The Economic legacy of the Bush administration

An underrated President by many, George W Bush took office in 2001 amid a recession due to the collapse of the tech bubble that began in the 1990s. Bush’s first election was of particular controversy, due to the close margin of victory in Florida that pushed him just over the 270 electoral votes that were required for victory. He promised a return to ‘compassionate conservatism’ alongside a return to morality, following Bill Clinton’s various affairs whilst in office. During his two terms in office, Bush pursued a fiscally conservative tax agenda, which proved successful in ensuring a quick economic recovery from the recession that followed after 9/11. However, the final two years of Bush’s second term were dominated by the Sub-prime mortgage crisis and subsequent Great Recession, with the Republican administration enacting several stimulus packages designed to improve the state of the economy. Whilst Bush’s taxation policy was very successful, excessive government spending from the increasing centralisation of education and the Iraq war, grew the budget deficit year on year, resulting in rising government debt levels.

Taxation

The Republican administration enacted two tax-cut laws that successfully spurred economic growth. In 2001, the Bush administration cut taxes for all income groups, lowering the lowest tax rate from 15% to 10%, cutting the 27% rate to 25%, the 30% rate to 28%, the 35% rate to 33%, and the 39.6% to 35%. In 2003, Bush passed another round of tax cuts which lowered taxes on dividends and capital gains. The effect of these tax reductions wasn’t realised immediately, due to the recession that followed 9/11. However, by 2006, economic growth was strong and unemployment had fallen. This is because tax reductions on lower earners prompt higher spending within the economy, due to lower-income individuals having a higher propensity to consume. As their disposable income increases, these individuals have more money to purchase goods and services. This results in greater profits for firms, leading to greater investment into the factors of production, leading to more jobs and more innovation within the economy. At the same time, reducing taxes for wealthier individuals also results in greater investment. This is as higher-income individuals are more likely to invest their money into businesses, leading to these firms having more capital at their disposal.

The result of these reductions was economic growth, greater prosperity and rising living standards; the average American family received a tax cut of $4,000. These tax cuts boosted economic growth insofar as tax revenues increased over time. Even though the top marginal tax rate was slashed from 39% to 35%, the richest 1% of earners paid over 33% more in tax by 2006 compared to 2001. Before the Bush tax cuts took effect in 2001, the top 1% paid $301 billion; by 2006, this sum had reached $408 billion. Therefore, the lower tax rates introduced by the Bush Administration not only gave individuals the financial freedom to spend money in whatever manner they wanted, but it also resulted in higher tax revenues, due to the economic growth that followed. These tax cuts were so successful that the Bush’s successor, Barack Obama, extended these tax cuts, despite having campaigned on a fiscally liberal agenda.

Government expenditure

Whilst the Bush administration had successfully reduced tax rates, they failed to curb the excessive growth in government spending. When adjusted for inflation, Bush spent almost twice as much as his predecessor, Bill Clinton. This was the result of the War on Terror in Afghanistan and Bush’s failure to decentralise government departments as he had promised in his 2001 election campaign, resulting in the continued centralisation of education.

Government Spending by each President: 1954-2008

The War on Terror, following the 9/11 attacks contributed greatly to the ballooning budget deficit. In 2001, defence spending stood at $300 billion; by 2008, this figure had reached $670 billion. This represented an increase of over 100% in the defence budget. Whilst increases in defence spending were warranted following the terrorist attacks of 2001, the excessive increase that had come to fruition certainly wasn’t necessary. The result was the US spending more on the military than the next seven countries combined, most of whom were US allies. Therefore, the unnecessarily large increases in defence spending contributed greatly to the growing budget deficit and government debt under Bush.

In addition, the increasing centralisation of the education system under Bush grew the budget deficit. When campaigning for President in 2000, Bush promised to return education ‘back to the states,’ thereby abolishing the Department of Education. This was undoubtedly a good idea, as US educational standards relative to other nations had been falling ever since its introduction in 1979. For much of the 1970s, the US had been ranked number 1. in high school and college education globally. However, by 2009, the US ranked 18th out of 36 industrialised nations. This is due to the increasing bureaucracy and inefficiency that centralising education brings. Bush accelerated this centralisation during his time in office, overseeing a 40% increase in funding for the Department of Education. Even though funding increased, educational outcomes continued to decline, representing a catastrophic waste of taxpayer money.

Great Recession

The Bush Administration responded poorly to the Great Recession of 2007-8 by bailing out a large number of banks and firms. In October 2008, the Emergency Economic Stabilisation Act (EESA) was signed into law by President Bush. This bailout package cost up to $700 billion, with nearly $200 billion allocated for the bailout of AIG, with the rest contributing to the bailout of other big institutions. AIG had engaged in risky financial transactions in the years leading up to the crash, by using the cash of those they insured. Bailing out AIG represented a disaster for taxpayers who were made to pay for their risky actions. Instead of letting the insurance provider fail like had been the case for other financial institutions such as Lehman Brothers, the US government has essentially encouraged these big firms to continue to take excessive risks, as they are now deemed ‘too big to fail.’ This is made evident by the fact that banks are more leveraged now than at any time during the 2000s.

Ultimately, the Bush Administration transformed the American economy. Bush cut taxes for low and middle-income Americans, taking six million of the lowest earners out of income tax altogether, whilst shifting the tax burden onto the wealthy. Contrarily, government spending rose drastically under his watch, spending more than the previous six Presidents when adjusted for inflation. His response to the Great Recession was one that has encouraged financial institutions to incur more risk, exemplified by the increasing risk and debt that they have taken on since then. With this said, Bush remains an underrated President by most political commentators.