If doesn't matter whether Hillary Clinton or Barack Obama is the Democratic nominee. At some point during the fall presidential debates, one of them will turn to John McCain and say something like this: "Senator McCain, we raised taxes in the 1990s and had one of the greatest economic booms in American history. Why not go back to those rates by repealing the Bush tax cuts?"
In my chat yesterday with Douglas Holtz-Eakin, McCain's director of economic policy, I presented him with that exact scenario. Here is what he said (boldface is mine):
That's bad economics. How would [Clinton or Obama] replicate the [information technology] boom of the late '90s exactly, which was the driving force in the economy, which was at the root of growth and productivity in the mid-'90s? We saw productivity return to the U.S. economy.... It disappeared in the '70s, no one knew why, and then in the early '80s we undertook big changes—opened markets, deregulated, lowered the tax burden. There was a lot of investment in IT through the late '80s, and finally in the mid-'90s we start to see stuff take off.... And what should not be forgotten out of that era is that even though we had the IT bubble in [stock market] valuations, we had real productivity growth, and that was the good thing. The economy survived higher taxes—that doesn't mean the higher taxes caused it. I am sure it was not true, and it doesn't mean the higher taxes were a good idea.
I also asked Holtz-Eakin about what he thought of the "bond market theory" of economic growth—that the way to grow the economy is cutting the deficit, which will lower interest rates and cause the economy to grow?
That is not what happened, and it doesn't make much sense. If the bond market theory were right, the U.S. economy would be at a standstill. We have overwhelming on-the-book commitments to the entitlement programs, and so if you took the bond market theory version of the '90s and applied it to today, we might be facing a much more serious downturn.
In addition, I asked him about economic nostalgia among some for the 1950s-version of the U.S. economy and the high taxes of that era. If the economy grew back then with high tax rates, why not now? His answer:
Because you would also have to root for a world war and have the other economies in the world literally in ruins. That is not something to root for, and we also don't want an era like in the '70s with very high marginal rates, and it was a really awful period and anyone who lived through it doesn't relish going back to it.... We have learned some things, and those lessons should not be lost.