Supply Siders Should Eagerly Bid Bush Adieu
Ever since the rebirth of classical economic theory as "supply-side" economics in the late '70s, the mainstream media have perverted its meaning as having solely to do with lower tax rates leading to higher federal revenues. And while empirical evidence shows the latter to be true, the real meaning of supply-side economics is actually quite expansive.
Measures passed by governments that reduce the barriers to work effort are what constitute true supply-side, or classical economic policy. Simplified, governments in a broad sense can negatively increase the barriers to work in four ways: through more regulation, tariffs on trade, higher penalties (taxes) on work, and currency devaluation. If they do, economic stagnation is frequently the result, while supply-side policies meant to enhance growth once again involve reductions in those wedges placed between work and reward.
And with President George W. Bush set to depart the White House today, it’s perhaps useful to look at his policies through a supply-side prism. Sadly, for a president who ran as an economic conservative, the economic policies forwarded by the Bush administration had very little to do with supply-side economics. Indeed, if his policies are to be viewed objectively, it should be said that adherents of the classical model should be eager to see Bush go.
With regard to regulations, they first and foremost inhibit natural economic activity that might otherwise be different absent rules set by the government. In one sense, Bush didn’t do too badly. When it came to the growth of the federal registry, pages under Bush rose 11 percent versus 21 percent during the presidency of Bill Clinton. On the other hand, the pages in the registry actually declined 12 percent under Ronald Reagan, and as Bush ran as Reagan’s heir, it’s fair to say he failed in this area.
Worse, not all regulations are the same in terms of how they deaden economic spirits. In that sense, Bush failed for eagerly signing Sarbanes-Oxley, a law that was successful only insofar as it expanded the need for legal and accounting services. Far from an economy enhancer, SarBox to a high degree turned otherwise entrepreneurial CEOs into slaves of accountants and lawyers. Failure was criminalized, and as such, the very risks that need to be taken by companies in order to grow were subsumed by draconian new rules that elevated economic facilitators over producers.
The Bush administration also foisted on the economy the Troubled Asset Relief Program (TARP), a program billed as capitalism’s savior. Given the collapsed shares of its alleged beneficiaries, it would be more true to say that government investment is always and everywhere an economic retardant given the basic truth that government money never comes without strings attached. In short, with the government now an owner of our banking system due to irrational fears suggesting the system was on the verge of collapse, our financial system will be weakened for the foreseeable future based on past and future certainty that its investment won’t be passive. In time, TARP will make the Community Reinvestment Act and other unfortunate regulations seem miniscule by comparison.
On the trade front, the departing head of one of Washington’s most prominent think tanks recently said despite Bush's many mistakes, he was strong when it came to free trade. Apparently this person missed the imposition of steel and soft-wood lumber tariffs early in Bush’s tenure, shrimp tariffs later on, and the administration's frequent jawboning of China for its allegedly weak yuan. Some might point to Bush’s aggressive efforts to pass a trade agreement with Columbia, along with positive rhetoric with regard to the latest (and failed) GATT round, but through the imposition of earlier tariffs the U.S. lost a lot of credibility that made future trade agreements less doable.
Perhaps worst of all, Bush caved when GM and Chrysler threatened bankruptcy absent a federal bailout. Suffice it to say, taxpayer subsidization of our ailing carmakers is but a tariff by a different name, and it might foretell a negative response from foreign governments. In the end, tariffs are a tax like any other, and as we work in order to consume freely, tariffs are a tax on work that Bush did too little to reduce.
When GOP partisans draw an economic line in the sand to defend Bush, they usually do so by noting the 2003 reductions in taxes on income and capital gains. There they have a point in that ’03 cuts were a certain positive for reducing the penalties on work and investment success.
But it should also be said that many of those same defenders miss the point. While almost to a man they would decry the explosion in spending under Bush not seen since the days of LBJ, they frequently fail to see the main reason why government spending is such a huge weight on the economy.
Spending is problematic because at its core, it too is taxation. When governments tax or borrow in order to spend, they are by definition reducing the amount of capital available in the private sector. Government spending is a tax, because spending by the government is money taken directly from our wages.
Worse with regard to Bush, his administration foisted no less than two “stimulus” packages on the economy; spending that once again withdrew capital from the private sector. And if that wasn’t bad enough, stimulus can only be an economic retardant for the wealth redistribution that it entails causing its alleged beneficiaries to work even less.
Lastly, when the government is not taxing or spending, it can tax us another way, and that is with inflation. Regardless of relatively low government measures of inflation wrought by productivity overseas, Americans were handsomely fleeced during the Bush years.
While the dollar bought 1/250th of an ounce of gold in 2001, as of this writing it buys 1/819th of an ounce. The aforementioned tariffs were a strong signal from the Bush administration that it desired a weaker dollar, and the aforementioned jawboning of China with regard to the value of the yuan was yet more confirmation.
Bush’s Treasury Secretaries of course paid lip service to a strong dollar being in our interest, but their frequent admonition that “markets” should set the price of the dollar concept revealed that a collapsing unit of account would be countenanced. And when we consider the strong correlation between weak dollars and failed presidents, the greenbacks’s decline on Bush’s watch is the largely untold explanation for his unpopularity. Put simply, voters will put up with a lot, but if the money they earn is being devalued, they become angry. Bush and the Republican majority ignored this truth all the way to minority status.
So while Bush got taxes right in 2003, his other economic policies largely taxed real work, and the direction of the S&P 500 during his tenure confirms as much. Indeed, while many would tie the lowering of tax rates to rising markets, the policies pursued under Bush undermined the good and the S&P fell 34 percent during his time in office. Even if we measure the S&P post 9/11, we find that it still fell 8 percent. To show readers how poor this performance was, the S&P even gained under Jimmy Carter - in his case 24 percent.
What’s comforting in all this is that the basic rules with regard to economic growth still hold. If we reduce the regulatory, tariff, tax and currency barriers to growth, the economy performs well. Unfortunately, none of this was done under Bush. At best we can say that his policies were anti-supply side.
So while his being the only 21st century president means George W. Bush can presently claim to be both the best and worst of the century so far, it seems not much of a reach to assume that the man who said his administration had to intervene in markets in order to save them will go down as the worst economic president of the 21st century. Whatever history's judgement, supply-side thinkers should eagerly bid Bush goodbye for bringing discredit to economic theories that he sadly never implemented.