Tax Cuts, Unemployment, and Public Debt

An American citizen with an inquiring mind (IM):  Gadfly, in our last conversation (see “The ‘Inherited Economy’ Narrative,” August 16, 2012), we did some analysis regarding causes for the economic problem that President Obama and many others attribute to Bush policies.  In particular, we looked at tax cuts.  I was amazed that with some simple analysis of federal government data, there is no evidence to conclude the tax cuts had a causal effect on annual deficit spending during the Bush era.

Old Gadfly:  I agree, IM.  Nonetheless, how do you respond to those, especially President Obama, who claim, we can’t afford to pay for tax cuts for the wealthy?  And to make it sound even worse, President Obama even claims the tax cuts, that the government cannot afford to give away, led to trillions of dollars that “went to every millionaire and billionaire in the country.”

IM:  Good question, Gadfly.  The answer is simple:  Governments do not generate income—private sector corporations and individuals generate income through labor and investments.  Even those who work for the government, like President Obama, earn an income that is paid for in tax revenue.  To suggest that the government is paying money to millionaires and billionaires completely dismisses the reality that a government is funded by tax revenue--money that is generated by businesses and financial institutions in the private sector. 

Old Gadfly:  If the Bush tax cuts cannot be blamed on the government spending deficits and growing public debt, then are there other explanations?

IM:  Yes.  Contrary to the public narrative, there is strong evidence to support the claim that rising unemployment rates corresponded with decreasing tax revenue per capita.  In fact, after our conversation, I ran a Pearson correlation statistical test and found a strong negative correlation.  The correlation coefficient was r = -.67 with a probability of error at p < .0001.

Old Gadfly:  That is impressive, IM.  So at this point, we can reasonably conclude the decline in tax revenues was due to rising unemployment and not Bush tax cuts.

IM:  That is correct.  Now, in our last conversation, I also suggested debt was another factor contributing to the poor health of our economy.  Since then, I think the focus of our analysis should be the amount of government spending.

Old Gadfly:  How can we analyze government spending as a factor related to the health of our economy?

IM:  In preparation for today’s conversation, I already conducted more analysis.  For this phase in our analysis, I collected public domain data on annual federal government spending listed as outlays and annual surplus/deficits between 1987 and 2011.  This data was in Table 1.1 in the Fiscal Year 2013 Budget of the U.S. Government Historical Tables from the Office of Management and Budget.  I used the same unemployment data from the Department of Labor’s Bureau of Labor Statistics.

Old Gadfly:  What did you discover?

IM:  The graph (see below) shows a comparison between annual unemployment rates and annual surpluses or deficits.  The left vertical axis represents surpluses or deficits, and the right vertical axis represents unemployment rates, on an inverted scale. 

Old Gadfly:  The graph shows another obvious correspondence.  How would you describe the dynamics of the relationship?

IM:  The graph clearly indicates that, assuming all things being equal, if unemployment increases, so will government spending deficits.  To the contrary, as unemployment decreases, so do spending deficits.  I also ran a Pearson correlation statistical test with these two variables and found an even stronger negative correlation.  The correlation coefficient was r = -.93 with a probability of errors at p < .0001.

Old Gadfly:  Help me to understand something.  President Obama says that his Administration has created 4.5 million jobs in the private sector in the past 29 months (see the graph below).  That sounds like an achievement.  And it seems to correspond with the slight reduction in deficit spending between 2010 and 2011.

 

IM:  All I can say is the Obama-Biden campaign graph is a classic example of “Lies, Damned Lies, and Statistics.”

Old Gadfly:  Why do you make such a claim?

IM:  Because I have looked into the data from the Bureau of Labor Statistics and arrived at a completely different picture of reality.

Old Gadfly:  IM, you are impressing me with the quality of your sense of discernment (see Gadfly Corner article, Cogito Ergo Sum, August 9, 2012).  Tell me more about your analysis.

IM:  Since 1977, the lowest unemployment rate was 4.0% in 2000.  The public narrative does not credit six years of a Republican-led Congress that insisted upon balancing the federal budget and welfare reform that moved many unemployed individuals into the workforce.  As we have already discussed, the dot.com bubble burst and other factors led to a recession with rising annual unemployment rates of 4.7%, 5.8%, and 6.0% for the years 2001, 2002, and 2003, respectively.  Also, recall in our discussion on August 16, 2012 (see “The ‘Inherited Economy’ Narrative”), we discussed how the Bush Administration called for income tax and capital gains tax cuts across the board (not just for the wealthy).  Consequently, in 2004, unemployment rates began to improve:  5.5% in 2004, 5.1% in 2005, 4.6% in 2006, and 4.6% in 2007.  The resulting improved unemployment rates had two beneficial effects:  an increase in individual tax revenues generated (see “The ‘Inherited Economy’ Narrative,” August 16, 2012) and a reduction in federal spending deficits.

Old Gadfly:  I still do not see why you refer to the Obama-Biden claim as “Lies, Damned Lies, and Statistics.”

IM:  Let’s take a look at the raw data from the Bureau of Labor Statistics.  There are certain data points we should consider:  2003, 2007, 2008, 2009, 2010, and 2011. 

·         The year 2003 is important because it represents the peak of the recession President Bush inherited. 

·         The year 2007 is important because the Democrat Party gained significant majorities in both Houses of Congress. 

·         The year 2008 represents President Bush’s last year in office.

·         Starting with the year 2009, the Democrat Party controlled the Executive and Legislative branches of government. 

·         The year 2010 is important because it was the last year the Democrat Party controlled the White House and both Houses of Congress. 

·         Finally, the year 2011 is important because this represents the year the Republican Party took control of the House of Representatives.

To simplify the discussion, I created a chart to demonstrate what actually happened regarding jobs lost and gained during the years mentioned above.

  

Old Gadfly:  What do you conclude from this data?

IM:  First of all, I cannot determine how the claim 4.5 million jobs created comes from.  An old friend of mine once told me that the Mayor of Phoenix boasted about the large population increases taking place during his tenure in office; but, what he failed to tell the public is that for every five people that moved to Phoenix, three moved away.  I think this may be a good analogy.  Somehow the Obama Administration seems to count new jobs gained, but does not count jobs lost.  Secondly, if you simply calculate the net jobs gained or lost between Bush’s last year in office from the number employed at the end of 2011, the number is 5,493,000 fewer Americans employed in the private sector.  This is a significant loss of jobs, not a gain.  Now, if you use the Bureau of Labor Statistics figure for the number employed in July 2012 (which does not reflect what will be reported as the annual unemployment rate for the entire year 2012), the number employed is 142,220,000.  This calculation still represents a net loss of 3,142,000 jobs between the end of 2008 and the end of July 2012.  A net loss of over 3 million jobs is not what the Obama Administration wants to admit.  Thus, they advance lies and damned lies under the cloak of manufactured statistics.

Old Gadfly:  But when the Obama-Biden campaign claims 4.5 million jobs in the past 29 months, it looks like they don’t want us to look at the number employed after Obama’s first year in office.  By using the end of 2010 figure of 139,064,000 employed and the July 2012 figure of 142,220,000, there seems to be a net gain of 3,156,000 employees.

IM:  I agree.  So, even if you manipulate the numbers this way, the Obama-Biden campaign claim is still over 1.3 million more than what the actual data reveals.  Quite frankly, for two years, President Bush had to contend with a hostile, anti-business Democrat Congress.  So, it is disingenuous to disregard data earlier than 2010.  Also disingenuous is the manner in which the Obama Administration plays down the growth in federal sector jobs.  In their recent budget, the Administration admits to a “slight increase” in nonmilitary federal jobs, from 1.9 million in 2008 to 2.1 million in 2010, explained on p. 9 of the Historical Budget Tables for 2012.  This “slight increase” represents a 10.5% expansion of federal government jobs, when unemployment rates in the private sector have ranged from 8.2% to nearly 10%.

Old Gadfly: I see what you mean.  So far, we have talked about tax cuts and unemployment rates in relation to government spending deficits.  Do you have any insights on other factors that explain how the deficits contributed to our public debt?

IM:  Absolutely.  The most significant factor is government spending.  Keep in mind that while the Constitution requires Congress to pass a government budget, there has been no congressionally approved budget during President Obama’s tenure, even with a Democrat-controlled Congress.  My next chart depicts government spending (left vertical scale) between 1987 and 2011 in constant 2011 dollars.  The right vertical scale reflects spending for human resources (i.e., entitlements controlled by the Department of Health and Human Services) and defense (Department of Defense).  As you can see, entitlement spending has risen significantly and clearly accounts for the lion’s share of extra government spending.

    

Old Gadfly:  It looks like most of government spending is linked to entitlements, and in 2011 our government spent approximately 2.5 trillion dollars on these entitlements.  This probably reflects why Niall Ferguson recently (Newsweek, August 19, 2012) said, “Welcome to Obama’s America: nearly half the population is not represented on a taxable return—almost exactly the same proportion that lives in a household where at least one member receives some type of government benefit. We are becoming the 50–50 nation—half of us paying the taxes, the other half receiving the benefits.”

IM:  And in the process of pandering to an entitlement class for political purposes, the Obama Administration has put our nation at grave risk.  When accounting for inflation, the Bush Administration added 3.08 trillion dollars to the public debt over an eight year period.  In just three years of his first term, President Obama has added 5.04 trillion dollars to the public debt.

Old Gadfly:  So, does your analysis indicate any political party effect on the economy?

IM:  A Republican President with a Republican Congress mitigated the effect of the recession they inherited in 2001.  Yet, I do not recall either the President or any members of Congress complaining about “the recession they inherited.”  They simply collaborated to get our economy back on track by keeping earned income in the private sector to grow jobs.  The charts we’ve discussed clearly reflect the effect of the Democrat worldview that the government controls the economy and must therefore control private sector business through stifling regulation.  This view has not inspired the private sector to invest cash reserves into expanding business and the jobs that would be created in the process.  Despite claims to the contrary, Republicans are not anti-government—they are for limited government.  Perhaps in a future conversation we can discuss how Democrat politicians, in collaboration with a liberal media, shaped a public narrative to demonize President Bush and by affiliation the Republican Party.  I believe the politically manufactured public narrative between 2001 and 2006 accounts for the major shift toward a Democrat Congress in 2007, with some of that momentum carrying over to the presidential campaign in 2008. 

Old Gadfly:  This has been a very enlightening conversation, IM.  But, before we bring it to an end, I must say the most encouraging phase on your graphic discussed in our conversation on August 16 (see “The ‘Inherited Economy’ Narrative”) seems to be during the 1992 to 2000 timeframe.  How would you account for this dynamic?

IM:  I have always read and heard that this good news picture was President Clinton’s handiwork.  But, based on my own critical analysis of the situation, I think President Clinton demonstrated what an excellent surfer he was when he brilliantly anticipated the economic wave being generated by other factors.

Old Gadfly:  This topic seems to be taking us away from today’s theme about tax cuts, unemployment, and public debt.  Why don’t we start our next conversation with your assessment of President Clinton’s economic surfing skills.  Until then, keep in mind that we want our discussion to relate to today’s contest regarding political visions for America.

IM:  That sounds like a good plan, Gadfly.  I also want us to eventually talk about some other topics that we’ve touched upon in our conversations, such as:  a manufactured public narrative, the Center for American Progress’s white paper on Bushonomics, the housing crisis, financial sector deregulation, etc.

Old Gadfly:  Let’s plan on it.  Thank you for the wonderful discussion, IM.  I’m ready for a glass of wine.