To cut or not to cut

Given the U.S. economy’s dramatic slowdown in recent months, now may be a good time to compare the vigor of the latest expansion with the strength of the nine previous post-World War II economic recoveries.

The Center on Budget and Policy Priorities (CBPP) is a liberal think tank that opposes the extension of many of the 2001 and 2003 tax cuts (the refundable child tax credit is a notable exception). It argues that its evidence “provides no support for the claim that the tax cuts generated exceptional economic growth.” In its April 22 report — “How Robust Was the 2001-2007 Economic Expansion?” — the center compares how the economy performed over the 23 quarters following the 2001 recession’s trough (which occurred in the fourth quarter of 2001) with how the economy performed during the first 23 quarters after the trough of the 1990-91 recession. The report also compares the post-2001 expansion, which CBPP terminates after the third quarter of 2007 because fourth-quarter data were so weak, with the average economic performance during the 23 quarters that followed the nine previous postwar recessions. Worth noting is that the economy had already reverted to recession at some point during the 23-quarter period for six of the nine previous expansions.

Based on its analysis of the changes in gross domestic product (GDP), consumption, business investment, household net worth, wages and salaries, employment and corporate profits, the CBPP concluded that the post-2001 recovery “was weaker, overall, than its performance in the equivalent years [April 1991 through December 1996] of the 1990s, years following significant tax increases.” Not only was GDP growth during the post-2001 expansion weaker than it was during the 1991-96 period, but “job creation, investment and wage and salary growth all were substantially weaker.”

Specifically, the annual growth rate of business investment, which averaged 7.5 percent during the 1991-96 expansion and 6 percent for the nine previous postwar expansions, grew by only 3.7 percent during the 2001-07 expansion. The average annual growth rate of employment was less than 1 percent during the latest expansion, compared to 2.5 percent for the nine previous recoveries and 1.9 percent for the 1991-96 expansion. Wages and salaries during the 2001-07 expansion grew at less than half the average annual rate for the previous nine recoveries.

Moreover, based on our own calculations, after the first 23 quarters, the 1990s expansion included an additional 16 quarters (four years through December 2000) of exceptionally strong average annual growth rates in GDP (3.9 percent), business investment (9.4 percent) and employment (2.3 percent). We pose the same question.