Reaganomics: Apply Directly to the Forehead
via NYT
Floyd Norris on comparing President’s Economies:
“The economic record of President George W. Bush was largely a disappointing one. During his administration, the country grew at the slowest overall pace of any recent president, whether measured in gross domestic product or employment. The last president to preside while the stock market did worse was Herbert Hoover.
Economic performance was actually good for much of the middle years of Mr. Bush’s eight-year term, but it began and ended with recessions. Some of the disappointment with Mr. Bush may stem from the fact that he took office at the end of a huge boom, in both the economy and the stock market . . .
President Bush’s administration was marked by a recession that began two months after he took office and another downturn in his final year of office. In the end, the economy during his term added enough jobs to employ only 14 percent of the added number of working-age Americans, the lowest proportion of any postwar administration. Employment grew at a compound annual rate of only 0.3 percent, half the 0.6 percent rate that his father had recorded in what had previously been the worst post-World War II performance.”
The main problem I see in Bush’s economic approach was an odd form of Reagan worship. Despite wildly disparate economies, Bush adopted Reagan’s approach. That the market had just collapsed, rather than was in year 14 of a secular bear market, rates were low and going lower, and the biggest Tech boom known to man were all but ignored.
Imagine a doctor who was once successful prescribing Penicillin to a patient with an infection. The next sick person comes in with diabetes — and he prescribes Penicillin again. The Penicillin supply-side school of medicine is genuinely shocked when the patient dies.
I wrote about this back in 2002-03: The epitome of the Bush approach to the economy was to vigorously apply Reagonomics directly to the forehead, despite a very different set of fiscal and economic conditions.
Surprise! The patient died!
>
Source:
Economic Setbacks That Define the Bush Years
FLOYD NORRIS
NYT, January 23, 2009
http://www.nytimes.com/2009/01/24/business/24charts.html
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January 24th, 2009 at 8:17 am
Disclosure: I’m not a Bush boy! Have been third part since 1992. So let’s not get into a partisan mode…….. bush did embrace Reagonics but that was a minor factor considering the dot com bubble and the snake oil the Maestro had been administering and the poisonous potions with which the financial sector cooked up to assist in the juicing of the economy.
Our problem is we went to a bubble to cure a bubble. Greenspan in charge with Bernanke his wingman.
We know all this. The “why pick on Greenspan” voices have dropped away.
We are in a global deflation now and all gov’t resources will be going to replenish lost liquidity- to stop the evaporation of economic vitality.
I can not conceive of the projections for a better second half or even plateauing. The deterioration takes time to bottom in an economy as huge as ours.
Barry: Please forget about Bush on economics.
January 24th, 2009 at 8:24 am
Re: The List
The Presidential Era to emulate appears to, sadly, be the Johnson Era. Sad because it was an era marked by racial tensions and the Vietnam War. That notwithstanding, the national investment in high technology through the Nasa Apollo Program spurred real growth, created real technology, and promoted an era of high tech the likes of which the world had never known.
If anyone in the Obama Administration actually wanted to help the US navigate these difficult times they would take a closer look at the Johnson Era. Here’s how I would modify it: The $850 Billion band-aid bailout should really be increased to a $1.5 T Sovereign Venture Capital Fund. This super fund would be distributed among VC funds throughout the country requiring investing in start-up and early stage high tech small businesses. These investments would permeate the globe because high tech equipment would be purchased, create jobs at all levels here at home, and new technology would be created for the market. Who knows, the next Microsoft, might arise from the many failures that are sure to happen. In the meantime, the nation has taken a stake in itself and it’s best asset – the creative spirit of the entrepreneur. The new jobs and spending would certainly feed back into the tax base helping all levels of government.
The Fly on the Wall
January 24th, 2009 at 8:24 am
For long term performance in employment here is a graph and some data from the BLS on men aged 25-54 from 1948 to 2008:
http://guerby.org/images/bls-usa-men-25-54.png
http://guerby.org/ftp/bls-men-25-54.xls
And my analysis (in french):
http://guerby.org/blog/index.php/2009/01/24/193-l-inexorable-ascension-de-la-population-sans-emploi-aux-usa
January 24th, 2009 at 9:00 am
Reaganomics IS the toxin that lead to the disease. More of the same didn’t help.
January 24th, 2009 at 9:05 am
My God, Barry, that’s the funniest blog post title ever.
January 24th, 2009 at 9:07 am
Barney Frank, Chuckie Schumer, and Chris Cox had more to do with this fiasco than Ronald Reagan even in your wildest dreams. I am no fan of Reagan, and fully blame the republicans for their part but to leave out the very people who were the first cause of this mess is just plain ignorant.
January 24th, 2009 at 9:26 am
BR: basically you’re right about the Bush piece of the jigsaw although of course there were other parts of the jigsaw notably the cheap money policies of Greenspan. Interestingly Bush’s economic management shared another feature with that of Reagan’s and that was deficit spending. Both of them massively increased public spending while pursuing the signature tax cuts. Personally I’ve always thought this was part of the supply side confidence trick. Economically literate Republicans know that on there own tax cuts of which the top 20 percentile are the main beneficiaries are not going to be enough to juice the economy to produce the increase in receipts necessary to justify the cuts. Therefore they have to lend them a little hand to produce the illusion that the formula is working. The problem is this ploy worked for neither of them. Reagan basically tripled the deficit while Bush turned a small but continuing surplus into trillion buck deficit. Cheney essentially acknowledged all this with those comments about deficits don’t matter and we’ve got to take care of our people. I actually put deficit amongst the trio of fundamental causes of this mess.
But your comment about applying innapropriate remedies surely holds good about the state of Republicanism at present. There’s a good new book out about the dangers of being tied to dead ideas and every Republican should read it. If you go through their ideas kit on everything from establishing an economically viable universal healthcare sytem to sorting out the immigration problem they are in a paradigm that is outdated. I lived in Britain in the fifties and although I was kid I was aware of what was going on. At the time the Brits still thought there was a viable British Empire, it was an absolutely core belief of British society, major newspapers advocated the reconquest of India!, and it caused them to do all kind of stupid things from invading Suez to trying to maintain Sterling as a reserve currency.
January 24th, 2009 at 9:26 am
I do not believe more oversight would have much a difference regarding the current financial crisis and I do not think it would have mattered who was in office. The air would not have been slowly let out of the boom during the good times (as oft opined by many that that is what should have been done) regardless of the administration or leadership in congress. My guess is that any manipulation outside of “letting the good times roll” would have been met with extreme skepticism and would have failed.
January 24th, 2009 at 9:29 am
Barry,
I still find it interesting your search for blame among republicans..well, so what? I guess I am more politically neutral than that…hopefully Obama can deliver…
I am a little more concerned about the present. I hope Obama is not going to be like Bush, who told us about political capital and his intent to use it when he started…
I see Obama in his first week staring down reporters, telling congressmen to quit listening to Rush Limbaugh, continuing the appointment for a treasury secretary who underpaid his taxes, and all we have is his word that it was an honest mistake.
He seems a little confrontational at this point, something that never came out during the campaign…it sounds like the football coach and the “My way or the highway” theme….
January 24th, 2009 at 9:37 am
flipspiceland Says
Barney Frank, Chuckie Schumer, and Chris Cox had more to do with this fiasco than Ronald Reagan even in your wildest dreams.
I’m afraid your bias is showing. To take one example Barney Frank became chairman of the house financial services committe in January 2007. Now we all know or I think we do that the wheels started coming off the real estate market at the end of 2006 so I struggle to to understand how Frank who was a completely powerless Democratic congressman in a house that was under the notoriously iron control of the Republicans from 1994 to 1996 had the magical ability to be one of the major authors of this mess. Perhaps he was slipping pot into DeLay’s or Hastert’s soup.
January 24th, 2009 at 9:46 am
I see Obama in his first week staring down reporters, telling congressmen to quit listening to Rush Limbaugh, continuing the appointment for a treasury secretary who underpaid his taxes, and all we have is his word that it was an honest mistake.
@Bruce ….With all due respect what do you expect him to do. Implement the economic proposals of a bunch of very conservative house members. As for Geithner, five out of the ten Republicans on the Senate Finance committee voted to confirm him. At the end of the day it’s no different than Clinton and Giuliani being able to get away with their nookie problems because in the scheme of things it’s not very important. I’m sure Geithner will get confirmed by a thumping majority in the entire senate. You have to stay focussed on the essentials.
January 24th, 2009 at 9:52 am
I don’t know what my philosophy is called. I have never admired, put much hope or embraced leaders as most people do. I have always thought that the chosen leaders are just a reflection of the times. They get there mostly because of the system and less because of the indiviudal. Yes, some type of acumen is required, but all the stars need to be aligned for that particular individual to get ahead. For example, had Germany not been so crushed, I doubt Hitler would have made it.
Bush was in power because the stars were aligned for him. The US psyche was like a moving train, anyone who stood in its way would have been crushed.
I’m not sure how much leeway the American system will give Obama. But if he provokes change, it’s because enough people in the system will let him make the changes. There is no way 1 person can radically change 300 million minds. without them beinf reaqdy to be changed. Just try changing your wife or husband and you have direct access to them!
One thing for sure is that the expectations are so high, I just feel he is being set up to fail. But then again it also depends on the definition of success or failure. What is the definition of success in America? I don’t think there is any consensus and it’s hard to succeed when the parameters of success aren’t even clear.
January 24th, 2009 at 10:23 am
Otto:
I don’t have high expectations of any president…frankly I think back in the day when Franklin, Washington, Jefferson, John Adams, …the founding fathers….set this thing up it was a once in a universe chance we’d get potential leaders at the time when the new republic was aborning…
I had no particular thoughts that Bush would do anything much…and I have about the same expectations of Obama…I am old enough to remember Nixon and his follies as his administration aged, and his aggressive nature; I am just saying that O seems a little aggressive for the first week….
Every man has flaws, including this one…I just hope this is not part of his personality, to seek confrontation….I certainly expect him to do a better job than Bush..
January 24th, 2009 at 10:25 am
I’ve never voted for a Republican in my life. The reign of George W. Bush was a catastrophe – Iraq, Katrina, warrantless wiretapping, Gitmo and habeus corpus but…
But let’s do a thought experiment…suppose the Supreme Court had ordered a complete recount in Florida and Al Gore was declared President. Would the dot com implosion not have happened? Would Treasury Secretary Larry Summers (or some other Rubin disciple) have reacted differently to the financial crisis of ’01 – ’02 than he did to LTCM and the Asian crisis? Would Greenspan not have enabled the housing bubble? Would there have been regulators who would have foreseen the problems with MBS, CDO and CDS and prevented the private sector’s addiction to ever higher leverage and debt?
I see no reason to conclude that the increase in private sector debt during the Bush years that completely dwarfed the increase in public sector debt and that is at the core of our current problems would not have occurred in a Gore administration. To the extent that government is responsible for the current crisis it is a failure to properly foresee the consequences of deregulation and the excesses of financial engineering run amok. Sure, these failures began with the free market fundamentalism of Reagan but financial deregulation continued apace during the Clinton years. Would a President Gore have turned to economic advisors with significantly different attitudes than those hailed as geniuses during the Clinton years? It pains me to see that President Obama has turned to same people who have yet to show that they have really learned anything. I hope I am wrong.
January 24th, 2009 at 10:59 am
This concerns me much more than who is president…debtor’s prison indeed…
http://emsnews2.wordpress.com/2009/01/04/us-budget-deficit-to-soar-by-over-2-trillion-next-year/
January 24th, 2009 at 11:12 am
At least Reagan was able to create the illusion of prosperity when he doubled the national debt in 8 years. Bush was unable to do even that.
January 24th, 2009 at 11:12 am
I find it hilarious that there’s even a debate about Republicans and Democrats anymore. Let’s be honest here folks, we’re all adults, it’s a 1 party system and 99% of you ain’t invited.
January 24th, 2009 at 11:20 am
Too many have taken the oath of servitude to the orthodoxy. I use Larry Kudlow as exhibit A. Obama or Summers seems to be appeasing them.
January 24th, 2009 at 11:21 am
@Mark 10:25
Good post. Blame for this mess rests squarely in the lap of the financial engineers who created and abused financial instruments of mass destruction; the hapless bagmen in Congress were merely witnesses to the crime.
January 24th, 2009 at 11:22 am
Note the dot com implosion began in March 2000, ten months before Bush was inaugurated, and was largely over by then.
January 24th, 2009 at 11:48 am
I was never convinced that Reaganomics did any good which wouldn’t lave occurred under any reasonable economic program. Other than getting the marginal tax rate below 50%. Maybe others would have done better. We were coming off the the post-Vietnam doldrums, the oil embarge and the inflation which was creating great economic dislocation.
Once Tall Paul killed the inflation, there was really no place to go but up.
January 24th, 2009 at 11:50 am
OMG some words of commonsense from Uncle Warren on the rescue plan. Economists don’t have all the answers in fact no one has all the answers so you have to try lots of stuff and see what works. Why does this simple truth elude so many.
“The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.”
It’s perhaps appropriate that it was exactly the approach Edison used when he was inventing the light bulb.
January 24th, 2009 at 11:52 am
Comparing economic cycles of President’s is really silly. Some other posters have gotten to the main point…economic cycles are just that…”cycles.” It’s a naturally occurring phenomenon that ebbs and flows with the “mood” of the people. All economic activity is “pro-cyclical”.
In good times:
Velocity of money increases…lots of buying and selling
Debt/Credit expand because everyone feels good about the prospects of paying it back…
Banks get a little looser on lending requirements…
In bad times: EXACT OPPOSITE.
Our biggest problem is the belief that we can do “something” about these cycles. There is nothing that can be done, for it is the human condition to have these mood swings, a natural pendulum.
The best the government/Fed can do is to avoid amplifying these cycles by joining the herd.
January 24th, 2009 at 12:08 pm
but is it a cycle this time? or is this like the recession in 2001, more a response to decisions of private actors? And its not like that hasn’t happened before. the great depression had the same sort actions by those private industry, that crashed the economy. and a lot of that was because the nobody was minding the store. and they over leveraged. sounds just like what the investment bankers did doesn’t it?
January 24th, 2009 at 1:05 pm
@ ottabvbs 11:50
Is the rough-hewed humility displayed by Uncle Warren in his quote rarely on display in replies posted by bloggers?
A word on Geithner @9:46: not only did 5 of 10 committee GOPers vote for the same failed-to-date status quo in thinking, one also stated that Tim was the ‘only person’ who could do the job. Rubbish! No more need be said on such fright-fueled foolery for the masses and media.
Back to Uncle Warren: I’m all for trying new things, but the queue of concepts and actions is chock full of discards from the same school of thinking that Mish has rightly debunked via 12 months of blog posts. Excessive over-spending will not ‘choke dead’ the debt unwind problem, nor will it arrest the continued over-all deterioration in the median creditworthiness of debt-laden American households who we find spread across multiple economic sectors that are hemorrhaging jobs. No one’s private banking sector will lend ‘en masse’, on any scale grand enuff to register, to growing masses of potential defaulters.
Repeatedly tossing more logs of excessive Keynesian ‘fresh debt’ to quench the fire while adding buckets of flame accelerant in the form of rising uncreditworthiness of the public borrowers? That’s experimenting?
Worse, in a consumer-spending-driven economy with excessive retail and services capacity, surplus white-collar workforces, and no more EZ credit to flip the surplus stock of real estate, there are few avenues for these combustible logs of Keynesian public debt to trickle / transform into credit-worthy private-sector projects capable of spurring employment. Such flammable logs are instead more likely to simply accumulate while new flame accelerants evolve within global markets. And then we’re back to “Whocoodanode” that more debt in over-built markets with excessive capacity simply feeds debt destruction. Whocoodanode that RE markets do not always go up? Whocoodanode that there’s no Keynesian ‘free lunch’?
Hurray for Uncle Warren…but let’s also experiment with tools from other schools of economic thought. Hit the delete button on project pro formas chock full of ‘bubble-era’ assumptions on rents, revenues, and debt service. Let’s move beyond the Geithner-Summers era of shallow spent tool bags.
January 24th, 2009 at 1:12 pm
typo…should have typed “humility …rarely on display in replies posted by blog READERS?”
January 24th, 2009 at 1:45 pm
I did well in the Reagan years. The prosperity wasn’t illusory, just misunderstood. We had a great deal of technological gain due to the Reagan era spending on science and computers, and we techies did well. It was not trickle down that made things work, it was actually developing the economy.
Bush hated science and destroyed science funding. That’s our problem — no science, no innovation. So the gains were in asset bubbles and not in technology, science, engineering.
I voted for Obama mainly because he understands that we need a new economic engine other than bidding up the prices on everything, borrowing money, sprawlconomy, and underpaying workers while overpaying those at the top. Those are the changes I hope to see from the new administration.
January 24th, 2009 at 1:53 pm
Hey, its Saturday morning, and I’m, just having some fun. Back from Georgetown, the Turtle Farm and Hell, onto 7 mile beach for some jet skiing and snorkeling.
Be back latah, mon !
January 24th, 2009 at 3:37 pm
Ah, Barry, please explain how loose monetary policy is “Reaganomics”. I seem to recall that under Reagan, Volcker ran an extremely tight monetary policy.
Oh, but that can only be a trivial detail right. Monetary policy has no consequence….
January 24th, 2009 at 3:53 pm
These simplistic presidential term = economic outcome analysis is ridiculous on so many levels. So, did Bush inherit a Clinton recession, or did Bush cause it? Did Obama inherit a Bush recession or cause it? Did Reagan’s foriegn policy allow Clinton to make huge military cuts/budget reductions? Is any president responsible for monetary policy? Periods of technological innovation? Increased efficiency/productivity in the private sector?
Cause and effect isn’t immediate except in the minds of simpletons.
I agree that tax RATE cuts are not always tonic for the economy. Lower taxes should be natural outcome of smaller government, but apparently neither party is interested in reducing the size of government.
Lastly, what do you say about Keynesianism and trickle up economics? Talk about an apply-to-the-forehead solutions.
January 24th, 2009 at 4:24 pm
Amen Tom K! Presidential policies are may be significant in the long run–as Reagan’s substantial reduction in marginal tax rates are still benefitting us–but credit expansions & collapses overwhelm everything else in the short run.
Economists shouldn’t have to be told this.
January 24th, 2009 at 4:44 pm
Ask Bush Sr. what he thinks about Reagonomics. Or David Stockman.
January 24th, 2009 at 5:02 pm
Avl Dao Says:
January 24th, 2009 at 1:05 pm
Is the rough-hewed humility displayed by Uncle Warren in his quote rarely on display in replies posted by bloggers?
Not usually.
January 24th, 2009 at 5:16 pm
Actually, the “doctor” prescribing penicillin for “whatever” is a great analogy. It actually happened. Remember the Tony Curtis movie “The Great Imposter”? A guy passed himself off as a doctor with predictable results. But again, that “Bush is incompetent” theme keeps coming back like a zombie. Why is it so hard to accept that these guys trashed the economy on purpose? This is not a conspiracy; it’s business as usual. They preach a meritocracy and practice a “destroy the competion” lifestyle. It’s simpler to sabotage anyone trying to get ahead than working in a level playing field. This is par for the course if you are part of the old rich. I had a rich friend who told me that if you redistributed all the wealth so everyone had an equal amount, within two years the previous poor would be poor again. I told him it was a great way to justify being greedy. He ignored me. These folks hear what they want to hear. The rest is a “conspiracy theory”.
January 24th, 2009 at 5:27 pm
Well, AGG, there is an element of truth to what your rich friend said.
January 24th, 2009 at 5:44 pm
nice job with the penicillin analogy Barry. I like it.
January 24th, 2009 at 5:56 pm
@thisson
20 yrs ago the rich friend would’ve been right, but not today.
Many of the prev poor would be poor again but the large lower middle-class and ‘up’ would do well. It takes money to make money & being wealthy is part luck, inheritance & smarts.
The redistribution would be equivalent to inheritance/luck and there are enough smart people today to preserve and build upon it.
January 24th, 2009 at 6:13 pm
It seems to me that your lefty bias is showing again.
First, Reagan was not what Republicans say that he was. He talked a good game about liberty and small government but allowed government to grow to a large size and did not take the opportunity to end the dangerous inflationary trend that was taken when Nixon closed the gold window.
That said, Bush I and Clinton were also failures because they continued to mismanage the economy and play statistical games that hid many of the problems that will surface in the next few years. Clinton changed the labour and CPI reporting by reclassifying a portion of the unemployed and hide them from view. He also allowed the BLS to hide price inflation by using arithmetic averaging, hedonic adjustments, substitutions, etc. At the same time SS contributions were used by the government for general operations without proper accounting. This permitted claims of surpluses even as the total debt kept increasing. What made things worse were the actions of the Fed, which kept blowing up bubbles to prevent necessary corrections in a malinvestment based Ponzi economy. By encouraging a bond carry trade as Greenspan signalled that the Fed stood ready to keep lowering short term rates he permitted a false prosperity to grow for some time and encouraged Americans to spend money that they did not have. Clinton and Congress did not help when they rewrote the CRA and told banks and GSEs to lend money to bad risks to meet social and political goals and allowed those banks and the GSEs to shed risks by securitizing toxic paper that was sold to pension funds, MMFs, foreign governments and idiot speculators reaching for a higher yield.
Bush II continued the terrible practices of his predecessors. He inherited a recession after the market collapsed but pressured Greenspan to continue lowering rates in order to avoid the necessary correction that was created by loose monetary policies. Instead of making changes to the CRA, he adopted the politically popular goals of the Clinton Administration and kept encouraging poor people with bad credit histories and young people without credit histories to buy homes that they could not really afford. He watched the euphoria but lacked to courage to do anything about it. By the end of his second term, the game was over and Bush paid for the sins of his administration and those of his predecessors by becoming (deservedly) the least popular president in quite some time.
This is not to say that Bush did everything badly. He avoided Kyoto but pandered to the eco-nuts as he watched temperatures decline in his eight years of office. At the end of his two terms the US had reduced its output by more than Europe without burdening taxpayers with a massive bill for actions that will do nothing to effect the climate. Of course, this little accomplishment will not be talked about much because Bush’s mishandling of the economy, oversight over two idiotic wars and presiding over a massive increase in the size of government deserve much more attention.
Sadly, Americans have not learned their lesson. Instead of admitting that increased regulations and bigger government did not work for Bush any more than they did for other meddling idiots who held the presidency they have asked for even more government and more regulations. They have now elected another ‘decider’ in the hope that his team of recycled Washington has-beens will do a better job of improving the economy. What they don’t realize is that there is no free lunch and that you can’t fix a problem that was created by loose monetary policy and more government with looser monetary policies and bigger government. I am sad to admit that no matter how much I try to find a positive all I see is a collapse of the American standard of living and the destruction of the purchasing power of the US dollar. The good news is that this time the ‘right’ cannot be blamed because the people pulling the strings will be incompetents on the ‘left.’
What you guys need is a third party that actually stands for the principles that made the nation the great example for the world and the greatest of countries early in its history.
January 24th, 2009 at 6:16 pm
Barry,
I’ve noticed an increasing recalcitrance by some incurable supply siders with respect to economic policy. Their arguments in favor of supply side solutions seem to fall in one, some, or all of the following three categories. Some, such as Larry Kudlow, seem oblivious to the fact that economic conditions right now (deflation, low top marginal tax rates, lack of regulatory oversight, high income inequality) are completely different, and in fact virtually inverted, from the way they stood in early 1981. Others, such as John Tamny, argue that Bush never truly followed Reaganomics at all, and this is why his economic record is so poor. Still others argue that presidents have no effect on the economy. Some who make this last argument make it in conjunction with one or more of the others, seemingly oblivious to the inherent contradiction.
Without going into the actual Reagan economic record, as that is a “can of worms” in and of itself, one needs to define Reaganomics. I think it is fair to say that Reaganomics consists of at least these four fundamental principles:
1) reduce the growth of government spending,
2) reduce marginal tax rates on income from labor and capital,
3) reduce government regulation of the economy,
4) control the money supply to reduce inflation.
So what was Bush’s record with respect to the fundamental principles?
1) Bush leaves office with federal spending higher as a percent of GDP than when he entered. It was 18.5% in 2001 and will certainly be over 20% during fiscal year 2009. The vast majority of that increase, about 80% has been due to increased spending on security related expenditures, which rose from 3.6% of GDP to over 5.6% of GDP. The only category he reduced as a percent of GDP was discretionary domestic expenditures, which fell from 3.1% of GDP to less than 2.8% of GDP. They now are less than 15% of total expenditures, which is the lowest in modern history.
2) Bush reduced the top marginal income tax rate from 39.6% to 35%, He also reduced the top marginal capital gains tax rate from 20% to 15%. Dividends are no longer treated as personal income but as capital gains. Under Bush no change in the top marginal corporate tax rate (39%) took place. He did succeed in reducing the estate tax rate (which now only applies to 6,200 deaths annually) from 55% to 45%.
3) An argument could be made that regulations have increased under Bush. For example, the number of pages of federal regulations has increased by a few percent. It was also under his tenure that Sarbanes-Oxley became law. However a stronger argument can be made that the Bush presidency adopted a policy of regulatory disarmament/non-enforcement. Most of this involved understaffing at the SEC and OTC. Here are a few articles that make that case, including one by you Barry:
http://www.nytimes.com/2008/12/25/business/25fraud.html
http://www.ritholtz.com/blog/2008/12/ots-asshat-central/
http://curiouscapitalist.blogs.time.com/2008/12/23/the-last-days-of-the-office-of-thrift-supervision-and-of-the-theory-of-regulatory-competition/
http://www.econbrowser.com/archives/2008/02/crony_capitalis.html
http://www.econbrowser.com/archives/2007/12/a_thought_on_th_1.html
4) There have been some who argue that monetary policy was excessively lose under Bush and this caused the housing bubble to inflate. However, as Orphanides and Wieland (2007) have pointed out, according to the Greenbook forecasts, monetary policy was not lax at all using a Taylor rule framework. Here is the paper, see the page numbered 28 for a graph of interest rate smoothed monetary policy:
http://www.econbrowser.com/archives/2007/12/a_thought_on_th_1.html
The paper only takes monetary policy up through early 2007, and I think a case can be made that based on the fact that the T-bill yield curve was inverted from mid 2006 through mid 2007, that rather than monetary policy being too lax, towards the end it was far too tight and a harbinger of recession.
In short, a strong case can be made that Bush followed through on the last three principles of Reaganomics, and on the first principle his record was not all that different from Reagan’s: a large run-up in security expenditures along with a slowdown in discretionary domestic expenditures.
Why might these policies have been inappropriate for our time?
1) Domestic discretionary expenditures are at very low levels. One result of this is the decrepit nature of our nation’s infrastructure which according to ASCE would need $1.6 trillion over five years to get up to a grade level of “B.” This certainly has a limiting effect on the ability of our nation’s economy to perform. Here is ASCE’s 2005 infrastructure report card (an updated one, no doubt even worse, is due out this year):
http://www.asce.org/reportcard/2005/page.cfm?id=103
And this is by no means the only example. One could easily provide others.
2) Top marginal tax rates are already at historically low levels. Their theoretical effectiveness as an economic policy is surely exhausted. Even Bruce Bartlett, who was an early proponent of supply side economics, and a member of the Reagan administration, has come out and said so. I don’t agree with everything he says in this article, but here is what he wrote recently in Forbes:
“Republicans also have to accept that there is a limit to tax-rate reduction. Cutting the top rate from 70% to 50%, as Reagan did in 1981, provided a huge increase in the after-tax rate of return. Some taxpayers went from keeping 30 cents on a dollar of interest or dividend income to keeping 50 cents–a 66% increase. But dropping the top rate from 40% to 35%, as George W. Bush did, only increased the after-tax return by 8.3%.”
http://www.forbes.com/opinions/2009/01/15/republicans-taxes-investment-oped-cx_bb_0116bartlett.html
There is also a compelling argument that a major contributor to our current crisis is income inequality, and if this is the case, policies that made our tax system less progressive only aggravated the situation. Here is an article by Mark Thoma that discusses the relationship between bubbles and income inequality. Feel free to backtrack to his previous article on the subject for some interesting graphs on the history of income inequality. (The 1920′s look a lot like the 2000′s, and both periods were marked by top marginal tax rate reductions.):
http://economistsview.typepad.com/economistsview/2008/10/income-shares-a.html
3) I think its safe to say nearly 99% of economist would say that poor regulations coupled with lax enforcement were a prime contributor to the “bubble” that was responsible for our fake sense of prosperity from 2003-2006, and ultimately, when it deflated, brought down our economy. The only people who think otherwise seem to be doctrinaire libertarians.
4) Tight monetary policy in 2006-2007 was the “pin” that burst the bubble, regardless of whether or not the bubble was untenable to being with.
As for whether or not presidents have a tangible effect on economic performance, many have made that argument. In particular Professor Larry M. Bartels of Princeton made that case in a fascinating book called “Unequal Democracy” where he showed that the economy at least since 1948 has performed better under Democratic than Republican presidents for all income classes, but under Democratic presidents income inequality tends to decline. He attributes it to more to differences in public policy than any other cause. Here is a good NYT article that serves as a review of his book:
“Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”
http://www.nytimes.com/2008/08/31/business/31view.html
January 24th, 2009 at 6:42 pm
Gregh, who are you kidding?
Huge swathes of our country can’t even figure out what a budget is, let alone stick to one.
There is no shortage of suckers paying retail.
January 24th, 2009 at 8:25 pm
Reagan’s cowardly retreat from Lebanon is what set us up for generations of warfare against the emboldened Islamic fundamentalists. Ever time I hear about the Reagan Myth I just laugh.
The guy that raised Social Security taxes after cutting upper marginal rates. A B-Actor clown. The second worst President after Bush II.
January 24th, 2009 at 8:27 pm
Almost nobody is getting Barry’s very simple point. Given what Bush II had in the economy in 2000, he did exactly the wrong thing by picking up the 1980 Reaganomics policy kit and applying it directly to America’s head. Americans will have a lower standard of living for some time to pay for all this, and there isn’t much anyone can do about it, Obama or his opponents. Of course his enemies will try and blame Obama for all this but I don’t think Americans will fall for it. This is not something that gets cleaned up in one year.
January 24th, 2009 at 9:28 pm
Bravo VangelV, but I don’t think your comments will be comprehended by many here. They believe Bush 41 and 43 were fiscal conservatives and free market capitalists and the current economic crisis discredits conservatism. Father and son are believers in big government.
Reagan was rhetorically right but fell short by not wielding the veto pen to curb the growth in spending. That said, the idea that Bush tax cuts were somehow responsible for the current economic crisis is pure nonsense. Bush deserves the same blame Reagan deserves: both let spending run out of control.
@gregh, none of the wealthy people I know got there through inheritance, luck, or incredible smarts. Most of them got to where they are today though dogged persistence, long hours/hard work, and a vision. The idea that I or any other American deserves a slice of their “pie” appalls me.
January 24th, 2009 at 9:34 pm
Barry,
I’ve noticed an increasing recalcitrance by some incurable supply siders with respect to economic policy. Their arguments in favor of supply side solutions seem to fall in one, some, or all of the following three categories. Some, such as Larry Kudlow, seem oblivious to the fact that economic conditions right now (deflation, low top marginal tax rates, lack of regulatory oversight, high income inequality) are completely different, and in fact virtually inverted, from the way they stood in early 1981. Others, such as John Tamny, argue that Bush never truly followed Reaganomics at all, and this is why his economic record is so poor. Still others argue that presidents have no effect on the economy. Some who make this last argument make it in conjunction with one or more of the others, seemingly oblivious to the inherent contradiction.
Without going into the actual Reagan economic record, as that is a “can of worms” in and of itself, one needs to define Reaganomics. I think it is fair to say that Reaganomics consists of at least these four fundamental principles:
1) reduce the growth of government spending,
2) reduce marginal tax rates on income from labor and capital,
3) reduce government regulation of the economy,
4) control the money supply to reduce inflation.
So what was Bush’s record with respect to the fundamental principles?
1) Bush leaves office with federal spending higher as a percent of GDP than when he entered. It was 18.5% in 2001 and will certainly be over 20% during fiscal year 2009. The vast majority of that increase, about 80% has been due to increased spending on security related expenditures, which rose from 3.6% of GDP to over 5.6% of GDP. The only category he reduced as a percent of GDP was discretionary domestic expenditures, which fell from 3.1% of GDP to less than 2.8% of GDP. They now are less than 15% of total expenditures, which is the lowest in modern history.
2) Bush reduced the top marginal income tax rate from 39.6% to 35%, He also reduced the top marginal capital gains tax rate from 20% to 15%. Dividends are no longer treated as personal income but as capital gains. Under Bush no change in the top marginal corporate tax rate (39%) took place. He did succeed in reducing the estate tax rate (which now only applies to 6,200 deaths annually) from 55% to 45%.
3) An argument could be made that regulations have increased under Bush. For example, the number of pages of federal regulations has increased by a few percent. It was also under his tenure that Sarbanes-Oxley became law. However a stronger argument can be made that the Bush presidency adopted a policy of regulatory disarmament/non-enforcement. Most of this involved understaffing at the SEC and OTC. Here is an articles that, in one particular context, makes that case. ( by you Barry):
http://www.ritholtz.com/blog/2008/12/ots-asshat-central/
4) There have been some who argue that monetary policy was excessively lose under Bush and this caused the housing bubble to inflate. However, as Orphanides and Wieland (2007) have pointed out, according to the Greenbook forecasts, monetary policy was not lax at all using a Taylor rule framework. Here is the paper, see the page numbered 28 for a graph of interest rate smoothed monetary policy:
http://www.econbrowser.com/archives/2007/12/a_thought_on_th_1.html
The paper only takes monetary policy up through early 2007, and I think a case can be made that based on the fact that the T-bill yield curve was inverted from mid 2006 through mid 2007, that rather than monetary policy being too lax, towards the end it was far too tight and a harbinger of recession.
In short, a strong case can be made that Bush followed through on the last three principles of Reaganomics, and on the first principle his record was not all that different from Reagan’s: a large run-up in security expenditures along with a slowdown in discretionary domestic expenditures.
January 24th, 2009 at 9:35 pm
Why might these policies have been inappropriate for our time?
1) Domestic discretionary expenditures are at very low levels. One result of this is the decrepit nature of our nation’s infrastructure which according to ASCE would need $1.6 trillion over five years to get up to a grade level of “B.” This certainly has a limiting effect on the ability of our nation’s economy to perform. Here is ASCE’s 2005 infrastructure report card (an updated one, no doubt even worse, is due out this year):
http://www.asce.org/reportcard/2005/page.cfm?id=103
And this is by no means the only example. One could easily provide others.
2) Top marginal tax rates are already at historically low levels. Their theoretical effectiveness as an economic policy is surely exhausted. Even Bruce Bartlett, who was an early proponent of supply side economics, and a member of the Reagan administration, has come out and said so. I don’t agree with everything he says in this article, but here is what he wrote recently in Forbes:
“Republicans also have to accept that there is a limit to tax-rate reduction. Cutting the top rate from 70% to 50%, as Reagan did in 1981, provided a huge increase in the after-tax rate of return. Some taxpayers went from keeping 30 cents on a dollar of interest or dividend income to keeping 50 cents–a 66% increase. But dropping the top rate from 40% to 35%, as George W. Bush did, only increased the after-tax return by 8.3%.”
http://www.forbes.com/opinions/2009/01/15/republicans-taxes-investment-oped-cx_bb_0116bartlett.html
There is also a compelling argument that a major contributor to our current crisis is income inequality, and if this is the case, policies that made our tax system less progressive only aggravated the situation. Here is an article by Mark Thoma that discusses the relationship between bubbles and income inequality. Feel free to backtrack to his previous article on the subject for some interesting graphs on the history of income inequality. (The 1920’s look a lot like the 2000’s, and both periods were marked by top marginal tax rate reductions.):
http://economistsview.typepad.com/economistsview/2008/10/income-shares-a.html
3) I think its safe to say nearly 99% of economist would say that poor regulations coupled with lax enforcement were a prime contributor to the “bubble” that was responsible for our fake sense of prosperity from 2003-2006, and ultimately, when it deflated, brought down our economy. The only people who think otherwise seem to be doctrinaire libertarians.
4) Tight monetary policy in 2006-2007 was the “pin” that burst the bubble, regardless of whether or not the bubble was untenable to begin with.
As for whether or not presidents have a tangible effect on economic performance, many have made that argument. In particular Professor Larry M. Bartels of Princeton made that case in a fascinating book called “Unequal Democracy” where he showed that the economy at least since 1948 has performed better under Democratic than Republican presidents for all income classes, but under Democratic presidents income inequality tends to decline. He attributes it to more to differences in public policy than any other cause. Here is a good NYT article that serves as a review of his book:
“Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”
http://www.nytimes.com/2008/08/31/business/31view.html
January 24th, 2009 at 9:37 pm
Why might these policies have been inappropriate for our time?
1) Domestic discretionary expenditures are at very low levels. One result of this is the decrepit nature of our nation’s infrastructure which according to ASCE would need $1.6 trillion over five years to get up to a grade level of “B.” This certainly has a limiting effect on the ability of our nation’s economy to perform. Here is ASCE’s 2005 infrastructure report card (an updated one, no doubt even worse, is due out this year):
http://www.asce.org/reportcard/2005/page.cfm?id=103
And this is by no means the only example. One could easily provide others.
2) Top marginal tax rates are already at historically low levels. Their theoretical effectiveness as an economic policy is surely exhausted. Even Bruce Bartlett, who was an early proponent of supply side economics, and a member of the Reagan administration, has come out and said so. I don’t agree with everything he says in this article, but here is what he wrote recently in Forbes:
“Republicans also have to accept that there is a limit to tax-rate reduction. Cutting the top rate from 70% to 50%, as Reagan did in 1981, provided a huge increase in the after-tax rate of return. Some taxpayers went from keeping 30 cents on a dollar of interest or dividend income to keeping 50 cents–a 66% increase. But dropping the top rate from 40% to 35%, as George W. Bush did, only increased the after-tax return by 8.3%.”
http://www.forbes.com/opinions/2009/01/15/republicans-taxes-investment-oped-cx_bb_0116bartlett.html
January 24th, 2009 at 9:38 pm
There is also a compelling argument that a major contributor to our current crisis is income inequality, and if this is the case, policies that made our tax system less progressive only aggravated the situation. Here is an article by Mark Thoma that discusses the relationship between bubbles and income inequality. Feel free to backtrack to his previous article on the subject for some interesting graphs on the history of income inequality. (The 1920’s look a lot like the 2000’s, and both periods were marked by top marginal tax rate reductions.):
http://economistsview.typepad.com/economistsview/2008/10/income-shares-a.html
3) I think its safe to say nearly 99% of economist would say that poor regulations coupled with lax enforcement were a prime contributor to the “bubble” that was responsible for our fake sense of prosperity from 2003-2006, and ultimately, when it deflated, brought down our economy. The only people who think otherwise seem to be doctrinaire libertarians.
4) Tight monetary policy in 2006-2007 was the “pin” that burst the bubble, regardless of whether or not the bubble was untenable to begin with.
As for whether or not presidents have a tangible effect on economic performance, many have made that argument. In particular Professor Larry M. Bartels of Princeton made that case in a fascinating book called “Unequal Democracy” where he showed that the economy at least since 1948 has performed better under Democratic than Republican presidents for all income classes, but under Democratic presidents income inequality tends to decline. He attributes it to more to differences in public policy than any other cause. Here is a good NYT article that serves as a review of his book:
“Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”
http://www.nytimes.com/2008/08/31/business/31view.html
January 24th, 2009 at 10:01 pm
The correct link for the paper that shows that monetary policy was “goldilocks” is here. See the page numbered 28 (at bottom) for monetary policy with interest rate smoothing:
http://research.stlouisfed.org/conferences/policyconf/papers2007/Orphanides_Wieland.pdf
Here are some additional links on regulatory disarmament/non-enforcement under Bush:
http://www.nytimes.com/2008/12/25/business/25fraud.html
http://curiouscapitalist.blogs.time.com/2008/12/23/the-last-days-of-the-office-of-thrift-supervision-and-of-the-theory-of-regulatory-competition/
http://www.econbrowser.com/archives/2008/02/crony_capitalis.html
http://www.econbrowser.com/archives/2007/12/a_thought_on_th_1.html
January 24th, 2009 at 10:03 pm
For the correct link for the paper showing that monetary policy was “goldilocks” (appropriatelt tight according to Taylor’s Rule) under Bush it is here. See the page numbered 28 at bottom for graph of monetary policy with interest rate smoothing:
http://research.stlouisfed.org/conferences/policyconf/papers2007/Orphanides_Wieland.pdf
January 24th, 2009 at 10:04 pm
Here are some additional links on regulatory disarmament/non-enforcement under Bush:
http://www.nytimes.com/2008/12/25/business/25fraud.html
http://curiouscapitalist.blogs.time.com/2008/12/23/the-last-days-of-the-office-of-thrift-supervision-and-of-the-theory-of-regulatory-competition/
January 24th, 2009 at 10:04 pm
And some more:
http://www.econbrowser.com/archives/2008/02/crony_capitalis.html
http://www.econbrowser.com/archives/2007/12/a_thought_on_th_1.html
January 24th, 2009 at 10:14 pm
“ But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”
Again, correlation doesn’t equal causation. A president’s economic policy can only have a limited, immediate impact on the economy and there are so many variables outside a president’s control that assigning blame or praise for economic conditions during a specific time frame (a presidential term) exclusive to a president’s policies is just plain silly.
And often economic policies can have an economic impact that lasts long past a president’s term. Our nation’s entitlement programs are just one example. They’re a train wreck waiting to happen, and when it does, which presidents will get the blame? Under Bartel’s methodology none of them will.
January 24th, 2009 at 10:53 pm
@Tom K
“And often economic policies can have an economic impact that lasts long past a president’s term.”
I assume you’re referring to FDR in the context of “The Great Leap” (1966) by John Brooks.
The largest entitlement programs are Social Security and Medicare. At current funding the CBO expects SS to run out of funds in 2049 and Medicare in 2019. I’ll be 105 in 2049 if I’m still alive so I’m not particularily worried for myself (we may have to increase SS taxes incrementaly). But we’ll almost certainly have to raise Medicare taxes, that’s just a given. We just need a president with the courage to do it. TNSTAAFL.
January 24th, 2009 at 10:57 pm
Early senility perhaps. I’ll only be 85 in 2049. I might still be alive (my father was 80 and his father was 74 when they died). Still I’m not worried.
January 25th, 2009 at 2:22 am
Mark A. Sadowski,
Well put, my friend.
Don’t mention income inequality to Tom K. To people like him, income inequality means there’s someone out there who makes more than he does and that’s okay. People that make considerably less than he does are invisible to him. They are poor because they haven’t worked hard. It’s all quite simple for him. I wish reality were that simple. It’s amazing how far people will go to avoid introspection. And this anecdotal stuff like “most people I know aren’t rich from inheritance or luck etc.” is spewed after criticizing some statistics as flawed. Well, at least he’s not a hypocrite. Sometimes it’s good to know you are dealing with a conscienceless greedy robot. It saves time.
January 25th, 2009 at 4:06 am
Here’s to the heroes of capitalism; those hard working, honest, noses to the grindstone, work ethic, if you don’t work you shouldn’t eat, legendery macho men:
http://www.marketwatch.com/news/story/Wall-Street-didnt-hear-Obamas/story.aspx?guid=%7BFEE7297F%2D4E57%2D4CF7%2D8ADA%2DCEAD851684DD%7D
May they all get a well deserved vacation in Sing Sing. Hey, these guya claim they like to work hard, right? The USA sewer needs a complete overhaul. Many septic systems are out of date. As part of their prison terms, they could become sewer rats ( I mean workers. They’re already qualified as rats). A real Darwinian scenario. I know of a fellow who defends greedsters here that would fit right in with all these best and brightest, heavily talented and highly innovative individuals.
I imagine the mafia will have no recruitment problems this year; their favored “personality type” is having employment problems.
January 25th, 2009 at 9:11 am
I had a rich friend who told me that if you redistributed all the wealth so everyone had an equal amount, within two years the previous poor would be poor again. I told him it was a great way to justify being greedy.
Ha! Ha! If they really believed that they would not have a problem with high taxes on their wealth(not that I agree with that, I’m just making a point here) because they would just ‘win’ it all back again. Anybody who has been at or near the bottom knows that once you are mired in the economic riptide it is a lot harder to swim out than those who have reached a certain level. That is because most of your resources are going to pay for you survival and trying to get ahead almost always requires some sort of borrowing to either educate yourself or start a business. When you have to borrow you are gambling and gamblers can be losers.
Success at the bottom can be measured year by year and sometimes decade by decade and not month by month like it is when you are on the top side of the food chain
January 25th, 2009 at 10:53 am
Income inequality is fine (in fact, it’s inevitable) in a system that isn’t rigged. Unfortunately, our system IS rigged. That’s the problem — not the income inequality.
Ron Paul’s book, Revolution, has some great examples of how Companies rig the system by influencing politicians. He uses U.S. Sugar as an example of a successful Company using its influence to levy import taxes on competitors, with the result being that U.S. consumers pay more for sugar than they otherwise would. And there are thousands of companies doing this, so the average joe is dying economically from the death of a thousand cuts.
Once you are successful enough to be able to afford political donations, it’s like being able to buy an insurance policy against failure. Except that you’re making someone else pay the premiums.
January 25th, 2009 at 11:16 am
“conscienceless greedy robot.”?
Isn’t that someone who thinks they deserve the fruits of someone else’s labor?
Listen buddy, you don’t know me so don’t pretend you do. I’ve moved hundreds of tons of rock manually, worked weeks in sub-zero tempertures in 2′x20′ ditchs, and gone literally 3+ days without food on numerous occasions (not by choice). Don’t give me this working class victim BS.
Most people, including myself, fall far short of achieving their potential. Most don’t even know it because politicians and simpletons like you keep telling them their victims and someone else is in control of their destiny.
January 25th, 2009 at 12:23 pm
Sorry about the repeated postings. I was having technical difficulties and they were submitted for review. I worked around it. Evidently Barry approved everything later but everything I wanted to submit was already posted. It would have been cleaner if he didn’t. Oh well.
By the way “The Great Leap” is an out of print work of social history. I did not know it was out of print when I mentioned it, but it turns out that copies are still out there. Its subtitle is “The Past Twenty Five Years in America,” and not only is it instructive as to how much America changed in the wake of FDR’s presidency but, in retrospect, it’s also nice as a social history of mid 1960′s political and economic thought as well.