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June 20, 2007
Apples To Apples
Today at Angry Bear, my friend pgl is doing some back-of-the-envelope econometrics:
From 1980QIV to 1992QIV, average annual real GDP growth = 3.0%.
From 1992QIV to 2000QIV, average annual real GDP growth = 3.6%.
From 2000QIV to 2006QIV, average annual real GDP growth = 2.6%.
Notice something? During the low tax eras (Reagan-Bush41 and Bush43), we witnessed lower growth rates. During the Clinton Administration – which began with its fiscally responsible policies with a tax rate increase – we saw strong growth. Maybe part of the explanation has to do with the impact on national savings from fiscal irresponsibility justified by phony free lunch promises.
I have a bit of a problem with the evidence here. To get the gist of my objection, take the following quiz:
Which one of these time periods did not include a recession?
a. 1980QIV to 1992QIV
b. 1992QIV to 2000QIV
c. 2000QIV to 2006QIV
If you answered b, you win the gold star. And if you knew that, are you really surprised that the period from 1992 through 2000 had higher average growth than the other two periods, which did include recessions? Suppose we instead make the comparisons including only the expansion years of the Reagan-Bush41 and Bush43 administrations? Here's what you get:
From 1983 to 1989, average annual real GDP growth = 4.3%.
From 1992 to 2000, average annual real GDP growth = 3.7%.
From 2002 to 2006, average annual real GDP growth = 2.9%.
You could just as well look at those numbers and conclude that potential GDP growth -- measured cycle to cycle -- is declining through time. And if you accept pgl's characterization of irresponsible policy, followed by responsible policy, followed by irresponsble policy, you might then conclude that policy has very little to do with that trend.
Perhaps you would want to argue that I shouldn't exclude recessions because the absence of a downturn in the 1992-2000 period is itself evidence of the superior growth effects of the fiscally responsible policies of the Clinton administration? Let me try to talk you out of that with a few more questions:
1. Do you really want to blame the Reagan fiscal policies for the 1980-82 recessions -- which are almost universally attributed to the Volcker Fed's fight against double digit inflation inherited from the policies of the 1970s?
2. Do you really want to characterize Bush41 as a tax cutter? And would you maintain that position knowing that Clinton's major piece of fiscal policy -- the Omnibus Reconciliation Act of 1993 --was pretty much of copy of the Omnibus Reconciliation Act of 1990, the legislation in which President Bush the Elder famously broke his "no new taxes" pledge?
3. Do you really want to finger the Bush43 tax cuts for the 2001 recession which began a scant two months into the administration and was over even before the tax cuts took effect?
Look -- It might very well be that "fiscal responsibility," as pgl defines it, is a central ingredient of pro-growth policy. But those GDP comparisons don't make the point.
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