Wednesday, November 24, 2004

Tax Cut Article - Part 4 of 5

Has the Bush Tax Cut Created Jobs?

Today we will deal with the next part of the question which is how effective has the tax cut been in creating jobs?

As I indicated in yesterday's article, there is a lag between the time the tax cut is enacted and the time households respond to the new environment. Since the tax cut was across the board in that it affected all income brackets, there was some Keynesian style stimulus on the demand side as many of the recipients began spending this money. As people began spending the additional money from the tax cut there was an increase in demand and business responded by drawing down inventories and hiring more people to increase output to replenish the inventories.

The most recent figures from the Bureau of Labor Statistics' payroll survey show an increase of 2.4 million jobs from August 2003 through October 2004. The Department of Commerce's household survey shows an increase of 2.5 million jobs for the same period. The difference is that the BLS figures are based upon a survey sent to existing businesses while the Commerce figures are based upon a survey of households which include people who have started their own business or work for very small new businesses both of which are overlooked in the BLS survey.

In addition to the 2.4 or 2.5 million new jobs created, the national unemployment figure for October 2004 was 5.5% which is down from the peak rate of 6.3% in June 2003. It is also lower than the average rate in the 1970s, 1980s and 1990s. Another encouraging sign in the 5.5% rate for October was that it increased by a fraction of a percent over the September figure. This is encouraging in the sense that one sign of an improving employment picture is an increase in the rate of unemployment. If you review the discussion of unemployment in your text you will notice that the official definition of unemployment is people who are both out of work and actively looking for work. If laid off workers get discouraged and stop looking for work, as happens in recessions, they are no longer included in the official unemployment statistics. When the job market improves, as it is doing now, these people begin looking for work again and they are reclassified as unemployed and are again included in the unemployment statistics.

So, with all this good news why do we hear so much about the tax cut not working? Obviously, during the recent election Senator Kerry and the other Democrats opposing President Bush and the Republicans could not praise the President for his good job and, at the same time, try to convince people to vote him out. Much of the mainstream media and others oppose President Bush and the policies that he is pursuing so they will naturally be critical of his policies. This is normal political debate.

But there are also some legitimate grounds for criticizing the effectiveness of the tax cut and of President Bush's economic policies in general. Like any policy, President Bush's economic policies in general and the tax cut in particular, are not perfect. If they were we would have zero unemloyment, stable prices and overall prosparity. Obviously this would be impossible to achieve, but to the extent we fall short of this ideal there is room for opponents to criticize the Presient's performance and put forth alternative policies that they feel will do better. In the recent election the voters could see the results to date of the President's policies and had to estimate how accurate the claims of the effectiveness of his opponents' proposed policies were. To the extent that people based their votes on economic considerations, we can say that a majority of the electorate felt more confident in staying with the existing policy than taking a chance on the alternative policies.

A second reason for questioning the effectiveness of the President's policies is the fact that the U.S. Is a large and diverse nation and the increase in jobs is not evenly distriubted throughout the nation. The Administration's own web page contains data that can be read in either a positive or negative light. According to the Administration, Job creation was up in 47 of the 50 states in the last year, and the unemployment rate was down in all regions and in 46 of the 50 states. This is good news if you are employed and living in one of the 47 states where job creation was up or one of the 46 states where unemployment was down. But what about unemployed people in the three or four states where jobs were not being created rapidly or unemployment was not going down? They obviously have a different perspective.

So, short of the policy either working spectaularly or failing massively, the relative effectiveness of the policy will depend upon each individual's point of view and opinion of the current and alternative policies. My job as your instructor is to teach you the principles of economics and provide you with a clear understanding of the various theories behind the competing policy positions. The decision as to whether a particular policy is better or more effective than competing policies is up to you but, hopefully, as a result of this class your opinion will be backed up with an understanding of the principles and theories involved and not rely upon political hype alone.

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