Polls continue to show that Americans believe that President George W. Bush is to blame for our flagging economy. Many commentators, most recently Thomas Friedman, make the blanket charge that Bush’s tax cuts, war spending, deficits, and deregulation caused the downturn. However, these claims don’t stand up to scrutiny.
Perhaps the most patently ridiculous claim is that tax cuts caused the meltdown. Even the most progressive economist would have to concede that tax cuts help stimulate the economy. President Barack Obama’s former chair of the Council of Economic Advisors, Christina Romer, did a study in 2007 which found that for every $1 in tax cuts, there is a corresponding rise in GDP of $3. People may quibble over the multiplier effect, but virtually all economists agree that tax cuts have some positive effect on growth.
While many disagree over the wisdom of the wars in Afghanistan and Iraq, most economists would acknowledge that war spending stimulates the economy. World War II is the most obvious example. Progressive economist Paul Krugman recently called for a fake alien invasion of the United States to spur a World War II-style defense buildup. According to Krugman, such a defense buildup would cure our economic ills in a matter of 18 months. It’s hard to believe that a fake war would be more stimulative than an actual war.
The tax cuts and wars, together with the economic downturn following 9/11, all contributed in varying degrees to deficit spending during the Bush administration. That being said, the deficit spending was relatively modest and certainly manageable. According to the Congressional Budget Office, the annual deficits as a percentage of GDP ranged between 1.2% and 3.5% before the collapse in 2007. Interest rates remained at historically low levels.
Proponents of the deregulation argument often point to the weakening of the Glass-Steagall Act of 1933, which prohibited any one institution from acting as any combination of an investment bank, a commercial office listings bank, and an insurance company. The Gramm–Leach–Bliley Act was passed in 1999 and allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate. The act was signed into law by President Bill Clinton, not George W. Bush. Notwithstanding, there is little evidence that Gramm-Leach-Bliley significantly contributed to the financial collapse of 2007. The collapse was largely set in motion by the insolvency of Lehman Brothers and Bear Stearns. Neither of these investment banks had insured deposits. Perhaps if they did, they would have been better able to withstand the downturn.
Clearly, the housing crash was largely to blame for the financial collapse. Fannie Mae and Freddie Mac played a large role in creating the housing bubble. In 2003, the Bush administration did in fact propose a new agency to oversee Fannie Mae and Freddie Mac. The proposal never became law. It was opposed by House Democrats who feared that tighter regulation of Fannie and Freddie could sharply reduce financing of low-income housing.
"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,' 'said Representative Barney Frank (D-Mass.), the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
In 2005, the Senate Banking Committee, then under Republican control, proposed a bill to regulate Fannie and Freddie. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. This was the kind of regulation that might have helped stem the collapse of the housing market, but it wasn’t George W. Bush who was opposing it. In the end, the failure to properly regulate Freddie and Fannie may end up costing tax payers as much as $1 trillion.
Bush understandably gets blamed for the economic downturn because he was the president at the time, but upon closer inspection, his policies played little part.
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