NFL Hall of Fame quarterback Bobby Layne was a chain smoker. He was also a heavy drinker, and considered to be a bit of a cad who thought nothing...
NFL Hall of Fame quarterback Bobby Layne was a chain smoker. He was also a heavy drinker, and considered to be a bit of a cad who thought nothing of spending the entire night before a game chasing women, even if it meant going directly from the bar (or an assignation) to the football game. Despite such shenanigans, his career was an unqualified success: During his 16 years in the league, he was voted to the UPI’s all-star team all but a handful of years, and his achievements included two NFL championships with the Detroit Lions, the last that moribund franchise has won. There’s no disputing he achieved a lot as a football player; however, in these more puritanical, health-conscious days, it’s a natural question to ask whether he would have achieved more had he kept himself in shape. While we have no way of precisely measuring how much his habits impeded his play, it’s probably safe to say he would have performed at a higher level for a longer period of time had he abstained from tobacco, drunk in moderation, and spent the nights before games at home, getting a good night’s sleep. So goes the debate over marginal tax rates and economic growth. The president and his supporters suggest that the solid growth in the 1990s, during the era of higher tax rates, is evidence that marginal tax rates simply don’t impact the economy. When the rates fell in the next decade, economic growth slowed as well. QED. Pro-growth politicians have struggled to counter this specious logic, which is why I invoke the ghost of Bobby Layne. The first and most obvious point is that the economy of today is markedly different from the economy of the 1990s. The IT revolution finally came to fruition and advanced enough that businesses could begin to take advantage of it to dramatically reduce costs. The advances that Wal-Mart had made by 2000 in terms of tracking their shipping, managing their inventory, and controlling their costs were simply unimaginable a decade before, given the embryonic state of computing at the time. Wal-Mart’s full embrace of technology is more than an anecdote; no less an economist than the Deputy Administrator of the White House’s National Economic Council, Jason Furman, wrote that Wal-Mart’s incessant drive to improve productivity was one of the key drivers of the rapid productivity gains of the 1990s. William Lewis, the founder of the McKinsey Global Institute, wrote in his book, “The Power of Productivity,” that nearly all of the gains in productivity growth we saw in the 1990s came as a result of the intensive competition and concomitant productivity gains that came in the retail sector and gradually forced their way up the production chain. Looking back we can see that the 1990s era was serendipitous in a number of ways. Besides the IT revolution turbocharging productivity growth, the baby-boom generation was entering its peak productivity years as well, while the relatively small cohort that preceded it (The Greatest Generation, I guess) was the one reaching retirement age. Entitlement obligations were relatively low as a result. Today, many of these trends have reversed. The Baby Boomers are now the ones reaching retirement age with a much smaller cohort trailing it, which has only begun increasing our entitlement obligations. It won’t stop any time soon. Productivity growth has diminished, and that’s before taking into account the possibility that our government has been overstating gains in productivity the past few years. And last but not least, higher energy costs over the past decade or so have put a serious crimp into the economy, just as in the late 1970s and early 1980s. Lower marginal tax rates in the 1990s would have resulted in even higher growth than was actually achieved. Similarly, higher tax rates in the last decade would have resulted in lower growth. The real economic debate is over precisely how much marginal tax rates do matter. “Not at all” is not a serious option, incidentally. Anyone who thinks that the 2001-2003 tax cuts were irrelevant to growth — or that higher marginal tax rates impose no cost on economic growth — needs to join Homer Simpson’s Bear Patrol.
