Liberals have always believed that higher taxes are great for the U.S. economy and both Hillary Clinton and Barack Obama promise to raise taxes as soon as they enter office. But back when the best hope for liberal causes came out of Arkansas and not Illinois, it was consensus in some liberal circles that trade liberalization was essential for our nation’s economic growth. Now that there is a contested primary underway, however, liberals now all believe that free trade is the greatest threat to American jobs there is today. So the liberal position on taxes and trade has gone from half right, to all wrong.
On taxes, a growing body of economic literature shows that higher taxes are associated with a smaller economy. Taking a closer look at the American experience in 1990s, we see that the 1993 tax cuts probably slowed an economy recovering from a recession that ended eight quarters before Clinton even took office. Despite historically low energy prices, inflation lower than 2%, and tremendous new productivity enhancing technologies, the economy grew at only 3.2% annually after the tax hike. Contrast that with the economy’s growth after the growth orientated1997 tax cuts which saw the U.S. economy grow at 4.2%.
On trade, the U.S. economy has performed better as the trade environment has become freer. According to reports issued last month by the Department of Commerce, the U.S. economy grew by 50 percent during NAFTA’s first 13 years. Not only did the U.S. economy actually add 25 million jobs during this period, the average unemployment rate since NAFTA has been only 5.1 percent, versus 7.1 percent during the prior period. U.S. manufacturing output rose 63 percent during NAFTA’s first 13 years, compared to only 37 percent in the period before. Additionally, compensation for manufacturing workers increased 1.6 percent annually during NAFTA, versus 0.9 percent annually before. Federal Reserve Chairman Ben Bernanke does estimate that up to 2 percent of U.S. job losses have been due to foreign trade. However, he attributed only 1 percent of job loss to outsourcing, and said such small negative effects are overwhelmed by the consumption and investment benefits of trade (which are estimated to amount to as much as $10,000 annually for a family of four).
Silly season will soon be over. Hopefully after that liberals will return to being only half wrong on trade and taxes.
