04/16/2017

Don't Whiff On Tax Cuts Like Bush 41

Brian Domitrovic, Forbes.com

Friday the 13th, October 1989. The day started out quietly on the stock exchanges, with the indexes hanging a few points shy of all-time highs. The market’s swell comported with economic facts. Over the past seven years, the nation’s economy had been expanding at the bumper rate of 4.5 percent per annum.

On that Friday the 13th, however, the market would just about crash. The 191-point drop in the Dow industrials that day was the second-worst ever, the 7-percent drop the 12th worst. The drop was, furthermore, prescient. After October 1989, economic growth would creep along at not even a point per year through 1991. The country would endure a recession, the first since the stagflation era a decade before.

Growth would pick up a little after that, firming only when the Republicans took Congress in November 1994, when stocks and bonds troughed and 4.5 percent growth returned through the turn of the millennium.

The recession of 1990-91, foretold by the flash crash in the markets that spooky Friday the 13th in October 1989, remains one of the great oddities of our recent economic history. The 1982-2000 boom was so immense—it resulted in 40 million new jobs, untold number of startups, and a renewed exploration of the American Dream—why did it have even that one interruption, there in the years of President George H.W. Bush?

The reasons are all too relevant to contemporary affairs, namely the matter at hand this spring before the Donald J. Trump administration: should there be a tax reform involving a major cut in tax rates, as roundly promised on the campaign trail?

Several weeks ago, I trucked out to the George H.W. Bush Presidential Library at Texas A&M University and found some documents pertinent to this question. The evening after that flash crash in the fall of 1989, Bush’s own Council of Economic Advisers (CEA) whipped up a memo indicating to the president that his current vacillation on tax-cut promises he had made the year before in the election season was at the root of the stock-market drop—and by extension, the recession that was about to come.

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