One more post before bed...
Now that we're in recession you're saying that the cuts are necessary, but what about in the future when the economy recovers, will they still be necessary?
If historical and theoretical evidence is correct (and this is still fiercely debated), then lower marginal tax rates are in part responsible for initiating and sustaining
robust economic growth. Bush and Clinton engineered tax increases, but these were mostly elimination of deductions, not substantial increases in marginal tax rates. These remained much lower than the pre-Reagan rates: some people have pointed to the double-boom of the 1980s and 1990s as products of the Reagan cuts, which is impossible to prove or disprove. In any case, no sane economist would argue that tax cuts are the sole determinant of economic prosperity. Monetary (interest rate) policy is generally regarded as more effective for dealing with short-term cyclical fluctuations, whereas fiscal (taxing/spending) policy impacts long-term growth rates.
The 1993-2000 boom was peculiar for a number of reasons:
First, we had significant, real growth in the technology sector which rippled through the entire economy. Economists call this a "productivity shock:" the emergence of high technology and the Internet were truly revolutionary. Many old industries completely changed the way they did business; many new industries were created from scratch. This initiated the economic boom, just like the then-new technology of radio kicked off the Roaring Twenties.
Second, we had a dramatic expansion in international trade in goods, services, and financial instruments. Although free trade does hurt some groups, it is good for a nation on balance. Expanding trade in the 1990s opened up new markets for US products and allowed cheaper production of labor-intensive goods abroad. Global financial markets saw especially strong growth in the 1990s.
Third, we had relatively low inflation because much of the economic growth was achieved through higher productivity. This doesn't cost anything and should actually push prices down. Low inflation meant the Fed was free to keep interest rates low, allowing businesses to borrow money cheaply. The Fed pumped additional liquidity into the economy in 1997, during the Asian financial contagion, and again before the Y2K rollover. A lot of this money went into the stock market and fueled the bubble.
Fourth, the influx of tax revenue, especially from gains on stocks, produced a federal budget surplus for the first time in decades. President Clinton and the GOP Congress deadlocked on domestic priorities, so federal spending and economic tampering were kept to a minimum. What they could agree on was often beneficial: welfare devolution, for example, certainly didn't hurt. Projections of rising budget surpluses contributed to the general euphoric mentality.
I'm sure corporate shenanigans, in the form of inflated earnings, had something to do with the boom, but I think some people overrate their impact. Enron, WorldCom, etc. remain relatively isolated cases.
This all went on for some time. Gradually, the boom shifted from sustainable real growth to unsustainable speculation. Businesspeople and investors (and governments) got caught up in the euphoria and lost all contact with reality. Technology stocks would shoot up 200-300% on their first day of trading. People talked about a "new economy," as if we had overcome fundamental economic laws, as if 75% annual returns in the stock market can continue indefinitely. Alan Greenspan warned about "irrational exuberance" as early as 1996, but was quickly ignored. He mumbled about a bubble economy for years but didn't do a lot to stop it.
Toward the end of the decade, growth was overheating and the economy was starting to hit resource constraints: we were running out of workers, infrastructure, resources, etc. (remember the CA
energy crisis?). Inflation began moving upward. Greenspan and the Fed tried to raise interest rates gradually enough to create a "soft landing," but the bubble could not be popped that easily. Interest rates started to rise more quickly, the yield curve inverted, and we came back to earth with a thud and a recession. The stock market tanked, tax revenues fell sharply, and deficits returned.
I think it's important to note that a great deal of the late-90s economy, including the budget surpluses, was a fantasy. Alan Greenspan was absolutely right when he called it "irrational exuberance." People who blame the economy on Clinton or especially Bush (given that he had been in office for 40 days when recession began) are simply showing their partisan biases. If anyone is to blame, it's Greenspan himself, but cyclical forces are beyond anyone's control. The recession was inevitable: the excesses of the 1990s had to be liquidated somehow.
I don't give Clinton much credit for the 1990s boom, but I don't blame him for the recession either. He got very lucky in the timing of the 1992-93 recovery and the 2000-01 downturn. I think Bush has generally followed the right path on tax policy, but he certainly does not have direct control over the economy. We built up a lot of unneeded capacity during the 1990s, particularly in the tech sector; the economy will have to grow into it before we see job growth resume. Repealing tax cuts now would almost certainly slow that process down. In the longer term, the adjustments needed to put the US on a long-term path of fiscal stability are much larger and more significant than the fiddling with the income tax brackets.
[Edited 2004-01-27 08:56:28]
Keynes is dead and we are living in his long run.