Politics & Policy

Dearth and Taxes

We have had four presidents in the past four decades of American history who signed major tax cuts: Kennedy, Reagan, Clinton, and Bush. Although these men also raised some taxes, they stand out in history for their large tax cuts.

The first three times, the tax cuts led almost immediately to significant drops in unemployment. In the three years following the Kennedy tax cut of 1964, unemployment fell by 32.14 percent; and in the three years that followed the Reagan tax cut (which took effect in 1982), unemployment fell by 15.12 percent. When Clinton signed the NAFTA agreement, a tariff-rate cut, unemployment fell by 23.29 percent. And following the Clinton capital-gains cut of 1997, unemployment fell 24.53 percent. On average, for Kennedy, Reagan, and Clinton, unemployment went down by 23.77 percent in the three years following their tax cuts.

BuzzCharts feels that the mass media has overly hyped recent unemployment statistics (USA Today led the story with the headline, “Unemployment Rises Sharply”). Nevertheless, it is clear that the current recovery has been one in which employment growth has lagged. Why is this?

Employment tends to lag no matter what the circumstances. If you are the manager of a small enterprise and business starts to fall off, you wait as long as you can before laying people off. Conversely, when the orders start pouring back in again, you tend to wait a long time before staffing up again. This means that employment tends to remain steady during the beginning of a recession, peak toward the end of a recession, and stay high for some time following a recession.

That’s the way it works under the best of circumstances. But as far as employment goes we are not under the best of circumstances. The economy has undergone an amazing trend in productivity, driven by information technology. As recently as ten years ago, some establishment economists were saying that they could “see computers everywhere but in the productivity statistics.” No one is singing that song any longer. Even during the recession of 2000-2001 when productivity ought to have been driven down by economic dislocation and uncertainty, productivity continued to grow. In fact, the most recent reports on productivity indicate substantial productivity growth in the first half of this year.

As a practical matter, this means that new telephone systems, Internet connections, pagers, fax machines, and cell phones can reduce the tail-to-tooth ratio of American businesses. It doesn’t take as many assistants, secretaries, and receptionists per line worker, problem solver, and sales guy as it used to. This means, of course, that the economy can continue to grow at a non-inflationary rate of 1 or 2 percent per year without having any impact on unemployment. This is positive news for the people who already have jobs, and especially for the people who own American businesses, but it is terrible news for the 6 percent of Americans who are looking for work and are currently unable to find it.

The only solution is to push the non-inflationary rate of economic growth to levels above productivity growth. Only when the real growth of our businesses exceeds the amount of growth that occurs as a result of our getting smarter by using our PDAs, will we begin to staff up again.

— Jerry Bowyer is a talk show host on WPTT radio in Pittsburgh, Pennsylvania. He can be reached through www.BowyerMedia.com.

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