Towards A Good Samaritan World

Wednesday, January 03, 2007

BUSH LEARNED HIS LESSON

Bush addresses the new Congress, and the nation in the Wall Street Journal. Just a few words here about Iraq. The main focus is on the economy:

America's priorities also include keeping our economy strong. The elections have not reversed the laws of economics. It is a fact that economies do best when you reward hard work by allowing people to keep more of what they have earned. And we have seen that businesses can expand and hire more workers when they have more money to invest--and since August 2003, America's employers have added more than seven million new jobs.

It is also a fact that our tax cuts have fueled robust economic growth and record revenues. Because revenues have grown and we've done a better job of holding the line on domestic spending, we met our goal of cutting the deficit in half three years ahead of schedule. By continuing these policies, we can balance the federal budget by 2012 while funding our priorities and making the tax cuts permanent. In early February, I will submit a budget that does exactly that.


Republicans missed a chance to get out the good news about the economy in 2006. I'll bet they won't miss it in 2008.

UPDATE: In the comments, Tom writes: "I'd take the economic growth of the Clinton years and the budget SURPLUS any day over the economic depression then growth and the largest budget deficits in the history of world during the current administration." Okay, what's wrong with this?

1) The phrase "economic depression" is certainly not an apt description of the first Bush years. This phrase is generally not used for any period in US history other than the Great Depression, because no economic troubles since then have even come close, but something would presumably have to be considerably worse than a recession to qualify. In fact, the slowdown in 2001 probably didn't even meet the technical definition of a recession, namely, two consecutive quarters of negative growth. As this table from the Bureau of Economic Analysis shows, the economy shrunk in (a) the third quarter of 2000, (b) the first quarter of 2001, and (c) the third quarter of 2001; but it grew in the intervening quarters, so there were never two consecutive quarters of negative growth. In popular discourse this has generally been called a recession, and most economists would probably go along with it, but you have to keep a mental footnote that, technically, it wasn't. Meanwhile, unemployment peaked in 2003 at 6.5%, as data from the Bureau of Labor Statistics shows. This is far lower than the 9% in 1975 or the 11% in 1983, let alone the 25% that America experienced in the real depression in the 1930s. That the Democrats peddled absurd memes about "the worst economy since Herbert Hoover" makes it a bit scary that they're now in charge of economic policy. Let's just hope they were lying.

2) The timing of the "recession" makes it pretty absurd to blame it on Bush. Common sense says that economic policy affects economic performance with a lag. The first quarter of negative growth occurred, and the second began, while Clinton was in office, while the third occurred when Bush had only been president for a few months, and it included 9/11. Interestingly, the recession seems not to have been caused by 9/11, either, but rather, by the popping of the Clinton bubble. In any case, it was certainly in no way Bush's fault.

3) As for "the largest budget deficits in the history of the world," proportionally to GDP, the budget deficit is moderate. As this chart on Greg Mankiw's blog shows, both expenditures and the gap between expenditures and outlays was much higher in the Reagan years. It's kind of funny that even as Reagan's retrospective reputation continues to soar, Bush gets blasted for fiscal sins considerably less than Reagan's. Moreover, the current budget deficit of about 2% of GDP is less than the rate of economic growth, which means that it's not only sustainable, but if sustained, will lead to a reduction in the national debt over time as a share of GDP. (Bush's deficits may be bigger than Reagan's in absolute terms, but the economy is much bigger, too.)

4 Comments:

  • I'd take the economic growth of the Clinton years and the budget SURPLUS any day over the economic depression then growth and the largest budget deficits in the history of world during the current administration. It's kind of sad when the one nice thing we can say about Bush is that, well, at least he didn't screw up so bad as to lead to economic deflation. It's also not that hard to have amazing growth after an economic dip like we had due to 9/11 and the wars in the Middle East.

    By Blogger Thomas, at 4:26 AM  

  • So if it wasn't technically even a recession, and common sense says economic policy affects economic performance with a lag, does that mean the uncommonly shallow recession in 2000-2001 is due to Clinton's good economic policy?

    In any case, the thing I found shocking about economic performance early in the Bush administration was how real interest rates were so low yet growth was anemic, then sporadic.

    By Blogger Nato, at 4:42 PM  

  • I don't mind giving Clinton some credit for economic management.

    "Anemic, then sporadic" is an interesting way of putting a bad spin on tolerably good economic performance. What I think is interesting is how interest rates were so low even though savings rates were extremely low or even negative.

    By Blogger Nathanael, at 5:40 PM  

  • I contemplated getting into the familiar arguments concerning interest and savings rates, but then I realized I wanted to end the post before the heat death of the universe. Instead, I'l just say that through about 2005* I felt there was a huge disjunction between the administration's spin and what was happening. The prime rate was lowest it had been in 30 years, but job creation was either not happening or was barely enough to keep up with population growth. It just wasn't a happy time for the masses.

    Since then, of course, things have improved, in 2004 returning to Clinton-era job-creation rates close to double the rate of entry into the job market, and interest rates have subsequently climbed into the normal range. I wouldn't say I love our current economic performance, but it's by no means appalling, either.

    *The economic "recovery" seemed to be largely on paper to me when I left for Iraq, but had changed to a fully veridical boom by the time I had returned. Based largely of real-estate, of course, which worried me, but that seems to have settled without dire consequences, so I have no problem calling the economy "good" right now.

    By Blogger Nato, at 11:50 AM  

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