The Economic Policy of George W. Bush
As he entered his first term as President of the United States of America, George Walker Bush inherited what seemed to be economic landscape rife with potential from his predecessor William Jefferson Clinton. Through fiscal discipline, investment in the country’s educational, medical, and technological resources, and tax relief targeted at improving the work/life balance of the labor force, Clinton had achieved expansion in the American economy on a level not previously observed and seemed to have positioned the economy to take full advantage of the global Information Age revolution of the latter part of the 20th century.
However, almost as soon as Bush entered office, the economy began to show signs that the times of record-breaking growth were coming to a close. As several macroeconomic indicators began to point at weakness in the economy, external strains were added as well. The terrorist attacks of September 11th, 2001 and the subsequent wars fought in Iraq and Afghanistan placed even greater levels of stress on an already underperforming economy. Combined with the bursting of the internet technology bubble on the stock market, these events radically changed the face of the American economy, leading to decreased economic growth and higher unemployment.
In response to these changes, the Bush administration lobbied for and passed through Congress two major pieces of legislation: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These measures, along with the monetary policy set by Federal Reserve under the supervision of Chairman Alan blackspan, comprised the economic policy of the first Bush administration.
Based on the theories of supply-side economics and expansionary monetary policy, the government’s course of action was designed to lay a new foundation for stable growth in the new millennium. Unfortunately, while the economic policies of the first term of George W. Bush’s administration succeeded in addressing the issues that first prompted them, they were ultimately ineffective, as the overall economy performed worse in comparison to previous business cycles and new issues in the economy were brought to light.
Background Economic Conditions
Following two terms of striking economic growth under the Clinton Administration, George Bush came into office at a crossroads in the American economy. In his last Economic Report of the President in 2001, the outgoing President Clinton made reference to some of the economic achievements of his Administration: "22 million new jobs since 1993, the lowest unemployment rate in 30 years, the lowest female unemployment rate in 40 years, the lowest Hispanic and African-American unemployment rates ever recorded, and the highest home ownership rate on record" (Clinton 3).
However, entering the year 2001, this economic panorama was only tenuously supported and not without its points of concern as several factors had emerged to indicate slowing an imminent economic downturn. Restrictions on output by the Organization of Petroleum Exporting Countries (OPEC) and growing geo-political instability in the petroleum producing regions of the world were leading to increasing worldwide energy prices, "raising costs throughout the economy, squeezing business profits, and eroding income available for discretionary expenditures" (Monetary Policy Report to the Congress 2001 1). At the same time large cuts were being made in investment spending by businesses in response to a newfound inability to sell inventories, especially in the manufacturing industry.
Equity markets, having already been in decline due to the bursting of the high-technology bubble, were further buffeted by the events of September 11th, 2001 as "heightened uncertainty and badly shaken confidence caused a wide-spread pullback from economic activity and from risk taking in financial markets" (Monetary Policy Report to the Congress 2002 1) plunging the American economy into its first recession of the new millennium.
The economic policies of the first George W. Bush’s first term were aimed at combating two of the consequences of the recession: rising unemployment and stagnant economic growth. From December 2000 to December 2001, the total unemployment rate rose by 1.8 percentage points to 5.8 percent, with most of the losses originating in the manufacturing and help supply services industries (Economic Report of the President 2002 33).
While the loss of manufacturing jobs can be attributed to the myriad structural inefficiencies of the American workplace, the decline in help supply services jobs is most simply explained by the “cutbacks in business travel and tourism, which have adversely affected employment in air transportation and travel-related services” (Economic Report of the President 2002 33) due to the September 11th 2001 terrorist attacks. Similarly, the reduction in economic growth during this time period can be attributed to both internal and external factors. Relatively high interest rates coming into the decade slowed down growth by making saving relatively more attractive than consumption and by making new investment by businesses less profitable while reduced economic activity overseas limited the market for American exports.
The governmental economic policies undertaken during the tenure of the Bush administration can be divided into two categories: non-discretionary supply-side tax cuts and a systematic lowering of interest rates by the Federal Reserve. President Bush himself endorsed and obtained passage through Congress two major pieces of legislation: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which hastened the pace at which some EGTRRA provisions took effect.
The EGTRRA, initially opposed by the Congress, had both a long and short-term focus, containing sweeping but staggered reforms of the Internal Revenue Code and a series of immediate taxpayer advance repayments. Among its reforms to the tax code, the EGTRRA changed the marginal income tax rates from 15, 28, 31, 36, and 39.6 percent to a new, lower structure of rates at 10, 15, 25, and 33 percent for individual filers.
The EGTRRA also doubled the child tax credit, reduced the so-called marriage penalty, eliminated the inheritance tax, increased the number of people who could claim charitable donation deductions and made permanent the Research and Experimentation credit. Lastly, the EGTRRA increased the limit on contributions to Individual Retirement Accounts (IRAs) and 401(k)s. The advance repayments paid out to taxpayers as part of EGTRRA were triggered by the restructuring of the lowest tax bracket, which left taxpayers with less tax liability.
The second piece of legislation, the JGTRRA, followed very much in the footsteps of EGTRRA. In fact, much of the bill simply sped up the timeline for the tax rate reductions set forth in the EGTRRA. However, the bill did have new effects: it put in place reductions in the capital gains tax, from brackets of 8 percent, 10 percent, and 20 percent to brackets of 5 percent and 15 percent and changed the bonus depreciation procedure, which lowered the cost of capital to businesses.
Also of note were the actions of the Federal Reserve during the first term of the Bush Administration. In response to the same economic conditions targeted by the administration’s policies, the Federal Open Market Committee (FOMC) engaged in expansionary monetary policy and cut their target for the federal funds interest rate down to only one percent by the summer of 2002.
The economic theory underlying the policy actions taken by George W. Bush during his first term is that of supply-side economics. This economic philosophy emerged during the 1960’s out of a paper written by the Nobel laureate economist Robert Mundell where he argued that the most effective means of spurring economic growth was to decrease marginal tax rates. Supply-side economists believe very simply that “there can be no demand without supply”; in other words, supply-siders deny the existence of a causal link between increasing demand and economic growth since “demand without supply is nothing more than a desire” (Storobin 3).
Supply-side economists achieve an increase in economic activity through what is known as the “trickle down” effect. In theory, as businesses and individuals find their tax burden reduced, they will redirect that income into either new investment or consumption. In accordance with this theory, Mundell convinced then President John F. Kennedy to lower the marginal income tax rate from 91 percent to 70 percent in the early sixties. This tax cut saw spectacular results, as “the inflation adjusted economy expanded by more than 42 percent” (Storobin 2) between 1961 and 1968. Unfortunately these results were not linked to the tax cuts by policymakers and supply-side economics played no role under the Johnson, Nixon and Carter administrations. It was not until Ronald Reagan assumed the presidency that supply-side economics made its return into the national economic policy debate.
The outcomes of economic policies of the first term of George W. Bush’s administration are mixed. On the one hand, the policies did succeed in mitigating some of the sting from the recession of the early part of the decade by providing “substantial short-term stimulus” (Economic Report of the President 2004 43) to the economy. This stimulus was felt in multiple ways. First, and most obviously, the tax cuts resulted in greater after-tax income, in the form of both an advanced repayment check and overall decreased tax liability across several major tax areas.
Because of America’s relatively higher marginal propensity to consume, much of that additional income was spent, pushing up aggregate demand. Secondly, the tax cuts, along with the expansionary monetary policy by the Federal Reserve increased the desirability of new business investment. Low interest rates made more business investment projects profitable by decreasing their opportunity cost while the tax code changes allowed for more money to be available for investment. Given these stimuli, several macroeconomic variables were affected.
The unemployment rate fell to 5¼ percent by the beginning of 2005 while economic growth continued to recover from the 2001 recession with the economy posting an increase in real gross domestic product of 3¾ percent in 2004 following a 4½ percent increase in 2003. Continually rising energy prices caused inflation to increase somewhat in 2004, although the rise in the price level was mitigated somewhat by the decrease in unemployment. Predictably, the massive tax cuts had an adverse effect on the federal budget deficit, with a total cost of $929 billion mostly financed through foreign debt (Price 1).
However, even as George Bush’s economic policies addressed the main background economic conditions present when he entered office, when compared to overall economic performance during business cycles of similar length, the first term of George W. Bush’s administration falls well below the average in several key macroeconomic categories.
During Bush’s first term, GDP only grew at an annualized average of 2.8 percent, which is much lower than the 3.4 percent average growth rate of the four previous business cycles. Similarly, job creation lagged well behind, with a 1.6 percent increase under George W. Bush as opposed to an historical average of 9.1 percent (Price 3). Wage and personal income, spending, and non-residential business investment all grew at a slower pace under George W. Bush.
George W. Bush made valiant attempts at rectifying the economic problems he inherited as President of the United States. Through discretionary fiscal policy and supply-side economics, his administration was able to moderate the immediate symptoms of the recession experienced in 2001 and also soften the blow to the economy of the terrorist attacks of September 11th 2001. However, in the process of addressing the issues of unemployment and stagnant economic growth, George W. Bush applied the wrong stimulus to the economy and found that during his first term, growth across a wide cross-section of economic variables was below the growth enjoyed by his predecessors.
In order to stimulate the economy tax cuts should focus on the consumers who are most likely to spend a greater portion of their newfound wealth; namely, middle to lower income taxpayers. Bush’s tax cuts were most felt however by the most wealthy Americans, as “families earning more than $1 million a year saw their federal tax rates drop more sharply” than any other demographic in the country.
By trying to affect long-term change in the tax structure at a time when only short-term stimulus was needed, Bush saw that his economic policies were less effective than they otherwise could have been.
New York Times. 8 Jan. 2007. 25 Feb. 2008Economic Report of the President. January 2001Economic Report of the President. February 2002Economic Report of the President. February 2003Economic Report of the President. February 2004Monetary Policy Report to the Congress.
Board of Governors of the Federal Reserve System. July 20, 2000Monetary Policy Report to the Congress.
Board of Governors of the Federal Reserve System. February 13, 2001Monetary Policy Report to the Congress.
Board of Governors of the Federal Reserve System. February 27, 2002Monetary Policy Report to the Congress.
Board of Governors of the Federal Reserve System. February 16, 2003Monetary Policy Report to the Congress.
Board of Governors of the Federal Reserve System. February 11, 2004Monetary Policy Report to the Congress.
Board of Governors of the Federal Reserve System. February 16, 2005Price, Lee. "The Boom That Wasn't: The economy has little to show for $860 in tax cuts."
Economic Policy Institute Briefing Paper (Mar. 1 2006): 14. 25 Feb. 2008Storobin, David L. "American Economic Policy From Hoover to Bush."
Global Politician. 5 Sep. 2005. 25 Feb. 2008U.S. House of Represenatives. Committee on Ways and Means.
Summary of the Economic Growth and Tax Relief Reconciliation Act of 2001. Government Printing Office.