Succeeding Reagan was to be an almighty task for anyone. Following a decade of unparalleled growth and prosperity, a turn away from stagflation and the economic misery of the 70s, Vice-President George HW Bush took the reins of the Republican party and the Presidency following Reagan’s departure in 1988. Quite possibly the most qualified ever to hold office, Bush had accomplished much in his esteemed career; from battling in fighter jets in WW2 to becoming director of the CIA, there was no better man for the job. An underrated President by most historians, Bush’s economic legacy focused on pragmatism as a posed to the ideological approach of his predecessor. Similar to Reagan, Bush had been forced to comprise with the Democrats to achieve his economic targets. However, contrary to the Republican icon, Bush comprised on Republican principles, contributing to the downfall of the one-term President.
Bush broke the golden conservative rule during his term in office – he raised taxes. This economic policy of Bush proved costly, causing internal divisions within the party. During his 1988 campaign for President, Bush made this infamous pledge:
“Read my lips: No New Taxes”
— George HW Bush
Faced with a Democrat-controlled congress, unwilling to push through necessary spending reductions and efficiencies, Bush was forced to do the unthinkable. He hiked the top income tax rate from 28% to 31%; payroll taxes and medicare taxes for employers increased. These measures were introduced as part of the Omnibus Budget Reconciliation Act of 1990. Unsurprisingly, the economy tanked in the following year. Whilst this can partly be attributed to the after-effects of the Gulf War and the skyrocketing oil prices that followed, investment into the US economy fell sharply following these tax rises, thereby provoking a recession. Given that high-income individuals tend to invest disposable income, as a posed to the comsumption-driven spending of lower earning individuals, raising taxes on this income group is to the detriment of the economy.
Similarly, increases to both payroll tax and employer contributions to medicare increased; this coincided with a sharp rise in unemployment. The unemployment rate rose from 5% in 1990 to a peak of over 8% in the three years following the introduction of these measures. Small businesses, faced with the burden of higher taxes, were forced to layoff workers to remain solvent, creating the largest increase in unemployment in over a decade. Labour costs make up on average over 50% of a firm’s total expenditures; thus, raising any taxes that further increase these costs simply lead to firings and higher benefit and transfer payments from the government to the newly unemployed. Lower tax revenues and higher government spending is the result. Economic illiteracy at its finest.
Recognising why these tax increases came to fruition is obvious – government spending got out of control. One of Reagan’s biggest regrets upon leaving office was his inability to tackle the deficit and the national debt; unfortunately, Bush was left to clean up his mess and paid the price of a second term. The budget deficit grew from $200 billion to $500 billion in less than three years in Reagan’s first term. Far-left ‘experts’ claim this was due to a shortfall of revenues from the large tax cuts; au contraire, tax revenues increased each year under Reagan – it was excessive and wasteful government spending!
The budget deficit only grew under Reagan. This was largely due to defence spending increases amidst the Cold War. As Bush wasn’t able to cut growing mandatory programs such as Medicaid and Medicare due to congress he comprised and raised taxes.
Bush was unwilling to enact the necessary drastic cuts in defence spending that would’ve taken defence spending to levels at the start of the 1980s. Whilst this would’ve made economic sense, given that the threat from the East of the Soviet Union was no longer looming, under pressure from the Military Industrial Complex and ideologues within the Republican Party, Bush refrained from necessary cuts in defence spending.
Had Bush enacted welfare reform that was eventually introduced by his successor, as a posed to raising taxes and killing jobs in the process, the 1992 election may have looked very different. Loopholes within the ever-growing US welfare state made it so that a life on benefits could lead to a fulfilling life, with hard-working taxpayers forced to pick up the dole – a grave misallocation of resources. Politically popular and economically-literate, diverting money away from wasteful government spending and towards efficient private sector investment, welfare reform would’ve fuelled growth and prosperity. With this said, the Democratic-controlled congress made it very hard for him to accomplish this feat. Instead, we had the tax-hikes and the recession of 1991 that cost Bush the economy and the Presidency.
Bush established the framework for the introduction of NAFTA. Whilst brought under the limelight for scrutiny by President Trump, the North-American Free Trade Agreement gave birth to record low consumer prices for most goods and services, giving way to unbridled prosperity as disposable incomes saw greater purchasing power. Free trade amongst the North Americans allowed each nation to specialise, leading to greater efficiency and productivity, allowing for each nation to trade goods at a lower price than otherwise would’ve occurred under domestic production.
Free trade agreements have counteracted the inflationary stimulus of Central Banks globally with their expansionary gilt purchasing policies – due to these efficiencies that come with trade liberalisation. NAFTA had initially been proposed by Reagan under bipartisan support, with Bush having accelerated negotiations with neighbouring states, leaving Clinton to sign the document and claim the credit for its economic success. Of course, no policy is without its downsides. The decline in manufacturing in the midwest was the price paid for economic competition from Canada and Mexico in particular. US manufacturing firms, under threat from being undercut from foreign nations, were forced to introduce measures that boosted productivity and output – some of which included laying off unproductive workers.
NAFTA and the Productivity Boom
However, given the greater specialisation and resultant output that resulted from NAFTA, Bush’s free trade agreement brought lower prices and higher quality goods for the masses, creating economic growth and prosperity.
Ultimately, Bush’s economic legacy has come to be defined by his controversial decision to raise taxes in face of an ever-increasing budget deficit. Tasked with the impossible, Bush faced a Democratic congress, forcing compromise and economic decisions that wouldn’t appease fiscal conservatives within his party either way. Tax increases or a growing budget deficit? Bush chose the former. Combined with rising oil prices, this provoked a deep recession in 1991, leaving HW Bush destined to lose his 1992 re-election bid. The White House would have to wait eight years before a Bush occupied the Oval Office again.