Bush's Policies Don't Promote Growth

The economic evidence is clear: the president’s tax changes have not worked to improve the health of the economy.
John Irons and Lee Price February 17 , 2006
Article created by the The Center for American Progress.

The economic evidence is clear: the president’s tax changes have not worked to improve the health of the economy. Business investment, employment, and wages have all underperformed past recoveries. Furthermore, the choices made in the president’s budget put at risk the future health of the nation by running massive deficits and by cutting back on important national investments in education, science, and energy.

Tax Policy

Bush’s tax policy has created a ballooning federal budget deficit that threatens our future prosperity. Between early 2001 and September 2005, tax changes reduced revenue by $870 billion. The tax cuts that favor the most prosperous cannot be defended on grounds of fairness. But the president has tried to justify them as promoting a stronger, more prosperous economy for everyone. In fact, however, the tax changes since 2001 have failed to spur business investment, jobs, wages, or overall growth.

The rhetoric for the tax cuts was appealing: by taxing income less, businesses would be encouraged to make new investments and people would work harder, knowing that they would keep more of what they earn. It has not worked out that way. Business investment has failed to recover at a normal rate and labor force participation has fallen. Rather than people coming into the workforce at higher rates, the opposite has happened. If the workforce had grown with the population since 2001, there would be 3 million more people between the ages of 20 and 65 in the workforce.

Business Investment

According to proponents of the tax cuts, cutting corporate income taxes and personal income tax rates was supposed to “improve the investment incentives of America’s businesses.” Small business owners, especially, were supposed to respond to lower individual tax rates by investing more and hiring new workers.

In addition, more than $200 billion of cuts were specifically tied to business investment, reducing the cost as a way to encourage purchases of equipment, software, structures and machinery.

The cuts were an utter failure. Business investment has always recovered after a recession, but this was the most sluggish recovery in memory. As a result, business investment has grown 65% more slowly since the peak of the business cycle five years ago than the average for similar periods after nine cycle peaks in the last 60 years. (A business cycle includes a recession and the expansion until the next recession. The peak of a business cycle occurs just before a recession.)

In the recession and recovery of 1990-1994, instead of cutting taxes, Presidents George H.W. Bush and Bill Clinton signed tax increases into law. Yet businesses’ investment grew much faster during that recovery than it has during the last four years.

The Bush tax cuts have been a waste precisely because they were targeted at business owners and the wealthiest Americans, rather than the average consumer whose increased demand and consumption would have made it sensible for businesses to invest.

Employment

Business investment didn’t take off, and neither did job creation. Even now, after five years of huge tax cuts, one million more people are officially unemployed than when George Bush took office, and millions more have left the labor force.

President Bush has noted that 2 million jobs were created over the course of 2005, and that we have added 4.6 million jobs since the decline in jobs ended in May 2003. This is not evidence that the tax cuts are working.

When the third round of tax cuts passed in 2003, one of the Bush administration’s major selling points was the claim that the economy would create 5.5 million jobs from July 2003 through the end of 2004 – almost one and a half million more jobs than would be expected in a normal recovery. Instead, only 2.4 million jobs were created, 1.7 million less than the number we were told to expect with no tax cut.

Job growth remains abnormally slow. Last year's 2 million new jobs represented a gain of only 1.5%. With normal growth, we would have created 4.6 million jobs last year.

Wages and Income

Not surprisingly, since job growth has been so poor, the tax cuts have also failed to create substantial wage and salary growth. Most Americans depend on their wages and salaries for their standard of living. In a healthy economy, wages and salaries should rise along with rising national income and productivity. A record long period of job decline followed by sluggish job growth has created slack in the labor market and pulled down wage growth below inflation growth in the last two years. Last year, middle income wages grew less than inflation (2.4% vs. 3.4%), reducing their buying power.

The Overall Economy

The tax cuts failed to produce the burst of economic activity the president promised. Instead of doing better than in past business cycles, the economy has grown sluggishly, at a rate far slower than in previous cycles The most common measure of economic activity, the Gross Domestic Product (GDP), grew only 13.5% since the first round of tax cuts were passed in early 2001, averaging 2.7% per year. The average for similar periods in the past was far better – growing 16.3% or 3.2% per year.

John Irons is Director of Tax and Budget Policy at the Center for American Progress, and Lee Price is Research Director at the Economic Policy Institute.