In a recently published op-ed piece in the Wall Street Journal, Stanford economists John Cogan and John Taylor argue that:
“Temporary, targeted tax reductions and increases in government spending are not good economics. They have repeatedly failed to increase economic growth on a sustainable basis. What may come as a surprise is that such policies are not good politics either. Their inability to deliver promised economic benefits has invariably led disappointed voters to turn against those politicians, Democratic and Republican, who have supported them.”
There is so much wrong with this article that it is hard to know where to start.
- Their assertion that temporary fiscal measures always fail to deliver a macroeconomic boost is just plain wrong. War, for example, which is almost always temporary, typically generates greater economic growth in its wake. Of course, the benefits are usually greatest and the costs the lowest if you are not involved directly in the fighting, but do business with the warring parties. For the record, I am not endorsing war for economic purposes, but am just making a point about temporary targeted spending.
- Their distinction between temporary and permanent is simplistic. Very little accomplished (if that is the right word for it) in Washington is permanent. It is only permanent until your political opponents are able to overturn it. And sometimes even “permanent” measures do not purport to be permanent. The tax cuts enacted under George W. Bush came with an expiration date.
- The assertion that Gerald Ford and Jimmy Carter were voted out of office because of harmful fiscal legislation passed during their terms is also dubious. Both of these presidents had major baggage which made a second term a long-shot in any case: Ford had Nixon; Carter had an oil shock, the Iran hostage crisis, and tight monetary policy pursued by Paul Volcker starting in 1979.
The authors offer a paean–sadly misguided–to Ronald Reagan. They write: “President Reagan rejected temporary stimulus measures and instead proposed permanent income-tax rate reductions. His tax program, in conjunction with steady monetary policy begun by Paul Volcker, produced the promised results.”
They continue: “By late 1982 the recession was over and in early 1983 employment and investment began to rise rapidly. In 1984, it was “Morning in America” and Reagan was overwhelmingly re-elected. Nearly two decades of strong, steady, noninflationary economic growth ensued.”
First, please stop giving credit to Reagan for Paul Volcker. Carter appointed Volcker; Reagan merely benefited–both politically and economically–from Volcker. Second, given the authors’ interest in “permanent” versus “temporary” policies, they should concentrate on permanent, rather than temporary results. As a result of Reagan’s tax (and spending, particularly on defense) policies, America’s debt-to-GDP ratio rose from more than 32 percent in the first year of his term to nearly 52 percent in the last (by the end of George H.W. Bush’s four years the figure stood at 64 percent). Reagan didn’t pursue a temporary stimulus, he pursued a fiscally irresponsible permanent stimulus. We already have enough budgetary woes in this country–we should not make them worse by emulating Ronald Reagan.
The best example of the authors’ economic myopia is in their description of the effects of George W. Bush’s tax cuts. They wrote: “Within four months, employment began to rise and the unemployment rate began to fall. By 2004, the economic recovery was in full swing. President Bush was re-elected, along with Republican majorities in both the House and Senate.”
What they forgot to add is that four years later, the–very temporary–macroeconomic boom set off by the Bush tax cuts and spending increases led to the worst financial and economic crisis since the Great Depression. Surely Messrs. Cogan and Taylor can find better role models for economic policy making.