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February 7, 2006
The Dionne Amnesia (Update and Bump)

E. J. Dionne, one of the best liberal columnists in America, suffers from a strange attack of amnesia in today's Washington Post. He argues that the tax cuts have crippled the American budgeting process, which I'll get to momentarily, but he also lays the blame on George Bush's father for disavowing his compromise with Democrats on taxes in 1990:

The roots of our fiscal madness, on display once again yesterday with the unveiling of President Bush's new budget and its deficit in excess of $350 billion, were planted on Oct. 27, 1990.

Ironically, that's the day when the first President Bush embraced the last genuinely bipartisan budget reduction package to include both tax increases and spending cuts.

It can be seen in retrospect as one of Bush 41's admirable long-term achievements. (Another, of course, was his success in driving Saddam Hussein out of Kuwait.) In tandem with Bill Clinton's tax increases three years later, the 1990 agreement set off a decade of fiscal responsibility and exceptional economic growth.

But Bush 41 could not embrace his budget victory as a triumph, because the agreement split his party and because he had won election just two years earlier promising "no new taxes." So he backed away from his achievement as soon as it was in hand.

Er, that isn't all that happened, and either Dionne has a bad memory or has slipped into uncharacteristic disingenuity by claiming this. Dionne leaves out two important points. The first fact omitted is that the tax increase in 1990 resulted in a sudden recession, which the Gulf War made worse by driving up oil costs temporarily. In fact, the increased rates flattened tax receipts; it did not result in any significant increase to the Treasury.

Second and more to the point, the Democrats with whom the President consulted and compromised used his efforts to castigate him as unfaithful to his promises in the 1992 general election. I find it hard to imagine that Dionne cannot recall the "Read My Lips' commercials that the Clinton campaign used to devastating effect in that election, which showed Bush promising to hold the line on taxes -- and blamed him entirely for raising them later. The Democrats stabbed Bush 41 in the back for working with them, and that's the lesson that 43 learned from the experience. Compromise with Democrats, and they will use it to attack at the first opportunity.

In terms of the actual issue of tax cuts and their effect on the budget, Dionne also neglects to mention that since the inception of the tax cuts in 2003, tax revenues have actually increased -- and increased sharply. The OMB, in fact, shows tax receipts at their highest point ever for this year (page 3). The reason for the deficit isn't the tax cuts, which provided the spark for the economy that has driven tax revenues far past the $2T mark for 2005. The deficit comes from increased federal spending, which both parties have increased on almost a straight line ever since that budget agreement in 1990.

Dionne is rightly concerned about the federal budget and the deficit, but he seems to have a hazy memory about its origins and its underlying causes. His call for bipartisanship in solving the problem is also laudable, but instead of castigating Republicans for a lack of intestinal fortitude in handling its fiscal conservatives, perhaps Dionne should scold the Democrats who twisted Bush 41's bipartisanship into a character flaw and the moderate Republicans who join with the Democrats in their inability to stop spending our money.

UPDATE: It's a little off the topic, but Kevin Drum at Washington Monthly claims that I've misrepresented the 1990 tax increase. He argues, as does some of his readers in the comments, that the 1990 tax increase actually rescued the American economy from a recession. That flies in the face of the actual numbers, and it also misrepresents the political climate at the time. I had an opportunity to briefly interview Brian Beach at the Heritage Foundation, who confirmed my original analysis that (a) the economy had not been in a recession when Bush 41 finally caved and agreed to negotiate for increased tax revenues in mid-1990, and (b) the immediate result was a slowdown in the economy. Brian also recalled that the need for the increase, according to the Democrats in control of Congress at the time, was not to reverse a recession but to balance the budget. Bush agreed to consider tax increases in May 1990, and by June had agreed in principle to do so.

If people have forgotten, then these numbers should recall the economic climate. The Bureau of Economic Statistics shows that the 1990 Q1 GDP performance shows a 4.7% annual growth rate, and the previous four quarters had performed at 1%, 2.6%, 2.6%, and 4.1% respectively. Even Q2, when Bush committed in principle to "increase tax revenues", grew at an annual rate of 1%. After announcing that he would raise taxes, and then doing so in November 1990, the economy stopped its slower growth and slipped into outright recession. GDP stood still in 1990 Q3, and then dropped in Q4 (-3.0%) and again in 1991 Q1 (-2.0). As recessions went, it was a shallow one, but the resulting anemic recovery -- and the Democratic attacks on Bush 41 as untrustworthy for having reversed himself on taxes -- cost Bush 41 his re-election.

King Banaian, the chair of the economics department at St. Cloud State University (and one of the nicest men you'll ever want to meet), provides an excellent analysis at SCSU Scholars. Read the whole thing, but here's the money quote, if you'll pardon the pun:

[I]f 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?

Revenues, in fact, grew very anemically over the next two years. In 1990, the year the tax increases went into effect, revenues only grew 2.2% in 1991, not even matching the average inflation rate for that period. Revenues only grew 3.4% the next year (1992). Deficits, however, continued to expand, because Congress and the Democrats reneged on their promise to Bush 41 and continued to expand federal spending (5.7% in 1991 and 4.4% in 1992). The deficits only came under control in the mid-90s because the Republicans took over the House and brought the expansion of federal spending under 4% for the rest of the decade.

All of this strays a bit from my original post, but the responses given by Washington Monthly and the commenters here show the short and fact-deficient memories of the Democrats when it comes to the effect of tax increases, as demonstrated by E.J. Dionne and Kevin Drum. It also reinforces the lesson that sucking money out of the private sector for redistribution by a bloated federal government does not generate growth, but instead kills investment and disrupts markets. The lesson from every tax cut and every tax increase is that only the former truly works to increase federal revenues.

Sphere It Digg! View blog reactions
Posted by Ed Morrissey at February 7, 2006 7:00 PM

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