Reviving the Economy

January 27, 2014

Higher tax rates and more targeted fiscal policies will not revive the economy, says John B. Taylor, a senior fellow in economics at the Hoover Institution.

Weak economic growth in the United States today is the result of costly regulations that have reduced incentives to hire along with an unpredictable, and unsuccessful, federal monetary policy.

But President Obama points to policies of the 1980s and 1990s as responsible for today's economy. In those years, "Washington doled out bigger tax cuts to the very wealthy and small minimum-wage increases for the working poor," Obama said in July.

Those years actually benefited, disproportionately, those with low and middle-level incomes, though income inequality did widen. Why?

  • Returns to education began increasing in the 1980s, as the wage premium for a college degree, compared to a high school diploma, increased.
  • But at the same time, high school graduation rates declined, and the supply of educated students did not respond to that increase in returns on education.
  • Without a great response of supply, those with education rose more quickly, and the United States saw a wider income distribution.

Tax cuts, on the other hand, are not responsible for widening the income distribution. Congressional Budget Office data indicate that the distribution of market income before taxes widened in the 1980s and 1990s by the same amount as the distribution of income after taxes.

Source: John B. Taylor, "Let It Grow," Hoover institution, January 21, 2014.

 

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