Q: Has the president's economic-recovery plan left the American worker behind? YES: Tax cuts for the wealthy haven't created confidence for U.S. households or employers

0 Comments | Insight on the News, Feb 16, 2004

Byline: Jared Bernstein and Lee Price, SPECIAL TO INSIGHT

There can be little question that the economic policy of the Bush administration has failed to help working families. Jobs and income are down, despite the fact that a short and shallow recession ended more than two years ago and, as President George W. Bush touted in his recent State of the Union speech, most major indicators are trending in the right direction. You won't hear much about this in Washington, but beyond the Beltway it's a constant refrain. This recovery is not reaching working families.

The numbers tell the story, and it's not a pretty tale. We have 2.3 million fewer jobs than in February 2001 a month after President Bush took office. That is the worst sustained period of job loss since jobs data began at the end of the Great Depression.

Unless things turn around very soon, Bush will have presided over the first administration since Herbert Hoover's to end with fewer jobs than it started with.

As Bush frequently reminds us, his economic policy is not responsible for the fact that a shallow eight-month recession began soon after he took office. Nor do we contend that there would be more jobs today if the government had done nothing for three years. In fact, the government has taken action to reverse every economic slowdown since the Great Depression, and this time is no exception. But the actual measures enacted by this administration (with the approval of Congress) have been badly designed for our situation. More effective policies would have created many more jobs over this administration's watch.

Every year for three years, the administration has developed a major tax package designed primarily to reduce the long-run tax burden on wealthy and high-income individuals. It has packaged each of the tax bills as a major boost to jobs. Taken together, and with the permanence sought by the president, the three tax bills would reduce revenues about $5 trillion during the next 10 years.

There are two fundamental problems with this administration's economic policies. First, despite the fact that many in Congress applaud the president's appeal to make the tax cuts permanent, most people outside the Beltway fear that a budget train wreck is imminent. Given the magnitude of current and future government borrowing, interest rates on business loans will soar once the Federal Reserve and our foreign creditors stop their easy-money policies. Knowing what is around the corner, businesses have hunkered down and not made long-term commitments to hire and invest.

Second, the ineffectiveness of the tax cuts has helped to reignite two harmful trends: stagnant wage growth and rising economic inequality. The failure of the tax cuts to reignite job growth has taken a toll on living standards. The real income of the typical household fell in both 2001, a recession year, and 2002, a nonrecession year; relative to 2000, the median household's income had decreased $1,400 by 2002 (the most recent year such data are available). With job creation so weak, many workers lost the bargaining power that had enabled them to bid wages up in the latter 1990s. The pace of wage growth slid consistently in 2003, ending the year at 1.9 percent, just about the rate of inflation and the slowest yearly growth rate since 1987. Part of this decline in wages has to do with the fact that we're losing higher paying jobs in manufacturing and professional services (including information technology) and adding jobs in lower-end services. Since the recession ended, the jobs we've lost are in industries that pay about $2 more per hour than the jobs we've gained.

Last year, the administration announced the so-called Jobs and Growth Plan as a supposed economic cure. While the plan (along with low mortgage rates) has helped to speed up economic growth, it has done little thus far for job growth. The most recent available figures show that, in the third quarter of last year, gross domestic product (GDP) grew at an annual rate of 8.2 percent, a 20-year high. But in that same quarter we lost 80,000 jobs. We finally gained some jobs in the last quarter of 2003, but at a rate far too slow to reduce the damage. Thus the plan has delivered the growth without the jobs.

The real reason why growth hasn't translated into jobs is that the Bush stimulus package was crafted primarily to deliver escalating long-term tax cuts for the wealthy, not to generate employment growth. Sure, there was some sugarcoating of short-term, middle-income tax cuts, plus lots of trickle-down rhetoric about the link between lower taxes on wealth and job creation. But, once again, that particular alchemy has failed to change lead into gold.

There are two main arguments made by the administration's supporters to try to explain away the growing gap between growth and jobs.

The first is to attempt to write off the jobless recovery by cherry-picking the jobs data. The most authoritative data source on changes in employment is the Bureau of Labor Statistics (BLS) survey of establishments, a monthly survey of the payrolls at 400,000 firms. That's not only our opinion, it's the stated view of both the Congressional Budget Office and the commissioner of the BLS.