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The Foundation for Greater Prosperity?

Beyond Bush’s Rhetoric on the Economy

by MATT VIDAL

In one of numerous pronouncements that economic recover is just around the corner, Bush told campaign donors in 2003 "This administration has laid the foundation for greater prosperity and more jobs across America."[1]

Just the other day in a New York Times op-ed, N. Gregory Mankiw, former Harvard economist and now chair of Bush’s Council of Economic Advisors, mechanically repeats the mantra: "the economy is strong" and the president’s "policies are making it stronger."[2] Whew! No need to worry after all.

Mankiw dismisses so many "pessimists" and implores us to "look at the facts," of which he presents two. First, lest you think the glass is half empty, the current unemployment rate is not nearly as bad as it was at the height of the Great Depression. A truly outstanding accomplishment for the Administration, indeed.

Second, Mankiw reminds us that due to current data limitations it is impossible to precisely say anything about the quality of jobs created in the recent wave of job growth. But to argue as he does that because different analysts, using available data on industry and occupations (rather than individual jobs), "can reach wildly different conclusions," means we can therefore say nothing about the quality of job creation is a non sequitur. To be sure, widely different conclusions have been reached in this debate. But this is rather standard for politically-charged social scientific debates.

The data, though imperfect, do tell us something about the character of recent job creation. In one methodologically sound analysis, economists from the Economic Policy Institute used Bureau of Labor Statistics data to show that the sectors–occupations within industries–that expanded from June 2003 to June 2004 have weekly earnings 7.2% lower than sectors that contracted during that period.[3] That is, recent job growth has been within relatively lower paying sectors.

More generally Professor Mankiw has apparently dropped the methodological and conceptual rigor of the academy and now fully embraced his role as cheerleader for the transfer of wealth currently masquerading as economic policy under the Bush Regime. Thus, rather than the more sober analysis that led him to label the Reagan supply-side advisors as "charlatans and cranks" in the first edition of his Principles of Economics textbook, Mankiw has now reverted to substituting the recitation of political codewords–"tax relief" and "double taxation"–for actual analysis.

One-size-fits-all policy

Whether during war or peace, budget surpluses or massive deficits, Bush’s economic policy has been bewilderingly single-minded: tax cuts. Professor Mankiw, maintaining that unwavering optimism, is sure that "the economy is heading in the right direction," due in part to the fact that Bush "acted decisively to jump-start the economy" through "tax relief reducing the double taxation of dividends" and other measure of the tax cut packages.

However, at least 450 of Mankiw’s esteemed colleagues disagree. Ten Nobel Laureates and 450 other prominent economists drafted a letter opposing Bush’s tax cuts, arguing that "there is widespread agreement that the purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near-term. The permanent dividend tax cut, in particular, is not credible as a short-term stimulus."[4]

As these and other economists have noted, the Bush tax cuts are very poorly designed as a policy for short-term economic stimulus. Isaac Shapiro and Joel Friedman of the Center on Budget and Policy Priorities have done an analysis of effectiveness of the 2003 tax cut, based on when they will be enacted–the proposal spreads them out over 10 years–and of the elements of the package that are high "bang-for-the-buck"–those that "yield more than one dollar of added short-term demand for each dollar of revenue loss."[5]

Shapiro and Friedman conclude that only around one-fifth of proposed cuts would have been in effect by October 2004, and that only 19% are high bang-for-the-buck. In combination, only four percent of the 2003 tax package would be an effective short-term stimulus.

Despite the rosy pronouncements of the Administration, labor markets remain weak. Mankiw noted, for instance, that the "recovery is broad-based." Yet the latest numbers available (July 2004) show that 45 states have higher unemployment, and 32 states have fewer jobs than when the recession began in March 2001.[6] While there has been some job creation, there are still 1.2 million fewer jobs now than when the recession began. In fact–Makiw’s protestations notwithstanding–while we are not in another depression Bush has presided over the greatest sustained job loss since the Great Depression.

If the Bush tax cuts were designed as short-term stimulus, numerous commentators have noted, they would be temporary. Yet, nearly all of them are intended to be permanent, as Bush has publicly stated, though the sunset clauses (where cuts are scheduled to expire unless reauthorized) have provided a useful accounting gimmick to hide the true costs of the tax cuts. And despite the rhetoric, the tax cuts are not free but must be paid for. As Paul Krugman has noted, the Congressional Budget Office concluded that half of the 2003 budget deficit of $400 billion is directly due to the tax cuts. That is, $2,000,000,000.

It has been noted by Krugman and others that this $2 billion could have been directly used in many other more effective ways to jump-start the economy, such as through aid to struggling state governments to ease their fiscal crises. These are not just idle speculations. The tax cuts are currently being paid for through borrowing, including substantial foreign borrowing. And there are plenty of available alternatives for much higher bang-for-the-buck policies. I’ll briefly mention two here.

The US manufacturing sector has taken must of the brunt of job loss over the last few years, due in part to competition from low-wage regions (and also to myopic capitalists in US multinational corporations who are facilitating the erosion of the domestic manufacturing base by shifting work overseas through "offshore" outsourcing). Yet, employers in high wage regions like the US can compete in a global world if they are technologically and organizationally "modernized," distinctive, and high-performance. For many reasons it is hard for small manufacturers to reach these points on their own, and it is here that government assistance can play a huge role. The US does have one program in this vein, the Manufacturing Extension Partnership (MEP), with state-level technology centers providing subsidized upgrading.

The MEP was recently selected as one of 15 finalists out of over 1000 government agencies for the Harvard Innovations in American Government Award. Yet the Bush administration targeted the MEP program for elimination in the FY 2003 and 2004 budgets, though the program survived due to widespread grassroots support from small and medium sized manufacturers. This program, with a current budget of just over $100 million is the primary, indeed one of the only, means of fighting the outsourcing of US manufacturing jobs, by directly upgrading small and mid sized manufacturers. Yet rather than direct some of the $200 billion toward some form of manufacturing policy such as the MEP might provide a basis for, the Bush administration sought to eliminate the MEP and gave the money away to millionaires.

A second available policy is being proposed by a group called the Apollo Alliance.[7] The Apollo Project is a good, old-fashioned Keynesian program to invest in public and private infrastructure, focusing on developing, building and retrofitting renewable energy sources across a variety of economic sectors. The plan, aimed at achieving energy independence, calls for a ten-year investment of $300 billion, directly creating millions of jobs and pumping billions of dollars into the economy. Of course, this is nothing but a daydream under the current Administration with its deeply vested interests in the oil economy. But the point is that many policy alternatives are practically, if not politically feasible.

A transfer of wealth

Alas, as Krugman notes, the core measures of the tax cuts are designed to benefit the very wealthy, not to stimulate the economy. In a penetrating article on "The Tax-Cut Con," Krugman writes that "The centerpieces of the 2001 act were a reduction in the top income-tax rate and elimination of the estate tax–the first, by definition, only benefiting people with high incomes; the second benefiting only heirs to large estates. The core of the 2003 tax cut was a reduction in the tax rate on dividend income."[8]

The latter has been given the political code name "double taxation," which we’ve seen Mankiw has now adopted. The double taxation argument holds no water, as dividends are just one of many ways in which monetary exchanges are taxed multiple times. For instance, individual income is taxed through payroll taxes, income taxes and sales taxes. And, furthermore, while corporate profits are increasingly untaxed due to various loopholes and tax breaks, only half of all Americans own any stock at all and those who do are largely invested in 401(k) plans that will not be affected by the dividend tax cut.

Reduction of taxes on dividends, like the elimination of the estate tax is part of a larger movement to shift the tax burden from the wealthy to the less well off–in this case it is a shift from taxes on wealth to taxes on work, as noted in a recent report by United for a Fair Economy.[9] This report also notes the shift of the burden on to future generations, citing a report by Citizens for Tax Justice that shows how the fiscal policies of the Bush Administration will impose an average debt of $13,000 per US citizen between 2002 and 2007.[10]

The Bush tax cuts also affect the income distribution more directly. According to an analysis by the Brookings Institution, 36.7% of the 2001 tax cuts will go to the top 1% of income earners. Only 1.1% will go to the bottom 20% of income earners; 5.9% to the next 20%; and 9.2% to the middle 20% of income earners.[11] Looked at another way, the after-tax income of the bottom 20% will be a mere 0.8% greater (roughly, $100 at the top of the bracket) while for the top 1% it will be 6.3% greater (roughly, $25,000 at the bottom of the bracket). In short, the tax cuts make an already unequal income distribution less equal.

Starting from the premise that tax cuts must be paid for somehow, either through tax increases elsewhere or through reductions in government programs, William Gale, Peter Orszag and Isaac Shapiro have conducted an innovative analysis of the "net effects" of the 2001 and 2003 tax cuts. They simulate two scenarios in which individuals receive the tax cuts but then pay for them either through increased taxes elsewhere or through spending cuts. Under either scenario–equal-dollar per person financing or progressive financing–they conclude that "Once the financing is included, the 2001 and 2003 ‘tax cuts’ are best seen as net tax cuts for about 20-25 percent of households, financed by next tax increases or benefit reductions for 75-80 percent of households."[12]

"It’s your money"

The tax cuts are sold as populist measures to give people back their hard earned money. But as the foregoing demonstrates, the Bush tax cuts are greatly skewed toward the very wealthy and, are financed largely through borrowing, and may even end up costing the average tax pay more in the long run. Indeed, the William Gale and Samara Potter report in a Brookings brief that "Treasury data show that a surprisingly large share of households receive no reduction in marginal tax rates [under the 2001 tax act], including 72 percent of those who file tax returns and 64 percent of all filers who actually pay positive amounts of income tax."[13]

Not only have the majority of the tax cuts gone to the very few, very rich, but these tax cuts come after income inequality has dramatically increased over the past two decades, with wage stagnation for most workers. The ratio of CEO pay to average worker pay exploded from 41-to-1 in 1982 to a whopping 301-to-1 in 2003.[14] According to the Congressional Budget Office, the gap between the bottom 20% and the top 1% in 2000 was the largest it’s been since– you guessed it– the Hoover years.

Roughly speaking, the money of average workers is not being taken by the taxman but by the boss man. Family income grew at a roughly even pace in all income categories from 1947 to 1979 (116% for the bottom 20% and 99% for the top 20%). From 1979 to 2001, in sharp contrast, family income growth was heavily tilted toward the upper percentiles: 3% growth in the bottom 20%; 11% growth in the next 20%; and 81% growth in the top 5%.[15]

But enough with all the statistics. There is a more general qualitative point to be made. American mythology notwithstanding, wealth is not created by individuals. Complex industrial societies create wealth collectively over many generations. Effectively functioning markets and societies require many "public goods" that markets cannot create: legal systems, security and safety, highways and other public infrastructure, sanitation systems, education systems, basic research, a social safety net and numerous other things we take for granted in our modern society.

At the same time, untamed markets create many intractable problems, including inequality, poverty and environmental degradation. For all of these reasons, strong, effective and well-funded government is needed. The FY 2004 is $2.3 trillion, and this does not include all the state budgets. Like it or not, the US is a global political economic powerhouse because of, not in spite of its massive governmental apparatuses. What the tax cut zealots really want is not a reduction in government per se, but to further shift costs and burdens on to the poor and working classes. Otherwise, as the wealthy understand well, public finance (taxes and spending) can be used to help average people by redistributing wealth downward, reducing inequality and increasing quality of life.

MATT VIDAL is pursuing his doctorate at the University of Wisconsin in Madison.

He can be reached at: mvidal@ssc.wisc.edu

[1]. Brian Knowlton, "In Heart of Steel Country, Bush Talks of Economy, Not Tariffs," The New York Times December 2, 2003.

[2]. N. Gregory Mankiw, "Not a Hooverville in Sight," The New York Times August 22, 2004.

[3]. Elise Gould, Lawrence Mishel, Jared Bernstein, and Lee Price, "Assessing Job Quality," Economic Policy Institute, Issue Brief #200.

[4]. "Economists’ Statement Opposing the Bush Tax Cuts."

[5]. Isaac Shapiro and Joel Friedman, "Tax Returns: A Comprehensive Assessment of the Bush Administration’s Record on Cutting Taxes," Center on Budget and Policy Priorities April 23, 2004.

[6]. Economic Policy Institute, Job Watch website.

[7]. See the Apollo Alliance website, and specifically the Apollo Jobs Report.

[8]. Paul Krugman, "The Tax-Cut Con," The New York Times September 14, 2003.

[9]. Chuck Collins, Chris Hartman, Karen Kraut, and Gloribell Mota, "Shifty Tax Cuts," United for a Fair Economy, April 20, 2004.

[10]. Citizens for Tax Justice, "We’re Paying Dearly for Bush’s Tax Cuts," September 23, 2003.

[11]. William Gale and Samara Potter, "The Bush Tax Cut: One Year Later," The Brookings Institution, Policy Brief No. 101.

[12]. William G. Gale, Peter R. Orszag, and Isaac Shapiro, "Distribution of the 2001 and 2003 Tax Cuts and Their Financing," Tax Notes June 21, 2004.

[13]. Gale and Potter, Ibid.

[14]. United for a Fair Economy, "Ratio of CEO Pay to Worker Pay Reaches 301 in 2003," Press Release, April 14, 2004.

[15]. United for a Fair Economy, Income Inequality Charts website.