NOTE: This post has been moved to the top and will stay here the rest of today, because of the contents of the UPDATE below. Especially this week after the smears attempted on Samuel Alito, I have totally had it with mainstream, common-sense views being discredited as “fringe” or “extremist” (even those of widely respected judges and Nobel Economics Prize laureates), simply because someone on the other side doesn’t like them or agree with them. Enough already.
In my afternoon post yesterday, I attributed the 12.1% growth in federal tax receipts in December 2005 vs. 2004 to the continued effects of the Bush supply-side tax cuts.
Commenter David took umbrage to my analysis, which was meant to be quick, dirty and glib, and responded, in part:
America’s fastest growth rates in the 50s, 60s, and 90s coincided with relatively periods of relatively high taxes (and low deficits). And please don’t give me the “oh but it would have grown even faster with lower taxes” line – you simply don’t know. Only an extremist fringe of economists believe in supply-side economics; Bush Sr. was right to call it “Voodoo Economics.”
Having been called out by Dave to go beyond the glib, I looked at annual GDP growth during the entire post-war period (that’s post-World War II), and selected the best seven-year periods of economic growth that did not have a year of negative growth during the time period. Seven different 7-year periods qualified, namely the ones that ended in 1965, 1966, 1967, 1968, 1969, 1989, and 2000. I selected the two best 7-year periods from the 1960s plus the final two for this analysis. I looked at total and annualized GDP growth during each 7-year period. I also identified the best 3 years, and the annualized GDP growth during those 3 years, in each 7-year period. Finally, for good measure, I also looked at annualized growth in the 10 most recent quarters during the Bush Administration.
Here are the results:
Graphically, here’s how the Kennedy-Johnson, Reagan and Greenspan-GOP-Clinton prosperities compare (I did not chart 1959-1965 to avoid clutter):
Source: Bureau of Economic Analysis Table 1.1.1 (Percent Change From Preceding Period in Real Gross Domestic Product) — when at the table, to see 55-year annual results, select a First Year of “1950-A” and a Final Year of “2004-A&Q”: then select the “Annual” button,” and click on the page’s “Refresh Table” dialog box. To see Bush administration quarterly results, select a First Year of “2001-A&Q” and a Final Year of “2005 A&Q”; then select the “Quarterly” button, and click on the page’s “Refresh Table” dialog box.
Three indisputable points (assuming that one thinks higher economic growth is preferred, which, amazingly is not a universal assumption, especially in far-left circles):
- The 1960s prosperities, including the one not charted, had far better numbers than the prosperities of both the 1980s and the 1990s.
- The 1980s prosperity was stronger than the 1990s prosperity.
- The Bush prosperity, in its hopefully early stages, is currently coming in between that of the 1980s and the 1990s.
- The Kennedy-Johnson 1962-1968 prosperity can be mostly traced to Kennedy’s tax cuts of 1964. Federal tax receipts also increased sharply during those years (the author at the end of this link notes that “Real income tax revenues did go up 67% from 1961 to 1969,” but is stubbornly unimpressed). Therefore, score one for supply-side economics, over a decade before the term “voodoo economics” was coined.
- The Reagan prosperity can be traced to the Kemp-Roth tax cuts of 25% spread over 3 years (1982-1984) and the Bill Gradison-driven indexing of federal tax brackets (third bullet at link) to negate the “bracket creep” of inflation. The shame is that some of the benefits from those tax cuts were reduced by other tax increases and the unintended consequences of certain elements of The Tax Reform Act of 1986, especially relating to real estate. Nevertheless, the economy did keep clipping along at near-4% growth, and federal receipts exploded during the entire time frame (link, about 1/3 of the the way through, notes that “Nominal federal revenues doubled in the 1980s from $517 billion to $1.031 trillion.”). Supply-side economics triumphed again.
- The Clinton-GOP-Greenspan prosperity has three influences attached to it. Alan Greenspan’s monetary policy, plus the Gingrich Congress of 1995-1996, which set up federal spending to come in line with revenues for the first time in decades, were the causes of the 1990s prosperity. But Bill Clinton and the 1993-1994 Congress kept things from being better than they could have been. Their 1993 tax increases kept an economy that could have been roaring along at 5% or more annual growth during the last half of the 1990s down in the acceptable (but nothing special in the context of the past 50 years) 3.5%-4.5% range. As good as they were, the last half of the 1990s, given the amazing innovations and improvements in technology during the period, represented a huge missed opportunity for breakthrough growth.
- The relatively brief Bush prosperity can be traced to the various tax cuts enacted in 2002 and 2003. I believe, however, that the drag caused by Sarbanes Oxley is cutting at least a half-percent off of otherwise achievable economic growth; otherwise, we’d be seeing a replay of Reagan-era or better growth. Nevertheless, given the rise in tax receipts cited yesterday and in this previous post that covers a much longer time period (HT for graph to TaxProf Blog), supply-side economics scores a third point.
Voodoo schmoodoo, Dave — For being the province of “an extremist fringe of economists,” supply-side economics has performed awfully well both in promoting economic growth and increasing tax receipts. Perhaps we should instead be questioning whatever is being passed off as “mainstream economics.”
What we’ve seen during the Greenspan-GOP-Clinton prosperity, and now during the Bush prosperity, leads to my final point, which somehow became accepted wisdom during the 1990s: There’s a belief that sustained economic growth of 4% or more will automatically lead to inflation and an overheated economy. I believe that’s hooey. One thing you can say about 1959-1965 and most of 1962-1968 is that inflation was not a problem; yet growth during those times, the first of which crossed administrations of both parties, was outstanding, and included several 5%-plus years. Though GDP growth during that time was very volatile, there were four different years during 1950-1959 where GDP growth was over 7%.
There’s no reason growth rates of 5% and more can’t be achieved now without inflation coming back, but there has to be a willingness to remove the barriers to achieving them that hasn’t been seen in Washington for a long, long time.
UPDATE: Fringe, Schminge — Thanks to Don in Comment 4 for identifying some of the “fringe” economists Dave must be thinking of: “Mundell, Prescott, Friedman, Buchanon, V. Smith, Becker.”
Especially in a week where the smearing of a person for no substantive reason, but instead simply because he holds conservative views, was so obvious, it’s good to document the “noble Nobel” credentials of the gentlemen Don named. Specifically (from the Nobel Prize site, sticking with Don’s order):
- Robert A. Mundell — 1999
- Edward C. Prescott — 2004
- Milton Friedman — 1976
- James M. Buchanan Jr. — 1986 (since the spelling differs from Don’s, see this Google search and it’s clear that this Buchanan is who Don was referring to)
- Vernon L. Smith — 2002 (this Vernon Smith)
- Gary S. Becker — 1992