The Republicans claim that tax cuts spur economic growth. The historical evidence presented below indicates interest rates cuts -- not supply-side tax cuts -- have long been the primary engine for economic growth.
The National Bureau of Economic Research - the government agency that prepares economic information for the Federal Reserve policy makers -- has identified 8 recessions since 1955. Below, I identify each recession, when the Federal Reserve cut interest rates, and the quarterly GDP percentage growth during and after the recession.
August 1957 - April 1958
The percentage change in GDP was 4%, -4.2%, -10.4%, 2.4% and 9.8%for the third quarter 1957 through the third quarter 1958, respectively. The Federal Reserve cut interest rates three times during the recession. On November 19, 1957, the Fed cut rates from 3.50% to 3%. On January 24, 1958 the Fed cut rates from 3% to 2.75%. On March 7, 1958, the Federal Reserve cut rates from 2.75% to 2.25%. In total, the fed cut interest rates 125 basis points. Three months after the last cut, the economy grew 2.4%, and six months after the recession the economy grew 9.8%.
April 1960 - February 1961
The percentage change in GDP for the second quarter of 1960 to the first quarter of 1961 was
-2%, .6%. -5.1% and 2.4%, respectively. The Federal Reserve cut rates one time during this recession, on August 11, 1960 from 3.5% to 3%, for a total rate cut of 50 basis points. 6 months after the Fed cut rates, the economy grew by 2.4%.
December 1969-November 1970.
The percentage change in GDP was -1.9%, -.7%, .8%, 3.6% and 11.6% for the fourth quarter of 1969 through the first quarter of 1970. The Fed cut rates 4 times during the recession. On November 11, 1970, the fed cut rates from 6% to 5.75%. On December 4, 1970, the Fed cut rates from 5.75% to 5.5% and on January 21, 1971, the fed cut rates from 5.25% to 5%. In total, the fed cut rates 100 basis points. The economy started to grow in the quarter after the first two rate cuts.
November 1973 - March 1975
The percentage change in GDO was 3.9%, -3.4%, 1.2%, -3.8%, -1.6%, 4.7%, 3% and 6.9% for the fourth quarter of 1973 through the second quarter of 1975. The Fed cut rates four times: On December 12, 1974 from 8% - 7.7%, on January 10, 1975 from 7.75% to 7.25%, on February 5, 1975 from 7.25% and on March 10, 1975 from 6.75% to 6.25%. In total, the Fed cut rates 175 basis points. The economy started to grow 4 months after the first rate cuts.
This is the last recession before "supply-side" economics became part of the Republican lexicon. Notice the direct relationship between interest rate cuts and economic growth. When the Fed cuts rates, the economy grows. The reason is simple. Lower interest rates mean it is cheaper to borrow money. If money is cheaper, more people will borrow money for corporate projects, houses and the like. From a supply and demand perspective, the cheaper good increases demand for that good. That is simple economics.
At this point, supply-side economics enters the political dialog. Republicans begin to claim that tax cuts created growth. However, as occurred before in all economic slowdown, interest rate cuts occurred during the recession. There is no reason to believe the previously established relationship between interest rate cuts and economic growth suddenly disappeared.
January 1980 - July 1980
The percentage change in GDP was 1.3%, -7.8%, -.7% and 7.6% for the first through fourth quarter 1980, respectively. The Fed cut rates twice during the recession: On May 5, 1980 they cut rates from 13%-12%, and on June 13 1980, the Fed cut rates from 12% to 11%. The Fed cut rates a total of 200 basis points during the recession. The economy started to grow 4-6 months after the last rate cut.
July 1981 - November 1982.
The percentage change in GDO was -3.1%, 4.9%, -4.9%, -6.4%, 2.2%, -1.5%, .4% and 5% for the second quarter 1981 through the first quarter 1983, respectively. The Fed cut rates 7 times during the recession: On November 11, 1981 from 14-13%, on December 4, 1981 from 13%-12%, on July 7 1982 from 12% - 11.5%, on August 2, 1982 from 11.5% to 11%, on August 16 from 11 - 10.5%, on August 27 from 10.5% - 10%, and on October 12 from 10 - 9.5%. Notice the large cuts that occurred in August when the Fed cut rates 150 basis points. In total, the Fed cut 450 basis points during the recession.
It is important to remember the severity of this recession, which was caused in part by Paul Volcker's huge rate increases to wring inflation out of the system. These large cuts in August indicated to the economy the Fed was comfortable with the amount of inflation eliminated from the system. As a result, the economy started to grow two quarters after this string of interest rate cuts.
July1990-March 1991
The percentage change in GDP was 1%, 0%, -3%, -2% and 2.6% for the second quarter of 1990 through the second quarter of 1991. The Fed cut rates twice: On December 26, 1990, from 7% to 6.50% and on February 13, from 6.50% to 6%. The Fed cut rates a total of 100 basis points. The economy started to grow 4 months after the first rate cut.
March 2001 - November 2001
The percentage change in GDP was -.5%, 1.2%, -1.4%, 1.6% and 2.7% for the first quarter of 2001 to the first quarter of 2002, respectively. The Fed cut rates 10 times: On January 10, 2001 from 6%-5.5%, on February 7, 2001 from 5.5% - 5%, on March 28, 2001 from 5% - 4.5%, on April 25, 2001 from 4.50% - 4%, on June 6, from 4% - 3.5%, on July 4, 2001 from 3.5% to 3.25%, on August 29, 2001 from 3.25% - 3%, on September 26, 2001 from 3% to 2.5%, on October 10, 2001 from 2.5% to 2% and on November 14 from 2% to 1.5%. In total, the Fed cut rates 450 basis points during the recession. The economy grew 2.7% in the quarter following the November rate cut.
Notice how the direct relationship between interest rate cuts and economic growth remain intact. The "supply-siders" never give the rate cuts credit, despite the clear relationship. This relationship existed long before "supply-side" economics, as all the recoveries before 1980 clearly demonstrate.