Bush Tax Cuts Exploded Clinton-Era Deficit Myth: Kevin Hassett

The argument over the Shrub taxation cuts is
heating up, and the Democrats aren't making any sense.

If you swan into a mass meeting for any of the Democratic
presidential candidates, you are certain to witnesser a lengthy
diatribe documenting the awful harm that President George
W. Bush's taxation policies have got done to the economy. Edmund Hillary Clinton
said in a recent debate, ''I set financial duty first... We have got to travel back toward a more than just and progressive tax
system and get once again to travel toward a balanced budget
with a surplus.''

If you listen to Clinton, the Restoration of ''fiscal
sanity'' and recommencement of higher taxation rates will have got a profound
positive impact on every corner of the economy.

Bill Clinton and her Democratic rivals have got a large problem. The facts don't back up their negative word picture of the
Bush taxation cuts. Indeed, everything Bush's oppositions said would
happen after taxations were reduced didn't happen.

Remember that protagonists of marginal-tax-rate reductions
argued that the less rates would bring on people and firms
to work more than than and take more risks. This heightened activity would
lift the economic system and, over time, even assist the Treasury
recapture a good spot of the gross lost when the rates were
initially cut.

Opponents warned that increased shortages would restrict or
even overmaster the personal effects of the taxation cuts by drive up
interest rates.

Both Right

Both schools of idea could, in theory, be correct. If
individuals don't react much to decreased taxation rates, but debt
markets react a good trade to growing deficits, then taxation cuts
would supply small benefit.

Back in 2001, when the first Shrub taxation cuts were being
debated, these statements were laid out by numerous economic experts on
both sides of the issue. One meme devising its manner through
Washington was the averment that a sustained addition in the
deficit relation to gross domestic merchandise of 1 percentage would
lift long-term interest rates by 50 to 100 footing points. That,
the narrative went, would countervail any positive stimulation from lower
marginal rates.

Looking back at more than than six old age of economical history
since the Shrub taxation cuts, two observations stand up out. First, the
deficit increased much more than than was expected at the clip Bush
took office.

Even after accounting for the taxation cuts, for example, the
Congressional Budget Office prognosis that there would be a
cumulative excess between 2001 and 2010 of $564 billion. Instead, including current projections, there was a shortage over
that time period of $3.7 trillion.

Rates Never Rose

Second, involvement rates never rose. Even though the change
in the financial state of affairs was at least twice as big as the
anticipated 1 percentage of GDP, involvement rates have got been lower
than they were in 2001 for almost Bush's full presidency. Bush
took business office on Jan. 20, 2001, a clip when the 10-year Treasury
bond yielded 5.17 percent. Today, it gives about 4.28 percent
and have been well below 5.17 percentage on norm every twelvemonth in
between.

Fine, a sceptic might say, but other things changed. True,
but they also changed in a way that would propose interest
rates should be higher. Inflation have surprised on the upside
because of high energy prices. gross domestic product growing during the past year
has been 2.6 percent, compared with 0.8 percentage in 2001.

Interest rates in the U.S. are low, of course, because
rates everywhere else are, too. Government debt from the U.S. is
a stopping point replacement for debt from many other countries, and their
rates move in tandem. A planetary nest egg oversupply and a flight to
safety are far more than of import determiners of U.S. interest
rates than the Shrub deficits.

Missing Link

One can only reason from such as grounds that the link
between swings in the U.S. financial state of affairs and involvement rates,
never very strong to get with, have go impossible to
detect. As Harvard University economic expert Kenneth Rogoff recently wrote in
the Financial Times, ''Explosive fiscal globalisation has
made U.S. federal budget policy far less of import as a
determinant of planetary existent involvement rates.''

But if we accept that planetary marketplaces have got mostly severed
the necktie between shortages and involvement rates, another question
emerges. Exactly how is it that the Shrub taxation cuts have got harmed
the economy?

Toilet Jonathan Edwards looks to be the first of the Democratic
candidates to look at the information and accept that shortages might
not be so bad. Edwards's policy director, Jesse James Kvaal, recently
commented, ''Investments inch wellness care, energy and education... are more than of import for our economy, even if that means
sustaining the shortage for a while.'' It shouldn't be long
before Bill Clinton and Barack Obama come up to the same conclusions.

Up, Up, Up

This agency if Democrats win, despite the vocalizations of the
presidential candidates, the shortage is going to travel up as tax
dollars are steered toward wellness attention and other Democratic
favorites. Taxes will travel up, too, as the Shrub taxation cuts expire,
and the economic system will suffer.

If, on the other hand, Republicans win, then they will
extend the Shrub taxation cuts, and the shortage will travel up. The
extension of the low edge taxation rates will supply continued
economic benefits.

Either way, you can be certain that the Bill Clinton-era dogma
about shortages and involvement rates will be a thing of the past.

(Kevin Hassett, manager of economic-policy surveys at the
American Enterprise Institute, is a Bloomberg News columnist. He
is an advisor to Republican Senator Toilet McCain of Grand Canyon State in
his command for the 2008 presidential nomination. The opinions
expressed are his own.)

To reach the author of this column:
Kevin Hassett at