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Embracing the Voodoo

Now that Donald Trump may be receding into the rear-view mirror, perhaps this endless presidential campaign may turn towards issues of substance, like the economy.

Okay, perhaps “substance” is a stretch, if we’re talking about economic plans that claim we can boost annual economic growth to 4 percent growth by—wait for it—tax cuts.

Jeb Bush has been the most visible candidate using this mantra, making the 4-percent-growth-by-tax-cuts connection the centerpiece of his campaign. He has other ideas—one was abolishing the deduction for state and local taxes—and his tax plan is structured to try to offer a little something for nearly everyone, but at the core, he’s talking tax cuts.

Bear in mind the 4 percent goal was not the product of economic analysis; it was an offhand comment during a 2010 conference call among a group of advisors to Bush’s brother’s George W. Bush Institute. James Glassman, now at the American Enterprise Institute and then the Institute’s executive director, told Reuters “[W]e were looking for a niche, and Jeb in that very laconic way said, ‘four percent growth.’ It was obvious to everybody that this was a very good idea.”

Campaigning in Iowa, Bush struck a Kennedy-esque rhetorical pose saying “aspirational goals” are important. In New Hampshire, he said, “It’s a nice round number . . . it’s doable.” Economists, including some that would be described as conservative, have doubted or scoffed at that claim.

Bush’s father and brother preached essentially the same message. Under the elder George Bush, annual GDP growth averaged 2 percent. Under the younger George Bush, it was 1.6 percent.

It was not always thus with the Bushes. Campaigning for president in 1980, elder Bush took aim at Ronald Reagan’s economic plan, which was grounded in tax cuts. His finger not yet to the political wind, he called the scheme “voodoo economic policy” (he didn’t actually say, “voodoo economics”). But such was his party’s tax-cut fervor, and so powerful is the siren call of tax cuts, that he found himself on the short end of the nomination process. Lesson learned, he climbed aboard and was rewarded with eight years as vice-president.

Accepting his party’s nomination for president in 1988, Bush told the nation, “Read my lips: no new taxes.” He later regretted saying that, but the line served its purpose.

Younger George got elected (okay, by five members of the Supreme Court the first time) on a tax-cut platform. He inherited a budget surplus and decided it should be used to pay for lower taxes, declaring to Congress, “The people of America have been overcharged and, on their behalf, I’m here asking for a refund.”

At the time, Bush had a tough sell. In February 2001, only 33 percent of Republicans thought the surplus should be used on a tax cut. Thirty percent wanted it used to shore up the finances of Social Security and Medicare. Independents and Democrats were more skeptical. Only 16 percent and 8 percent, respectively, favored using the surplus for tax cuts. But Bush kept at it, and tax cuts have become Gospel, even if they aren’t effective economic policy.

Wait, Ronald Reagan cut taxes, and we had incredible economic growth, didn’t we?

Actually, that Tinker-to-Evers-to-Chance connection doesn’t really hold.

He cut taxes, primarily for those at the upper end, but also raised taxes, primarily on the rest of us. At the same time, government expanded, adding more than 300,000 employees while federal outlays climbed by slightly more than 50 percent. Moreover, the Reagan years benefitted from a steep drop in oil prices. In 1981, when he took office, it was $35.75 a barrel (about ($92 a barrel today). In 1988, his last year, it was $14.87. That $21-a-barrel drop translates into a significant economic stimulus.

Finally, and perhaps most importantly, Paul Volker, intent on taming inflation (primarily caused by oil prices), threw the economy through the windshield by letting interest rates climb, triggering the recession of the early 80s. He changed course once inflation eased, and then it was Morning in America.

The result? Reagan’s tenure was marked by an average annual 3.4 percent growth in GDP, same as Jimmy Carter and slightly less than Bill Clinton.

Bruce Bartlett, who worked for both Reagan and the elder Bush, and who helped draft the Kemp-Roth tax bill, in 2011 reviewed studies evaluating the impact of the big tax package of 1986 and concluded, “[I]t is hard to find ways in which it changed anything real in terms of economic growth, employment, or productivity.”

More recently, Bartlett made a harsher assessment of Jeb Bush’s proposal, saying, “We had a real-world test of Jeb Bush’s tax plan from 2001-2008, and it failed miserably.”

Bartlett has also warned against deploying the Reagan model nowadays, saying, “Economic conditions are entirely different today than they were in Reagan’s era, and different conditions demand different policies. Those who say otherwise are simply engaging in cookie-cutter economics.”

Tax cuts do some things very well. They get politicians elected. They redistribute wealth upward. They create deficits. Jeb Bush’s plan, for example, would create a budget hole estimated between $1.2 trillion over the next decade, if you use the optimistic forecasting known as dynamic scoring, and $3.4 trillion, using traditionally conservative methods. What they cannot do boost the economy to unrealistic levels of growth. A good overview can be found in this 2014 Brookings Institution paper – http://www.brookings.edu/research/papers/2014/09/09-effects-income-tax-changes-economic-growth-gale-samwick

You don’t like taxes and want them cut? Make the case on that basis. You want to cut taxes to shrink government a la Grover Norquist? Argue for that. You want a silver bullet for economic growth? Dream on, Lone Ranger.

Later,

Happy Autumnal Equinox!

The days are shorter, but no less rich. And nights are for dancing!

Later,