Posted by
Bruce Bartlett on Thursday, June 21, 2007 3:43:21 PM
In my previous post, I made some provocative points in hopes of stimulating further research. In the interest of furthering debate, I have dug around and found a couple of studies that may illuminate the discussion.
First is a business cycle analysis showing that the recovery from the 2001 recession was among the weakest in history. Just look at the first five graphs. Unfortunately, the analysis stops in late 2003.
http://www.nber.org/cycles/hall.pdfSecond is a 2006 Treasury Department study estimating the impact of extending the 2001 and 2003 tax cuts. Because it is a forward-looking analysis, it does not tell us what impact the tax cuts previously had. But assuming that the impact is symmetrical, it is apparent that the effect was quite small. Treasury concluded that the long run effect would be to raise the level of real GDP by 0.7 percent. This is not an increase in the annual rate of growth, but the cumulative impact of a faster growth rate after many years on the overall size of the economy. This is not nothing, but is a very small impact. Furthermore, even this very modest impact is very sensitive to how the deficits resulting from the tax cuts are financed. The 0.7 percent result assumes that government spending is cut to finance the tax cuts. But if future taxes are raised instead, then the economy actually shrinks in the long run.
http://www.treasury.gov/press/releases/reports/treasurydynamicanalysisreporjjuly252006.pdfThird is a 2006 Heritage Foundation study using commercial macroeconometric models that also attempts to estimate the economic impact of extending the tax cuts. Again, it is a forward-looking study with no estimate of how the tax cuts had affected the economy up until that point. But assuming that the effects are symmetrical, the Heritage study confirms the very modest impact suggested by the Treasury study.
http://www.heritage.org/Research/Taxes/upload/CDA_06-10.pdfI encourage readers to post links to other serious studies along these lines. If links are unavailable, give citations.
Here are links to other web sites where people have commented on my earlier post:
http://economistsview.typepad.com/economistsview/2007/06/bruce_bartlett__1.htmlhttp://angrybear.blogspot.com/2007/06/bruce-bartlett-on-bush-boom.html