Evans On The Economy -- How Bush's Tax Cut Will Really Work

I have been in the economic forecasting business for quite some time -- 40 years, to be precise -- and I have never seen so many conflicting opinions as on the economic merits of President George W. Bush's latest tax cut. More curiously, I have not yet seen any accurate analysis of the tax cut. First, let me indulge in a little history. Many economists were surprised that the 2001 Bush tax cut did not provide as much stimulus to the economy as had tax cuts during the Kennedy-Johnson and Reagan years. In fact, most people did spend their tax cut. But they bought goods produced in other countries. In other words, consumption did rise -- check the figures -- but imports rose almost as much. Hence, there was virtually no gain in U.S. production. Hence, there was no pickup in capital spending. The so-called multiplier didn't multiply. Meantime, what were foreign producers doing with all the extra dollars? They couldn't eat the stuff, so they reinvested it. And because the world is on a de facto dollar standard, that meant the money flowed back into this country and into Treasury securities. In other words, it was a wash. The U.S. government reduced taxes and boosted the deficit; Americans bought more imports; foreign producers took the extra dollars and bought the extra Treasury securities. So on the demand side, there was virtually no impact from the cut. That bit of economic history doesn't seem to be so difficult to understand. Yet these days any commentary on the latest Bush tax cut seems to be hopelessly politicized. Either people believe that the latest Bush tax cut is a wonderful idea because Bush is one heckuva president, or they think it is a terrible idea because Bush stole the 2000 election and doesn't deserve to be in the White House. The fact -- virtually ignored -- is the latest round of tax cuts will likely have some positive effect on the supply side, not the demand side, of the economy.