Friday, September 17, 2010

Bush Tax Cuts Had Severe Negative Impact on Economy

Bruce Bartlett by way of Mark Thoma:

Bruce Bartlett notes that the Bush tax cuts did little to stimulate growth, and that tax cuts of this type are very poor at what we need the most right now, countercyclical stabilization:
Bush Tax Cuts Had Little Positive Impact on Economy, by Bruce Bartlett, Commentary, Fiscal Times: Republicans are heavily invested in permanently extending the tax cuts enacted during the George W. Bush administration, all of which expire at the end of this year exactly as the legislation was written in the first place. To hear Republicans, one would think that the Bush tax cuts were the most powerful stimulus to growth ever enacted and only a madman would even think of allowing any of them to expire.
The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.
Saying that the Bush tax cuts had "little positive impact" on the economy is being excessively charitable.  The Bush tax cuts helped ruin the economy by generating free cash flow to fuel more and more financial speculation. 

Wealthy Americans no longer invest in creating productive American businesses, so the primary way to "protect" the value of the money they earn is to engage in financial speculation (i.e., "investing" in the stock market).  Many wealthy Americans sought outsized gains by speculating through hedge funds, who leverage up through factional reserve borrowing.  With so much money seeking yield, asset prices were driven higher and higher, until the point was reached where the only way to keep the bubble going was to extend credit to people who could not afford to pay it back (derivatives must be "derived from" something).

To be fair, Bush's tax cuts could have been a very big positive if the tax and accounting rules encouraged investment into the productive output of the United States.  Unfortunately, our de facto industrial policy does the opposite.