Read my lips
When last we left off, the Reagan Revolution seemingly repudiated years of established Keynesian logic, as tax cuts and spending cuts coincided with a decade of prosperity for America. George Herbert Walker Bush, two-term vice president, seemed to be the perfect heir to the Reagan legacy. Today, Bush 41 is seen as a foreign policy success but a domestic failure, as recession pushed him out of office in 1992. Ironically, Bush inherited from Reagan a massive budget deficit and a democrat-controlled Congress, preventing him from effectively increasing government spending. Although the successful military intervention in defense of Kuwait pushed Bush's approval ratings over 90%, recession in 1991 would lead to his loss to Clinton in 1992. In fact, signs of economic weakness were already appearing at the end of Reagan's term. On October 19, 1987, stock markets around the world crashed, with the Dow Jones losing 22% over fears of American inflation. Another crisis came at the end of the decade, as deregulation in the Savings and Loans industry (private banks that specialized in home mortgages) led to risky investments and instability. Bush was forced to ask Congress for a $100 billion bailout of the industry, only exacerbating his financial problems. Faced with increased spending and increased deficits, Bush was thus left with little choice to compromise with the Democratic congress and raise taxes, reneging on his famous "no new taxes" pledge. The move was immensely unpopular (nobody likes a liar), but some speculate that these efforts may have led to recovery under the Clinton administration. Bush held office at a rather unfortunate time: too late to ride to coattails of Reagan's prosperity, too early to take the country out of recession. Even so, Bush himself confessed that he far preferred foreign policy to domestic, and never really found a way to work with what he once called "voodoo economics."It's the economy, stupid
Despite intrigue and scandal, Bill Clinton is still one of the more popular American presidents in recent memory. The reason for this is fairly simple: in the wake of Bush's malaise, GDP grew and unemployment fell under the Clinton administration. Most of the credit for economic growth is attributed to the passage of the Omnibus Budget Reconciliation Act of 1993, which raised tax rates to raise revenue. GDP growth was higher after the bill's passage, and unemployment fell significantly. However, the relationship between Clinton policies and economic growth is somewhat tenuous. Falling oil prices (from $23 a barrel in 1991 to $12 in 1998) and a surge in private investment in technology did wonders for the economy. In fact, Clinton had the good fortune to preside over the computer networking and communications revolution, as information technology made the economy not only more efficient, but also more optimistic. This optimism inflated stock markets, creating what would become known as the infamous Dotcom bubble. When the bubble burst and stock markets crashed in 2000, not many thought to blame Clinton.
It's got lots of numbers in it
In 2000, the bubble burst. Suddenly, the beautiful budget surplus was gone, leaving George W. Bush with a recession. In response, Bush took the Reagan route, and cut taxes. The economy, in turn, recovered, and the deficit once again shrunk. Bush then spearheaded an initiative to expand home ownership, but even as home ownership increased, bad loans and inflated property values lurked in the background. Lack of regulation led to the collapse of the housing bubble in 2007 when federally sponsored mortgage giants Fannie Mae and Freddy Mac collapsed. The result was the first economic crisis that we're old enough to remember, and the first challenge faced by Barack Obama in office.
The takeaway from this is not that presidents are totally helpless to change the economy. After all, tax cuts, tax hikes, interest rates, loans, trade agreements, spending hikes, spending cuts, and much much more can have significant impacts on domestic affairs. Even if oil prices and foreign markets have a much larger impact than any fiscal or monetary policy can, it is still nice to take comfort in the fact that POTUS is not completely powerless.
http://millercenter.org/president/biography/bush-domestic-affairs
http://www.usnews.com/news/articles/2009/02/23/reflecting-on-george-hw-bushs-legacy
http://vm136.lib.berkeley.edu/BANC/ROHO/projects/debt/1990srecession.html
http://www.usnews.com/news/articles/2009/02/23/reflecting-on-george-hw-bushs-legacy
http://www.aei.org/publication/why-the-1990s-boom-happened-despite-the-clinton-tax-hikes/
http://www.politifact.com/truth-o-meter/statements/2010/apr/19/bill-clinton/bill-clinton-takes-credit-flowering-economy-1990s/
http://www.huffingtonpost.com/dean-baker/there-is-no-santa-claus-a_b_2362845.html
http://www.nytimes.com/2008/12/21/business/worldbusiness/21iht-admin.4.18853088.html
With all these presidents inheriting economic strife from their predecessors, what can a leader to to stay above the crisis in terms of political capital? Perhaps Bush was on to something when he called Reagan's policy "voodoo economics", because the truth was that Reagan's policy didn't work. We then can assume that it was Reagan's policy in addition to his political ineptitude that led to the 1991 recession. On a side note I believe that this is the reason that many of our policies have five year limits. If it fails, it's someone else's term/you've already been re-elected.
ReplyDeleteThing is, Bush's "voodoo economics" remark actually was not received well, especially in light of his perceived incompetence in domestic affairs. I should clarify that while Reagan's policies led to a bubble, most people believed that they worked. Bush faced recession and unpopularity as a consequence, but also because he was forced to compromise with congressional Democrats and raise taxes for the sake of making good economic policy.
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