Even as the American economy continues to struggle in the Great Recession’s aftermath, Americans continue to blame President George W. Bush and the Republicans for causing the worst economic catastrophe since the Great Depression. It’s an understandable conclusion. The downturn began on the GOP’s watch. And even though Wall Street as a bastion of Republicanism is a political anachronism, many voters blame the housing bubble on an under-regulated financial sector whose unchecked greed eventually led to its own near demise — and then a bailout by Republican friends. A “market failure” led to the financial crisis and the Great Recession, say Democrats, proving once again that we need big, intrusive government. When Republicans now and in the future call for lower taxes and smaller government, Democrats have an easy counter: “We tried that with Bush in the 2000s. And look how that turned out.”
Republicans and conservatives heard much the same for decades after the Great Depression as the Left blamed the downturn on Wall Street speculators and unfettered markets. That explanation helped provide a rationale for the New Deal and decades of government intrusion afterward. To this day, many Americans think the Great Depression was caused by the excesses of the Roaring Twenties.
Well, many Americans who aren’t economists think that. The economic consensus today, thanks to the work of Milton Friedman and collaborator Anna Schwartz, is that monetary-policy failures by the Federal Reserve caused the Great Depression. And had we not suffered through the hard times, as former Fed economist Michael Bordo has written, “we might not have had World War II, Keynesian economics, and the Great Inflation.” No Great Depression, no New Deal.
Then the Bernanke Fed made two huge, historic mistakes. First, the Fed left interest rates alone between April 2008 and October 2008 as the economy deteriorated. Second, the Fed policymakers effectively tightened monetary policy in June by pushing up the expected path of the federal-funds rate through a series of hawkish statements. In May 2008, federal-funds futures had been predicting the rate would remain at 2 percent through November. By mid June, that forecast already had risen to 2.5 percent.
As Hetzel writes, “Restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008.” An intriguing counterfactual: Had the Fed responded differently (immediately slashing rates, massive bond buying, guaranteeing to stabilize spending), there would’ve been no Great Recession, no Lehman bankruptcy, no trillion-dollar stimulus, no Obamacare, and maybe no Obama two-term presidency. (Note to libertarians: Economic collapse leads to even bigger government rather than freer markets.)
This is a story that needs telling. Republicans have had two presidential elections and two Federal-chairman confirmation hearings to do so but haven’t. They really need to, both to salvage the badly damaged reputation of pro-market economic policies and to provide a plausible alternative explanation for What Went Wrong. Bush may have spent too much and continued the bipartisan effort to push housing, but his policies didn’t almost cause a depression.
If Republicans want to retake the White House, they must develop and publicize a creative middle-class policy agenda. Why should the majority of American voters trust the GOP with reforming education, the safety net, and the tax code if they think the party doesn’t really care about or even understand their problems? But it also might help the GOP’s electoral prospects if the party stops letting Democrats depict the last Republican president — the only one millions of young voters remember — as the 21st-century version of that mean Herbert Hoover.
— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.