Soccer Dad

Against tax cuts and free trade

Kevin Hassett, (identified as an advisor to Sen. McCain) looks at the Bush tax cuts and declares them successful. In particular, he argues that the deficits initially caused by the tax cuts don't hurt the economy by raising interest rates.

Looking back at more than six years of economic history since the Bush tax cuts, two observations stand out. First, the deficit increased much more than was expected at the time Bush took office.

Even after accounting for the tax cuts, for example, the Congressional Budget Office forecast that there would be a cumulative surplus between 2001 and 2010 of $564 billion. Instead, including current projections, there was a deficit over that period of $3.7 trillion.

Second, interest rates never rose. Even though the change in the fiscal situation was at least twice as large as the anticipated 1 percent of GDP, interest rates have been lower than they were in 2001 for almost Bush's entire presidency. Bush took office on Jan. 20, 2001, a time when the 10-year Treasury bond yielded 5.17 percent. Today, it yields about 4.28 percent and has been well below 5.17 percent on average every year in between.

And yet, Hassett observes that Democrats are starting to take notice that deficits may not be that bad. Still he warns, that Democrats are likely to raise tax rates that will hurt the economy, even if the deficits don't.

This means if Democrats win, despite the utterances of the presidential candidates, the deficit is going to go up as tax dollars are steered toward health care and other Democratic favorites. Taxes will go up, too, as the Bush tax cuts expire, and the economy will suffer.

If, on the other hand, Republicans win, then they will extend the Bush tax cuts, and the deficit will go up. The extension of the low marginal tax rates will provide continued economic benefits.

George Will, on the other hand, decries the Democratic move against limiting free trade.

Although the House passed the Peru agreement, Democratic opposition shows the growing strength of a long-term fever: A majority of congressional Democrats opposed the North American Free Trade Agreement in 1993. For the first time since the 1920s—which were followed by the grim 1930s—one of the parties is protectionist. Opposition to liberalized trade has become liberal or, as is now said, "progressive."

John Edwards, the shrillness of whose progressivism is inverse to his standing in the polls, urged Congress to reject the Peru agreement. This, although during his single Senate term—his entire governmental experience—he voted for the Andean Trade Preference Act, under which Peru has almost entirely free access to U.S. markets. The agreement he opposes would give U.S. companies reciprocal access to Peru's market.

Edwards would require Peru to adopt more stringent labor and environmental standards than the pact requires. This, in spite of the fact that the pact's standards were negotiated by two very liberal House Democrats (Charlie Rangel and Sander Levin), have been endorsed by the AFL-CIO and are stronger than those in the Chile and Singapore agreements for which Senator Edwards voted. Hillary Clinton, who vows to undo the damage done by what she thinks has been George W. Bush's overbearing unilateralism in dealing with other nations, promises to re-evaluate all existing trade agreements to pressure nations to adopt domestic polices more pleasing to us. Free trade, crucial to the growth of wealth globally since 1945, is in peril. People are playing with fire at a moment when there is economic gasoline spilled all over the place. But overstating problems can be its own form of fire: Recent polls, taken just before the announcements that third-quarter growth was a robust 3.9 percent and that 166,000 jobs were created in October, showed that up to 46 percent of Americans think the economy is in a recession.

Will, I think, has it right.

Presidential elections are always epidemics of economic illiteracy and hysteria, for two reasons: The party not holding the White House has an incentive to talk gloomy nonsense, and the media, for whom the phrase "good news" is an oxymoron ("We don't report the planes that land safely"), love crises. In 2004, Democrats spoke of "the worst economy since Hoover" and "Benedict Arnold CEOs." Republicans will, in time, have their wilderness season for spouting nonsensical pessimism.

It's not just economics. The party out of power is also more likely to be isolationist decrying the president's foreign adventures. (Remember that in 2000, George W. Bush belittled the concept of nation building. Events intervened and now that is arguably the centerpiece of his foreign policy these days.)

The Democrats of course will object to tax cuts and free trade right now. If they were in power that might not be the case. Still, Will wonders if their pronouncements (specifically on trade, though it could apply to tax cuts too) will have a negative impact on the economy.

economy.

Posted by SoccerDad at November 12, 2007 9:44 AM