Thursday, May 19, 2011

What Was the Bush Economy?

Conflicts on the right are still simmering over what course to chart for the economy for the years ahead. Though many Republicans ran on economic issues in 2010, many of those economic issues have taken a back-seat to fiscal ones in 2011. Our fiscal health definitely affects our economic health (a collapse in the US bond rating would, for example, be very economically traumatic), but our economy also affects the nation's fiscal sustainability.

Arguments over how much government stimulus spending could be effective for rebooting the economy have been in the forefront of left and right discussions of the economy. Yet I think another (often unspoken) issue for many Republican debates about economic policy is the meaning of the Bush economy. Was it a time of great prosperity---an economic model to look back on with esteem---or was it much more mixed?

For one faction, the Bush years were fundamentally an economic success. There was a near-meltdown at the end, but the economic growth throughout that period can be isolated from the 2008 collapse. While there were problems with a housing bubble and excess spending, the economic policies of 2001-2009 on the whole led to real growth and prosperity. This faction has considerable power on the right. One sees, for example, commentators on the right often point to the Bush tax cuts (of 2001 and 2003) as kicking off huge economic growth, and use that claimed growth in order to argue for more tax cuts, especially for the wealthy, in the future.

Another faction on the right has a more pessimistic view of the Bush economic record. While this faction acknowledges the benefits of some of the tax cuts and other aspects of the Bush record, it also suggests that much of the growth of the Bush years was fueled by debt and the financialization of this debt. The housing bubble, inflated by federally-encouraged easy access to credit, allowed for a glut of money to flood the economy and pay for jobs in realty, construction, landscaping, retail, and so forth. This borrowed money was in turn leveraged by would-be financial wizards in various hedge funds and banks. While the fit of borrowing did create the illusion of growth, it was the equivalent of a middle-class family remortgaging its house to go on European vacations and buy a Bentley and gain a world of short-term luxury: it came from borrowing against the future, perhaps an amount that could never be paid back. The realization of the scope of this debt hit in 2008, and the story of 2009, 2010, and 2011 has been the transfer of this indebtedness from the private market to the government. TARP and other bailouts cycled through the debt of private banks, and now Americans, rather than flipping houses, collect multi-year unemployment benefits. Before, private borrowing fed the economy; now, public borrowing does.

For those of the first faction, the economic path ahead is fairly clear: get a Democrat out of office, keep cutting taxes for upper-income earners, cut government spending (or not), and we're back to Bush prosperity circa 2004.

The path is less clear for those of the second. For them, the real economic growth of the past decade has been anemic at best, and they are less sure that tax cuts for the wealthiest 1% should be the foundation for Republican economics. Such tax cuts may have a role to play, but they are not enough, especially in light of the spiraling inequality and economic stagnation in the American economy. But apostasy from tax cut monomania leads to a host of questions. Following this path may lead to the challenging of numerous elite orthodoxies---on regulatory, trade, and financial policies, among other areas.

The factions outlined above are not exclusive, nor are they totally comprehensive, but I think the difference between these two points is an important one for Republican economic discussions. A vision for the way forward is often shaped by a view of the road before. At a time when Obama's stimulus has failed by its own standards and the conventional wisdom of Democratic and Republican elites has fallen so sorely short, many conservatives are pondering a free-market way to renewed prosperity. How much of this way forward will involve Bush economics remains to be seen and debated.

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