In his campaign for President in the year 2000, George W Bush appealed to the common dislike of paying taxes. He made tax cuts the centerpiece of his campaign, and upon taking office he made tax cuts his first major legislative priority. His appeal: "it's your money." A recession had begun at the end of the Clinton administration, and Bush believed that tax cuts would stimulate the economy.
There had been the dot-com bubble. Speculators had been eager to invest in stocks associated with the computer craze. The Fed Chairman, Alan Greenspan, back in 1996 had warned about an "irrational exuberance," to no avail. Dot-com companies were racing for position, pursing the dream of economic success while the idea prevailed to "get large or get lost." (There had been 16 dot-com commercials during the January 2000 Super Bowl, each commercial costing $2 million for a 30-second slot.) But there was only so much room for success with profits.
The market did its job of punishing. The economy was more than dreams and an enthusiasm competition. There was the dynamic of debt and profit possibilities. Sober investors worried about dot.com company debt compared to profits, and eventually the sellers of dot.com stocks began to outnumber the buyers. The climb of stock prices stopped and a race began to sell before others did, sending stock prices into a crash mode. The bubble had burst. Good companies sank along with the bad. Amazon.com had been at a high of $94 per share at the end of 1999 and in October 2001 it fell to $7.2 per share. (Tens years later, Amazon shares would be selling at 18 times that, and in June 2017 it would rise to $1,000 per share.)
Bush's tax cut was signed into law in June 2001, with Bush surrounded by the happy faces of Republican Party leaders, all expecting great success. (image).
The tax bill lowered the top income tax rate from 39 to 35 percent and reduced the estate tax. Those with incomes over a million got a tax cut of $18,000 — more than 30 times larger than the cut received by the average American. In his State of the Union message in January 2002, he spoke of the nation still in recession but that he looked forward to his tax policy helping the economy by "encouraging investment in factories and equipment, and by speeding up tax relief so people have more money to spend. To enthusiastic Congress people he added:
For the sake of American workers, let's pass a stimulus package. (Applause.) Good jobs depend on sound tax policy. (Applause.) Last year, some in this hall thought my tax relief plan was too small; some thought it was too big. (Applause.) But when the checks arrived in the mail, most Americans thought tax relief was just about right. (Applause.) Congress listened to the people and responded by reducing tax rates, doubling the child credit, and ending the death tax. For the sake of long-term growth and to help Americans plan for the future, let's make these tax cuts permanent. (Applause.)
The economy in 2001 declined 1 percent (down from a growth of 4 percent in the year 2000). In 2002 the economy grew a little under 2 percent, and there were homeowners who were having trouble paying their mortgages as their mortgage rates reverted to the regular interest rate.
In January 2003, Congress passed Bush's second tax act, saying again that the plan would "stimulate the U.S. economy, end the recession, and create jobs." Democrats dismissed the plan as financially. The cuts had been largely opposed by American economists, including the Bush administration's own Economic Advisement Council. There were 450 economists, including ten Nobel Prize laureates who signed a statement that "these tax cuts will worsen the long-term budget outlook... will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research."
With the dot.com recession in mind, the Federal Reserve Board was lowering interest rates until 2004, described by some as injecting huge amounts of "easy" credit-based money into the financial system, creating an unsustainable economic boom (Wikipedia, footnote 52).
In Janury 2004, Bush told Congress that,
Americans are proving once again to be the hardest-working people in the world. The American economy is growing stronger. The tax relief you passed is working. (Applause.)
In 2004, Bush ran for re-election against John Kerry. The US had been at war in Iraq for more than a year, and it was at war in Afghanistan. Kerry talked up his military service (annoying those veterans who didn't believe in using their service for boasting in contrast to the silent who had died in combat), and Kerry put himself on the tax cut bandwagon, on the side of the middleclass, saying in his second debate with Bush (on October 8):
Bush thinks it's more important to fight for that top 1% than to fight for fiscal responsibility and to fight for you. I want to put money in your pocket. I have a proposal for a tax cut for all people earning less than the $200,000. The only people affected by my plan are the top income-earners of America.
Kerry won only 48.3 percent of the vote and 19 states while Bush won re-election with 50.7 and 31 states (286 electoral votes to Kerry's 251). Bush's approval rating was around 53% and disapproval around 44, and those figures were to change little in 2005. Bush tried to rally the public by describing the nation as at war, but some in the military were dismayed by what seemed to them as only the military at war. Bush appeared to be for a continuation of happy consumerism, people buying things with the money they had received from tax relief and paying with their credit cards — more debt. There wasn't the sense of public sacrifice for the war, including the need of taxes to pay for the wars.
The federal government's public debt as a percent of GDP was rising every year, as were Bush's budget deficits (the government spending more than it received in revenues). In 2001 his deficit was $128 billion, in 2002 $158 billion, in 2003 $378 billion, and 2004 at $413 billion.
In August 2005 Hurricane Katrina, with winds as high as 175 mph caused catastrophic damage along the Gulf Coast from central Florida to eastern Texas. Some estimates said the storm's economic impact was $200 billion, and US economy fell to 1.5 percent for the last three months (the last quarter) of the year. The Gross Public Debt as a percentage GDP was rising, but modestly from 33.6 percent in 2000 to 35.6 percent in 2006. The coming recession (less GDP) would elevate that debt to GDP figure considerably. The Republican theory was that the economy stimulated by tax cuts would accompany a reduced debt relative to GDP.
Real estate is the largest single form of wealth. In the early 2000s, real estate prices were rising and people were buying and selling homes for a profit, some owning maybe three homes at a time, holding them for a year or so — their speculations contributing to the rising prices. The website Investopedia.com writes of "housing prices fueled by demand, speculation and exuberance." And it goes on:
...the mania over homeownership grew to alarming levels as interest rates plummeted, and strict lending requirements were all but abandoned. It is estimated that 56 percent of home purchases during that period were made by people who would not have been able to afford them under normal lending requirements.
Big financial institutions were putting their loan deals in what they thought were clever investment packages and selling them to other financiers, packages called Mortgage-Backed Securities. Buy these financial packages allowed non-bank financiers into the mortgage game, and free of government regulations (detested by Republicans) these go-go lenders were not always careful about the solvency of their customers.
Home prices peaked in mid-2006. In his January 2007 State of the Union message, President Bush spoke of economic success:
We are now in the 41st month of uninterrupted job growth, a recovery that has created 7.2 million new jobs so far. Unemployment is low, inflation is low, wages are rising. This economy is on the move. And our job is to keep it that way — not with more government but with more enterprise. (Applause.)
Meanwhile an old story was starting to unfold: having made too many bad loans, lenders were in financial trouble. New Century Financial, a company that specialized in "subprime" home mortgage lending (lending to borrowers with a poor credit history) stopped trading on Wall Street. And on April 2 the company declared bankruptcy.
For many it was still a go-go economy. The Dow Jones Industrial Average hit a high on October 9, at 14,164. Then it started to decline, and people raced to sell.
In January, Bush announced:
Our economy is undergoing a period of uncertainty... Wages are up, but so are prices for food and gas. Exports are rising, but the housing market has declined. At kitchen tables across our country, there is a concern about our economic future... Last week my administration reached agreement with Speaker Pelosi and Republican Leader Boehner on a robust growth package that includes tax relief for individuals and families and incentives for business investment.
The housing bubble was bursting. The financial sector of the economy was described by the economist Joseph Stiglitz as the role of allocating capital and managing risk, "both with low transaction costs. Instead, it was misallocating capital: "it provided hundreds of billions of dollars to housing ― for houses that were beyond people’s ability to afford and in the wrong places."
February 13, 2008: President George W. Bush signed into law the Economic Stimulus Act of 2008 into law. It provided many Americans with income tax rebates and gave tax breaks for businesses purchasing new equipment. The rebate checks boosted "overall nondurable consumption by 2.4 percent in the second quarter of 2008" (Wikipedia). But finacial sector problems were growing.
In March, after losing billions in subprime mortgage investments, the 85-year-old brokerage firm Bear Stearns collapsed and was purchased by JPMorgan Chase at the cut-rate price of $2 per share. (Bear Stearns stock had been valued at $30 per share just days before the sale.) And news of the sale sent global stock markets tumbling.
Lehman Brothers, the fourth-largest investment bank in the United States (Goldman Sachs, was the largest) suffered from a loss of customers and a dramatic drop in the price of its stock, and on September 15 it filed for bankruptcy — the largest bankruptcy in US history. News of this sent stocks down around the world.
There was alarm that the economy was "going over a cliff" and that a bank bailout was needed. Many, including conservatives, were opposed to the proposed government (taxpayer) bailout that went up for a vote in Congress in early October. It was voted down, and with this the Dow suffered its largest-ever weekly loss: 1,874 points.
In early November, Barrack Obama won the presidential election, defeating the McCain-Palin Republican ticket. (A decade later, crazies would blame the drop in the Dow and the Great Recession on a loss of confidence created by Obama's election — more of those who saw the economic downturns as the product of a drop confidence. And there would be the radio host Sandy Rios blaming the economic crash on billionaire investor George Soros trying to get presidential candidate Obama elected.)
(Entertaining comedy came in October 2008 with Tina Fey playing Sarah Palin in her vice presidential debate opposite Joe Biden. First, skip the ad.)
Through the year of 2008 a total of 3,157,806 foreclosures had been filed on 2,330,483 properties, up 81 percent from 2007. George W Bush's presidency was at an end. His approval rating was 34 percent and disapproval was 61 percent. He was passing to the Obama administration the wars in Iraq and Afghanistan and what the International Monetary Fund concluded was the worst global recession since the Great Depression in the 1930s.
CONTINUE READING: Obama, Recession and Ideology, 2009 and 2010
Copyright © 2018 by Frank E. Smitha. All rights reserved.