Snow Job

by Russ Roberts on February 16, 2006

in Less Than Meets the Eye

Treasury Secretary John Snow tries to make the case for the Bush tax cuts that lowered the tax on capital:

While officially the recession had ended in late 2001, the pace of the
recovery was too slow. Growth was anemic, business confidence low and
— of critical importance — capital investment was way down. As a
result job growth was nonexistent.

President Bush recognized that something needed to be
done to overcome those headwinds and, in particular, to create a more
favorable climate for capital investment that would result in job
creation. To do so he sent Congress far-reaching proposals to encourage
capital formation by lowering taxes on investment returns. Congress
responded with the Jobs and Growth Act, which was signed into law in
May 2003.

Since then we have seen a remarkable turn-around in
the economy. After nine consecutive declining quarters of real annual
business investment, we have had 10 straight quarters of rising
business investment. This business expansion led to a substantial
increase in employment. In the intervening period, some 4.7 million new
jobs have been created and the unemployment rate — 6.3% in 2003 —
today stands at 4.7%, lower than the average of the 1970s, ’80s and

I happen to agree with Snow on the virtues of low (or better yet, zero) taxes on capital.  And he may be right that the Bush tax cuts were good for the economy.  But his evidence is a bit misleading.  At first glance, the case looks pretty strong:

After nine consecutive declining quarters of real annual
business investment, we have had 10 straight quarters of rising
business investment.

Who could argue with that? Then you look at the chart that accompanies the article:


Look at that!  Nine negative quarters followed by ten positive guarters!  Pretty impressive.

Well, actually, it’s eight negative quarters.  But who’s counting?

But that’s not the real problem with the chart.

The problem is that if you took away the dotted line showing the date when Bush signed the tax cuts, the resumption of positive business investment looks perfectly consistent with the trend beginning in mid-2001—the negative rates of investment shrink until they turn positive in 2003.  There doesn’t appear to be any impact at all from the signing of the Act. 

And besides you’d really want to know when the Act took force.  And you’d also expect the behavioral changes the Act induced to begin before the Act took effect and maybe even before the signing.  Now if the signing or the implementation coincided with what looks like the 3rd quarter of 2001, then at least the picture would complement the claim that the tax cuts had driven the improvement in the business climate.  But the picture contradicts the claim of the article.  It makes it look like the return to positive business investment was in the cards even without the tax cuts.


28 comments    Share Share    Print    Email

Previous post:

Next post: