The Bush administration vs. its economists - part 2
By Brendan Nyhan
In February, the Council of Economic Advisors (CEA) released its Economic Report of the President, which contradicted claims by President Bush and other top administration officials on the revenue effects of tax cuts and the relationship between federal budget deficits and interest rates. Now, President Bush is again being contradicted by CEA and his nominee for chairman of the council, N. Gregory Mankiw, on the date a recession began in 2001, the revenue effects of tax cuts and the number of jobs that would be created by his tax cut package.
In the last several weeks, Bush, Press Secretary Ari Fleischer and political strategist Karl Rove all made the claim that a recession started in January 2001 -- before Bush even took office. During a speech in California on May 2, for example, Bush said, "[W]ith the combination of the loss of revenue as a result of the recession -- which was official in January of 2001 -- and the expenditures in order to win a war and deal with an emergency and deal with the new issues of homeland security, we've got a deficit." He expanded on this on May 12 in Nebraska: "And so the market started going down in March of 2000. And then we went into a recession. That's three quarters of negative growth. From January of 2001, for the three quarters ending, starting January 2001, we were negative." Bush then repeated versions of it in New Mexico on May 12 ("In January of 2001, we were in a recession, which meant three quarters of negative growth.") and Indiana on May 13 ("And then our nation went into a recession, starting January 1st of 2001. That means three quarters of negative growth."). Fleischer reused this point on April 30, May 6 and May 12, and Rove even repeated it in a rare public appearance in New Hampshire.
This continues a strategy that was launched last year after the release of revised economic figures showing negative GDP growth in the first three quarters of 2001. But as Slate's Daniel Gross pointed out in December, the January 2001 start date is not accurate -- the shorthand definition of a recession as two consecutive quarters of negative GDP growth is not accepted by professional economists. They look to an official committee at the National Bureau of Economic Research (NBER), which takes a closer look at a set of more precise monthly statistics and dates the start and end of each recession to a month (rather than a quarter) based on a complex set of factors. Based on this information, NBER's committee determined in November 2001 that a cyclical peak had been reached in March 2001 and that a recession began in the same month (NBER has not declared an end to the recession.)
Mankiw, Bush's nominee for chairman of CEA, recently stated his agreement with this assessment of the NBER committee's role, telling the Wall Street Journal in 2001 that a recession "is whatever they [the NBER committee] want to call a recession." He added, "Economic growth is sort of more on a continuum, there's nothing special about zero," referring to the two quarters of negative growth definition. Mankiw later went on to serve on the NBER committee (subsequent to the November announcement), where he served for a short period before resigning due to his CEA nomination.
The previous chair of CEA, R. Glenn Hubbard, also endorsed NBER's role in defining a recession during his term at the White House, stating in a December 14, 2001 speech [152 KB PDF] that NBER "made its official declaration that the United States is in recession" and that it "dated the cyclical peak in March 2001." In addition, CEA acknowledged the NBER's role in dating recessions in the 2002 Economic Report of the President [3.1 MB PDF], which called NBER's Business Cycle Dating Committee "the arbiter of U.S. business cycle dates" (though CEA did question the March 2001 start date chosen by the NBER committee).
The date of the beginning of the recession is not the only economic point on which Mankiw has contradicted the President. During testimony before the Senate Committee on Banking, Housing and Urban Affairs on Tuesday [Real Player video], Mankiw contradicted Bush and misrepresented the President's statements on the revenue effects of tax cuts. Under questioning from Senator Paul Sarbanes (D-MD) about opposition to his nomination from Club for Growth president Stephen Moore, Mankiw said Moore was criticizing "a passage where I had raised skepticism about claims that tax cuts would generate so much employment growth as to be completely self-financing. And I remain skeptical of those claims." Mankiw added that "the most extreme advocates of tax cuts, I think, sometimes paint an excessively rosy picture out of what they can get out of them. I don't think this administration has done that."
President Bush, Vice President Cheney and Fleischer, however, have made the exact claim that Mankiw is "skeptical of" and attributes to "the most extreme advocates of tax cuts." On November 13, Bush said "[W]e have a deficit because tax revenues are down. Make no mistake about it, the tax relief package that we passed -- that should be permanent, by the way -- has helped the economy, and that the deficit would have been bigger without the tax relief package." Then, on January 7, he claimed his tax cut proposals "are essential for the long run... to lay the groundwork for future growth and future prosperity. That growth will bring the added benefit of higher revenues for the government -- revenues that will keep tax rates low..." Cheney made the same claim in a January 30 speech promoting the President's tax cut: "By leaving more money in the hands of the people who earn it, people who will spend and invest and save and add momentum to our recovery, we'll help create more jobs and ultimately increase tax revenues for the government." And Press Secretary Ari Fleischer was the most direct during a January 8 press briefing: "The entire package the President does believe will lead to growth, which will over time grow the economy, create additional revenues for the federal government and pay for itself."
As we previously pointed out, the CEA's 2003 Economic Report of the President also casts doubt on these claims [2.7 MB PDF]:
The modest effect of government debt on interest rates does not mean that tax cuts pay for themselves with higher output. Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity.
In addition, in a little-noticed report, CEA has undermined the President's claims that his tax cut package will create 1.4 million new jobs. As first discovered by blogger Dwight Meredith and explained in further detail by Economic Policy Institute Senior Economist Max Sawicky on his personal blog, the February 4 CEA analysis [132 KB PDF] that justifies Bush's job growth estimate actually reveals that the estimate is misleading. The CEA writes that "[s]tronger GDP growth would lead to an estimated 510,000 new jobs expected to be created as a result of the proposal over the course of 2003. Another 891,000 new jobs would be created in 2004." This is the source of the 1.4 million figure that Bush and other officials cite.
However, the CEA also briefly states that, "On average over end-2002 to end-2007, job creation as a result of the package would be 140,000 higher than otherwise." In other words, over this five year period, a net total of 700,000 additional new jobs would be created as a result of the proposal, not 1.4 million. Thus, according to CEA, the President's plan would create 1.4 million additional new jobs in the first two years, but would also lead to 700,000 fewer jobs being created in 2005-2007 than would have been created without the passage of a tax cut, leading to a net job creation total as a result of the package of 700,000 (140,000 per year for five years). This remarkable finding, which is obscured by the CEA in its analysis, has received scant national media coverage besides a CNN/Money story.
The purpose of the CEA is not only to provide sound advice and guidance on the economy, but also to educate policymakers and help them to speak responsibly about these issues. With the contradictions between CEA statements and the Bush administration persisting, it appears the public will not be getting straight answers from the White House on economic matters any time soon.
Update 6/11 1:14 AM EST: I recently discovered a post from Sawicky clarifying the details of the CEA model. After a conversation with CEA staff, he reports that there is no net job loss relative to current employment levels (a mistake he made that I did not repeat). All positive and negative figures are measured against a baseline of growing employment - thus, the negative effect relative to the model after 2004 does not mean job growth is under the baseline. Instead, it brings the net job creation number back toward the baseline. In 2007, Sawicky reports, there would have been approximately 400,000 net additional jobs created relative to the baseline prediction. From there, job growth would have continued to decline relative to the baseline job creation prediction until they equalize in approximately 2010.