Thursday, November 10, 2005

Moving Targets

Ah, it feels good to get back home again. After a few days of devoting itself mostly to denouncing American intelligence agents and lauding Iranian ones, the Journal has returned to its signature issue, not to say absurd hobbyhorse, of tax cuts at all times and places. Its analysis of the election results turns, of course, on the supposed centrality of taxes to GOP defeats. A note to the Journal on that point: Jerry Kilgore was in fact an early and vocal opponent of Mark Warner's tax reform in Virginia. That Warner is now one of America's most popular governors makes it hard to take seriously the suggestion that more vocal opposition to his most visible policy success would have been a ticket to victory for Kilgore.

Let's leave the Journal to wallow in recriminations on its own, though, and move on to the main tax editorial of the morning. This editorial, "Snowe Daze," is an extended whine about Olympia Snowe's refusal to vote to make permanent the 2003 Bush tax cuts or even to vote for what the Journal supposes is a minimally adequate 2-year extension of the cuts. She'll only agree to one, and the Journal all but promises to hold its breath until it turns blue if she won't sign up for more than that.

The real injustice here, the Journal thinks, is to the tax cuts themselves. So little gratitude, which "we could understand if the tax cuts had failed to do what supporters promised, but they have done that and more." Poor tax cuts! Maligned cruelly and unjustly by the Senator from Maine, after they did so much for the economy. And, as is its wont, the Journal has numbers to make its case!
"Almost from the day in May of 2003 when it became clear they'd become law, the U.S. economy shifted into a higher gear -- to 4% average GDP growth from 2%. The stock market bounced back, corporate investment revived, and unemployment declined to its current and historically low rate of 5%."
Well, now. The Journal is correct that GDP growth increased from almost 2% in the first quarter of 2003 to almost 4% in the second (link opens Excel spreadsheet), and that unemployment is now at 5%, which makes it almost as low as when the President took office. The interesting thing about these statistics, though, is that the Journal begins its analysis "when it became clear" that the tax cuts would be passed, rather than when the cuts actually took effect. The reasoning here is a bit obscure, but it apparently has something to do with the fact that businesses making long-term capital investment decisions are focused on expected tax rates five or ten years hence.

Conveniently, this new rule draws attention away from the fact that economic growth has been slowing (link opens Excel spreadsheet) ever since the brief burst in the summer of 2003 to which the Journal points so proudly. In other words, by the time the tax cuts had been implemented, the economy was already beginning to decelerate, and it has continued to do so despite the cuts. So we get the newest iteration of the editors' tax-cut dogma. It turns out to be the act of cutting taxes, not the cut itself, that produces the promised economic miracle.

Oddly, the Journal has been less vigorous about making that case about the 2001 tax cuts. Presumably the nature of investment decision-making didn't change too radically between 2001 and 2003, but since the economy slipped back into recession and then stagnation in the third quarter of 2001, the first one to follow George Bush's signing of the 2001 cuts, the new evaluative rule is dropped for that round of cutting.

The editors further cite a burst in federal tax revenue as proof that the tax cuts have been "self-financing." Of course, the burst in revenue came this year, while the Journal located the benefits of the tax cut in 2003. When a similar temporary uptick in revenue took place in the final years of the Clinton Administration (and for the same primary reason, a rising stock market) the Journal denounced it as an example of "record-high taxes." Now, rising revenue is evidence of the benefits of tax cuts.

It would be enough to make a lesser man despair. Journal editorial arguments are hard enough to parse when they hold still. But the editors' explanations for why we need ever more tax cuts move around so quickly, it's enough of a job just to remember where they are from day to day.

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