[Futurework] Voodoo resurrects supply side economics

[Karen Watters Cole]

The big economic spin story this week was the unexpected tax receipt windfall. It’s been proclaimed as proof positive the Bush tax cuts worked. It is, however, a short time increase and not likely to be seen again anytime soon. Two partisans, one an economist, take issue with the GOP party line. Fortunately, there are also traditionally ‘fiscal Republicans’ who know the difference between a bounce and an annual, ongoing revenue stream. - kwc   Try This Quiz on Supply-Side Economics By Gene Sperling, Bloomberg, July 14, 2005 Here's a multiple choice question: What is the most absurd aspect of supply-siders' claim that the possible improvement in this year's budget deficit -- to an estimated $333 billion from more than $400 billion in February - -proves that deficit-exploding tax cuts are working and paying for themselves? Here are your choices: A) their failure to acknowledge the deep fiscal hole that President George W. Bush's policies have already put us in and the temporary nature of key factors that are contributing to this year's better-than-expected revenue; B) their ability to attribute to the Bush tax cuts only good economic news but never any disappointing job, wage or market data; or C) the lowering of standards that allows advocates of supply-side economics to brag about an administration that inherited four years of consecutive surpluses and now is looking at trillions of dollars of future deficits. This is not an easy question, so it's worth exploring the possible options. The first pick is a strong contender. Supply-side cheerleaders suggest that we are now on a revenue trend that's likely soon to dramatically reduce the deficit. One-Time Gains.  Everyone from Congressional Budget Office Director and former Bush administration official Douglas Holtz-Eakin to Goldman Sachs Group Inc. to Economy.com say temporary factors such as a one-time corporate tax holiday for repatriated profits and the end of the temporary depreciation bonus for equipment drove much of the rise in revenue. Far from moving toward a new era of surpluses, most experts who take into account the likely costs of Bush priorities are projecting $400 billion annual deficits as far as the eye can see.  Even taking account of the recent improvement in the deficit projections for 2005, Economy.com -- a Web site that provides economic forecasts -- expects the federal government to run a $4 trillion deficit over the next 10 years. Goldman Sachs projects $4.8 trillion in cumulative deficits. Try Option B.  The selective attribution that is the heart of Option B also must be taken seriously.  This option can be summed up as the idea that any bad economic news has nothing to do with Bush fiscal policies, but that any good news is due solely to the magic of tax cuts.  When gross domestic product, investment or revenue estimates are better than expected, it's all thanks to the Bush tax cuts. If the Chicago Cubs win the World Series anytime in the next century, you should know it will be due to the Bush tax cuts. There are other economic trends that have occurred in the aftermath of President Bush's decision to abandon fiscal discipline.  Ø      Average real weekly wages were lower in June 2005 than they were both when the recession ended and since the dividend and capital gains tax cut of 2003. Ø      Job growth in the Bush recovery is the weakest of any recovery since the 1930s. The current account deficit hit historic highs in 2002, 2003 and 2004 and is headed for another record in 2005. Ø      The S&P 500 monthly average was lower in June 2005 than it was four years ago, when the Bush tax cuts began. Not All Blame.  While you can't blame this bad news solely on Bush fiscal policies, it is a bit much for his cheerleaders to claim that the impact of his policies is limited to only what is positive.  Option C may be the best choice. When Bush came into office, the CBO projected a $433 billion surplus in 2005. Even if the new projection announced yesterday by the White House comes true, it would mark a three-quarter of a trillion dollar deterioration from projections when Bush took office. As New York University economist Nouriel Roubini has documented, when one breaks down the weakening of our fiscal position, three-quarters of it is accounted for by a collapse in government revenues. Only one-quarter was the result of increased spending. While it is true that revenues as a share of GDP in the late 1990s were slightly higher than the historical average, these revenues were used to pay down the national debt to help prepare us for the baby-boom retirement. Nor did increased tax payments prevent after-tax income from rising across-the-board. When one compares the trillions in surpluses that were projected when President Bush took office with the current projections by independent analysts, we are looking at a 10-year fiscal projection that has deteriorated by $10 trillion. If Al Gore had won in 2000 and racked up this fiscal record, I don't think the supply-siders would be pointing to the current deficit picture as proof that his policies were working. Perhaps I should have added another option: D) all of the above. Gene Sperling was President Bill Clinton's top economic adviser, is a columnist for Bloomberg News. He is a director of the Center on Universal Education at the Council on Foreign Relations.   http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_sperling&sid=atuK1VW9CXRk   That voodoo that they do Jonathan Chait, LA Times, July 15, 2005 When last we left the Bush economic team and its defenders, they were predicting that tax cuts wouldn't cause revenue to drop very much at all. The naysayers, they insisted, were just a bunch of Keynesian liberals who failed to grasp the power of tax cuts to unleash the dynamism of investors and entrepreneurs. Since then, revenues didn't just fall, they utterly collapsed. In 2003, income tax revenues as a share of the economy fell to their lowest point since before World War II — when, needless to say, the government was a lot smaller. The Bushies have had almost nothing to say about this inconvenient fact, until this month, when tax revenues began rising again. Now, they suddenly want to bring the topic of revenues back up. White House budget director Josh Bolten gloated, "We got to this point largely because of the president's pro-growth policies, especially tax relief." And the Wall Street Journal's Stephen Moore asserted in a column last month that the rising revenue has vindicated supply-side economics. Moore's column was so overflowing in its enthusiasm that it described rising revenues with terms like "surged," "eye-popping," "unexpected gush" and "exploded like a cap let off a geyser," suggesting that he has either been profoundly influenced by the literary style of e-mail spam or is harboring some deep-rooted sexual frustration. So, are the supply-siders right? Of course not. First, the rise in revenues mainly reflects temporary factors. Economic growth is nothing special at this point in a business cycle, and revenue from individual income tax withholdings — that is, regular wages — are actually growing very slowly. As Mark Zandi of economy.com has noted, the primary factor is the red-hot housing market, which is causing capital gains, as well as bonuses for brokers and underwriters, to skyrocket. A second factor is the hot stock market from 2004, which is already cooling. On top of that, a provision in a 2004 tax bill encouraged corporations to bring home overseas profits right away, causing them to pay more in taxes in 2005 but less in subsequent years. The upshot of all this is that a bunch of short-term factors have come together to cause revenues to shoot up this year. It has nothing to do with President Bush's "pro-growth" tax cuts, unless you think the tax cuts have somehow caused the housing run-up. But suppose that weren't the case. Suppose the rise in revenues is permanent — anything's possible, after all — and suppose further that Bush's tax cuts caused it all to happen. That still doesn't vindicate the tax cutters. Basically, for the last three years, revenues have continuously come in well below expectations. One year of over-performance can't possibly make up for all those years of underperformance. As the Center on Budget and Policy Priorities notes, revenues are still expected to come in $91 billion below where they were projected to be in 2002, even taking into account all the tax cuts enacted since then. Imagine the Bushies as investment advisors who urge you to buy a stock, promising it will grow 20% a year. Instead the value of the stock drops for several years in a row, until finally it begins rising, but not nearly enough to cover the loss. If these advisors tried to claim they'd been proved right, you probably wouldn't take them seriously. The only way the federal budget looks good is if you pretend history began last year. Bolten bragged that the deficit is supposed to drop this year to a mere $333 billion. That's not a terribly huge number by normal standards. But given that we're already four years into an economic expansion, it's awful. It's fine to run deficits when the economy runs into trouble. When it's humming along, you should have a balanced budget, or even surpluses. Bolten predicted the deficit would be down to $162 billion by 2009. But that figure rests on all sorts of implausible assumptions, including that the fighting in Afghanistan and Iraq will cost nothing after next year.  But even if he's right, it's pathetic: The Bushies expect that after eight years of economic expansion, we'll still be borrowing, rather than paying off our bills. At the peak of the last economic expansion, when Bill Clinton was president, we actually eliminated the deficit and began paying off the national debt. If tax cuts really cause revenues to rise, why are we doing so much worse this time around?   Jonathan Chait is a senior editor at The New Republic, where he has worked since 1995. He has written for The New York Times, Washington Post, Wall Street Journal, Slate, Time, American Prospect and other publications.   http://www.latimes.com/news/opinion/commentary/la-oe-chait15jul15,0,4146366.column?coll=la-news-comment-opinions

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