The "Inherited Economy" Narrative

An American citizen with an inquiring mind (IM):  Gadfly, I keep hearing one presidential candidate, who happens to be the incumbent, say he wants to “press forward” on his policies.  He also says his opponent wants to return to past policies that got our nation into the trouble he’s trying to fix.  The voter has a choice to stay the current course or to regress.

Old Gadfly:  What is your question?

IM:  For whom should I vote?

Old Gadfly:  Can you not think for yourself?  What do you know about the situation?

IM:  Except for Fox News, the Wall Street Journal, and a small handful of other news sources that seem to try to examine strengths and weaknesses of both candidates, most of the news networks, such as ABC, CBS, NBC, CNN, and MSNBC, and newspapers such as The New York Times, the Los Angeles Times, and The Huffington Post, and magazines such as Time and Newsweek seem pretty comfortable with the incumbent.

Old Gadfly:  Yet, you seem to want a deeper understanding of which candidate has a better grasp on how to handle the economy.  Let’s think through this topic, the economy.  What’s wrong with it?

IM:  I’d say there are two major problems—sustained high unemployment and increasing national debt.

Old Gadfly:  O.K., let’s focus on these problems for now.  What do you think caused these problems?

IM:  According to the prevailing public narrative, Bush policies got us into this mess.  Some people refer to them as Bushonomics.  Even the tax-exempt, nonpartisan think tank, The Center for American Progress, published a white paper on it.  But I found some issues with the paper (I think you and I will have a future conversation on this paper), and when I tried to learn more about the Center at the “About Us” tab, I was a little discouraged about the objectivity of the white paper.  Especially disappointing about the “About Us” description was the part that said, “We develop new policy ideas, critique the policy that stems from conservative values, challenge the media to cover the issues that truly matter, and shape the national debate.”

Old Gadfly:  What’s disappointing about the statement?

IM:  I have two concerns with it.  First, while not all Americans embrace conservative values, as a liberal democracy we preach tolerance of different views, especially if they do not affect my individual liberty.  Otherwise, we sacrifice some freedoms when policymakers impose values that stem from egalitarianism, which infringes upon some individual freedoms to promote equality as an outcome.  Second, challenging the media and shaping the national debate sounds like subtle encouragement of censorship or the unbridled tactic of engineering public sentiment (there will be a future blog on engineering public sentiment).  Also, it is an example of the “framing” you described in your August 9, 2012 blog entry.

Old Gadfly:  I do not disagree with your observations.  But, let’s get back to the economy and start with tax cuts.  Since you are not a Copernican drone (see my inaugural blog posting, "Cogito Ergo Sum," on August 9, 2012, in which I describe this label), I want you to do some analysis.  One of the good things the federal government does is collect data. 

·         Go to the Internet and download the Fiscal Year 2013 Budget of the U.S. Government Historical Tables from the Office of Management and Budget. 

·         Now, go to Table 2.1 for tax revenue generated.  Let’s start building a database for the years 1987 through 2011. 

·         We will want to normalize the data to account for inflation and population growth.  To adjust the revenue data for the years 1987 through 2011 in constant fiscal year 2011 dollars, visit the inflation calculator at the U.S. Department of Labor’s Bureau of Labor Statistics.

·         For population growth, go to the US Census Bureau for the population data.  Unfortunately, there is no single file that captures these data. There are three files:  1900 to 2002, 2003 to 2009, and projections for 2010 and 2011. 

·         Let’s identify the years that top marginal individual income tax rate changes were imposed.  We can get these data from The Tax Policy Center, sponsored by the Urban Institute and The Brookings Institution.

·         Let’s also include maximum long-term capital gains tax rates.  This set of data is also available from the Tax Policy Center, sponsored by the Urban Institute and The Brookings Institution.

·         Finally, collect unemployment data form the Department of Labor’s Bureau of Labor Statistics.

IM:  This seems like a lot to digest.

Old Gadfly:  Let’s just graph what the individual income tax revenue in constant dollars per capita looks like between 1987 and 2011.  Let the left hand axis reflect tax revenue and the right hand axis indicate unemployment rates (inversed for easier comparison).

IM:  The graph (see below) shows increases and decreases.  But, what is striking about the graph is that there seems to be a very close correspondence between employment rates and tax revenue generated.

Old Gadfly:  Since Bush tax cuts, both top marginal tax rates and capital gains rates, are singled out as causing the recession, let’s position them on the graph to see what effect they had on revenue and unemployment rates.

IM:  This is what the graph looks like with tax cut changes.

IM:  Bush took office in 2001.  That year, top marginal tax rates were reduced by 1%.  This change seemed to have no effect on the sharp decline in employment and revenues following the recession stemming from the dot com bubble burst.  Two years later top marginal tax rates were reduced by 3.6% and capital gains tax rates were reduced by less than a percent.  This seems to have slowed the unemployment rate and the loss of tax revenues.  The following year, 2004, capital gains taxes were reduced by 5%.  Unemployment rates improved from 6.0% in 2003 to 4.6% in 2007.  Revenue per capita rose from $3,287 in 2004 to $4,185 in 2007.  However, the year 2007 saw a sharp decline both in employment rates and tax revenue with no tax rate changes.

Old Gadfly:  What happened in 2007?

IM:  I don’t know.

Old Gadfly:  Any changes in Congress?

IM:  From 1994 through 2006, the Republican Party controlled both houses of Congress.  In 2007, the Democrat Party assumed significant majorities in both houses of Congress.

Old Gadfly:  Could political party dominance in Congress have such an impact on employment?  After all, the Democrat Party claims to be the advocate for labor.

IM:  You raise two separate points.  First, political party matters when considering pro- or anti-business sentiment.  Businesses generate jobs in the private sector.  Senator Reid received an 18% rating from the Chamber of Commerce in 2010.  Congresswoman Pelosi received a 0% rating from the Chamber in 2010.  It is safe to say the two Democrat leaders in Congress were not pro-business.  On the other hand, Congressman (now Speaker) Boehner received a 100% rating in 2010.  Your second point regards labor.  To a Democrat, labor means an employee protected by union membership.  Employment, on the other hand, is a broader concept that includes employees that may or may not be affiliated with a union.

Old Gadfly:  According to your graph, there was a reversal of trends for both revenue and unemployment rates in 2010.  Were there any changes to account for this trend?

IM:  There were no tax rate changes, but the Senate lost some seats to Republicans and Republicans gained a significant majority in the House of Representatives.

Old Gadfly:  Your observations seem to align with your inference about political parties and their effect on business in the private sector.  In the final analysis, do your findings prove anything?

IM:  Technically, no.  However, aside from a preponderance of public narrative rhetoric, there is no evidence that Bush tax cuts caused the recession.

Old Gadfly:  Then why does Obama keep saying he inherited a recession caused by Bush policies?

IM:  Perhaps to deflect attention from the real causes.

Old Gadfly:  We covered (and perhaps, in the process, uncovered a more accurate picture) a lot in this conversation.  Let's address the debt issue in our next one.