Friday, April 10, 2009

Lest We Forget: the 2003 Bush Tax Cuts and the Folly of Economic Conservatism

One of the worst examples of conservative economic policy-making in recent years was the 2003 Bush tax cuts. W and his supporters in Cabinet, Congress and the business community were reaching for that winning Reagan formula of feeding the fat cats to generate prosperity while foolishly asserting that the cuts would "pay for themselves". They were also using the recession as a pretext for trying to ideologically engineer permanent changes to the tax structure--at the same time that a very expensive war in Iraq was just getting underway. The case of the Bush tax cuts is instructive now as we watch governments deal with the 2008-2009 economic crisis, a crisis largely triggered by Bush's financial deregulation and no doubt made worse by his fiscal policies.

Not surprisingly, a prestigious group of 450 leading economists signed a statement urging Bush not to enact the cuts. The list had ten American Nobel Prize winners on it, including the two greatest living economists since John Maynard Keynes, Paul Samuelson and Kenneth Arrow.

The statement was printed as a full-page ad in The New York Times and released to the public through the Economic Policy Institute. According to the statement, the 450 plus economists who signed the statement believe that the 2003 Bush tax cuts will increase inequality and the budget deficit, decreasing the ability of the U.S. government to fund essential services, while failing to produce economic growth.

The statement reads as follows:

"Economic growth, though positive, has not been sufficient to generate jobs and prevent unemployment from rising. In fact, there are now more than two million fewer private sector jobs than at the start of the current recession. Overcapacity, corporate scandals, and uncertainty have and will continue to weigh down the economy."

"The tax cut plan proposed by President Bush is not the answer to these problems. 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."

"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."

"To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment. Such a stimulus plan would spur growth and jobs in the short term without exacerbating the long-term budget outlook. "

Over 450 economists signed the statement, including the following ten Nobel Prize Laureates:

George Akerlof, University of California – Berkeley
Kenneth J. Arrow, Stanford University
Lawrence R. Klein University of Pennsylvania
Daniel L. McFadden University of California – Berkeley
Franco Modigliani Massachusetts Institute of Technology
Douglass C. North Washington University
Paul A. Samuelson Massachusetts Institute of Technology
William F. Sharpe Stanford University
Robert M. Solow Massachusetts Institute of Technology
Joseph Stiglitz Columbia University

No comments: