Fear the Return

In response to the bad jobs news, John McCain promises to continue George W. Bush's policies and warns that "Democrats will continue to advance their anti-growth agenda." But of course it's easy to recall, and very easy to show with a graph that job performance was much, much, much better when the Democrats were in charge.

The period of job growth under Bush was slower growth than the Clinton-era growth period. And on top of that, the Clinton years were years of basically uninterrupted job growth, whereas the Bush administration has seen two separate employment downturns. Under the circumstances, the case for continuing with Bush's policies seems like a bad idea -- indeed, as John McCain argued back in 2001, Bush's policies were a bad idea in the first place. But now McCain loves those policies and wants to continue them because, basically, all he cares about is acquiring power so he can start more wars and he's decided that the Tax Cut Gospel is his best chance.

Comments

Yeah, but the case for reversing the Clinton free trade policies also seems pretty weak. Claiming that Obama is from the party of Clinton on economic matters is a little like claiming that Strom Thurmond was from the party of Lincoln on racial matters.

Posted by y81 | April 5, 2008 1:14 PM

"But now McCain loves those policies and wants to continue them because, basically, all he cares about is acquiring power so he can start more wars"

Isn't this sort of political hackery beneath you, Matt?

Posted by Fred | April 5, 2008 1:15 PM

Following up on Y81's point, the Democratic meme being launched by the ever-so-subtle Chuck Schumer is that Bush is Hoover. Of course, left unsaid is that Hoover's two big, disasterous economic policies that made the Great Depression worse were massive tax increases and tariffs. The candidates today who are proposing higher taxes and railing against free trade are Obama and Hillary.

Posted by Fred | April 5, 2008 1:21 PM

Yes, if Obama can just manage to win respect and good will from foreign countries by unilaterally repealing trade policies, all will be well.

Gosh, who knew snark was so easy!

Posted by Will Allen | April 5, 2008 1:25 PM

McCain has already acknowledged that he doesn't know jack shit about economics. Why is this a surprise?

Posted by Woody Bombay | April 5, 2008 1:35 PM

To be ignorant and know it is peferable to ignorance tied to unwarranted self-confience.

Posted by Will Allen | April 5, 2008 1:46 PM

McCain's grasp of public policy and political economy -- and the whole "National Greatness Conservatism" -- pretty much begins and ends with "War is the health of the state".

Posted by Davis X. Machina | April 5, 2008 1:49 PM

Bush's economic policies have been closer to Bill Clinton's than Bill Clinton's are to those proposed by Hillary and Obama. Consider:

- Both Bush and Clinton were free-traders. Obama and Hillary threaten to repeal or unilaterally re-write NAFTA.

- Clinton raised the top income tax rate. Bush lowered it by less than Clinton raised it.

- Clinton lowered the capital gains rate from 28% to 20%. Bush lowered it further to 15%. Obama wants to raise it to pre-Clinton levels.

- Both Bush and Clinton endorsed the same policies to make mortgages more available to minority and low income borrowers with shaky credit to expand minority and overall home ownership in America. Both succeeded, and their success helped fuel the housing bubble that started in 1998.

The two biggest differences between Bush and Clinton on economic policy were:

- Bush signed tougher regulations into law (Sarbanes Oxley) while Clinton signed the Glass-Steagell repeal.

- Bush was tougher on corporate criminals, with his Justice Department handing out harsh sentences to Enron and Worldcom execs. Clinton pardoned corporate criminal and tax evader Marc Rich.

Posted by Juan | April 5, 2008 1:53 PM

What a platform to run on: McCain=Bush! Four more years!

Posted by S | April 5, 2008 1:54 PM

I'll take "Projection" for $2000, Alex.

To be ignorant and know it is peferable to ignorance tied to unwarranted self-confience.

Who is Will Allen?

Posted by milo | April 5, 2008 1:54 PM

Re: The candidates today who are proposing higher taxes and railing against free trade are Obama and Hillary.

When Bill Clinton took office in 1993 the US was barely recovered from a recession. Clinton increased taxes (hyperbolically,"The biggest tax increase in history"). Rightwingers moaned that economic Armageddon would follow. Guess what-- the economy boomed.
The theory that (judicious and moderate) tax increases are economically ruinous has been disproved.

Posted by JonF | April 5, 2008 2:10 PM

The heated debates over minor adjustments to tax rates has always been mostly pointless, and that remains the case today. However, people who ridicule McCain's admitted ignorance, while supporting a candidate who speaks favorably of unilaterally repealing trade agreements, while castigating the current President for alienating foreign countries, are themselves worthy of ridicule.

Posted by Will Allen | April 5, 2008 2:25 PM

The heated debates over minor adjustments to tax rates has always been mostly pointless, and that remains the case today. However, people who ridicule McCain's admitted ignorance, while supporting a candidate who speaks favorably of unilaterally repealing trade agreements, while castigating the current President for alienating foreign countries, are themselves worthy of ridicule.

priceless

Posted by scudbucket | April 5, 2008 2:30 PM

JonF,

"When Bill Clinton took office in 1993 the US was barely recovered from a recession. Clinton increased taxes (hyperbolically,"The biggest tax increase in history"). Rightwingers moaned that economic Armageddon would follow. Guess what-- the economy boomed.
The theory that (judicious and moderate) tax increases are economically ruinous has been disproved."

Hoover's tax increase wasn't just hyperbolically massive, he more than doubled the top marginal tax rate. I agree that "judicious and moderate" tax increases are not "economically ruinous", but no serious economist recommends tax increases as an antidote to an economic downturn.

Posted by Fred | April 5, 2008 2:33 PM

Fred is right, Matt, and other Dems, your acceptance of Obama and Hillary's economic plans is not helping them, it's drinking the koolaid.

For what it's worth I think Obama is marginally ahead because he proposed to cut some taxes.

I will vote for the Dems because I'm against the war, but raising taxes is the wrong way to go. Even under the Democrats' flawed economic orthodoxy, raising taxes during a recession is not recommended.

The mythic success of Clinton's 1993 tax increases has been a curse on the Democrats ever since and I hope some Democrat will kill the myth please. The Dems could very easily lose on this alone.

Posted by wellbasically | April 5, 2008 2:45 PM

You have heard of the Lucas Critique, right?

Posted by sam henly | April 5, 2008 3:16 PM

"Even under the Democrats' flawed economic orthodoxy, raising taxes during a recession is not recommended."

By January 2009, the recession could well have ended. We don't know.

Also, the mindless orthodoxy that no tax should be raised during a recession is for concern trolls. For example, raising taxes on luxury yachts would have no measurable negative effect on the economy during a recession. The question is not whether the next administration should raise taxes, the question is which taxes and when.

Posted by Joel | April 5, 2008 3:21 PM

Bush was tougher on corporate criminals, with his Justice Department handing out harsh sentences to Enron and Worldcom execs.

You must be joking. Not that Clinton has a good record here (I agree) but Bush is no saint:

Enron: You're forgetting about the The NSC-led Dabhol campaign that Rice/Cheney led to force India into the plant buyout by Enron....AND the price caps Bush refused CA energy during Enron's supply stranglehold (and record profits)...AND the appointment of the pro-Enron Fed Energy Regulatory chairman, as well as Lawrence Lindsey, the White House’s chief economic adviser, and Robert Zoellick both of whom were ex-Enron employees. All evidence of Bush's longstanding relationship with Ken Lay and Enron.

And it was the SEC that conducted the initial investigation into Enron...and after the whistle-blower incident, the Justice department, of course, organized a task force, which had nothing to do with Bush. The only thing Bush could do was stay out of the way and play down his dealings and friendship with Ken Lay and Enron ties.

Oh and Sarbanes Oaxley? Bush was initially against it, but after the Enron scandal blew up, Bush signed the bill amidst pressure to restore public confidence in the integrity of the business community.

And don't even get me started on the all corporate scandals surrounding government defense contracts.

Posted by AKBY | April 5, 2008 3:27 PM

"For example, raising taxes on luxury yachts would have no measurable negative effect on the economy during a recession."

It wouldn't have a measurable effect on the folks who build luxury yachts?

Posted by Juan | April 5, 2008 3:42 PM

Bush was tougher on corporate criminals, with his Justice Department handing out harsh sentences to Enron and Worldcom execs. Clinton pardoned corporate criminal and tax evader Marc Rich.

Much more to the story than that though - Marc Rich was subject to all sorts of state and civil suits - NYState was after him for almost $100 million in back taxes for example, but the federal claims took precedence and no one could go after Rich until the federal claims were adjudicated. And nothing could be done at all as long as Marc Rich stayed abroad. As part of the federal pardon agreement, Rich had to come home and face the music on all other charges - which he did, and which would not have happened without the federal pardon. But of course you won't hear anything about that from the anti-Clinton crowd.

Posted by Ethel-To-Tilly | April 5, 2008 3:50 PM

Re: Hoover's tax increase wasn't just hyperbolically massive, he more than doubled the top marginal tax rate.

I was not talking about Hoover (whose tax polices I know nothing about). I was talking about Bill Clinton.

Re: no serious economist recommends tax increases as an antidote to an economic downturn.

Yes, I do remember that much from Econ 101. However by the time a new president sworn in next year we will be past the recession, though not necessarily (indeed probably not) in a period of significant growth. And for the record I do firmly agree that starting a trade war is the last thing we need to do. That is a foolish step even in prosperous times. The correct remedy for the upheavals that free trade create is to provide a true and comprehensive social safety net. Sadly, the Right opposes that as well. In fact, I suspect the Right would consent to a trade war before they would consent to the type of safety net we really need in this country.

Posted by JonF | April 5, 2008 3:59 PM

Come on Matt, I know economics aren't your specialty, but even you should know better than to say 'the economy was better in the '90s, that proves Democratic economic policies are better than Republican ones!'
In the '90s, we had the tech boom and no housing crisis or 9/11 (which are the two factors responsible for the slower economic growth during the Bush era). As far as I can tell, neither party was responsible for the tech boom, nor can either party promise to recreate that particular phenomenon. Nor has any one Bush policy really caused the housing bubble, any more than the Clintonian policies did in the 90s.

No matter what politicians say, economic performance is largely independent of Washington-correlation (of a Democrat being in charge) does not equal causation.

Posted by jamie | April 5, 2008 4:08 PM

JonF,

What's happening now in America is more significant than just a likely recession: it's the end of a ten-year period where American consumers spent more than they earned and made up the difference with debt. That was unsustainable, and now it's over. The de-leveraging process will take time, and when it's done we shouldn't expect the same level of consumer-led demand. The most prudent approach to get the economy through this transition next year wouldn't be to raise taxes but to increase government spending, particularly on infrastructure which (aside from being necessary anyway) will create jobs and increase future productivity.

Once the economy is back at trend growth, we can talk about raising tax revenues. At that point, decisions should be based on what sort of taxes would do the least to slow the economy rather than following class-based dogma. Judging from policies that have worked in other first world countries, that would probably involve higher taxes on consumption, slightly higher taxes on personal income, and lower taxes on corporate income and capital gains. If taxing consumption directly at the federal level would be impractical, we can achieve the same result by raising taxes on income while raising contribution limits on 401(k)s and IRAs by similar amounts.

As for expanding the social safety net, we should figure out how to pay for the safety net we have now before coming up with more ways to expand it. Entitlements already consume 45% of the federal budget and are growing at a faster rate than our long-term trend GDP growth (in the case of Medicare, about three times as fast). Since we can't indefinitely continue to raise taxes at a faster rate than our economic growth, we need to either slow the growth of spending in our entitlement programs or raise taxes enough to create an initial surplus that can grow at faster rate in a sovereign wealth fund. Most likely, a combination of both approaches will be needed.

Also, I would argue that the proper response to job losses from free trade is to enact policies that would encourage foreign companies to establish or expand operations and hire more people in America. One such policy would be a reduction in the corporate income tax rate, to bring it more in line with the rates in other first world countries. Another would be reform of the tort system to get legal costs more line with other first world countries.

Posted by Fred | April 5, 2008 4:34 PM

One of the reasons you don't lower tax rates during good times, but actually raise them, is so you can lower tax rates during bad times. Pretty simple.

However, the moment is approaching - as the recession kicks in - that will allow for some creativity in tax policy. For instance, tax penalties on those companies that increase the spread between the compensation packages of upper management and the lowest paid employees would be excellent. Very severe tax penalties. And tax breaks for companies that peg the compensation packages of the upper management to the compensations paid to the rest of the employees, with the ultimate goal of getting us back to the eighties spread, in which top executives at Fortune 500 companies earned around 70 times what their lowest salaried employees earned. Use taxes as a weapon in the class war against the wealthy in order to save capitalism - for, of course, we can't continue to support both a consumer based capitalism that depends on the spending power of the bottom 80 percent of the income bracket while freezing their wages (as a buffer against inflation) and distributing all the gains in productivity to the upper 20 percent.

It is pretty simple - the parameter here is to lessen income and wealth inequality.

The next four years, with a Democratic dominated congress, will be a great time to do it. We need to let a thousand flowers bloom in terms of policy suggestions to shrink the portion of the national wealth controlled by the wealthiest.

Posted by roger | April 5, 2008 4:51 PM

To be ignorant and know it is peferable to ignorance tied to unwarranted self-confience.

So, Will, which of the two are you?

Posted by SavageView | April 5, 2008 4:54 PM

re:
The heated debates over minor adjustments to tax rates has always been mostly pointless, and that remains the case today. However, people who ridicule McCain's admitted ignorance, while supporting a candidate who speaks favorably of unilaterally repealing trade agreements, while castigating the current President for alienating foreign countries, are themselves worthy of ridicule.

Posted by Siir | April 5, 2008 5:25 PM

Roger,

Regarding executive pay, Barney Frank had one of his occasional good ideas when he suggested that shareholders get a vote on CEO comp packages. Plenty of shareholders have been disgusted with the amount some CEOs have gotten paid for failure recently (e.g., Robert Nardelli). More broadly though, put yourself in the shoes of a foreign CEO trying to decide whether or not to open a factor in the U.S. next year. Would the prospect of a liberal President and Congress letting "a thousand flowers bloom" encourage or discourage you from setting up shop or expanding your workforce in the U.S.?

Posted by Fred | April 5, 2008 6:39 PM

Fred, your example has too little context to be very useful. As Mancur Olson observed long ago, national economies are on different plateaus in the global system. America has a lot of advantages - it has a very well educated work force, it has a research and development structure that is still the best in the world, it is more inclined, than other countries, to loose credit policies (and, within reason, this is good), and it has the richest internal market in the world. But as it pursues policies that stagnate the wages of the producers of goods and services, the whole picture starts to unravel - it becomes too costly to get an education, people are frozen into situation in which they are using a less than optimal amount of their human capacity (talents, training, etc.) because of things like health care costs, the inevitable bursting of asset bubbles that strand them in houses that are too expensive, etc. There is a certain level of inequality a society can afford - and a certain level it can't. We have been beyond the affordable level of inequality for some time. That's behind the propaganda of framing our current crisis as one of "liquidity" - when, actually, it is one of solvency. The solvency of the vast mass of the population which has created the rise in productivity, year after year for the past seven years, and yet gained nothing from it.

We aren't going to entice European sneaker companies by further stagnating wages and increasing the inequality spread. On the other hand, we should be able to keep high value factories making, say, technologies for testing the wafers used in computer chips. I chose that because Robert Kuttner wrote a nice piece, included in The Squandering of America, of how a Russian refugee in the U.S., Igor Khandros, built a company that made these wafer cleaners, Form Factor, discovered that Korean companies were using his patents, found no help from the government that was intent on negotiating a free trade pact with Korea, and was even told, by people in the Commerce Department when he went to talk with them about filing a complaint about Korea, that he should think of transferring his factory from California to Singapore.

You can't combine free trade, high levels of income inequality, a consumer based economic system, declining public investment and a government that is only moved to help the economically unfortunate when they are hedge fund traders on a bad day and produce prosperity. These are mutually canceling policies, if general prosperity is your goal, though in the short term they will certainly keep the upper crust in summer houses and the best cocaine.

Posted by roger | April 5, 2008 9:07 PM

"Judging from policies that have worked in other first world countries, that would probably involve higher taxes on consumption, slightly higher taxes on personal income, and lower taxes on corporate income and capital gains."

Who let my clone off the leash in here... I can't believe this, somebody is talking sense......

Fred, your critique is ok. The general mistake of Democratic economists is to see all taxes as equivalent, so simply taxing $100M out of luxury yachts is the same as taxing $100M out of capital gains.

To my Democratic friends: all growth is the result of risk, either of personal capital like time and effort, or financial capital like an investment. In this analysis, you are right that education is a capital investment, a risk that the result of the education will pay off above the amount the kid would have earned by working and not going to school.

Investment taxes are entirely on risk. The money you get out in government revenue does not make up for the loss to the overall economy.

Clinton's 1997 capital gains cuts were responsible for the late 90s boom. It is not a matter that the taxes need to keep getting cut to stimulate, no.

The prospect that Obama or Clinton will win, and return the economy to the growth level of 2002, is what is driving the market down and hurting growth.

Anyway thanks for listening and Fred please keep up the good fight.

Posted by wellbasically | April 5, 2008 9:52 PM

Clinton's 1997 capital gains cuts were responsible for the late 90s boom.

Not necessarily - it could very easily - and more plausibly argued that 1993 tax increases and the budget discipline enacted during Cliton's second term sent an extremely strong message to captial markets that the historic deficit hangover from the Reagan/Bush years was being finally seriously addressed. For the first time in a generation the federal government was actually paying it's own way, lowering long-term interest rates to generational levels freeing up billions of dollars in capital for private investmentthat had been previously sucked up by the federal government. You can't run up enormous deficits and pretend that that doesn't distort the financial markets and then ignore when those deficits end that that doesn't also have a powerful and dramatic stimulus effect on the private sector.

Posted by Ethel-To-Tilly | April 5, 2008 11:33 PM

The data doesn't support it. Rates went up in 93 because of tax increases and down in 97. Whoever said it was right that the Republicans went Chicken Little in 93 over the tax hikes. Even so it doesn't change the data. The mechanism you describe was a phantom, nobody ever actually saw it work the way you claim. And if what you say is true the budget surplusses of the late 90s should have prevented slowdown/recession in 2001.

The political favorability that allowed Clinton to push through his 93 tax hikes depended on several things, 1. his attempt to woo Alan Greenspan as some kind of economic pope who would bless the Democrats, 2. Ross Perot's deficit hawkery and the perception that for 94 and 96, the Dems needed to capture Perot's deficit-obsessed voters, 3. a perceived hunger for an expensive domestic agenda in health care. I haven't seen anything like that this year.

Posted by wellbasically | April 6, 2008 1:05 AM

An economist at a major investment company where I worked in the 1990s attributed the late 90s boom to the confluence of three factors that each took over a decade a few to come to fruition: the capital investment in computers and the forerunner of the Internet by the Defense Department in the 1960s, the taming of inflation starting with Volkler's Fed in the late 1970s, and the tax reform of 1986 which, among other things, lowered capital gains taxes (to 28%) and simultaneously removed a lot of tax shelters that had attracted capital fleeing high taxes into less-productive investments.

Clinton's capital gains tax cut (to 20%) had a salutary effect on the stock market (and were followed by higher capital gains tax revenues), but arguably his effective elimination of capital gains on most residential real estate had a larger effect in sparking the real estate boom which began in earnest in 1998 and ended recently.

Posted by Fred | April 6, 2008 2:10 AM

Re: but arguably his effective elimination of capital gains on most residential real estate had a larger effect in sparking the real estate boom which began in earnest in 1998 and ended recently.

Correct me if I am wrong, but doesn't the above apply only to owner occupied houses? So this is not a tax cut that "flippers" could take advantage of? A major compopnent of the housing bubble (in fact THE major component) was speculation.

Posted by JonF | April 6, 2008 8:04 AM

You can put certain economic matters into strikingly simple form. For instance, Bush inherited a two trillion dollar surplus, and he is leaving behind the largest deficit since WWII, 500 billion dollars.

It is pretty simple. When you cut taxes during a slump, you raise them during a boom as a measure of prudence. This takes a bit off of the boom - which is good, since booms will get irrational - and leaves you elbow room for the downturn.

And what was purchased, what was new, what did the government do better for the majority of the American people with all the money Bush spent? Well, we got a pill bill that grants big pharma a captive customer at prices they want to set. That's it, folks.

But hell, after stealing the election in 2000, the American people saw that Bush sucked in every way, since his major accomplishment was vacationing while Mohammad Atta wasn't, and they still re-elected him in 2004. Call it the mortgage equity loan election. The 80 some percent who think the country is going to the dogs in the polls now should look in the fucking mirror.

Posted by roger | April 6, 2008 1:04 PM

60% of subprime foreclosures occurred because of a loss of jobs. Only 2% occurred because of ARMs.

I don't believe there was a housing bubble that burst, I think the borrowers just lost their jobs. Why? Because the Fed raised rates 8 times over 2005-2006 to raise unemployment.

http://www.realclearmarkets.com/articles/2008/01/double_trouble_for_economy_mar.html

Posted by wellbasically | April 6, 2008 4:02 PM