I am reading Captain Ed, my NARN co-host and ecstatic Steelers fan, who today took on E. J. Dionne's claim that tax cuts crippled the budget process and faults Dionne with amnesia of the 1990 tax hikes under Bush41 and their leading to the recession of 1990. Kevin Drum, along with commenters on Ed's blog, argue that the tax increases came after the start of the recession, and that tax increases were responsible for pulling the U.S. out of the 1990 recession. Drum and Dionne are wrong on both counts; here's why.

First, the passage of the bill in November isn't the pivotal event for economic agents deciding how to save, work and invest. Expectations matter. Bush had given his famous "read my lips" pledge in the 1988 campaign and rode his position as keeper of the Reagan legacy to electoral victory. Given its prominent place, it is probable that in 1989 and early 1990, workers and investors had depended upon the pledge. The key would be when did GHWB renounce his pledge? The answer is Tuesday, May 8, 1990. Via Lexis-Nexis, this report by Ann Devroy of Dionne's own paper appeared on page A1.

HEADLINE: Bush Opens Door To Tax-Hike Talks;'No Preconditions' for Budget Session

BODY:President Bush wants budget negotiations "unfettered with conclusions about positions taken in the past," the White House announced yesterday, opening the door to tax increase discussions that have been banned since Bush took office.

White House press secretary Marlin Fitzwater, under a barrage of questions on whether Bush was abandoning his "read-my-lips" campaign pledge of no new taxes, said the president had proposed a new round of high-level budget negotiations with Congress whose guiding principle would be "no pre-conditions."

Asked a half-dozen ways whether Bush might now approve of a tax increase, Fitzwater said answering such a question "is not helpful, not useful, does not further the progress of the talks in any way." But he did not dispute statements by congressional leaders who met with Bush Sunday and reported he was opening the door to talks that include taxes. ...

Note again, that's in Mr. Dionne's own newspaper. James Pinkerton recalls the period well.

I have known Larry Lindsey since the days when he was a staffer for Ronald Reagans Council of Economic Advisers; during the Bush 41 administration, we sat next to each other in the Old Executive Office Building. Needless to say, we were both dismayed to see President Bush break his read my lips, no new taxes pledge in the spring of 1990. But Lindsey soldiered on, as the negotiations dragged onand dragged 41s presidency down. For months during that bleak summer of 90, the budget-deal negotiations were being held at Andrews Air Force Base. Every day, the White House worthies would travel out to lock horns with Congressional Democrats; yet the Bushmen, having begun the fiscal bidding with a base-destroying, promise-breaking concession on the tax issue, had no good cards to play. So every afternoon, the Democrats would leak the Republican position to The Washington Post, complete with their Bush-bashing, class-warfaring spin. And the next morning, every morning, the Post would gleefully report that the Bush plan, whatever its particulars, would enrich the rich and harm the poor. Where was the Republican counter-spin? There wasnt any, because the White House had decided not to fight back, lest the Democrats get mad and walk away from the deal, and Dick Darman's chance to be Time magazines Man of the Year.

There is no way one can represent the tax increase as coming in November. On June 25, Bush came out of a meeting with Congressional leaders and says "tax revenue increases" are needed. By the 27th, an article from Paul Taylor and Maralee Schwartz, also of the WP, reports:

Four days after George Bush won a presidential campaign in which the phrase, "read my lips: no new taxes," was his most memorable slogan, The Washington Post polled voters across the nation to see if they believed him.

Sixty-seven percent said they did not.

Such deep public skepticism usually poses a problem for a politician, but yesterday Bush's political advisers were counting on it to shield the president from what they acknowledged will be "24 hours of political hell" following his statement opening the door to new taxes.

The Washington Times proclaimed that Bush had broken his pledge that same day. Words matter; economic agents could no longer rely on stable tax rates.

Bush negotiated thorugh the summer to try to keep his other major pledge on taxes -- a cut in the capital gains tax (sound familiar?) -- but by September Newt Gingrich was mad enough not to show up at a Rose Garden function. The effect of the tax increase did not start in November.

A quick detour on recession dating. The recession of 1990-91 was dated to have started in July 1990 and ended in April 1991. It took until after the 1992 election (12/22/92) for NBER to announce the date of the end of the recession. (Bush41 supporters probably just ground their teeth.) The reason for the difficulty in dating was given by the dating committee thus:

The committee had waited to make the determination of the trough date [the end of the recession] until it was confident that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in July 1990. The committee noted that the broadest measure of economic activity -- gross domestic product in constant dollars -- had finally surpassed its previous peak by the third quarter of 1992. Only by December did the overall pattern of economic activity appear to be strong enough to warrant the determination of the trough date.

So, if the tax increases were really going to lead to the recovery and growth of the economy, why did the resulting expansion take so long to take hold that 21 months had to pass before the recession's end was found?

And they did nothing for revenues either. Indeed, at the beginning of the Andrews AFB negotiations of summer 1990, the projected FY 1992 budget deficit was $101 billion. By the time of Bush's 1991 SOTU speech, it was $318 billion. (Source.) If tax increases were to stimulate the economy, how could they have been so anemic both to economic growth and to tax revenues?

Lastly, there is nothing to be gained from viewing the Clinton 1993 tax increase differently. Jude Wanniski explains:

Clinton was persuaded by his Cabinet that the bond market was more important than speculative stocks. The final tax bill, which passed without a single Republican vote, raised the top marginal income-tax rate to 39% from 33%, but it left alone the 28% capital gains tax. At the time it passed, we told our clients that it would not do much damage to the economy. ...

There was no technical recession following the Clinton tax increase, but that is only because the recession that ended the Bush administration was not followed by rising expectations of rapid economic growth. When the economy dips below a projected expansion path for two successive quarters, we term this a recession. When it recovers from this dip, we say the recession is over even before the economy returns to the growth path from which it dipped. The administration�s support of Greenspan�s monetary policy was enough to offset the dampening effects of the tax increase. Between the end of 1992 when the recession ended and the fall of 1996, the economy grew at a glacial pace.

This wasn't Ed's point at all, but call this a marker in case Drum, Dionne, et al., wish to use the Clinton tax increase instead. But of course, Democrats would love for Bush43 to emulate the Clinton 1993 tax increase. After all, look at what it did for Clinton's party in the 1994 elections?

Categories: economics, politics