San Francisco Fed: Tax Hikes are Slowing Economic Recovery

Since the sequester took effect in March, the White House has been quick to claim that lagging job growth is a result of the these very modest cuts to spending growth. In Obamanomics, government spending and deficits are virtues. But last week, Conn Carrol pointed to a study from the Federal Reserve Bank of San Francisco making the case that tax hikes — not spending cuts — are to blame for the poor economic recovery:

Why is the Obama recovery the weakest recovery since the Great Depression? According to a new study by the Federal Reserve Bank of San Francisco, it is not because the federal government failed to borrow and spend too little during the height of the economic downturn.

In fact, the San Francisco Fed reports that “federal fiscal policy was unusually expansionary during the Great Recession” thanks largely to the “American Recovery and Reinvestment Act, the economic stimulus program passed by Congress in 2009. As a consequence, federal government saving in the recession fell faster—that is, the deficit grew faster—than our historical norm would predict.”

Looking ahead, however, the Fed does see fiscal policy slowing growth, but not, as liberals would have you believe, due to spending cuts:

Surprisingly, despite all the attention federal spending cuts and sequestration have received, our calculations suggest they are not the main contributors to this projected drag. The excess fiscal drag on the horizon comes almost entirely from rising taxes. Specifically, we calculate that nine-tenths of that projected 1 percentage point excess fiscal drag comes from tax revenue rising faster than normal as a share of the economy.

Don’t act surprised. We’ve been shown before that economic intervention only slows the pace of an economic recovery. Back in 2004, two UCLA economists — Harold Cole and Lee Ohanian — scrutinized the economic policies of Franklin D. Roosevelt during the Great Depression. They noted that the economic policies enacted during this time prolonged the depression by seven years. They didn’t specifically point to tax hikes, but it should also be pointed out that tax rates jumped significantly during the Great Depression, in addition to the New Deal policies enacted. Ironically, Cole and Ohanian noted at the time — again, in 2004 — that “relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

The ill-conceived polices enacted at the end of the Bush Administration — stimulus and expensive bailouts — and the Obama Administration — even larger stimulus, more bailouts, more regulations, and tax hikes on the vast majority of Americans — have gummed up our economic recovery. It’s hard to explain the tepid economic growth otherwise.

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