Editorial: Happy talk, but a hollow recovery

12/29/2005

Poorly designed tax cuts have delivered disappointing growth.

Star Tribune Editorial
Last update: December 28, 2005 – 6:06 PM

With members of Congress home for the holidays, voters will be hearing a lot of happy talk about the economy and the nation’s vigorous recovery. “Our economy is showing real signs of strength and growth,” Rep. Gil Gutknecht, R-Minn., said in a news release earlier this month. “The economy’s rapid growth in the third quarter reinforced the expansion’s robust pace,” says the House Budget Committee.

This sort of boosterism should come as no surprise. The GOP Congress has passed four big tax cuts in five years—and is laying the groundwork for a fifth in January—while converting a substantial federal budget surplus into a large and persistent deficit. In economic lingo this is called fiscal stimulus, and if it doesn’t deliver stupendous economic performance, lawmakers have some explaining to do. Well, it’s not.

It’s true that the economy is growing: Gross domestic product was up 4.1 percent in the third quarter and the nation’s unemployment rate has subsided to 5 percent.

But that’s not the point: The economy is in the fourth year of recovery from the 2001 recession and it’s supposed to be growing nicely.

The question is how this recovery measures up to previous business cycles, and whether five years of tax cuts have actually improved its performance.

On this point the evidence is clear: Despite billions of dollars in tax relief and fiscal stimulus, this is a subpar expansion. Since the recession ended in late 2001, gross domestic product has grown at an average annual rate of 3.3 percent. That’s well below the postwar average of 4.5 percent. Measured against other recoveries, the current expansion also lags in job creation, wage growth and business investment, according to a new analysis by the Center on Budget and Policy Priorities in Washington, D.C. (Yes, the center is known for its liberal politics. But data from the Economic Report of the President show the same pattern.) Wages for nonsupervisory workers have actually gone down, not up, during this expansion.

In fact, on key measures such as job creation, wage growth and business investment, the current expansion even lags behind the expansion of the 1990s—when Congress and President Bill Clinton were raising taxes to reduce deficits.

Workers and consumers have a right to expect something better, and certainly something more than another round of tax cuts on stock dividends and capital gains.

This disappointing performance might be acceptable if it came for free. But it doesn’t. Tax cuts at a time when Washington is running budget deficits mean that Congress is borrowing the money from someone—bankers, foreign investors, future taxpayers. That money will have to be repaid at some point, and true fiscal conservatives would ask why they’re getting such a poor return on their investment.