[lbo-talk] Recent Growth & Bush's Economic Policy

Doug Henwood dhenwood at panix.com
Tue Dec 23 07:23:05 PST 2003


Samuel Waite wrote:


>I've been meaning to ask this question for a while. I hope to have
>it answered by someone who knows more about economics than I do.
>
>Progressive critics of the Bush tax cuts said that because they were
>geared primarily towards wealthier Americans, they wouldn't generate
>enough consumer demand to stimulate growth. And certainly, the
>first two apparently didn't.
>
>But last quarter (as I'm sure everyone knows by now), the economy
>grew 8.2 percent. And next year, economists are predicting a 4.5
>percent GDP.
>
>I assumed that last quarter's growth had more to do with growth in
>productivity, low interest rates, and the mortgage refinancing boom
>than the Bush tax cut.
>
>But I'd like to hear what others think. Why are last quarter's
>growth and next year's projections not the result of Bush's policy?

Don't put much faith in projections for next year. But the recent growth spurt got a lot of its juice from the combination of lower taxes and higher military spending. In the case of the tax cuts, the rebate checks were probably quite important, given the late summer/early fall spurt in retail sales, which is now fading. Unlike 2001, when people mostly saved their rebate checks (or used them to pay down debts), the latest round were mostly spent it seems. The other major source of stimulus has been various forms of home equity withdrawals - esp new borrowing against appreciated values when a mortgage is refinanced ("cash-out refis," they call 'em) - which have added some $600 billion to consumer demand this year. The fading in retail sales over the last several months is probably the result of the fading of those two stimuli - the rebate checks are all spent and refi has mostly run its course, and with job growth weak and real wage growth at 0, labor income isn't up to the task.

With deficits as large as these it's no surprise the economy's been stimulated, but it's taken quite a long time and the growth rates are hardly overwhelming, testimony to the inefficiency of the stimulus, because of its upper-bracket skew. Tax cuts for millionaires and Halliburton contracts (the biggest component of military spending in the second quarter, which saw the biggest spurt in Pentagon spending since the beginning of the Korean War, was "support services," i.e., transport, setting up bases, fixing turkey dinners) just don't pack the punch that higher unemployment benefits or infrastructure spending would.

Doug



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