Boskin writes -
President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn't big enough, and that spending control any time soon will derail the economy.In short, tax cuts produce growth and spending during the worse recession in 75 years is bad and a failure. Bull hockey - No Correlation Between Bush Tax Cuts and Job Creation, Report Shows
But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.
....Writing during the Great Depression, John Maynard Keynes argued that "sticky" wages and prices would not fall to clear the market when demand declines, so high unemployment would persist. Government spending produced a "multiplier" to output and income; as each dollar is spent, the recipient spends most of it, and so on. Ditto tax cuts and transfers, but the multiplier is assumed smaller.
By contrast, the last two major tax cuts—President Reagan's in 1981-83 and President George W. Bush's in 2003—boosted growth. They lowered marginal tax rates and were longer lasting, both keys to success. In a survey of fiscal policy changes in the OECD over the past four decades, Harvard's Albert Alesina and Silvia Ardagna conclude that tax cuts have been far more likely to increase growth than has more spending.
Former Obama adviser Christina Romer and David Romer of the University of California, Berkeley, estimate a tax-cut multiplier of 3.0, meaning $1 of lower taxes raises short-run output by $3. Messrs. Mountford and Uhlig show that substantial tax cuts had a far larger impact on output and employment than spending increases, with a multiplier up to 5.0.
While the Recovery act ( stimulus) has not been as successful as we'd like it has not been a failure - Economists agree: Stimulus created nearly 3 million jobs
As President Bush and his senior advisors traveled across the country this past weekend touting 2005 job growth numbers and demanding that Congress make the administration's tax cuts permanent, a study examines the administration's claim that tax cuts create jobs–and finds it without merit.
While two million jobs were created in 2005, this is 3.5 million jobs short of expectations by the President's Council of Economic Advisors, who estimate job growth at 3.1% in a normal year. Jobs grew by only 1.5% in 2005.
"The president's tax-cutting policy is a failure in regard to job creation, and we need to recognize it as such, " said Anisha Desai, program director at UFE and one of the report's co-authors. "While there is no evidence that massive tax cuts create jobs, there is considerable evidence that they contribute to economy-choking deficits."
The report reviewed administration claims that "tax cuts create jobs" and found the following:
* Tax cuts have no predictable effect on employment, either in job creation or job destruction.
* Since 2003, job creation has fallen millions of jobs short of the administration's promises.
* The current weakness in job creation during an economic recovery is unprecedented since World War II.
The report highlighted other concerns about jobs and the economy as well. For example, the number of good quality jobs (defined as those paying at least $16 an hour, providing employer-paid health insurance, and providing a pension) has remained flat at 25% of all workers. Significant racial disparities exist: black employment is at 89.6%, compared to 95.2% for whites. And Latino workers average more than $10,000 per year less in earnings than whites, and this gap is increasing.
Amid mounting signs that the economic recovery is faltering, one potential remedy seems out of the question: a booster shot of government spending.
The White House says the multiyear $814 billion stimulus program passed by Congress in 2009 boosted employment by 2.5 million to 3.6 million jobs and raised the nation's annual economic output by almost $400 billion. A recent study by two prominent economists generally agrees, crediting the pump-priming with averting "what could have been called Great Depression 2.0."
If President Obama expected anyone to say, "Thank you," however, he's been disappointed. In a recent USA TODAY/Gallup Poll, 59% of respondents disapproved of the president's handling of the economy. In the partisan war over the economy's performance, the word "stimulus" has became synonymous with "boondoggle,"
....Politically, the "Recovery Act" — which is divided among tax cuts, financial aid for cash-strapped state governments, emergency unemployment assistance and spending on roads, bridges and other infrastructure — has taken fire from the left and the right.
Liberal economists such as New York Times columnist Paul Krugman complained that the massive program should have been larger and was marred by the inclusion of excessive tax cuts that would have a less-immediate impact on job creation. Republicans derided the legislation as wasteful spending that would add to ballooning government debt.
Eighteen months later, the consensus among economists is that the stimulus worked in staving off a rerun of the 1930s. But the spending's impact was dwarfed by other crisis-fighting tools deployed by the Bush and Obama administrations, including costly efforts to stabilize crippled banks and the Fed's unconventional monetary policy.
"I think it was important for confidence. ... But fiscal stimulus was the least important of the three planks of the government's strategy," said Harvard University's Kenneth Rogoff, former chief economist of the International Monetary Fund.
Counting jobs
Christina Romer, the outgoing head of the president's Council of Economic Advisers, never really recovered politically from her January 2009 forecast that the stimulus would keep the unemployment rate below 8%. In fact, by the time Obama signed the Recovery Act into law on Feb. 17, 2009, it already had breached that level. (The original administration forecast was prepared using data from late 2008 before the already-wounded economy deteriorated even more dramatically.) The unemployment rate hit 10.1% in October 2009 and stands at 9.5% today.
Republican leaders such as Rep. Eric Cantor of Virginia say that proves the stimulus a failure. But Romer last month told the Joint Economic Committee that the stimulus "helped to turn the economy from free fall to recovery."
It's no surprise that the administration would proclaim its own policies a success. But its verdict is backed by economists at Goldman Sachs, IHS Global Insight, JPMorgan Chase and Macroeconomic Advisers, who say the stimulus boosted gross domestic product by 2.1% to 2.7%.
It's impossible to determine precisely how many jobs or how much growth the stimulus program caused. In a nearly $14 trillion economy, economists can't go employer to employer counting new hires. And there are too many moving parts to confidently link any single factor with individual hiring decisions. Roughly one-third of the stimulus, for example, came in the form of tax cuts, which are designed to boost demand for a wide array of products and eventually result in related hiring.
But to estimate the answers to such questions, economists rely on models based on historical relationships between various policies and real-world results. Earlier this month, Zandi and co-author Alan Blinder, former vice chairman of the Federal Reserve, released the most detailed assessment of the government's efforts to combat the so-called Great Recession. Neither economist is regarded as a partisan firebrand. Zandi, for example, backed John McCain in the 2008 presidential campaign and has advised members of both parties.
Their conclusion: The fiscal stimulus created 2.7 million jobs and added $460 billion to gross domestic product. Unemployment would be 11% today if the stimulus hadn't been passed and 16.5% if neither the fiscal stimulus nor the banks' rescue had been enacted, according to Zandi and Blinder. "It's pretty hard to deny that it had a measurable impact," Zandi said.
Do not be fooled by Boskin's use of the multiplier effect doublespeak. He was a Bush economic advisory and made the same claims about the link between growth and tax cuts years ago. Bush had the worse economic growth record of any president since Hoover. Funny that Boskin belongs to the Hoover Institute.
