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Tax Cuts Aren't the Only Way Out of Recession

Recent study finds recent economic expansion -- tax cuts included -- wasn't as successful as that of the 1990s.
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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:

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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, networth, 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.

Supporters of tax cuts also hate comparisons to the 1990s. Treasury Secretary Robert Rubin counseled then-President Bill Clinton to follow a circumspect fiscal policy aimed at cutting budget deficits. This included a tax on the wealthiest Americans. Taxing the wealthy did not prolong the recession of the early '90s; rather, it helped put America's fiscal house in order.

The study notes that the economic expansion in the '90s beat the most recent one in the following ways: higher rate of GDP growth, more rapid net worth growth, stronger job growth, and better fixed non-residential investment growth. One area it did not outperform: corporate profit growth. Profit growth in the 2000s easily outstripped the 1990s.

Will these facts find their way into the presidential debate?

McCain has questions to answer on tax cuts. He voted against the Bush tax cuts in 2001 and 2003, though he recently changed his mind. Yes, the straight-talker flip-flopped. McCain not only now endorses Bush's tax cuts and wants to extend them, but he also prefers Bush's solution to the economic downturn: tax rebates.

Those tax rebates will soon be arriving in Americans' mailboxes. It's not clear whether consumers will save or spend their checks, but it is clear that a shallow recession greatly favors McCain. He will argue that once again tax cuts were good for the economy and are the answer to all economic problems. I predict this effort will work. The electorate has a much more myopic view of the economy, forgetting the good times of the 1990s.

Overlooking the 1990s economy certainly hurts Democrats. Obama has exacerbated this by attacking the Clintons' record in an effort to defeat Hillary Clinton in the primary. In fact, Obama may repeat the mistake of another Democrat: Al Gore.

Gore tried to distance himself from Bill Clinton because of the Monica Lewinsky scandal. Instead of running on a strong economic record, the 2000 campaign turned into a likeability contest, which helped to defeat Gore.

In the end, tax cuts and tax hikes aren't necessarily the determining factor in economic growth, but the candidates will try hard to convince us anyway.