RALEIGH – Critics are right to question the economic legacy of the now-ended Bush administration – but most of them are wrong, dreadfully wrong, about the specifics.
Take Bush’s tax policies. When the president proposed old-fashioned Keynesian stimulus nonsense in the form of rebates or temporary rate cuts – in his first year in office and then again last year – the results were underwhelming. Money was simply shuffled from one account to another, as household and businesses chose not to make substantial changes in their behavior based on fleeting, herky-jerky manipulations of the tax code. On the other hand, when in 2003 the Bush administration made long-term tax changes that created incentives for people to work, save, and invest, the results were predictably growth-enhancing, with several years of sizable GDP increases and low unemployment.
On regulation, the Bush administration is being savaged as unwilling to unleash the watchdogs on malefactors of great wealth. Tell that to the many businesses saddled with massive costs from the Sarbanes-Oxley disaster, which most recently forced banks and other financial services firms into a tailspin of devaluation by mandating unrealistic accounting rules that made their assets look artificially deflated. On the other hand, back a few years ago when the Bush folks tried to increase federal supervision of the hybrid entities Fannie Mae and Freddie Mac, which were mixing risk-taking lending practices with an implicit federal guarantee against loss and thus necessitated either privatization or stricter oversight, the defenders of Fannie and Freddie in both houses and parties in Congress objected and obstructed. Bush was stymied.
As for trade policy, Bush largely steered clear of the siren song of protectionism, defending free trade and for the most part championing proposed tariff reductions against the maneuvers of a skeptical Congress. As protectionism was Herbert Hoover’s biggest sin, helping to convert a painful financial bubble into an extended worldwide depression in the early 1930s, to have Bush accused of modern-day Hooverism is both a slander and an embarrassing admission of historical ignorance.
In reality, Bush’s three big errors in economic policy are either not understood or shared by his left-wing critics.
The first lay in monetary policy. Unfortunately, Alan Greenspan capped off a largely successful tenure at the Federal Reserve with two massive overreactions. Partly in response to concerns about the Y2K turnover, he used open-market operations to hold interest rates artificially low in the late 1990s, inflating the dot-com bubble. Then, in response to 9/11 and ensuing fears of a worldwide economic downturn, the Fed opened up the money spigots again from 2002 to 2004. Other central banks did, too, inflating another financial bubble. This time, it manifested itself in equities, commodities (such as oil and minerals), and especially real estate. Nominal prices grew massively out of alignment with reality, and all that money sloshing around the system led to reckless lending standards, overexposure, and unsustainable debt.
We’ve only begun to pick up the pieces from this monetary mistake. Was it really Bush’s? Well, yes, given that after the first Greenspan overreaction the incoming Bush administration did not clearly signal a return to sound money with its policy pronouncements and Fed appointments.
The second of Bush’s true economic sins was his failure to control federal spending during the boom years. He did try to address the nation’s long-term fiscal imbalance when it came to Social Security, but he actually worsened the imbalance by expanding Medicare and didn’t do nearly enough to rein in Medicaid expenses or domestic discretionary programs. His increase in defense spending is a bit more debatable – if you think the Iraq and Afghanistan campaigns to be largely wastes of time, rather than costly investments that will pay off in lower security risks from and trade to the Middle East in the long run, then you should include their cost as part of Bush’s profligacy.
In any event, the president never vetoed a big-spending budget, or even credibly threatened to do so. As a result, the federal government has now taken on many new fiscal obligations without reducing the previous ones. The prospect of future tax hikes is one dampening factor on private business investment.
Another is Bush’s third and arguably his most devastating error of all: his embrace of bailout mania and stimulus folly.
So what do leftist critics and the incoming Obama administration think about these three critical mistakes?
They don’t seem to have a coherent position on monetary policy. And they now lobby enthusiastically for federal budgets, bailouts, and “stimulus packages” that will make the Bush years look restrained.
Hood is president of the John Locke Foundation