Tuesday, March 21, 2006

Students of philosophy will recognize a logical fallacy usually quoted in Latin: post hoc ergo propter hoc. Basically, it means that just because B follows A, it doesn’t prove A caused B. There may not necessarily be any relationship between the two. Only careful analysis can establish such a relationship.

Unfortunately, much of the debate about President Bush’s tax cuts relies on this logical fallacy. Supporters of the tax cuts point to a healthy economy, as evidenced by recent economic statistics. Since tax cuts preceded the economic expansion, therefore the expansion was caused by the tax cuts. By implication, we would still be wallowing in recession had President Bush not pushed large tax cuts through Congress.

Obviously, this is ridiculous. The economy has suffered from many recessions in the past and always recovered, usually without benefit of any tax cuts.

Of course, revenues always fall off when economic conditions are depressed. Economists call this an “automatic stabilizer” that helps recovery. But this is not the same as legislating tax cuts expressly to stimulate growth.

Anyway, the economic data upon which tax cut supporters rely doesn’t really prove their case. If one compares the recovery from the most recent recession to the last one, it is hard to find any effect of tax cuts at all.

According to the National Bureau of Economic Research, the most recent recession ended in November 2001. If one counts forward to the most recent data, the economy — gross domestic product in inflation-adjusted terms — has grown 131/2 percent or about 3.2 percent yearly on average.

This sounds pretty good on the surface. But if one counts forward the same number of months from the end of the previous recession in March 1991, the economy had increased by 131/4 percent or 3.1 percent per year on average.

And let us not forget taxes were raised twice in that recovery — first by President Bush’s father in the infamous 1990 budget deal, when he broke his no-new-taxes pledge, and again by Bill Clinton in 1993. Over this period, the top income tax rate was increased from 28 percent to 39.6 percent.

Knowing nothing else beforehand, most supply-side economists would have predicted economic calamity — and some did. But in fact the economic expansion after 1991 was much more robust than from the latest recession. For example, since November 2001 real investment has risen 32.3 percent.

Over the same period after March 1991, it was up 43 percent. Since November 2001, payroll employment is up 3 percent (through February). In the same number of months after March 1991, it was up 8 percent.

My friend Larry Kudlow always likes to use the stock market as his primary indicator of economic health, so let’s look at that. On Nov. 30, 2001, the Standard & Poor’s 500 Index stood at 1139.45. At last Friday’s close, it was 1307.25 — an increase of 14.7 percent. But if one starts March 31, 1991, and counts forward the same number of days to July 14, 1995, the S&P was up an amazing 49.2 percent, from 375.22 to 559.87.

Confronted with these figures, some tax-cut supporters are now saying the 2001 and 2002 tax cuts don’t count; they really had no economic effect. Only the 2003 tax cut, which lowered tax rates on dividends and capital gains, was effective, they say. Therefore, we should only look at the economic data since 2003. This is what the Treasury Department did in a study released on March 14 (available at www.treas.gov/offices/tax-policy).

The study looks at the percentage of companies paying dividends before and after 2003 and finds a modest increase after many years of decline. It looks at the S&P Index from Jan. 1, 2001, forward and shows the stock market began turning up in early 2003, though it has yet to reach the level it had in early 2001. The study shows investment spending becoming positive in second-quarter 2003, although negative spending bottomed in the fourth-quarter 2001 and had been turning upward thereafter. And it looks at real GDP growth, which turned much stronger in the second quarter of 2003.

That is really all the empirical evidence in the study. The rest is mostly a theoretical discussion. There are no estimates of where the economy would be without the 2003 tax cut. It is simply asserted that the economy is doing well because of it. It all boils down to post hoc ergo propter hoc and doesn’t prove anything.

There may still be a case that the Bush tax cuts raised growth above the no-tax-cut baseline, but it has yet to be made.

Bruce Bartlett is a nationally syndicated columnist. His new book is “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy,” published by Doubleday.

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