A CRASH COURSE IN DUBYANOMICS: President Bush's Economic Policy

Tuesday, January 6, 2004

The decades of the 1980s and 1990s seem to offer two different fiscal models for promoting economic growth. The 1980s under President Reagan suggest that cutting taxes is more important than balancing the budget. The 1990s under President Clinton suggest the importance of balancing the budget with moderate tax increases. Yet the results in each decade were similar: sustained economic growth. President George W. Bush has clearly been following the Reagan model in his first term: enacting large tax cuts even as the federal budget approaches record deficits. But has the Bush team taken the correct lessons from our recent economic past? Do the Bush policies promote long-term growth or jeopardize it?

Recorded on Tuesday, January 6, 2004

Peter Robinson: Today on Uncommon Knowledge: Dubyanomics...

Announcer: Funding for this program is provided by the John M. Olin Foundation.


Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: the economic policies of George W. Bush. The decades of the 1980s and 1990s would seem to offer two quite different models for promoting economic growth. The 1980s under Ronald Reagan? Deep tax cuts and mounting federal deficits. The 1990s under Bill Clinton? Tax increases and growing federal surpluses. Yet the results in both decades were similar: economic boom. George W. Bush has clearly been following the Reagan model, cutting taxes even as federal deficits mount to now record levels. But has the President drawn the correct lessons from our recent economic history? Are his policies genuinely promoting long-term, sustainable, economic growth or endangering it instead?

Joining us today, two guests. Robert Barro is an economist at Harvard University, a senior fellow at the Hoover Institution and a columnist for Businessweek magazine. Paul Krugman is an economist at Princeton University, a columnist for the New York Times and the author of a recent book highly critical of George W. Bush entitled The Great Unraveling.

Title: A Crash Course in Dubyanomics

Peter Robinson: Nobel Prize-winning economist George Akerlof on the fiscal policies of George W. Bush, "What we have here is a form of looting." Robert?

Robert Barro: I think the tax policy's been very good. The economy's doing great so I don't agree with that.

Peter Robinson: Paul?

Paul Krugman: He's exactly right. It's a form of looting.

Peter Robinson: A form of looting. All right. Let's set the fiscal policies of George W. Bush in the context of recent, economic history, Eighties and Nineties. Reaganomics. Ronald Reagan cuts personal income tax rates by some 30% across the board, engages in a major increase in defense spending and runs up chronic deficits, adding 1.4 trillion to the federal debt. And the economy responds how? By entering on the--to that point in American history, longest peacetime expansion we had ever seen, 18 million new jobs, interest rates down, inflation down, stock of assets in the United States increases in value by $17 trillion. What did Ronald Reagan do right? Paul?

Paul Krugman: There are a lot of things that explain that expansion and it was just a business-cycle expansion. It was just taking up the slack. If you look at the underlying rate of growth of productivity, nothing good happened during the Reagan years. It was the same as it had been before.

Peter Robinson: And you give Ronald Reagan no credit at all? Reagan's policies had nothing to do with it. Purely cyclical.

Paul Krugman: It was purely cyclical. Did Ronald Reagan's policies have anything to do with the good cyclical developments after 1982? A bit. Federal Reserves policies had more to do with it. But I think you could easily have come up with a policy that would have not have built up all that debt and would have done just as well in the business cycle. So I give him nothing.

Robert Barro: I don't think this is really fair at all. I mean, Reagan came in with a crisis situation in terms of the financial markets, inflation was high, volatile, out of control and interest rates were similarly high. I think Reagan was central to supporting the Federal Reserve to eliminate that. And moreover, the government was getting steadily larger, particularly outside of defense at the time when Reagan came in. And I think his tax policy, cutting taxes, really put the pressure on to keep the government smaller. And I think it worked. It worked not only through the '80s but even into the '90s, even into the Clinton period. I think that outside of defense, there was sort of a peak in spending before Reagan got in and he really produced discipline in that…

Peter Robinson: Let me just try to tease out a few of these elements here. What the Fed did. Volcker stomps on the money supply, sending us into a very sharp recession but inflation is quite quickly, over a period of two or three years--inflation is all but squeezed out of the economy. You're both in favor of what happened there?

Paul Krugman: It had to be done. There's…

Peter Robinson: It had to be done.

Paul Krugman: Inflation was--every business cycle before then, inflation was coming out at a higher level. It was necessary to do something. You know, we can talk about in an ideal world could it have been done with less pain because the pain was enormous but yes, the Fed did what had to be done. And I think I, you know, what we--I think we both agree is that Paul Volcker was a great Fed chairman and did what was necessary and he was responsible both for bringing inflation under control and for the recovery that followed.

Peter Robinson: Okay.

Robert Barro: I don't think we disagree on this. Possibly one could have avoided at the extent of the increase in unemployment, I don't know, but it was important to do it. I think Volcker was the leader. Greenspan actually in many ways has followed on to what Volcker produced.

Peter Robinson: The Reagan tax cuts? Irrelevant, useful, harmful?

Paul Krugman: Oh, they added a little bit of stimulus, a fraction of what the Fed did, but in 1982, 1983, they were adding some stimulus. After that, made no difference and it's not clear that the Fed wouldn't have managed to do it anyway. Beyond that, definitely led to a big buildup in debt. Robert is right. It led to a lot of constraint on the growth of government. But then the question is all right but that's a value judgment. That's not about economic growth. That's about do you think that the things that were under pressure should have been under pressure.

Peter Robinson: Do you value the Reagan tax cuts in and of themselves or because the deficits to which they led constrained the growth of government?

Robert Barro: There's two different parts to it. One is on the supply side. The tax cuts really were aimed at creating more incentives to have more jobs and to have more investment. I think that worked. I don't think it was primarily a stimulus in the sense of the usual demand stimulus. It was really more similar to the Kennedy-Johnson tax cuts in the '60s which also had important supply-side effects. But then on the other side, I think that tax cuts and the deficits were important as the mechanism for making the government smaller. It didn't work immediately. That's why we had the deficits but it worked over time. And I think it was quite successful in that respect.

Peter Robinson: From boom to boom--comparing Reaganomics with Clintonomics.

Title: The Gay Nineties

Peter Robinson: Clinton raises personal income tax rates. He doesn't raise them as sharply as Reagan cut them but there is an increase in personal income tax rates. He transforms the federal deficit of $290 billion, the year before he takes office, into a surplus of $236 billion the year he leaves office. And as it did during the Reagan years, during the Clinton years, the economy booms. Creation of 22 million new jobs, Dow Jones Industrial Average goes from under 4,000 to over 10,000. What did Bill Clinton get right?

Robert Barro: I think the tax increase there and also the earlier Bush tax increase are quantitatively quite trivial. They don't really make too much of a difference. The big thing that led to the surplus was the strong economy, particularly after the mid-1990s. That's where the revenue really started to boom, when you had the high tech boom including the stock market expansion. That's where the surplus came from. It really didn't have to do with the tax increase earlier in the Clinton period.

Peter Robinson: So Bill Clinton's principal achievement was staying out of the way.

Robert Barro: Oh I think so. He had actually a very conservative economic policy, in many ways, more conservative than the current Bush Administration. In many ways, he had more restraint on government expenditure than the current administration.

Peter Robinson: Okay so Clinton controls the growth of spending, just a miniscule tax increase quantitatively. He basically stays out of the way of the economy and lets Reagan's policies continue working.

Paul Krugman: Well the tax rate he raised was the one that drives conservatives wild, which is the tax rate on the top income bracket.

Peter Robinson: The top 1.2% of households were the only ones affected by Clinton's tax increase.

Paul Krugman: Those are the people who conservatives say you mustn't touch. We have to cut those rates and, you know, what they give credit to Reagan for is cutting that rate, exactly the one that Clinton raised. Now I think the lesson you would want probably drawn from all of this…

Peter Robinson: Right.

Paul Krugman: …is that that tax rate doesn't matter very much one way or the other for the economy.

Peter Robinson: You're talking about the tax rate on the very top income earners?

Paul Krugman: That's right. The tax rate on the top bracket and what we're finding is that if that moves back and forth between 28%-40% which is roughly the range we're talking about, it doesn't seem to matter very much for the economy.

Peter Robinson: No. When Reagan came in, it was 70-something.

Paul Krugman: Yes, right. And everyone was supporting--everyone believed that 70% was too high. Jimmy Carter thought 70% was too high. And I think it was actually 50%.

Peter Robinson: Okay. So you think we've actually learned something from recent history, that the top rate--if you keep it within a band of 20-something to 40-something, you're okay.

Paul Krugman: Yeah. In other words, if you were going to do what, you know, what the Democratic candidates for President want which is to reverse that top rate, you should not expect to see any major adverse effect on the economy.

Peter Robinson: Robert?

Robert Barro: I find this a very odd reading of what actually happened. I mean, the rates were clearly much higher before Reagan was in. The 50% rate at the time applied only to so-called earned income. It didn't apply to, for example, asset income. The cuts in the marginal tax rates that occurred during Reagan were not anywhere near undone by what happened in the subsequent Bush Administration or in the Clinton Administration.

Peter Robinson: This brings us to the economic policy of George W. Bush.

Title: Tax (Cut) and Spend

Peter Robinson: Central feature of Bush's economic policy tax cuts. 2001, President Bush enacts temporary tax cuts as they were then, totaling some 1.35 trillion over ten years. Although we can all chuckle a little bit because who knows what anything will amount to over ten years but that's the number that was used. Then just last year the President proposes--he makes portions of those temporary tax cuts permanent and he proposes and gets additional tax cuts that amount to at least 350 billion over ten years, a lot of tax cutting. Paul Krugman notes that Bush promoted the tax cut during the 2000 campaign as a way of giving the surplus back to taxpayers. Then during the recession of 2001, once there's no longer surplus, as a short-term stimulus, and finally as a long-term tonic for growth and job creation, these, quoting Krugman now, "ever-shifting rationales for an unchanging policy suggest an obsession in search of a justification." Robert?

Robert Barro: I think I have what I would call a fair and balanced approach to evaluating Bush's economic policy.

Paul Krugman: And we all know what that means, yes.

Robert Barro: Exactly. Because I like some parts of it and I don't like other parts of it.

Peter Robinson: All right.

Robert Barro: The parts that I like have to do with the tax plans that you just outlined. I particularly applaud the 2003 tax change because that's much more in terms of a supply-side incentive kind of a program.

Peter Robinson: Explain supply-side. The term supply-side is to give people much more direct incentive to invest, also to work harder. Are you hoping to produce more hours in the work week?

Robert Barro: Yeah, I think it's incentive both to invest and to have higher productivity and to work more.

Peter Robinson: Because you get to keep more of your fruits of your own labor.

Robert Barro: Whereas the 2001 tax cut was mostly giving money to people and hoping that that would have some kind of standard Keynesian demand stimulus which is not what I find attractive. What I don't like about it is that there's a complete lack of restraint on the expenditure side. It looks very different from Reagan. Reagan put in the tax cuts first but then he really wanted to keep the government smaller and over time, he was able to do it. The Bush Administration seems to have no restraint whatsoever in terms of talking about non-defense expenditure and it seems to be out of control at the moment.

Peter Robinson: Now are you going to give us a mirror image analysis?

Paul Krugman: No, let's…

Peter Robinson: Go ahead.

Paul Krugman: First thing to say just whether or not you approve of the policies, there is the honesty thing. Whatever it was that this policy was supposed to accomplish, the actual salesmanship was spectacularly dishonest. First of all, it has to have been dishonest because they had three different reasons for the same tax cut, each one of which was, you know, excluded the others. And there's a lot of just plain lying about who gets the direct benefits. You can talk about the indirect benefits but these have been tax cuts whose direct benefits, the major tax cut goes to people with very high incomes, consistently sold as being middle class, populist tax cuts which they've never been. By the way, you say it was a temporary tax cut in 2001. Actually it was the opposite.

Peter Robinson: Why's that?

Paul Krugman: It was phased in which Robert and I both agree was a bad thing. It was actually designed to deliver the minimum amount of stimulus when it was needed. And then to build up over time and the reason they did that was to hold down the ten year number on the budget impact which, you know, that's just faking it.

Peter Robinson: Let's take a look at the notion that Bush's tax cuts were just for the rich.

Title: Don't Mess With Taxes

Peter Robinson: Treasury Department, the average reduction in income taxes for last year, 2003, slightly more than 12%. For those who earned less than $30,000, the average reduction was about 17%, while for those who earned above $100,000, it was 11.4% or less and some 3.8 million lower-income taxpayers were taken off the tax rolls altogether.

Paul Krugman: No, taken off the income tax rolls.

Peter Robinson: Taken off the income tax rolls. Okay.

Paul Krugman: The income tax is the one strongly progressive tax we have.

Peter Robinson: Right.

Paul Krugman: It's the one that is levied primarily on upper-income people. So naturally, people towards the bottom of the scale who pay hardly any income tax, get a large percentage reduction in their taxes but very little actual dollar reduction even as a percentage of income. If you look at the percentage of income that the tax cut was or at the percentage of total federal taxes paid, include the payroll tax, include other taxes.

Peter Robinson: Right. Right.

Paul Krugman: And it turns out that it's very much tilted towards the top.

Peter Robinson: Okay. So but what I'm--go ahead, Robert.

Robert Barro: The bottom 50% of the income distribution pays about 4% or 5% of the income tax. So, of course, it's not possible to have a serious cut in terms of income taxes.

Paul Krugman: I'm sorry; I'm going to do a Ronald Reagan. There you go again. The income tax. Why does it always have to be the income tax?

Peter Robinson: Let me just ask you that.

Robert Barro: At the moment, I'm talking about the income tax but let me say something about the social security payroll tax.

Peter Robinson: All right.

Robert Barro: That obviously generates a lot of revenue. It's almost as much now as the individual income tax. But if you really want to look at that in terms of what it does to poor and rich people, then I think it's fair to count the expenditure side of that as well as the payroll tax side. On net that program is also redistributive, even considering the fact that the tax itself is roughly proportional or maybe slightly regressive. The overall impact of that program is further to redistribute income because the benefit side, the pension payments are also highly skewed toward the relatively low-income people.

Paul Krugman: We can get off into a…

Peter Robinson: I want to understand your critique. On the one hand, you're accusing the administration of dishonesty, selling the tax cut dishonestly but it seems to me as I listen to you, that really what you're opposed to is any income tax cut because of the nature of the income tax whereby the top 50% pay 96% of income taxes and the top 5% pay something like 44% of income taxes. You can't have an income tax cut that doesn't disproportionately favor what you…

Paul Krugman: Let's break this down.

Peter Robinson: That's a bad instrument of policy? Or--go ahead…

Paul Krugman: First the question is, you know, why exactly are we having permanent tax cuts at a time when the budget is deep in deficit and no credible forecast shows it returning to balance ever?

Peter Robinson: Because the way to promote growth is to cut taxes.

Paul Krugman: We just said there is no evidence really that that's true.

Robert Barro: The reason I like the tax cuts is twofold. One is that I think it improves the incentives for the longer run economic performance for growth. And secondly, that I favor a smaller size of the government and I learned from the Reagan period that a way to accomplish that is to starve the government of revenue and I look at this as further going in that direction.

Paul Krugman: But that's where we get to the nub of the matter. At this point talking about what looked like long-run deficits of 4% or 5% of GDP, 25% of the federal budget. You can't close that gap. If you're talking about a smaller government, what you mean is major cuts in the level of benefits provided by social security and Medicare. There's no way to do it without that. Now that--if you favor that, then you favor tax cuts that lead the government to that kind of financial hole because it provides you the reason to cut these programs.

Peter Robinson: Milton Friedman on deficits. "Many discussions assume that government spending is predetermined," little hint of that in you if I may say so. "In that world deficits are produced entirely by a shortage of tax receipts. As I, Milton Friedman, see the world, what is predetermined is not spending but the politically tolerable deficit. Raise taxes and spending will go up to restore the tolerable deficit." We want Bush to raise taxes; Congress will just spend it and more. "Tax cuts represent an effective; I would go so far as to say the only effective restraint on the spending propensities of government." In other words, you get exercised about the deficit, Barro gets exer--I get exercised and what happens is it's the one hope we have, the one practical hope we have of constraining government spending.

Paul Krugman: Wait a second now.

Peter Robinson: Deficits are useful.

Paul Krugman: So is government spending.

Peter Robinson: Is it? Robert? You see…Social Security, Medicare. I mean, if you…I hope we caught that on camera. That's what we call a reaction shot.

Robert Barro: Milton Friedman asked me once to name a program I thought that people were getting their money out of in terms of a government program. So I answered national defense. And then he said, well give me another example.

Paul Krugman: Well, there we are. Look, if George W. Bush wants to run in 2004 on the program that we don't need Medicare and we don't need Social Security and we don't need Medicaid and we don't need the Parks Department, and you can go on down the list of everything that isn't national defense and I intend to cut taxes so that we can't afford anything except national defense, I'd be happy if the American people were to give him a majority of the votes on that basis by all means, but that's not the way that they're campaigning. They're campaigning on the basis, you get these tax cuts and we're going to give you all of these programs we take for granted without any constraints and that's a lie.

Robert Barro: Well that is worrisome. I mean, Bush really is a compassionate conservative in that sense. And he started with a big education program.

Peter Robinson: And it's the compassion part you don't--that worries you?

Robert Barro: And then there were agricultural subsidies, and then there was this big Medicare package.

Peter Robinson: On to the current and improving state of the economy. Does George W. Bush deserve any credit?

Title: Growth Happens

Peter Robinson: Third quarter of 2003, the economy expanded at an annual rate of just over 8%, the most robust rate of growth since the Reagan years. Figures for the fourth quarter expected to be nearly as high. By the time this show airs, perhaps they'll be out and they will have been proven nearly as high. Consensus view 2004, the economy will grow briskly. So if Bush is doing such a terrible job of leading the country economically, how are things suddenly turning so good?

Paul Krugman: Short-term stuff, one or two quarters, maybe even three or four quarters isn't the verdict. Reagan had six quarters of growth at about 7%.

Peter Robinson: Right.

Paul Krugman: I still think he did a pretty bad job of managing the budget and the economy because by the time the dust had settled, the economy at the end of Reagan's term was about where a projection from the '70s would have led you to expect it to be. So this doesn't mean very much. The thing that's missing--and by the way, this is not entirely Bush's fault--the thing that's missing is jobs. They may start to improve but you know, we have not yet had one month in which the U.S. economy generated anything close to the amount of jobs in an average month of the Clinton years.

Peter Robinson: 1.6 million jobs lost since Bush took office. And even during this third quarter that grew so quickly, 8.2% of 2003, it looks now as though the economy created only about a quarter of a million new jobs. What is going on? Why do we have this jobless recovery?

Robert Barro: I think it's not an accurate way to categorize it now. Economy looks very good now. The GDP growth was quite amazing. But it also looks like the job situation is picking up. If you look at the employment growth numbers from the payroll, that's become positive but not as fast a growth as the labor force. If you look at the household numbers, the growth is actually more like about 3% at an annual rate faster than the labor force. That's why the unemployment rate has come down some. You put the two together, it looks like the labor market is starting to become vigorous. Moreover, the other side of the employment growth not being all that rapid is that productivity growth has been very impressive. And that makes one think that the recovery is probably going to be more sustainable than it would have been otherwise.

Peter Robinson: Can I ask both of you this question. Rising health insurance costs, those heavy payroll taxes, combined with growing productivity, don't you have a situation in which firms can do more with fewer workers and the cost of hiring someone is going up and up and up. So isn't that a kind of structural--won't that militate against job growth?

Paul Krugman: No, I…

Peter Robinson: No, you don't buy any of that?

Paul Krugman: I don't think we know. I mean, look…

Peter Robinson: We don't know?

Paul Krugman: On the other hand, wages are not going up. Real wages are completely flat in spite all of this so I'm not sure that the cost of hiring a worker is going up.

Peter Robinson: Last topic, economic advice for Democrats and Republicans alike.

Title: Binging on a Starvation Diet

Peter Robinson: Have you endorsed a Democratic candidate?

Paul Krugman: I can't.

Peter Robinson: You can't?

Paul Krugman: Times rules.

Peter Robinson: Oh, the Times will not permit you to do that.

Paul Krugman: In fact, you don't know which party I support. I'm as obscure as Bill Safire.

Peter Robinson: Okay. Then out of the depths of your obscurity…

Robert Barro: I always knew you were a Republican.

Peter Robinson: Out of the depths of your obscurity, give us the one or two lines of advice that you would offer to Democratic Presidential candidates. That is to say, what is to be done?

Paul Krugman: Oh and--and presumably you mean economics as opposed…

Peter Robinson: Yes, yes.

Paul Krugman: …to campaign. I think that the Democrats have to talk about fairness. They have to talk about how we've starved the government of the revenue it needs to maintain these programs that I happen to think do a lot of good. And that it has done so with tax cuts that very much benefit a relatively small number of people.

Peter Robinson: We have revenues measured in the trillions and you say we're starving the government. This is simply a difference in world view.

Paul Krugman: We have the smallest--you know, revenue as a share of Gross Domestic Product is now back down to what it was in the Eisenhower years. We are, for what it's worth, among advanced countries, we're way at the bottom. We have by far the smallest government, smallest revenue base relative to the size of the economy of any advanced country.

Peter Robinson: So more government? More revenues?

Paul Krugman: I'm a conservative. I want to preserve these programs we have and that unfortunately requires more revenue than we're collecting after the Bush tax cuts.

Peter Robinson: Speaking of slippery salesmanship--now Krugman is portraying himself as a conservative. Robert, your advice to say Josh Bolten? What needs to be done?

Robert Barro: The thing we haven't discussed--the other part of the Bush policies that trouble me really is about international trade and the tendency toward protectionism but the funny thing is, the Democratic candidates are even worse on this score now, certainly not Clinton. Clinton was quite different particularly when he…

Peter Robinson: He drove through NAFTA…

Robert Barro: …when he was in office, he was very pro free trade at least. That's the other part aside from the lack of restraint on government expenditure that I'm concerned with…

Peter Robinson: So your advice to Bush and Josh Bolten is control--get a grip on domestic spending and free trade.

Robert Barro: And embrace free trade. And included in that would be things like opening up to places like Cuba and Libya which I would put in as part of that sort of globalization openness.

Peter Robinson: Okay. Television, so we have to come to the last couple questions. During the eight years of the Reagan presidency, GDP grows in real terms 21.2%. During the eight years of the Clinton presidency 20.2%. Assume, difficult though this may be for you, that George W. Bush is reelected, at the end of his eight years, how much growth, what kind of growth will we have seen?

Paul Krugman: Might be pretty good. American business is creative. Technology marches on. Might be terrible. Maybe if they keep on with the kind of irresponsibility we've seen lately, we could turn into a giant Argentina. You know, the range is enormous.

Peter Robinson: Robert, would you care to give us a prediction?

Robert Barro: Well, I think you can sort of look at the first term--that's sort of within a realm of feasible prediction and you'd expect to see growth overall that would be about average, something like 3%-4% for the term. It's because it was quite sluggish at the beginning and now looks much stronger.

Peter Robinson: Jobs 18 million under Reagan, 21 million under Clinton. Same sort of thing under Bush or has the economy changed?

Paul Krugman: It's going to be slower.

Peter Robinson: Labor market available now in China, in India. You can ship so much stuff offshore. That's not a fundamental change?

Paul Krugman: Look, I think Robert and I probably agree that in the long-run, job growth is determined by the growth of the labor force, that only spectacular mismanagement manages to produce or, you know, over a period of four years, you can manage to deviate from that a lot. But only spectacular mismanagement would bring you way down from that. And the only thing to say is that when Clinton came into office, the economy had fairly high unemployment…

Peter Robinson: Right.

Paul Krugman: …and over that period that he was in office, both were recovered from that and for reasons we're not clear about; the economy seemed to be able to operate at a lower unemployment rate than the past. So Clinton was able to preside over a period of unusually large job growth. I think his policies were pretty responsible but I think you have to say that it's unlikely that Bush who came into office with a near-full employment economy and a slower-growing population, is going to be able to exceed that or even match it.

Peter Robinson: You agree?

Robert Barro: I don't really disagree with that. That was pretty sensible. But we already know that job growth was pretty sluggish in the first couple years. So it's not likely to be a very big net increase in the first term. And then the second term, of course, starts from the beginning again. But you could have substantial job growth in the second term. That's a possibility.

Peter Robinson: All right. Paul Krugman, Robert Barro, thank you very much.

Peter Robinson: For Uncommon Knowledge, I'm Peter Robinson, thanks for joining us.