Friday, April 26, 2013

The Bush tax cuts made the stimulus worse. Blame the Democrats.

On his blog, 4:17 A.M. alum South of the 49th makes the case that the Bush tax cuts didn't measurably impair the nation's ability to respond to the financial crisis and recession with stimulus spending.  His point is simple enough:
A number of commentators claim that the Bush tax cuts hampered our ability to respond to the 2008 financial crisis with appropriate fiscal stimulus ... This could be true for two reasons, both of which seem unsupported: 1) the accumulated debt could have created economic barriers to more fiscal stimulus; or 2) the accumulated debt could have created political barriers to more fiscal stimulus.
Possibility one, he argues, is clearly contradicted by the bond market, where interest rates on American government debt are historically low, indicating that the nation could easily borrow and spend significantly more without seeing major negative consequences.  Fair enough, and I agree.

Possibility two is where things get a little more complicated.  Sot49th (I should probably figure out a better shorthand than this) goes into considerable historical detail making his point, but the gist of the argument is that none of the key negotiations over stimulus spending seem to have been measurably impacted by America's absolute level of debt.  The Republicans adopted an anti-spending stance as part of a concerted strategy to oppose Obama, rather than the other way around; the moderate Senators who cut hundreds of billions out of the stimulus bill were attempting to bolster their centrist credentials rather than making anything resembling a coherent policy decision; and in any case, the recession would have produced quite a large deficit by reducing revenue and increasing entitlement expenditures.

(The post also argues that the leverage created by the expiring tax cuts ultimately benefited stimulus proponents, because Obama could demand fiscal concessions for their extension.  That's an excellent point, but so particular to the political context of 2010 that there's almost no way to compare it to a counterfactual in which there had been no tax cuts at all.)

So far, so good.  I can't deny that in any conceivable scenario, Republicans and self-declared centrists would have groused about the debt and deficit. But I still suspect the tax cuts have undermined the country's ability to fiscally respond to the recession, albeit in a broader, fuzzier way than is immediately obvious--and in a way that leaves Democrats shouldering a lot of the blame.

The underlying problem is here is that the Bush tax cuts made the deficit a major issue, before the aftermath of the recession made it the major issue.  Democrats, eager to hit Bush however they could, attacked his deficit, and Republicans, eager to distance themselves from Bush however they could, decided that apparent nonchalance about the deficit betrayed the President as a faux conservative.

Then the financial crisis came, and suddenly advocates of fiscal stimulus were in an awkward position.  Many of them were Democrats who had, only months before, been lambasting Bush's mishandling of the nation's finances.  Their opponents, by contrast, were emboldened: the recession, they said, only reinforced the need to cut spending and get the deficit under control.  Small wonder that so many legislators wasted so much time desperately, quixotically searching for "deficit-neutral stimulus."  Perhaps the debate over stimulus spending was never going to turn out well, but the Bush tax cuts ensured that it started in a bad place and got worse from there.

Of course, even if the tax cuts ultimately worsened legislative outcomes in this way, these effects can't really be laid at Bush's feet.  Instead, the problem is political opportunism and economic illiteracy on the left.  It's okay, we have plenty of other stuff to blame Bush for. UPDATE: South of the 49th says I'm being too hard on Democrats, reminding me that cutting spending in good times while raising it in bad times, far from being incoherent, is actually the correct application of Keynesian principles. This is true, although the anti-Bush rhetoric was usually implicitly premised on the assumption that all debt is bad, rather than currently macroeconomically inappropriate. It's that assumption that's haunted us to this day.

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