In a recent speech, John Kerry declared, “[President Bush] inherited the strongest economy in the world — and brought it to its knees.” There is no evidence to support this claim. In fact, the evidence now suggests that President Bush inherited a recession.
A key issue this election season — one which some observers believe will determine the outcome of the presidential election — is whether the recession began in the last quarter of 2000 or during the first months of the Bush presidency. Granted, even if the truth is that the recession began in the days after George W. Bush’s inauguration, most reasonable people would conclude that a president cannot on a dime turn a $10 trillion economy one way or the other. However, data and supporting analyses from economists indicate that the recession began well before Bush took office, making political criticism of the president on the jobs issue even more inappropriate.
According the National Bureau of Economic Research (NBER), the unofficial arbiter of business cycles, the recession began in March 2001 and ended in November 2001. NBER analyzes four data series from the U.S. Department of Commerce, the Federal Reserve Board, and other government sources. While previously NBER indicated the recession started in March 2001 (it has not formally revised that date), official revisions of the data indicate that the recession started earlier than that.
For example, under revised calculations, real disposable income peaked in October 2000, rather than steadily rising in 2000 and early 2001 as indicated in the original data. Industrial production/manufacturing and trade sales both peaked in June of 2000, instead of September and August, respectively. Non-farm payroll employment peaked in February 2001, not March 2001. And monthly gross domestic product, which the NBER recently announced will be included in dating recessions, also peaked in 2000.
According to the Council of Economic Advisers, the median date of these five data series is October 2000 — at least three months before George W. Bush took office. We also know that the stock market started to decline in March of 2000, business investment began to fall in the third quarter of 2000, and initial jobless claims began to rise at the end of 2000 — more evidence that the U.S. economy in late 2000 was in fact “on the front end of a recession,” as Vice President-elect Dick Cheney observed on Meet the Press on December 3, 2000.
Senator John Kerry and other Democratic party leaders ignore or gloss over these facts. However, even professor Joseph Stiglitz, the chairman of the Council of Economic Advisers under President Clinton, admits that “the economy was slipping into recession even before Bush took office, and the corporate scandals that are rocking America began much earlier.”
To be sure, the Federal Reserve’s twelve-month tightening cycle that began in mid-1999 contributed to the economic slowdown. It is also true that cyclical forces in the economy led to the type of business retrenchment that we have seen in the past and that will likely always be seen to some extent in a market economy. But a significant contributing factor in the slowdown was the policy direction of the Clinton administration, which included an aggressive use of antitrust regulation in the high-tech marketplace, a lack of a national energy policy which resulted in energy-price spikes, and a high and rising federal tax burden.
A key area in which presidents can have an impact on the economy is tax policy. President Clinton raised tax rates right after taking office in 1993, and presided over a massive “stealth tax hike” which ultimately hurt the economy. Because income taxes were not indexed, the increase in real incomes during the 1990s pushed people into higher and higher tax brackets. According to Brian Wesbury of GKST Economics in Chicago, from 1993 to 2000, the number of people who paid taxes in one of the top three income-tax brackets almost doubled from 3.4 million to 6.4 million filers. Further, total income taxes paid by these filers increased from $84.6 billion in 1993 to $245.8 billion, an increase of 190.5 percent. President Clinton’s policies increased the federal tax burden as a share of our national economy from 17.5 percent in 1992 to 20.9 percent in 2000.
President Bush, however, took the opposite approach of his predecessor. Upon taking office, George W. Bush took immediate action to lift the tax burden and strengthen the economy. The first Bush tax cut put $40 billion immediately back into the economy in mid-2001 and helped cushion the economic fallout from the 9/11 terrorist attacks. In March 2002, the president signed a second tax cut that allowed partial expensing, which began the recovery in business-investment spending. In May 2003, Bush signed the third tax cut of his administration, boosting after-tax economic incentives by slashing tax rates on income, capital gains, and dividends.
Largely as a result of the president’s tax-rate cuts, the recovery has moved into higher gear. The economy grew 6.1 percent in the second half of 2003, and 4.3 percent over the four quarters of 2003 — well above potential GDP growth. Business fixed investment in the fourth quarter of 2003 was revised upward to a 9.6 percent annual rate from 6.9 percent. The stock market has now returned to the level it was at when President Bush took office, which means that all the losses that occurred since March 2000 happened under President Clinton. In January, the economy generated 112,000 new jobs — the largest monthly increase since December 2000 — and 366,000 jobs have been added over the last 5 months. The unemployment rate has declined from 6.3 percent in June 2003 to 5.6 percent in January of this year, the fastest seven-month decline in nearly a decade.
And its not just supply-siders lauding the Bush tax cuts. Goldman Sachs economist Edward McKelvey, an early skeptic of Bush tax policy, now concludes, “they definitely had a stronger impact on spending than we anticipated.” The Wachovia Economics Group reports that the “economic data provide support for the case that the midyear tax cut did take the economy up a notch. There is no need to resort to esoteric data or the torture of innocent economic statistics. The data are clear in their verdict” [emphasis added]. And International Monetary Fund economist Magda Kandil says the president’s plan “is directly targeting consumer spending and investment incentives … The end of double taxation of dividends and increasing incentives for small businesses should help sustain momentum in favor of job creation and long-term growth.”
While armchair quarterbacking is fun for politicians, voters increasingly want to know what John Kerry would do to “create jobs.” His solution, it appears, is to raise income-tax rates on job-creating small-business owners, roll back the tax cuts on investor capital gains and dividends, and cancel the scheduled elimination of the death tax. In the first presidential debate a reporter should ask John Kerry: “How will increasing taxes on those most likely to save, to invest, and to employ people create jobs in America?” His answer will tell Americans much about his own vision of America’s economic future.
– Cesar Conda, formerly assistant for domestic policy under Vice President Dick Cheney, is a board director at Empower America and a principal at Navigators LLC, a Washington-based consulting firm.