Republicans Should Acknowledge Bush Economic Errors

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The sour economy is presenting Republicans with a golden opportunity to retake both houses of Congress. The Democrats will try to defend their seats by attacking Bush's record on the economy. Republican candidates should counter this move by acknowledging the economic errors made during the Bush years. This will help restore the credibility of the Republican brand with respect to the economy and free up the candidates to move on to what really matters-the future.

Just how bad was the Bush administration's stewardship of the economy? A good measure of economic performance is the "Real Dow", which is the Dow Jones Industrial Average divided by the price of gold. The Real Dow is a proxy for America's real wealth, the sum total of what Americans have worked 400 years to accumulate. A rising Real Dow is highly correlated with rising employment and real wages, while a falling Real Dow signals mounting economic distress. The Real Dow is also a good predictor of whether a presidency will later be considered to have been a success or a failure.

In December 2000, the Real Dow stood at 39.63. By December 2008, it was down to 9.85. During Bush 43's eight years in office, the nation's real wealth declined by 75%. Given this long, steep decline, the Republicans' loss of Congress in 2006 and the Presidency in 2008 was not surprising.

Was Bush 43 the worst post-1952 president in terms of the economy? No, he was the second-worst. Jimmy Carter managed to drive the Real Dow down by 78% in just four years, 1976-1980. If considered as one presidency, Nixon/Ford was the third-worst, with the Real Dow declining by 68% from December 1968 to December 1976. The Real Dow also declined (by 5%) from December 1964 to December 1968 under Lyndon Johnson, contributing to his failed presidency.

In terms of the Real Dow, the most successful presidents since 1952 were Clinton (+302%), followed by Reagan (+229%), and Eisenhower (+125%). Bush 41 produced a very respectable gain of 87%. If he had read his own lips on taxes, he would almost certainly have been reelected in 1992. The economically successful presidencies are rounded out by the four Kennedy/Johnson years, during which the Real Dow gained 43%.

So, what were the mistakes that made Bush 43 the second-worst president since 1952 with respect to the economy?

The biggest single economic error Bush made was his "weak dollar" policy. While the president has no direct control over monetary policy, it is said that a president always gets the monetary policy he wants. Bush (and his Treasury Secretaries) wanted a weak dollar, and they got one. The dollar lost 69% of its value against gold during the Bush years. This accounted for almost 80% of the decline in the Real Dow during his presidency.

The unstable dollar during the Bush years was the root cause of the financial crisis of 2008. The dollar fell almost continuously during the first seven years of his term. By February 2008, it had lost 72% of its value. This long, deep slide engendered a speculative asset bubble that was fueled by massive increases in leverage and a proliferation of derivative instruments. Then, in mid-March, 2008, perhaps shocked by the gold price breaching the $1000/oz level, the Fed reversed course.

Highly leveraged inflation hedging strategies cannot survive deflation. During the next six months, from mid-March to mid-September 2008, the value of the dollar rose by more than 30%. On September 15, 2008, Lehman Brothers filed for bankruptcy. The ensuing financial crisis crashed the real economy, sent unemployment skyrocketing, and elected Barack Obama president.

The second biggest economic mistake made by Bush was to allow Lehman Brothers to undergo a disorderly collapse. If this had not happened, the necessary liquidation of the asset bubble could have proceeded in a much more orderly way, with much less damage to GDP and employment.

The third biggest economic error under Bush was the design of the 2001 tax cuts, which phased in the reductions in the top income tax rate over 5 years. As we learned in 1981-1982, phased-in tax cuts guarantee economic sluggishness, because people defer income until the lower rates take effect. The result was a "jobless recovery", slow growth, and escalating deficits. The 2001 tax cuts also wasted $58 billion on futile Keynesian "stimulus", an error that Bush was to repeat in 2008.

If Bush had gotten his 2001 tax cuts right, and economic growth in fiscal years 2002 and 2003 had averaged 3.5% instead of 1.6%, the "Bush deficits" would have peaked at 2.5% of GDP in FY2004, rather than at 3.5%. A continuation of 3.5% real growth would have put the budget in surplus by FY2007, despite the massive spending.

The fourth largest economic mistake Bush made was to make Social Security reform the number one domestic priority of his second term, rather than making the 2003 tax cuts permanent. When it comes to Social Security and Medicare, the people don't (and didn't) want tax increases, benefit cuts, a higher retirement age, and/or privatization. They want 3.5% real economic growth, which would make the existing programs affordable. As things stand, the expiration of the Bush tax cuts will depress economic growth and add to the financial woes of Social Security and Medicare.

The fifth biggest economic error of the Bush years was his failure to make America's corporate income tax competitive internationally. From 1987 to 1999, the U.S. corporate income tax rate was lower than the average of the other OECD nations. By 2001, it was higher, and the gap was growing. The 2003 tax cuts attempted to offset this by cutting the top personal income tax rate on dividends to 15%, but this was not nearly as effective as simply cutting the corporate tax rate. Going forward, the corporate income tax is a luxury that America cannot afford. It costs far more in lost investment, employment, and economic growth than it produces in Federal revenue.

There were many other economic mistakes made during the Bush years (Sarbanes-Oxley, the auto company bailouts, Medicare Part D, the steel tariffs, the 2008 "stimulus" bill, "mark to market" accounting, allowing the Fed to pay interest on bank reserves, etc.), but the above are the "Big 5".

Because the Democrats have "doubled down" on Bush's economic errors, Democrat-held House and Senate seats are ripe for the picking. During the first 18 months of the Obama administration (i.e., through June, 2010), the Real Dow fell by another 11% to 7.86, which was the level of June 1952. After 16 months of massive government "stimulus", total employment in June 2010 was 6.0 million below what the administration predicted it would be if the stimulus bill passed, and 3.2 million lower than they said it would be if the stimulus bill didn't pass. If the labor force participation rate had not unexpectedly declined, June's unemployment rate would have been reported at 11%.

In desperation, the Democrats will try to "run against Bush". Republican challengers should run against both Obama and Bush. However, highlighting Bush and Obama's economic errors will not be enough to achieve a landslide victory in November. Republicans must also present a plan for prosperity. This plan should be based upon the age-old formula for prosperity: economic freedom, the rule of law, stable money, low tax rates (especially on capital), free trade, and sane regulations. If Republicans acknowledge Bush's economic mistakes and present a credible plan for prosperity, they should do very well on November 2.


Louis Woodhill (, an engineer and software entrepreneur, and a RealClearMarkets contributor.  


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