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The Center on Budget and Policy Priorities is a nonpartisan, nonprofit policy organization that examines how state and federal fiscal policy and public programs affect low- and moderate-income people. This report was compiled by Aviva Aron-Dine, Chad Stone and Richard Kogan.Aron-Dine is a policy analyst who specializes in federal tax policy. Chad Stone is the center's chief economist and specializes in the economic analysis of budget and policy issues. Richard Kogan is a senior fellow at the center, specializing in federal budget issues.
Some proponents of the 2001 and 2003 tax cuts have argued that the economic and employment growth of the past few years establishes that these tax cuts are "working" and have had strong beneficial effects.
Examination of a broad range of key economic indicators, however, indicates that this economic expansion has not been especially robust. To the contrary, relative to expansionary periods in the past, the current recovery has, on balance, been somewhat weaker than average. In fact, with respect to gross domestic product, consumption, investment, wage and salary, and employment growth, the current period is either the weakest or among the weakest since World War II.
Moreover, the economy's performance over the past five and a half years has overall been weaker than its performance in the early 1990s, in years following significant tax increases. GDP growth has been slightly weaker than in the 1990s, and job creation, wage and salary growth, and investment growth have been substantially weaker.
What the Data Show: The Key Findings
We examine Commerce Department, Labor Department, and Federal Reserve Board data on seven economic indicators: the gross domestic product, personal consumption expenditures, private domestic fixed nonresidential investment, net worth, income from wages and salaries, payroll employment, and corporate profits.
For each indicator, we look at average growth both since the economy hit bottom in November 2001 (when the recession ended and the current recovery began) and since the last business-cycle peak in March 2001. We compare average growth over these periods with the average growth that occurred over comparable periods in the other business cycles since the end of World War II. (Growth is measured after adjusting for inflation, except for employment levels, where such an adjustment is inapplicable.)
• For six of the seven indicators, the growth rate over the current period is below the average growth rate for the comparable periods of other post-World War II economic recoveries. Notably, during the current recovery, the economy has been weaker than or as weak as any other recovery since World War II with respect to both overall economic growth and growth in fixed nonresidential investment. These two indicators should have captured any positive "growth effects" of the tax cuts.
• The labor market also has been weaker during the current recovery. Both employment growth and wage and salary growth have been weaker during the current recovery as a whole than in any prior recovery period since the end of World War II. While the pace of job growth has picked up in more recent years, it has remained unexceptional by historical standards.
• The current period has outperformed the average post-World War II recovery period in only one area: corporate profits, which have grown much more rapidly than average.
These conclusions hold whether one focuses on comparisons that examine the period since the recovery began or comparisons that examine the period since the last business-cycle peak (i.e., since the last expansion ended).
Comparisons Measuring from Economic Peaks
In the previous section of this analysis, we compared the current recovery with previous recoveries by measuring growth rates for various key economic indicators from the trough of the business cycle. Some may argue that this comparison disadvantages the current recovery because it followed a relatively mild recession. All else being equal, one would expect the economy to grow more quickly after a deep recession than after a shallow one.
To account for the possibility that starting from the trough skews the results, we also examined growth in the same indicators starting from the previous economic peak, which in the case of the current recovery was March 2001. Using this approach does not change any of our central conclusions. Growth in the current period continues to fall short of the postwar average for all indicators except corporate profits. Growth in wages and salaries, employment, and investment continues to be especially weak in comparative terms.
Supporters of the tax cuts generally focus on a different set of statistics: growth rates measured only since the economy's performance improved in 2003. Such an approach is misleading. The fact that growth rates over the recovery as a whole remain below average indicates that the economy still has not caught up to where it would be if GDP, consumption, investment, net worth, wages and salaries, and employment had merely grown since the start of the recovery at the average rates for postwar recoveries. Moreover, even growth rates since 2003 are unexceptional by historical standards (except in the case of corporate profits).
Comparisons with the Economic Cycle of the Early 1990s
Findings from a comparison of the current period with the business cycle of the early 1990s also are of note, since the comparable period of the 1990s recovery followed tax increases.
• The rate of GDP growth was slightly higher in the 1990s.
• Net worth has grown at about the same pace during the current recovery period, and corporate profits have increased much faster during the current period.
• But the labor market has been significantly weaker during the current period. During the current recovery, job growth has occurred at half the pace it did during the comparable period of the 1990s recovery.
• Fixed nonresidential investment also has grown significantly more slowly during the current recovery. During the current period, it has grown at a 3.2% annual rate, well below the 7.1% annual rate at which it grew over the comparable portion of the early 1990s recovery. If tax cuts are good for long-term growth because they induce investment, as proponents argue, then they should have had a positive impact on nonresidential investment (investment in the productive capital stock).
It is also worth noting that the 1990s expansion continued for three and a half more years after the period considered here; growth during the later part of the decade was considerably stronger than in the years of the expansion that we examine here.
The Dismal Fiscal Consequences
These data suggest that the tax cuts of the past few years have not led to a shining economic performance. Even relative to the early 1990s, when taxes were increased significantly during the early stages of the recovery, the performance in the current period does not stand out.
But while the tax cuts do not appear to have delivered especially good outcomes for the economy, they have contributed to an exceptionally sharp deterioration in the fiscal outlook. Since the last economic peak, the budget has swung from a substantial surplus to a deficit equal to about 2% of GDP in fiscal year 2006. The tax cuts account for a large share of this swing: their cost in fiscal year 2006 was about equal to the fiscal year 2006 budget deficit.
It is important to remember that these costly tax cuts, which are currently being financed by government borrowing, eventually must be paid for, whether through higher taxes or through reductions in government services. Thus, the true cost of the tax cuts has yet to be felt.
This summary was drawn from a longer analysis by the Center on Budget and Policy Priorities. To read the entire paper, click here.
POSTED BY: Sam (October 04, 2007 10:01 AM)
this article is a political hack job and does not discuss how the tax cuts hurt the economy. it just compares one economic expansion to another. also, the author does not discuss how raising taxes would have changed anything.
POSTED BY: Teresa (October 04, 2007 05:44 PM)
Nice politics! -No mention that comparing the WWII period of expansion was our country's industrial revolution and the whole economy operated differently. Women went to work, there really wasn't any global competition,etc... and these huge details were not even mentioned in this article. If I wanted to read a political rag about economics I would have done so, instead I chose Kiplinger- but no more! I'm done with Kiplinger too!!
POSTED BY: Rocco Rotondo (October 10, 2007 07:44 PM)
Finaly the truth. We know that this economy has produced more multimillionaires and billionaires at any time in our history. We are living on borrowed time with these huge deficits. This is what the tax cuts produced. The middle class is stagnant. Thanks Kiplinger
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