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The Obama campaign has made a curious economic argument as part of its attack on Paul Ryan:
Ryan rubber-stamped the reckless Bush economic policies that exploded our deficit and crashed our economy. Now the Romney-Ryan ticket would take us back by repeating the same, catastrophic mistakes.
Actually, Team Obama is saying the same thing twice here since the deficit would not have initially exploded without the Great Recession. (In 2007, the federal government ran a tiny budget deficit of 1.2% of GDP)
So which Bush policies, exactly, “crashed the economy”?
Certainly not the much reviled — at least by Democrats — Bush tax cuts, most of which President Obama says he wants to keep.
And certainly not Bush’s spending and debt, since Obama wants more of both. The most recent Obama budget, according to the Congressional Budget Office, would add $6.4 trillion more to the federal budget deficit over the next decade, leaving debt as a share of the economy stuck at around 76% of GDP vs. 37% pre-recession.
OK, if it wasn’t the taxes Bush cut or the money he spent, then what were the Bush policy actions that led to the Great Recession and “crashed our economy”?
Maybe the villains here are the Bush policies that deregulated Wall Street? A few problems with this theory, though. For starters, the law that ended Glass-Steagall was signed by President Bill Clinton — the guy who will be introducing Obama at the Democratic National Convention — in 1999. Second, few analysts think the end of Glass-Steagall directly contributed to the financial crisis.
Another candidate — and you hear this one a lot — was a 2004 rule change by the Securities and Exchange Commission — the Bush SEC! – that supposedly allowed broker-dealers to greatly increase their leverage, contributing to the ﬁnancial crisis. But as Prof. Andrew Lo of MIT notes in a 2011 paper, “… it turns out that the 2004 SEC amendment to Rule 15c3–1 did nothing to change the leverage restrictions of these ﬁnancial institutions.”
And besides, there’s a strong case to be made that it was the economic downturn — begun by negative wealth effects from the collapse in the housing market and then greatly exacerbated by the Fed — which caused the financial crisis rather than the crisis causing the severe downturn. As Robert Hetzel, an economist with the Richmond Fed, argues in The Great Recession: Market Failure or Policy Failure:
A moderate recession became a major recession in summer 2008 when the [Federal Open Market Committee] ceased lowering the federal funds rate while the economy deteriorated. The central empirical fact of the 2008-2009 recession is that the severe declines in output that appeared in the [second quarter of 2008 and the first quarter of 2009] … had already been locked in by summer 2008.
Now, since the housing bubble did play a role, you could pin some of the blame there on Bush, as the New York Times did in 2008: “[Bush] proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.” Yet the homeownership push was begun by Clinton. As is pointed out in the book Reckless Endangerment, Clinton in 1995 launched Partners in Homeownership, a public-private partnership to raise home ownership.
So now we arrive at the backup argument: Even if Bush isn’t directly to blame for the Great Recession, the economy stunk even before the downturn because of his policies.
There was an eight-month recession in 2001 that officially began in March and ended in October. It was marked by a huge decline in business investment, while consumer spending stayed positive. You can blame Bush for that if you wish, but doing so demands an explanation of how his policies caused a stock and investment bubble to burst in 2000, months before he was elected.
The 2002-2006 period was the core of the Bush recovery after the 2001 recession. GDP growth averaged 2.7% a year, and the economy added an average of 102,000 jobs a month. Hardly a powerful rebound. But then, again, we shouldn’t have expected one given how mild the downturn was. As a Fed study said late last year, recoveries “tend to be faster” after severe recessions, such as the one we just had. The deeper the downturn, the more robust the rebound. The 2001 recession was mild, and so was the recovery after.
And isn’t the most obvious explanation for the “weak” Bush recovery simply one of mean reversion? Things more or less returned to average. The Clinton boom veered too far above the real growth and job creating potential of the U.S. economy, so it was balanced off by a weak recovery after the 2001 recession.
From 1996-2000, GDP growth averaged 4.3% a year, and average monthly jobs growth was 240,000. Now, if you combine those five years with the 2002-2006 Bush recovery, what you end up with is average GDP growth of 3.3% and monthly job growth of about 170,000. Both figures are right around the average for the U.S economy. The Clinton economy was a bit on the hot side, so the Bush years were a bit on the cool side. The U.S. economy reverted to its mean.
You can reasonably knock the Bush years for spending too much and failing to reform the tax code and entitlements. But it is difficult to make the case that the Bush tax cuts or deregulation or other unnamed “reckless” policies “crashed our economy.”
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