gift that keeps on taking. The negative employment effect of the excessively large permanent deficits inherent in the Bush policies may be seen in Zandi's analysis of the next ten years. Here he compared the economic effects of two scenarios. One has deficits declining as tax cuts expire and spending grows with inflation. The other scenario increases defense spending with the GDP and makes the tax cuts permanent (with adjustments to prevent more people from paying the alternative minimum tax). As a result of the excessively large, long-term fiscal deficits in the second scenario ($623 billion in 2014), interest rates would rise to slow growth so much that, ten years from now, we would have 3 million fewer jobs and 3 percent lower GDP.
Thus, the centerpiece of the Bush economic policy -- massive tax cuts for those already well off -- created remarkably little growth in the short term and will reduce growth in the longer term. Bush's plan, which he promoted just over a year ago as his “Jobs and Growth” plan, has turned out to be anything but.
Lawrence Mishel is the president of the Economic Policy Institute (EPI). He writes a monthly column on economic issues for the Prospect's online edition. Lee Price is research director of EPI.
