A Fearful Step into Politics
Jobs is the mantra of this Presidential election. What creates jobs? I do not know. There is likely an answer but each party has its own, and the electorate is ill-educated to judge. I suggest that our own personal analysis is fundamentally flawed by this lack of data: we fill the absence of facts with intuitions informed by prior bias.
At the risk of wandering into a storm that this blog has until now avoided – avoided because I have a hard enough time writing about what I actually know or about which I have gathered reasonably solid facts – I refer to a New York Times article from Sunday September 16 that asks, Do Tax Cuts Lead to Economic Growth? Simply put, assuming the data is accurate (the article is written by the DC bureau chief of the Times), tax cuts since 1990 do not correlate with US economic growth.
The article goes on to interview “conservative economists” who are quoted as agreeing that tax cuts do not stimulate jobs in any significant degree, for a variety of reasons; the most interesting theory is that historically we were cutting taxes from 90% or 70%, but now the top rate is far more modest. I discount these conclusions as hearsay and perhaps from a biased source; the Editorial content of the Times today is unabashedly liberal.
But what about the numbers? It strikes me as unlikely that they are fudged.
Neither candidate has been clear about exactly what they will do with taxes; Romney to my mind is more opaque, and I heard him say that his selection of loop-holes to close is something “I will have to negotiate with Congress” which is of course no answer at all. But I believe it is fair to say that Romney wants to cut the tax rate to spur job growth. I do not think I am making a volatile political statement in saying that much.
Tax cuts tend to increase deficits. In the political battle that would attend the proposed elimination of tax deductions, it is hard to believe that ANY president will be successful in eliminating many broadly based deductions. For example, if housing is a problem and an indicator, what happens if we eliminate the tax deduction for interest paid on residential mortgages? If the tax rate does not spur growth so as to increase tax revenues even with a lower rate after we in fact effect substantial tax cuts, but rather has the same effect it has had in the last 20-plus years of slowing growth, we are expanding the deficit even more.
I do not here attempt to make an argument for Obama on these points; but I am troubled by these pesky facts. You need not be an economist to look at the Times chart: growth after the 1990 Bush tax increase in 1990 and the Clinton tax increase in 1993, and loss of jobs after the 2001 Bush tax cuts were followed by further Bush cuts in 2003.
Neither candidate speaks with any credibility on jobs because as far as I can tell, the jobs gap is driven by forces not easily controlled by domestic US tax policy. If economic contraction is mostly tied to lack of regulation, or cheap money, or poor credit practices, or world events, or a battle for the minds and hearts of European bankers, or hydrocarbon politics, or by some difficult-to-compute combination of these factors, then tax policy will likely have little impact.
My problem is not only that I do not know the answers. My problem is this: I don’t think the candidates know the answers either. I wonder what would happen in the voting if one of them said so….