Tax Cuts Aren't the Only Way Out of Recession

Considering the horrendous housing market and a struggling stock market, the economy will play an important role in the presidential election in the fall. Republican John McCain will argue that tax cuts stimulate the economy. Democrats -- either Barack Obama or Hillary Clinton -- will support raising some taxes on the wealthy.

What effect do tax cuts have on the economy? A new study from the Center on Budget and Policy Priorities on the economic expansion from 2001 to 2007 throws light on the issue. It shows that the expansion lagged past expansions in every respect, except corporate profits.

That is bad news for the average voter, and it may appear worse to them in light of a weakening economy.

The study examined seven economic factors based on statistics from the Commerce Department, Labor Department and the Federal Reserve: Gross Domestic Product, personal consumption expenditures, private domestic fixed nonresidential investment, net worth, income from wages and salaries, payroll employment, and corporate profits.

The study compares average growth in those seven areas with the average growth of other economic expansions following World War II. The study demonstrates:

For six of the seven indicators, the average annual growth rate between 2001 and 2007 was below the average growth rate for the comparable periods of other post-World War II economic expansions. Notably, this expansion was among the weakest since World War II with respect to both overall economic growth and growth in fixed non-residential investment. These two indicators should have captured any positive "growth effects" of the tax cuts.

The economic expansion had two specific benefits. First, corporate profits surged, beating previous expansions by almost 3 percentage points. Second, the expansion also lasted longer than most. It in fact outlasted six of the last nine expansions in the study.

The authors of the study suggest that many proponents of tax cuts choose to cherry-pick the numbers:

Supporters of the tax cuts generally focus on a different set of statistics: growth rates measured only from 2003-2007, the strongest portion of the expansion. ... The fact that growth rates over the expansion as a whole were well below average indicates that the economy never caught up to where it would have been if GDP, consumption, investment, net worth, wages and salaries, and employment had merely grown since the start of the expansion at the average rates for post-war expansions.

One down side of the tax cuts is the role they've played in swinging the federal deficit from a projected surplus to massive deficits, pushing the national debt over $9 trillion dollars.