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The Bush tax cuts are the most destructive economic force to hit the U.S. economy since the bank runs of the Great Depression. Let me explain.
Historically: At the time the Bush tax cuts were first passed, we were told that they would stimulate the economy. What actually happened was that the economy began to slip into recession. To prevent a recession, the Fed chief, Alan Greenspan, decreased interest rates. This resulted in a great increase in home refinancing and a sharp rise in home prices because of cheap loans; combined with Wall Street's securitization of new home loans, a housing bubble was created. When the bubble burst, people found themselves with debt they could not repay and banks undercapitalized. With banks unwilling to risk future loans, the economy collapsed. Historically, the Bush tax cuts were a direct contributor to the present economic mess.
We were also promised increased job growth through the trickle down effect. The trickle-down theory postulates that if the rich had more money, they would invest more in job-creating industries and, consequently, the middle class would expand and become wealthier. Historically, what actually happened was the rich became wealthier and the middle class lost ground in both numbers and income. Currently, the wealthiest individuals and largest corporations are proportionally richer than at any time since the post-World War I golden age.
Psychologically: The example given by the Bush tax cuts was that you could take on debt without worrying about the consequences. The propaganda was that increased private spending caused by fewer taxes would increase economic activity. This, in turn, would increase revenue to federal and state governments and would decrease government debt. Not to worry, the future would take care of itself! If things went bad, you could always escape by borrowing more on your home. And the government could always get out of trouble by borrowing more.
Another psychological effect was the hoarding of cash by the wealthy. The Bush tax cuts led to a progressive increase in the redistribution of wealth to the upper 10 percent. Cash trickled up, not down. Psychologically, wealth is power, so it was predictable that the Bush tax cuts would increase hoarding and not promote job growth. If the wealthy faced increased taxes, they would have been much more likely to invest their money back into the economy. If you had a choice in either spending more on your business or sending the money to the government, what would you do?
The Bush tax cuts imposed a heavy psychological price on our culture. It preached that debt does not matter, that there are no real consequences to not repaying debt, and that the way to social and political power is to hoard cash.
What should be done? Perhaps the best solution would be to let the Bush tax cuts expire for all. This would increase revenue and demonstrate our sincere effort to control our debt. It would re-establish faith that the government was trying to live within its means.
This would stabilize the bond market as it did during the Clinton years. It would demonstrate to the people that debt does matter, that we do need to pay off our obligations rather than leaving it to the next generation, and it would stop hoarding.
The argument that a tax increase would cause a double-dip recession is historically weak. In fact, letting the Bush tax cuts expire very well might cause a significant resurgence in the economy. Also, it is the only solution that has not yet been tried. The Japanese tried not properly recapitalizing their banks nor writing off bad debt. This resulted in a prolonged, significant lack of economic growth. We have done this and it has helped somewhat, but not enough. We have been cutting government spending but this has not helped at all and has probably contributed to the slow rebound and persistently elevated unemployment rate. The Europeans have cut government programs and continue to do so. This has actually extended the recession in several European countries and even caused countries like England to re-enter recession. The only solution that has not been tried is raising taxes, increasing government income and paying down debt.
President Obama wants to maintain the Bush tax cuts for those with incomes under $250,000. This is commendable and probably just. It would relieve those who could least afford an increase, who had the least to do in causing our present predicament, and would help to correct the redistribution of wealth to the top echelons of society. This, however, is not realistic with a Republican-controlled Congress. It would be better to let the Bush tax cuts expire. Then, in the future, write a more just tax code in which each class pays in proportion to the benefits they receive from a debt-free and well-run government.
Dr. William D. Bezdek has practiced cardiology in Bakersfield for more than 35 years. He is a fellow of the American College of Physicians and a fellow of the American College of Cardiology.