Bush's Economic Report Card:  Timely Stimulus, Poor "Bang for the Buck," Disastrous Budgeting
Jeff Lemieux
August 2, 2004

A new study by Economy.com's chief economist Mark Zandi puts President Bush's track record on the economy into perspective.  On balance, Bush Administration deserves an "A" for quick reaction to the economic downturn in 2001, a "C-" for the effectiveness of its short-term stimulus policies, and an "F" for his management of the federal budget and long-term deficits.

President Bush inherited serious economic problems:  the "Y2K" bubble in technology and telecom stocks, corporate accounting fraud, and the September 11 attacks.  The Bush Administration deserves credit for pro-actively expanding the federal deficit to fight recession.

However, Bush's tax cuts haven't given the economy much "bang for the buck."  Other types of tax cuts and stimulus methods would have been more effective in the short run and less risky in the long run.

Moreover, the Bush Administration's long-term economic strategy -- permanent tax cuts for high-income people with few corresponding long-term spending cuts -- will weaken the economy.  Uncertainty over the long-term U.S. deficits is part of the reason the economy continues to perform below expectations, despite the stimulus.  The overhang from Bush's long-term deficits will reduce economic growth and increase the risk of economic problems for years to come.

Economy.com's new study, entitled Assessing President Bush's Fiscal Policies, comes to three important conclusions:

1.  The price of doing nothing?  1.4 million fewer jobs.  The Bush Administration deserves credit for acting quickly in 2001 -- the economy would have been worse had no fiscal stimulus policies been enacted.  According to the Economy.com macro-economic modeling system, had no fiscal stimulus policies been enacted, the economy would have had 1.4 million fewer jobs in 2004.

2.  Better stimulus would have created 2 million more jobs.  President Bush's fiscal stimulus policies were pooly targeted.  According to Economy.com, an alternative set of stimulus policies -- such as short term payroll tax cuts and grants to the states, additional unemployment benefits, and short-term business tax cuts -- would have yielded 2 million more jobs by 2004.  (These were the policies advocated by many Democrats and a few moderate Republicans interested in maintaining long-run fiscal discipline.)

3.  Bush's fiscal policy reflects disastrous long-term budgeting.  Bush's long-run economic policy of unfunded tax cuts for high-income people will depress economic growth by 0.4 percentage points a year by 2009 and 0.5 percentage points by 2014.  In other words, if Bush's long-term tax cuts were allowed to expire, the economy would eventually grow about one-half of one percent a year faster.

The Bush Administration gets a good grade for successfully re-inflating the economy.  Rapid application of fiscal stimulus in the summer of 2001 combined with historically low interest rates to prop up U.S. economic activity in spite of serious economic "shocks."  Fiscal stimulus helped prevent a debilitating bout of deflation (a prolonged downward trend in prices that can paralyze economic activity for years).

However, several of the Bush Administration's pet policies produced very little stimulus in the short run (see Table 1).

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Table 1. 
Economic Stimulus "Bang for the Buck" 

Stimulus Policy	Bang for the Buck	Cost in Billions
	(1.00 = neutral)	(2001-2004)
Extend Emergency Federal UI Benefits	1.73	-11
10% Personal Income Tax Bracket	1.34	-162
State Government Aid	1.24	-20
Child Tax Credit Rebate	1.04	-50
Marriage Tax Penalty	0.74	-2
Alternative Minimum Tax Adjustments	0.67	-5
Personal Marginal Tax Rate Reductions	0.59	-196
Business Investment Writeoff	0.24	-153
Dividend-Capital Gain Tax Reduction	0.09	-24
Estate Tax Reduction	0.00	-13
Source: Economy.com
Note: "Bang for the Buck" greater than one means economic stimulus impact exceeds revenue loss.  Bang for the Buck less than one means revenue loss exceeds economic stimulus impact.

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Virtually all of the Administration's tax cuts were "sold" to the public as recession-fighting tools.  Some of the policies didn't work.  A contemporaneous study by the Congressional Budget Office predicted this in advance.

Therefore, the question is:  Why did the Bush Administration insist on tax cuts that weren't good for stimulus?

There are two possible explanations:  (1) supply-side incentives, which could create faster economic growth in the long run, despite the lack of effectiveness as short-run stimulus, (2) an expected "starve the beast" effect, in which lower tax revenues force Congress to restrain spending.

Supply Side?  Most economists believe the supply-side incentives created by lowering the top income tax rates, reducing estate taxes, and cutting tax rates on dividends and capital gains have been oversold.  Although lower marginal income tax rates do create better incentives to work and invest, failing to "pay for" the tax cuts defeats the purpose.  

Supply-side tax cuts don't come close to paying for themselves via more rapid economic growth and revenue generation.  And long-term deficits will place a drag on the economy that would more than offset the positive supply-side effects of lower tax rates.

According to Zandi, the "supply side argument has been vastly overstated.  There is no empirical evidence to suggest that lower top marginal tax rates, that have already been cut in half during the past quarter century, would provide anywhere near the supply-side boost to the economy needed to right the fiscal situation."

Spending Restraint?  The "starve the government" theory certainly hasn't worked so far.  Federal spending excluding interest, defense, and homeland security has risen by over 1 percentage point of GDP since the late 1990s (see Figure 1).

Figure 1.



To be fair, some of that spending since 2000 reflects "automatic stabilizers" that kick in when the economy sinks:  unemployment compensation, Medicaid, and so on.  But Figure 1 excludes defense and homeland security spending -- some of which was inevitable after September 11 -- and interest costs (which reflect the debts built up by past governments).  Figure 1 fairly illustrates the Administration's general tolerance of higher non-defense domestic and entitlement spending.

Moreover, recently enacted Medicare spending increases all but guarantee that non-defense spending will remain high throughout the decade.  Even a strong economic rebound will not reduce non-defense, non-interest spending as a percentage of GDP.

Finally, the nation's interest costs will soar when the Federal Reserve raises interest rates over the next several years (see Figure 2).

Figure 2.



Zandi concludes:

The economic import of the bleak fiscal outlook has yet to be felt.  Bond investors have yet to incorporate any of this into long-term interest rates.  This will soon change, however, once corporate credit needs revive and bump up against the Treasury's ever-increasing funding needs.  Unprecedented foreign buying of U.S. debt will also eventually weaken.  Measurably higher long-term interest rates will have a pernicious effect on the nation's long-term growth prospects.

A focused debate regarding the darkening fiscal situation and its economic implications must thus occur and be resolved.  The next President may very well have the last opportunity to do this in a measured and thoughtful way.  After that, the debate will be conducted in the heat of a fiscal crisis and resolved to no one's satisfaction.

Links:
Economy.com Assessing President Bush's Fiscal Policies by Mark Zandi (July 2004)

Centrists.Org GDP Figures Imply Economic Stimulus Receding, But Recovery Still in Place (July 30, 2004) 

Centrist Policy Network Deficits for Stimulus Were OK.  But Now?  (July 14, 2004)  President Bush and Senator Kerry should mimic Presidents Reagan and Clinton by advocating tax reforms and the reduction of long-term deficits.

Jeff Lemieux Mortgaging the Future in Blueprint, the magazine of the Democratic Leadership Council (May 7, 2004)  Large budget deficits and ultra-low interest rates provided an enormous economic stimulus over the last three years. We will eventually have to pay for that stimulus, either with higher taxes, lower government spending, or higher interest rates.

Congressional Budget Office Economic Stimulus:  Evaluating Proposed Changes in Tax Policy (January 2002)