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Fact Versus Fiction in Latest Supply-Side Debate

Fact Versus Fiction in Latest Supply-Side Debate

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Michael Linden explains how a recent Heritage Foundation report aims to distort economic history.
Michael Linden explains how a recent Heritage Foundation report aims to distort economic history.

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Published by: Center for American Progress on Sep 22, 2011
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1Center for American Progress | Fact Versus Fiction in Latest Supply-Side Debate
Fact Versus Fiction in LatestSupply-Side Debate
 To Sustain Supply-Side Myths, Heritage FoundationMiscalculates Economic Growth and Ignores the JobCreation Records in Clinton and Bush Eras
Michael LindenSeptember 22, 2011
Under Presiden Bill Clinon, he U.S. economy grew or 32 sraigh quarers. Duringha ime, overall annual real economic growh averaged 3.8 percen, and each monh, anaverage o nearly 240,000 ne new jobs were creaed. Under Presiden George W. Bush,he U.S. economy grew or only 25 sraigh quarers. And during ha expansion, economicgrowh averaged jus 2.6 percen, and only 86,000 jobs were creaed per monh.Tese are dicul acs or he righ wing o explain. Aer all, Presiden Clinon didhe one hing ha righ-wing, supply siders say you absoluely canno do i you wano have good economic oucomes—he raised axes. And or his par, Presiden Bushdid he one hing ha hose same people promise will resul in enormous economicgains—he cu axes.Te economic records o he Clinon and Bush presidencies are so clear and so sark ha hey serve as painul reminders o supply siders everywhere ha heir ideas have been esed and ha hey have ailed in specacular ashion.So i is no surprise ha hese same supply siders who promised doom and desrucion i Presiden Clinons rae hikes were passed and who similarly promised dramaic growhand millions o new jobs i Presiden Bush’s ax cus were passed are now ying hemselvesin knos rying o prove ha hey were righ all along. Given how well he economy per-ormed under Clinon and how poorly i perormed under Bush, his is no easy ask.rying o prove somehing ha is so obviously unrue usually requires some prety acrobaic rheorical ricks and some unny number crunching. And he newes conribu-
2Center for American Progress | Fact Versus Fiction in Latest Supply-Side Debate
ion o his genre o disored economic hisory  , a repor rom he Heriage Foundaion ,conains pleny o boh.Heriages new “policy backgrounder” makes wo cenral claims. Firs, ha he Clinon-era economic boom only began in earnes aer he signed a ax cu ino law in 1997. Andsecond, ha he Bush-era ax cus, especially he second round in 2003, helped spark aneconomic “surge.” Te rs claim is jus wrong, relying on a very srange demarcaion beween he ime periods. Te second claim is only rue i considered compleely ou o he conex o recen hisory.Fundamenally, he Heriage repor is a crude, hough valian, atemp o prove some-hing ha mos everyone who lived hrough he pas 20 years simply knows o be alse.Tis issue brie delves ino he deails o expose jus how o base he Heriage repor is.
Capital gains tax cut in 1997 had little noticeable effect on theU.S. economy
 When Presiden Clinon proposed ax rae increases in 1993 o helpclose he ederal budge deci, acolyes o he supply-side heory o economics, including he Heriage Foundaion isel, gravely warnedo caasrophe,predicing slower growh and ewer jobs. O course, weknow now ha none o ha came o pass. In ac, he economy hrivedunder he Clinon ax code, a ruly uncomorable ac or supply siders.I supply siders admi wha almos everyone else knows, ha heeconomy perormed exremely well aer Presiden Clinon’s ax hike,hen i would undermine heir enire worldview. Tis explains why he Heriage Foundaion eels he need o make he incredible claimha aer he ax increases o 1993, economic growh was “cerainly no excepional,” and ha “i was no unil aer a 1997 ax cu … hahe specacular growh kicked in.”o bolser his claim, Heriage oers a graph ha shows average annualeconomic growh in “he our years ollowing he 1993 Clinon ax hike,and “he our years aer he 1997 capial gains rae cu.” Tis graph showsha aer he ax hike, he economy grew a an annualized rae o 3.3percen, bu aer he ax cu, i grew by 4.4 percen. (see Char 1)I is rue ha rom he sar o 1993 hrough he end o 1996, eco-nomic growh averaged 3.3 percen per year. Firs, i’s worhwhileo poin ou ha 3.3 percen is sill very good, cerainly oupacingaverage GDP growh during he Bush adminisraion. Bu in ac,
Heritage versus reality
How the conservative think tank’s misinformationstacks up against what actually happened
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%In the four yearsafter the 1993Clinton tax hikeIn the four yearsafter the 1997capital gains rate cut
Real annualized gross domestic product growth rates
Source: Bureau of Economic Analysis
3Center for American Progress | Fact Versus Fiction in Latest Supply-Side Debate
Heriage has o cook he books o even ge i down o 3.3 percen. While 3.3 percenaccuraely refecs he annual growh rae rom he beginning o 1993, he Clinon ax increases weren’ enaced a he sar o 1993. Tey weren’ signed ino law unil hehird quarer o 1993, Augus 10 o be exac.Similarly, growh did average 4.4 percen rom he beginning o 1997 hrough he endo 2000, bu he capial gains ax cu o which Heriage is so enamored wasn’ enaced ahe beginning o 1997 eiher. I was signed ino law in Augus 1997. Te Heriage graphmisallocaes ully six quarers o economic daa ino he wrong caegories.Tis maters a grea deal. Te rs hree quarers o 1993, which Heriage apparenly  believes came aer he ax hikes were enaced, averaged jus 1.8 percen o economicgrowh. Te rs hree quarers o 1997, which Heriage couns as coming aer he ax cu, averaged 4.8 percen growh. In shor, Heriage couns hree low-growh quarersha occurred beore he ax increases were even enaced as i hey’d happened “in heour years ollowing he 1993 Clinon ax hike. A he same ime, Heriage akes away hree very high-growh quarers ha acually occurred prior o he enacmen o he ax cus and assigns hem o he “our years aerhe 1997 capial gains rae cu.” Te eec is o drag down he average growh rae o hers caegory, and aricially boos he average growh rae o he second. When all he quarers are properly allocaed, he picure looks very dieren. In heour years saring wih he ourh quarer o 1993—he rs ull quarer aer heenacmen o he Clinon ax increases—he economy grew a an average annualizedrae o 3.9 percen. In he our years saring wih he ourh quarer o 1997—hers ull quarer aer he capial gains rae cu was signed ino law—economic growhaveraged 3.7 percen. I’s hard o see how slighly slower growh suggess ha he 1997ax cu sparked he economic boom.o be clear, he our years ha immediaely ollow he 1997 ax cu do include hers wo quarers o he 2001 recession, which brings down he overall average or heperiod. Excluding hose wo quarers, economic growh averaged 4.2 percen in heperiod aer he 1997 ax cu. Ta’s slighly higher han he 3.9 percen in he our yearsha ollowed he 1993 ax hikes bu i’s a ar cry rom he “33 percen” improvemen ineconomic growh ha Heriage claims was sparked by he 1997 ax cu.Te simple ac is ha here isn’ a whole lo o dierence, in erms o overall eco-nomic growh raes, beween he period aer he 1993 ax increases and he periodaer he 1997 ax cu.Nor is here much dierence beween he wo periods in erms o job creaion. In ac,he economy added new jobs a a slighly higher rae in he pos-1993 ax increase years

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