As I’ve said many times, I think that Bush is not responsible for the weakness of the economy in 2001. A recession was bound to happen at the end of the long uninterrupted expansion of the 1990s – all expansions end with a recession, after all. And as Brad DeLong put it in a WSJ interview, “Presidents influence the economy. They don’t control it.”
But while the president can’t manipulate the month-to-month movements in the economy, and can’t defy the economic laws of gravity, there are some very real ways that a president can affect the economy. The most important of those ways is through his control of federal taxing and spending policy. In the rest of this post, I will focus on just one aspect of these policies: Bush’s tax cuts.
The centerpiece of Bush’s economic policy has been tax cuts. Though the original motivation behind the tax cuts was principally ideological, both the 2001 and 2003 tax cuts were sold as job creation machines (see here and here for examples). The latter was even titled “The Jobs and Growth Act”, and involved promises that it would create 1.4 million new jobs.
But even before the tax cuts were enacted, it was clear to many economists that most of the provisions in the tax cuts had nothing to do with stimulating the economy. How would a reduction in estate taxes help the recovery? How would tax cuts that were primarily scheduled to take effect in the years 2005-2010 help the recovery? After all, of the $350 billion total cost of the 2003 tax cut, only $60 billion or so was spent in 2003, and even the 2004 portion accounted for less than half of the total (see here).
Furthermore, 70% percent of the tax cuts that did take effect in 2003 were destined for the 15% of taxpayers with the highest incomes (see here). Economists have always understood that high-income individuals spend less of any windfall they receive than middle or low-income individuals. So (as I explained in this post) it’s no mystery why most economists never really expected the tax cuts to stimulate the economy: they were never designed to stimulate the economy.
The evidence that economists were right about this is striking and pervasive. By various measures, the recovery is weaker than any other in recent history. The lack of new jobs created by the economy during this recovery has been widely commented upon (including by me), but the weak recovery is also reflected in low growth in workers’ take-home pay. Put it all together and you get economic performance that is dismal relative to typical US economic performance over the last 50 years.
So given that economists knew that the tax cuts wouldn’t help the economy, and given that the administration was committed to the idea of passing some sort of large tax cut, why not try to redesign the tax cuts to be more effective? At this point we have to blame both Bush’s economic advisors (see articles here, here and here for examples of the widespread feeling that Bush’s economic advisors have been mediocre at best), and Bush himself, who (judging by how he runs meetings about economic policy) seems to have little interest in or understanding of how the economy works.
So while Bush has spent hundreds of billions of dollars in tax cuts, supposedly to help stimulate the economy, the effects on the recovery were modest because of their bad design. This is one reason why it is clear to most economists that Bush’s management of the US economy has been poor.
It will not be hard for Kerry to do better on that score. But chances are that Kerry will do far more than just beat the low standards set by the Bush administration.
Kerry’s economic advisors are largely former Clinton administration advisors, who have a proven track record of being able to guide the economy to sustained and robust growth through good times and bad. They faced an economy that threatened to move into recession in 1995, numerous foreign financial crises (including in Mexico, our second-biggest trading partner), and the near collapse of the US’s financial system (thanks to LTCM), and yet were able to use the president’s influence to keep the economy growing smoothly through it all.
The fact that Kerry is putting his trust in such competent, experienced economic advisors means that the economic management of the US will immediately go from poor to quite good if Kerry is elected. That’s one reason why I’m voting for Kerry.