Kerry on Taxes

My impression is that Democrats are increasingly comfortable about advocating tax increases, and that they think they can sell the idea that higher taxes are good for the economy. Latest to try this line is John Kerry, who on Monday credited Bill Clinton’s 1993 tax increase for “the greatest growth in this country in modern history, 23 million jobs created, lowest inflation, lowest unemployment.”
It’s always been hard to explain why tax increases would lead to increased economic growth–contrary to most historical precedent–but Kerry recycles the theory that Clintonites used in the late 1990’s: “…what President Clinton did was restore the confidence level by showing Wall Street that we were indeed going to be responsible in Washington.” This is the theory on which Robert Rubin tried to claim credit for the 90’s expansion: higher taxes reduced the budget deficit which in turn lowered long-term interest rates. This claim had a superficial plausibility when originally made–notwithstanding the fact that there is little historical correlation between budget deficits and interest rates–but it has been thoroughly refuted by subsequent events. Long-term interest rates today are lower than ever (hence millions of home refinancings) despite looming budget deficits, but the economy remains in the doldrums. If the main key to economic growth were low interest rates, we would be in the midst of an unprecedented boom.
The reality is that long-term rates are low because twenty years of experience have convinced the bond market that there isn’t much danger that the government will re-inflate the currency. Low interest rates are indeed good for the economy, but are just one factor out of many.
One also wonders whether Kerry and other liberal Democrats really want to take the position that our economic health is a function of whether, in Kerry’s words, “Wall Street” believes that “Washington is going to be responsible.” Leftism, I guess, isn’t what it used to be. Realistically, though, the Democrats know they don’t have to have a coherent economic theory. If the economy is still soft late next year, President Bush will pay a price whether the Democrats have a theory or not.


Books to read from Power Line