It really is Bush’s fault, Part 1: the temporary tax cuts

The 2012 election has led, in theory, to a large amount of “soul-searching” in the Republican Party. However, one datum from the electorate that has largely been unaddressed is the fact that a majority of voters still blamed former President George W. Bush for the current state of the economy than his successor. After a review of the economic situation over the last dozen years, I have come to the conclusion that the majority is correct, although my reasons for it are likely not theirs. This series will cover how I believe the former President earned the blame. I should note that I will only deal with economic policy here.

First and foremost, it is now clear that Bush the Younger’s strategy for reducing taxes in 2001 and 2003 – bigger, but time-limited, over smaller and permanent – was a mistake.

For much of the last four decades, argument over economics have been between Keynesians – those who believe aggregate demand for economic output (consumption, business purchases, and government spending) is the dominant force in the American economy – and, for lack of a better term, anti-Keynesians – who recognize numerous other factors, most affecting production. Monetarists focus on the dangers of uncertainty, the Rational Expectations school zeroes in on reactions and expectations of consumers and businesses, and Supply-siders emphasize the costs to businesses caused by government (taxes and regulations in particular).

The fact of the matter is this: from an anti-Keynesian perspective – any anti-Keynesian perspective – temporary tax cuts are a disaster. They add uncertainty, fuel expectations of a future tax increases (once the reductions expire), and do little to the long-run costs businesses must endure to operate and expand – and in fact can add unproductive costs for time-phased tax avoidance. This is why the last temporary tax policy of any kind prior to 2001 was imposed during the 1970s, before anti-Keynesianism grew into the umbrella of ideas that it has become.

As a result, Bush the Younger’s tax reductions were drained of any supply-side effects, and were simply much larger versions of Keynesian temporary tax cuts from earlier times. The result was as expected – an inflationary expansion fueled by higher prices in resources (including land – hence the housing bubble) and vast increases in consumer debt to pay for it all.

Looking back, it would have been better to reach out to the Democrats to see if they would accept smaller, but permanent, tax reductions. Instead, we now have reductions about to expire, and massive budget deficits fueled in no small part on the possibility of those very tax cuts expiring (and thus recovering large amounts of revenue).

In short, we got the disadvantages of higher tax rates (on the economy, and on the impulse of Washington to spend) without that actual revenue from them: literally the worst of all worlds.

Looking forward, it is all but certain that the Republicans currently in Washington will cave on the president’s demand for higher tax rates. I would prefer that they didn’t – in fact, I find any kind of tax increases to be a bad idea – but to some extent this was inevitable the moment Bush the Younger and the Republicans in Congress decided to make the 2001 and 2003 tax cuts temporary rather than spend the political capital needed to make them permanent and/or find accommodation with the Democrats for a smaller yet permanent reduction.

A Republican Party that so thoroughly lacks the courage of its convictions is in need of a far deeper overhaul than anyone is considering right now – or simple replacement.

Cross-posted to Virginia Virtucon

About these ads

9 Responses to It really is Bush’s fault, Part 1: the temporary tax cuts

  1. […] second in a continuing series reviewing the economic policies of President George W. Bush. In the first post, I discussed why the temporary nature of the 2001/2003 tax cuts drained them of any deep economic […]

  2. […] second in a continuing series reviewing the economic policies of President George W. Bush. In the first post, I discussed why the temporary nature of the 2001/2003 tax cuts drained them of any deep economic […]

  3. […] a s segment in this series all its own. Even by that point, however, the Keynesian high from temporary tax cuts, reckless spending, and monetary mayhem had run its course, leaving trouble in its […]

  4. […] a s segment in this series all its own. Even by that point, however, the Keynesian high from temporary tax cuts, reckless spending, and monetary mayhem had run its course, leaving trouble in its […]

  5. […] Bush (although not for the reasons usually aimed at him). I have mentioned the damaging effects of temporary tax cuts, loose money, and rampant […]

  6. […] Bush (although not for the reasons usually aimed at him). I have mentioned the damaging effects of temporary tax cuts, loose money, and rampant […]

  7. […] while I was on vacation, the Republicans did what I expected them to do in the “fiscal cliff deal” – they […]

  8. […] while I was on vacation, the Republicans did what I expected them to do in the “fiscal cliff deal” – they […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 53 other followers

%d bloggers like this: