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
Introduction
Under Presiden Bill Clinon, he U.S. economy grew or 32 sraigh quarers. Duringha ime, overall annual real economic growh averaged 3.8 percen, and each monh, anaverage o nearly 240,000 ne new jobs were creaed. Under Presiden George W. Bush,he U.S. economy grew or only 25 sraigh quarers. And during ha expansion, economicgrowh averaged jus 2.6 percen, and only 86,000 jobs were creaed per monh.Tese are dicul acs or he righ wing o explain. Aer all, Presiden Clinon didhe one hing ha righ-wing, supply siders say you absoluely canno do i you wano have good economic oucomes—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 Clinon and Bush presidencies are so clear and so sark ha hey serve as painul reminders o supply siders everywhere ha heir ideas have been esed and ha hey have ailed in specacular ashion.So i is no surprise ha hese same supply siders who promised doom and desrucion i Presiden Clinon’s rae hikes were passed and who similarly promised dramaic growhand millions o new jobs i Presiden Bush’s ax cus were passed are now ying hemselvesin knos rying o prove ha hey were righ all along. Given how well he economy per-ormed under Clinon and how poorly i perormed under Bush, his is no easy ask.rying o prove somehing ha is so obviously unrue usually requires some prety acrobaic rheorical ricks and some unny number crunching. And he newes conribu-
2Center for American Progress | Fact Versus Fiction in Latest Supply-Side Debate
ion o his genre o disored economic hisory , a repor rom he Heriage Foundaion ,conains pleny o boh.Heriage’s new “policy backgrounder” makes wo cenral claims. Firs, ha he Clinon-era economic boom only began in earnes aer he signed a ax cu ino law in 1997. Andsecond, ha he Bush-era ax cus, especially he second round in 2003, helped spark aneconomic “surge.” Te rs claim is jus wrong, relying on a very srange demarcaion beween he ime periods. Te second claim is only rue i considered compleely ou o he conex o recen hisory.Fundamenally, he Heriage 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 ino he deails o expose jus how o base he Heriage repor is.
Capital gains tax cut in 1997 had little noticeable effect on theU.S. economy
When Presiden Clinon proposed ax rae increases in 1993 o helpclose he ederal budge deci, acolyes o he supply-side heory o economics, including he Heriage Foundaion isel, gravely warnedo caasrophe,predicing slower growh and ewer jobs. O course, weknow now ha none o ha came o pass. In ac, he economy hrivedunder he Clinon ax code, a ruly uncomorable ac or supply siders.I supply siders admi wha almos everyone else knows, ha heeconomy perormed exremely well aer Presiden Clinon’s ax hike,hen i would undermine heir enire worldview. Tis explains why he Heriage Foundaion eels he need o make he incredible claimha aer he ax increases o 1993, economic growh was “cerainly no excepional,” and ha “i was no unil aer a 1997 ax cu … hahe specacular growh kicked in.”o bolser his claim, Heriage oers a graph ha shows average annualeconomic growh in “he our years ollowing he 1993 Clinon ax hike,”and “he our years aer he 1997 capial gains rae cu.” Tis graph showsha aer he ax hike, he economy grew a an annualized rae o 3.3percen, bu aer he ax cu, i grew by 4.4 percen. (see Char 1)I is rue ha rom he sar o 1993 hrough he end o 1996, eco-nomic growh averaged 3.3 percen per year. Firs, i’s worhwhileo poin ou ha 3.3 percen is sill very good, cerainly oupacingaverage GDP growh during he Bush adminisraion. 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
HeritageHeritage
CorrectedCorrected
Source: Bureau of Economic Analysis
3Center for American Progress | Fact Versus Fiction in Latest Supply-Side Debate
Heriage has o cook he books o even ge i down o 3.3 percen. While 3.3 percenaccuraely refecs he annual growh rae rom he beginning o 1993, he Clinon ax increases weren’ enaced a he sar o 1993. Tey weren’ signed ino law unil hehird quarer o 1993, Augus 10 o be exac.Similarly, growh did average 4.4 percen rom he beginning o 1997 hrough he endo 2000, bu he capial gains ax cu o which Heriage is so enamored wasn’ enaced ahe beginning o 1997 eiher. I was signed ino law in Augus 1997. Te Heriage graphmisallocaes ully six quarers o economic daa ino he wrong caegories.Tis maters a grea deal. Te rs hree quarers o 1993, which Heriage apparenly believes came aer he ax hikes were enaced, averaged jus 1.8 percen o economicgrowh. Te rs hree quarers o 1997, which Heriage couns as coming aer he ax cu, averaged 4.8 percen growh. In shor, Heriage couns hree low-growh quarersha occurred beore he ax increases were even enaced as i hey’d happened “in heour years ollowing he 1993 Clinon ax hike.” A he same ime, Heriage akes away hree very high-growh quarers ha acually occurred prior o he enacmen o he ax cus and assigns hem o he “our years aerhe 1997 capial gains rae cu.” Te eec is o drag down he average growh rae o hers caegory, and aricially boos he average growh rae o he second. When all he quarers are properly allocaed, he picure looks very dieren. In heour years saring wih he ourh quarer o 1993—he rs ull quarer aer heenacmen o he Clinon ax increases—he economy grew a an average annualizedrae o 3.9 percen. In he our years saring wih he ourh quarer o 1997—hers ull quarer aer he capial gains rae cu was signed ino law—economic growhaveraged 3.7 percen. I’s hard o see how slighly slower growh suggess ha he 1997ax cu sparked he economic boom.o be clear, he our years ha immediaely ollow he 1997 ax cu do include hers wo quarers o he 2001 recession, which brings down he overall average or heperiod. Excluding hose wo quarers, economic growh averaged 4.2 percen in heperiod aer he 1997 ax cu. Ta’s slighly higher han he 3.9 percen in he our yearsha ollowed he 1993 ax hikes bu i’s a ar cry rom he “33 percen” improvemen ineconomic growh ha Heriage claims was sparked by he 1997 ax cu.Te simple ac is ha here isn’ a whole lo o dierence, in erms o overall eco-nomic growh raes, beween he period aer he 1993 ax increases and he periodaer he 1997 ax cu.Nor is here much dierence beween he wo periods in erms o job creaion. In ac,he economy added new jobs a a slighly higher rae in he pos-1993 ax increase years
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Fact Versus Fiction in Latest Supply-Side Debate
Michael Linden explains how a recent Heritage Foundation report aims to distort economic history.
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