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The Pelosi recession

Posted by Richard on August 6, 2010

Every political pundit in the country will admit that presidents get too much credit when the economy is good and too much blame when it's bad. And then they'll promptly forget that. Everyone does it, myself included. For what seems like forever, pundits and politicians on the left and right have been blaming Bush and Obama, respectively, for the current economic mess. Certainly, both deserve blame, but neither deserves as much as he gets.

Bush was never much into fiscal discipline to begin with. And in his final three years — with his popularity sagging, his focus on turning things around in Iraq, and his own party in Congress abandoning whatever commitment to their professed principles they had, shoveling out pork by the ton, and wracked by scandals — he seemed to give up on the domestic front. His efforts to do something about Fanny and Freddie, for instance, were half-hearted at best. Eventually, to his shame, he bought into the neo-Keynesian clamor for stimulus and bailouts. 

Obama, in my opinion, deserves a larger share of blame because he isn't just going along with destructive economic policies, he's the author and chief advocate of them. In the Senate, he was one of those pushing Bush into the destructive decisions made in final two years, and in fact complaining that Bush wasn't spending, stimulating, and bailing enough.

But let's not forget that all spending bills must originate in the House and that Congress is the source of all legislation of any kind. A president can propose and can veto, but that's about it (to his further shame, Bush was unwilling to veto irresponsible spending bills, even when he was still popular and had majorities in Congress). 

So I suggest a little less blaming of Bush or Obama and a little more examination of the historical record. When did things really start falling apart and deficits start ballooning? Why, in 2007 (FY2008). After the Democrats regained control of the House.

Democrats will shout (they always shout) that Bush inherited a balanced budget and turned it into huge deficits. Yes, initially. In the wake of the 2000 dotcom collapse and 9/11 (you do remember 9/11, don't you?). But then, Bush did one great thing domestically: he vigorously fought for lower taxes. And in 2001 and 2003, the Republican Congress cut tax rates significantly. These were across-the-board rate cuts, not the kind of picayune targeted tax credits, picking winners and losers, that we get from the Democrats.

Critics have tried to rewrite history, but the 4 years after the first tax cuts took effect in mid-2002 were a period of remarkable economic growth, rapidly declining deficits, and historically low unemployment. I outlined the facts in July 2006 in a fine fisking, if I do say so myself, of a New York Times editorial. Read the whole thing, but here are some key facts: 

  • Annual GDP growth was 4%, well above the average since WWII.
  • Unemployment declined to 4.6%, well below the average for the preceding four decades.
  • Tax receipts were up by double digits each year, once again proving Arthur Laffer correct — tax rate cuts don't reduce revenue, they stimulate so much growth that revenue increases. (Some of us would argue that that's the dark cloud in the silver lining of tax cuts. 😉 )
  • The deficit declined from 4.5% of GDP ($450 billion) in FY2004 to 1.2% ($160 billion) in FY2007, and was on a glide path that would have balanced the budget by October 2008 (FY2009) had Congress not changed course.

The last time things were going nearly as well was in the years after the Republicans took over the House in 1994, before the "Gingrich revolution" fizzled and (like during the second Bush term) the Republicans lost their way. 

Bush bears responsibility for doing some good things and some bad things, and Obama bears responsibility for doing some bad things and some worse things. But the major responsibility for the fiscal and economic state of the nation always resides in Congress, and particularly in the House.

Things go to hell when the Republicans abandon their core principles and when the Democrats have the power to act on theirs.

If you have to hang a single individual's name on it, this is properly called the Pelosi recession. 

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