QandO

August 26, 2004

More about Jobs
Posted by Dale Franks

In reference to the jobs picture we talked about below, reader MK-Ultra writes:

If employment is in fact higher than the payroll numbers indicate, then the question becomes why are we operating in record deficit territory?

When employment numbers were high in the 90's, we had a surplus. Bush hasn't cut the size of government, but he hasn't created any new major programs either. And yes, government spending outpaces inflation. But not on a level that would account for the current deficit.

Only two explanations present themselves: Revenue is down because there simply aren't that many people working. Or Bush's tax cuts are not having their promised effect, i.e., increased revenue.

Funny how that works.

First, despite his rather cavalier dismissal of federal spending , saying simply that it "outpaces inflation" that substantially understates the case, in much the same way as saying that the South Pole is "somewhat cool". In point of fact, Federal spending has substantially increased:

Since 2001, even with record low inflation, U.S. federal spending has increased by a massive 28.8% (19.7% in real dollars)—with non-defense discretionary growth of 35.7% (25.3% in real dollars)—the highest rate of federal government growth since the presidencies of Richard Nixon and Lyndon Johnson. This increase has resulted in the largest budget deficits in U.S. history, over $520 billion in fiscal year 2004 alone. Furthermore, the projected spending for 2005 is a conservative estimate, since it doesn’t include at least $50 billion for the 2005 cost of the Iraq occupation.

Technically, though he is correct. Spending increases have certainly outpaced inflation.

Revenues, of course, are down as well:

And you can take that 2005 estimate with as many grains of salt as you like.

So clearly we have an unsustainable spending situation going on, with massive spending increases, and declining revenues. So, why are revenues down? Alan Greenspan, earlier this year, provided the answer:

In part, the recent deficits have resulted from the economic downturn in 2001 and the period of slow growth that followed, as well as the sharp declines in equity prices. The deficits also reflect a significant step-up in spending on defense and higher outlays for homeland security and many other nondefense discretionary programs. Tax reductions--some of which were intended specifically to provide stimulus to the economy--also contributed to the deterioration of the fiscal balance.

The chief problem with the federal budget has not been revenue losses due to tax cuts, but rather revenue losses due to the recession that began in early 2001, and the implosion of the stock market that began in the spring of 2000, which reduced equity values across the board by 40%.

To go back to MK-Ultra:

Only two explanations present themselves: Revenue is down because there simply aren't that many people working. Or Bush's tax cuts are not having their promised effect, i.e., increased revenue.

Even if one assumes that the payroll data from the establishment survey are absolutely correct, that still puts our current rate of employment of 5.5% at the same rate it was in July of 1996, which is hardly remembered as a time of great tribulation. Indeed, the unemployment rate never reached as low as 5.5% from 1974-1988, or from 1990-1994. So, it's a bit dumb to pretend that a 5.5% rate of unemployment is a crisis. Moreover, if in fact, the establishment survey is missing employment because it does not account for changes in the composition of the labor force, the actual unemployment rate is below—and judging by the household survey, significantly below—5.5%.

As far as the Bush Tax cuts not having their desired effect, i.e. increasing revenue, there's really no way we can know that one way or another at this point. Both rounds of tax cuts were back-end loaded, although the 2003 round moved $100 billion in cuts to the front end as a stimulus method. Considering the time it takes for tax cuts to filter into the revenue basket, especially if they come during a recession, it seems to me that it is hard to bifurcate out those effects.

What we do know, however, is that despite the complete implosion of the equity markets, followed by the 9/11 attacks, the recession of 2001-2003 was fairly shallow, all things considered. Those of us who remember the back-to-back recessions of 1982-83, with unemployment above 10%, have some historical experience to go by, and the 2001-2003 recession was extremely tame compared to that. It was, in fact much shallower than the 1991-1992 recession, where unemployment peaked at 7.6% a full 1.3% higher than it reached at any time in the last four years.

If, as John Maynard Keynes first taught us nearly 70 years ago, that stimulus through deficit spending and tax cuts is the appropriate remedy for ameliorating recessions, then I suggest that the tax cuts and increasing deficits, while not increasing revenue, certainly helped to make the recession shallower, and, by so doing, prevented even worse hemorrhaging of the fiscal situation.

If, in fact the tax cuts do eventually increase revenue, that will happen at the top of the economic cycle, when economic growth is higher, and the period of expansion is longer than it otherwise would have been. Tax cuts at the bottom of the cycle don't increase revenues; they merely help cut the losses.

As regular readers know, though, I am not a Supply-Sider, so I dispute that, outside of certain bounds, Supply-Side economics has the powers its advocates attribute to it. So, I am agnostic that the Bush tax cuts will increase revenues. But, even I were to accept, arguendo, that Supply-Side policies work in the exact way Supply-Siders describe, I would argue that we are either very close to, or perhaps slightly to the left of the equilibrium point on the Laffer Curve.

As such, any reductions in taxes, no matter how spiffy they are at keeping the economy growing, will not result in significant increases in tax revenues, and, may actually result in revenue decreases.

But that, of course, is a subject for another post.

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