Before becoming Reagan's vice-president, George Herbert Walker Bush had called Reagan's economics, "voodoo economics." As Reagan's vice president he was a good team player, and when he accepted the Party's nomination for president in 1988 he told the delegates, "Read my lips: no new taxes."
Recession arose during his administration. The deficit grew and Bush felt obliged to raise taxes. Many Republicans were outraged, including Grover Norquist and House Whip Newt Gingrich. Gingrich claimed that Bush having raised taxes destroyed for years to come the Republican Party's most potent election plank.
President G. H. W. Bush came close to a balanced budget, but he did not raise taxes enough to successfully combat a rising national debt. When he left office in January 1993, the national debt as a percentage of GDP was higher than when Reagan left office. Some of the money involved in the national debt was owed to foreign governments. The nation was spending more in dollars buying from abroad than it was selling abroad. The Bush administration, like the Reagan administration before it, was looking for economic help from consumer spending. Consumers were encouraged to buy rather than to save and rather than practice frugality. As under Reagan, a steep rise in credit market debt was underway.
Conservative rule was interrupted in 1993 following the election of Bill Clinton. Clinton and his economic advisors were not fans of the idea that tax reduction was always the best way to stimulate the economy and produce wealth for everybody. Clinton signed into law one income tax increase, in 1993. It created tax rates of 36 percent and 39.6 for individuals and a 35 percent income tax rate for corporations. A booming economy, produced in part by the new demand for computers, increased tax revenues substantially, and by 1997 there was a budget surplus of less than one percent of GDP.
Clinton left office with a budget surplus of 2.4 percent of GDP – after having cut military spending by that same amount. And the National Debt during the Clinton administration dropped.
Going into the 21st century, people with much wealth were still able to make money faster than those who had little of it. Some that this reduced an economy's functionality. They believed in government wealth redistribution – accomplished by taxation. Some but not all conservatives were adamantly opposed to such taxes, and among those hostile to taxes were those who believed in what was called supply-side economics – a phrase coined in 1975 by a journalist who referred to the ideas of economists Robert Mundell and Arthur Laffer. With the supply-side theory was the Laffer Curve, which was supposed to demonstrate that higher taxes reduced incentive to pursue wealth. At the high end of the curve, of course, were taxes so high that entrepreneurship would be non-existent. Lower taxes according to supply-side theorists would encourage investment and the creation of jobs. It was seen as an alternative to a Keynesian approach of restoring the economy by getting more money into the hands of common people.
Some who preferred the Keynesian approach called supply-side economics "trickle down economics," describing the supply-side view as wealth that went to producers of goods and services eventually trickling down to the masses. Those who favored wealth distribution claimed that an economy works best when wealth distribution gives the masses more money to buy.
People in the Reagan administration, except for a few, had embraced supply-side economics. When George W. Bush entered the White House in 2001 he too believed in supply-side economics. He adhered to the economic philosophy of the new conservative movement that any interference with the market process decreased social well-being. Bush believed in "voluntary regulation." He and some of his fellow conservatives believed that unregulated free markets corrected themselves. For them there was no such thing as a bubble in an economy; free markets would maintain an equilibrium hostile to bubbles.
Under George W. Bush, government spending on publicly owned projects – roads, ports, bridges – was to be kept at a minimum or left to local governments, except for military projects for the sake of national security. As president, Bush was to ask no sacrifices from the upper or middle class for military operations in Afghanistan and Iraq. Shopping at the mall was to reign while war was pursued, with victory imagined as just around the corner.
In 2003, President Bush signed into law a tax plan designed to reduce taxes and stimulate economic growth. The act reduced the long-term individual income tax rate on capital gains to 15 percent, and it significantly reduced the amount of tax paid by investors on dividends and capital gains. A statement signed by 450 economists, including 10 Nobel Prize Laureates, opposed the bill. Two economists called the tax cuts a reverse government redistribution of wealth. The liberal economist and New York Times columnist Paul Krugman claimed that the great bulk of the tax cuts would benefit the top 2 percent of the population and a full 42 percent of the tax cuts would benefit people making more than $300,000. More than 50 million taxpayers, he claimed, would receive no tax cut at all. A supply-side economist and pundit, Larry Kudlow, credited President Bush's supply-side economics and tax cut of 2003 with having triggered an "economic boom." In 2005 he called it the "Bush boom."
The budget deficit returned. By late October, 2008, it was around 2.7 percent of GDP. Military spending was a little more than 4 percent of GDP. Interest on the national debt for 2008 was rising to more than $500 billion. Military expenditures for the year were to be a little more than $600 billion, and health and human services a little more than 700 billion.
By September 2008 the national debt had risen to around 70 percent of GDP. In October, an investment-credit bubble burst and the greatest economic crisis since the Great Depression began. The regulatory system in the US was described as not having caught up with new financial structures. Washington Post columnist David Ignatius described hedge fund managers who had "fooled themselves" into believing they had engineered highly leveraged investments without risk. Ignatius wrote that their "make-believe world" had begun to crash in August 2007. He wrote that they had created paper assets out of pools of mortgages, and in a falling market nobody knew what they were worth.
With the these developments, a crisis of confidence and a banking crisis developed, with lenders across the globe as part of the credit crisis. President Bush joined other world leaders in trying to keep the economy working by bailing out financial institutions – lending money being a necessary grease that kept the economic machine functioning. A few conservatives in the US stuck to their commitment to free market capitalism and opposed government bailouts, but their opposition was unsuccessful.
There were economists who complained that across the decades there had been too much credit buying. Fareed Zakaria wrote that "Household debt [had] ballooned from $680 billion in 1974 to $14 trillion today." He described every city, county and state wanting to preserve its proliferating operations without raising taxes, and doing so by borrowing. He described Federal Reserve chairman Alan Greenspan as having "refused to inflict pain."
The US was described as entering a new era. There had been decades of trade imbalance, with China among others buying up US assets and sitting on piles of US currency.
Copyright © 1998-2018 by Frank E. Smitha. All rights reserved.