When George Bush was unable to win re-election in 1992, there were many
factors which influenced the outcome of the contest. Bill Clinton was a rather unknown
commodity who was rather 'slippery' when it came to being tied down on issues. He and
his fellow Democrats ran a very negative campaign, but their 'success' came as much from
a retrospective discontent with Bush's performance in his term as President. Not the least
important grievance the electorate seemed to hold against him was his back-tracking on
his 'no new taxes' pledge made at the Republican Convention in 1988 and during the
campaign after. The third party effort of Ross Perot had a great deal to do with the
outcome, also. In fact, had he not gotten into the race, it is likely that Bush would have
won. Bush probably did better than even his own people expected, almost winning the
election. An addition factor in the contest was the state of the national economy in 1992.
Clinton campaign officials relentlessly criticized the President for what they claimed was
the 'worst economy in fifty years.' It wasn't even close to being that, but Bush clearly had
baggage on the economic front which diminished his chances. 'It's the economy, stupid,'
had much to do with the results of the election.
At least the perception of hard economic conditions played an important part in the
race. Bush was presiding over rising unemployment rates early on in the campaign,
although they had begun to decline well before election day came. For his part, Bush
seemed unable to accept or acknowledge that we were in a recession, and that fact was
used against him. Dependent upon what statistics utilized, it might very well be that there
was no recession techniquely speaking. A recession is consecutive quarters of economic
contraction, and by that standard, there might truly have been no such economic downturn
of significant measure. Quite obviously, though, there was something going on.
Unemployment reached above the 7 % level, and the administration and other
governmental bodies were taking action to counteract it -- actions which did reverse the
direction within a relatively short period of time. The unemployment rate had begun to fall
and growth had become relatively strong well before the 1992 elections. It is likely that if
the elections had been one month later or if the recovery had moved along one month
sooner than it did, even with Perot in the race, Bush would have been able to win -- which
he very nearly did anyway.
It is possible to trace the development of the economic woes the country faced as
the decade ended and the nineties began. But to do that, it is necessary to go back well
beyond the time of the eighties to begin to get a grasp on what was going on in the
country. When Ronald Reagan took office in 1981, he inherited a sick economy, but not
one which was fatally flawed. It was, indeed, the worst economy since the Depression of
the 1930's. And what proceeded from Reaganomics was to become the longest continuous
period of economic growth in peace time in the history of the country. That story will be
returned to, but it is also important to consider what Reagan was not able to accomplish.
It is often contended that the growth of the federal government in size and
expenditure began with the long tenure of FDR as President. While there is certainly
some truth to such assertions, it is not quite as simple as that. For one thing, there were in
many ways at least two FDR's, that of the New Deal and then that of World War II.
Although the economic advances of the second of these were much more important in the
development of the economy, it is true that government experienced huge increases during
both periods. Even as some of the later was shaved away after the war, little of the New
Deal was ever shed.
Some individual programs were replaced by others as they expired, but in net, the
government's size escalated with the New Deal, never to return to anything like the
preceeding level. This was actually a trend which began with the Presidency of Woodrow
Wilson, itself a continuation of the Progressive Era's enlargements. However, the late
sixties marks a period of growth of governmental largeness that nothing before it can
begin to match. From the Great Society, the public sector began to experience a growth
that has created a public sector complex of leviathan character. Even under Nixon and
Ford following LBJ the government's size and expenditures continued to expand to
colossal proportions. That growth ran almost rampant through the Carter term and felt
only the first attempt at constraints with Ronald Reagan. But even the 'cuts' won by
Reagan were for the most part merely reductions in the rate of growth of most programs.
The importance of this for the present consideration is that the growth of the
public sector made it an albatross around the neck of economic growth and development.
Just the anti-poverty programs, which had actually a negative effect on that problem with
more people living impoverished lives after thirty years, resulted in some $ 6 trillion being
spent during that time. Here, the 'crowding out' of the private sector became a very
important phenomenon for whatever the government spends must come out of the pockets
of consumers or business or from the credit markets which therefore have that much less
to invest in the private sector. Much of the decline in manufacturing's share of the
economy in the decades after the Second World War resulted due to the encroachment of
the public sector. That the country moved toward a more service oriented economy during
this period is not to be denied, either. And, a good deal of the reduction of manufacturing
jobs from 75 % of the economy in 1945 to 25 % by 1995 resulted from increases in
productivity during that same time, as well. Indeed, it is conceivable that much of such
decline could be handled by a vibrant economy which created wealth at the same or higher
levels.
However, the long term development in this direction did not keep pace with
wealth creation adequately largely because of the growth of the public sector. There has
been a steady decline in the annual rate of economic growth which matches the swelling of
the public sector, which for the most part does not create wealth, but merely redistributes
it. Even with Reagan constraints on such growth, throughout the period leading up to the
ninties, the public sector burgeoned and the resultant diminishment of private sector
vibrancy had the inevitable culmination effect of leaving the country much more
susceptible to economic cycles. Even had we not progressed so far toward the post
industrial society, it was probably almost inevitable that the forces of the business cycle
would make themselves visible following the long period of prosperity that marked the
Reagan Presidency. They had a lot of help in developing.
By this time, too, some of the more positive initiatives of NASA during the
Eisenhower and Kennedy Administrations and the tax cut and accelerated investment tax
credits of Kennedy origin had run their course by a wide stretch, especially given the de-
emphasis put on such efforts after the inauguration of the Great Society. The huge tax cut
sponsored by Reagan had much to do with the dynamic growth that occurred after 1982,
as did the tremendous push for revitalization of our military. It is true that the recovery
benefited from the pent up demand from the recession.We also experienced a tremedous
infusion of foreign capital which helped fuel that seven years of prosperity. And yet, there
were a series of measures undertaken which effected the slowdown that we began to
experience by 1991.
As much as the military build-up helped spur the economy through the middle
eighties, with the demise of the Cold War, and even before, the beginnings of reductions in
military spending began to manifest themselves in some braking of the forces of economic
growth even before George Bush became President. The continuation of this decline
actually accelerated under Bush with the aggravated consequences for economic activity.
The Reagan tax cut itself was not as good as it might have been due to concessions
that were extracted by liberals in the Congress for its enactment. For example, there was
an end legislated to sales and gasoline tax deductions, as well as a closing off of tax credits
for interest payments aside from the home mortgage interest deduction. Reagan also
accepted what amounted to a tax increase in the form of the TEFLA legislation in 1983.
The harmfulness of this was mitigated by the kind of tax increases that were involved,
however. The overall impact of Kemp-Roth followed by TEFLA was to make the tax
system a much flatter and fairer sort of construct, and one thereby much more conducive
to economic activity. The most dilatory aspect of TEFLA was the failure of the
Congressional liberals to live up to their end of the bargain, however. In order for Reagan
to accept the closure of such loop-holes, Democrats pledged themselves to the enactment
of cost cutting measures in government spending. But this was a promise that they
somehow neglected to ever undertake.
In Reagan's second term, with the increased strength of Democrats in the
Congress, a number of other measures were enacted which began to have the impact of
throwing a damper on the forces of economic activity. Government expenditures began to
grow at an accelerating pace once again. The administration was once more co-opted into
accepting things on the promise of restraints in spending -- which they did not get, of
course. One such initiative was the Tax Reform Act in 1986. This is a piece of legislation
which probably should never have passed on practical grounds because it is remarkable
that so many lobbyists were opposed to it. But they never got organized in any concerted
effort to defeat it and it was enacted before they really knew what hit them. It isn't that
some of the closures of loop holes were not warranted, although some were. Others were
less positive. Former Senator Packwood once described how he and a few of his
colleagues sat around a pitcher of beer and wrote the legislation, probably not the best
way to create the most constructive legislation.
In fact, the Tax Reform Act had a lot to do with another factor in the economic
downturn, the Saving and Loan bailout. In closing many loopholes, there were a large
number of investments which suffered less than attractive fates. These were not all bad
investments, but many were. However, in closing off tax deductions on such investments,
their value suddenly was considerably diminished, much of that stemming primarily from
their value as tax write-offs.
The S and L crisis actually had its roots back in the time of the loan shark interest
rates of the Carter administration which helped bring on the economic crunch of 1978
through 1982. Thrifts were precluded by law from offering competitive interest rates and,
faced with competition from other financial institutions offering very high yields, the thrift
industry was confronted with a major disintermediation.
The Banking Deregulation Act in 1980 permitted them to offer competitive rates
as well as the ability to make additional kinds of loans and provide other services which
they previously had not been able to offer. In short order, institutions which were starving
for capital at one moment were virtually flooded with it the next, and they began to be
able to make loans. The wisdom of some of those extensions was not always the best and
far too often they were made under rather questionable circumstances. A number of
ambitious individuals in the private sector as well as many in the public sector got involved
in things that were beyond the pale of the ethical. Just as important, many of the loans
without legal problems were less than wise in business and economic terms, and many
were made on the backs of the tax write-offs the tax laws allowed -- until 1986. Thus,
when those incentives were removed many of the properties they were sunk into lost their
attractiveness and thereby some of their value, the holders of the loans suddenly found
themselves in untenable positions. The result was a massive threat of insolvent thrifts
which the Bush administration sought to remedy. The cost was monumental. The
government had to sink billions into reorganizing the entire industry. The expense had to
be borne by the taxpayer and the credit markets from which governance sought to borrow
to help finance the reorganization to preserve faith in the banking system, without which
faith in our currency and economy might well have been jeopardized. Indeed, the deficit,
which had been closing with the growth of revenues out of the tax changes of the early
eighties and the ensuing economic boon, swelled beyond any previous levels. The overall
impact of this series of moves was to pull some of the foundation out from under the
American economy. The contribution this would make to the economic recession a few
years later was probably well worth the cost of the potential economic blow-out which
could have resulted if the insolvencies had run their course.
The developing conditions in the financial community and with regard to the value
of investments negartively impacted by the Tax Reform Act of 1986 had something to do
with the travails that the stock market suffered the following year. Stock prices had been
on the decline since about August, but the bear market went into a free fall in late
October. When this happened, the computer programs set to sell when stocks declined
went into a selling frenzy which human intervention found impossible to stop until stock
prices had tumbled by drastic levels. Apparently, the relative newness of the technology
had meant that no consideration had been given to this possibility. Before it was ended,
billions of dollars of value had been wiped out that might have been the basis for
investment, collateral, etc. Another hit had been struck against the economy and the
prosperity the country had been enjoying. Yet another impact on the economy were
effected by the compromise over social security which gave the system a new lease on life
though it was a rather limited one. The costof the social security bail out, however, was
tremendous, and registered further blows on the economic prosperity of the eighties. So,
too, did the Reagan administration's acceptance of a boost in the capital gains tax which
unnecessarily tied up a great deal of imvestment potential. One more time, the constraints
in spending that were promised by the Democrat Congress got lost in the shuffle. What
was not lost was the further undermining of the long period of economic growth.
The economy suffered another serious blow with the Budget Deal of 1989. George
Bush was confronted with a Congressional blackmail involving the shutting down of large
sections of the government due to its determination to put the brakes on Congressional
excesses. Like several times before, the blame for this was laid at the feet of the White
House. Curiously, just six years later, a similar stalemate would be blamed on the
Republican Congress as it tried to rein in the wild spending drive of the Democrats who
this time were in control of the White House. That Bush succumbed to the liberal
blackmail was to be a major weapon used against him when he sought re-election in 1992.
But what Bush's acceptance of Democrat pledges of spending cuts if he would accept a
budget with huge tax increases did was far more critical than whether or not he was able
to win a second term. Some $ 500 billion in new taxes simply tore at the heartstrings of
the economy. That it prolonged the period before movement toward a balanced budget
would be possible is also crucial to understand. The higher tax rates not only would mean
slower growth of government revenue, but would also compound the economic woes the
nation was staggering under further aggravating the situation. Bush also accepted an
increase in the minimum wage which fed the march toward economic trouble.
Before the end of that same calendar year, the wall came tumbling down. In good part
because of what the Reagan administration had been able to effect, within a relatively
short period of time, the 'evil empire' collapsed, its buffer zone of satellites would be cut
lose to develop toward market forms, and Germany would be reunited. This was an
historical moment. The end of the Cold War came not with a bang but a whimper. There
were repercussions. The uncertainty of the time would mean a time of uneasiness for the
economy, not the conditions most amenable for continued economic vitality. But it also
presented some remarkable opportunities for investment which would drain some degree
of capital flow into the United States. Furthermore, it was not just the fertile field of the
former Soviet Union that would draw considerable disintermediation. Germany found
itself confronted with monumental problems of reunification which would demand much
capital, some of which would come from what otherwise would have been investment into
the U.S.
The situation was further complicated by the worldwide depression of the late
1980's. Most regions of the world were suffering under sluggish patterns of economic
activity, and this included Japan, which for the first time in decades was experiencing
considerable economic travail. The constraining effect that had on US foreign markets
meant that we would be hurt, too, if less than other parts of the world. Most importantly,
the biggest customer the US has overseas, Japan, had less capacity to consume American
product as a result.
On top of all of this came Desert Storm. In reality, the US actually had a net plus
from this conflict. It would not have been so had the struggle not been decided so quickly.
However, there were nonetheless dilatory effects on the economy. There was both a
heightened sense of uncertainty which slowed economic activity, but the impact of the
fighting itself and its aftermath added Iraq and Kuwait to the Iranian situation. These have
been important sources of capital for worldwide economic activity, and the drying up of
capital from those three sources in the months and more after Desert Storm would mean
that a great deal of capital which would have found itself into the worldwide markets was
suddenly gone, with obvious consequences for investment and market development. That
does not suppose that it was not necessary to act against Sadaam but it nonetheless had a
most chilling impact on the world economy and, with it, that of the United States.
Like a boxer hit by a steady volley of blows, the American economy began to
sputter. We experienced a rise in unemployment which, while it never reached the levels of
other industrialized nations, did result in curtailed prosperity. It was clearly not the 'worst
economy in fifty years' as the Clinton campaign and media would portray it. The Carter
1979 to 1982 depression had been far worse. If it helped cost Bush re-election, of more
importance was the impact on the world's most important economy which staggered back
to levels of growth hovering only around 3 %.
The American government in the last year of the Bush Presidency did undertake
important efforts to counteract the recession, even if they wouldn't call it that. George
Bush sought and achieved a reduction in the amount of withholding from the paychecks of
American taxpayers, putting a modicum of money in the aggregate into the economy. It
was unable to effect passage throught the Democrat Congress of a capital gains tax cut
which would have unleased a huge dynamo of investment to offset the situation.
More important were actions taken by the Federal Reserve under Alan Greenspan.
The Fed undertook a massive effort to pump up the money supply. It lowered the
discount rate, and launched upon a course of massive infusion of wealth by buying paper.
It removed any reserve requirement for time deposits, whatsoever,
unleashing tremendous credit possibilities.
It also acted for the first time in decades to lower the reserve requirement, permitting
overnight billions of dollars in new credit and investment to proceed. The economy
responded too slowly to help Bush, but the massive infusion of money supply slowly
turned the dragging economy around and put it on a course of expansion which would
proceed throughout the ensuing several years. The increased money supply remained a
worry for Alan Greenspan for a long time after that, as the Fed stayed jittery about the
danger of a spate of inflation thoughout the next four years, especially given the dollars
steady decline in international markets (what after all is a dollar that is worth less? -- that
is the definition of inflation. That we did not experience a wave of inflation in the first half
of the nineties had much to do with the huge retroactive tax increase Clinton was able to
squeak through in the early months of his administration. What that did do, however, was
to restrain the recovery so that growth rates slowed to levels of just over 2 %, quite lower
than the 'worst economy in fifty years.'
From 1993, the deficit did narrow gradually, but this had very little to do with
anything the Clinton administration did, including its 'Deficit Reduction Package.' It had
much to do with the evolution of the savings and loan bail-out. By this time, the crisis had
been largely resolved (at great cost), but the government and the Resolution Trust
Corporation held tremendous assets which it could begin to sell-off.
This meant a huge influx of revenue to the government. The deficit had begun to close
prior to the crisis and would have balanced within a few years, especially with the
wreckless defense cuts which amounted to a 43% decrease between 1987 and 1996, had
it not been for the necessity of the bail-out, the recession, and the tax increases that were
enacted ostensibly for deficit reduction (they, once again, had the opposite impact).
Taking off from the Bush record, the Clinton administration began a massive military
reduction schedule which slashed the defense budget. Even with the increases in other
government spending it pursued, the deficit in net began to grow smaller. The one thing
that the Clinton people did that had a small impact on the deficit actually would mean a
larger bite of government revenue over the long term.
Clinton opted to refinance federal debt as it came due in larger measure by short
term debt which carried with it a lower interest rate than longer term refinancing would
have. However, this action began to force up short term interest rates. The short run gain
thus achieved would be a long term loss when the notes came up for refinancing in short
order and would have to be recycledat higher rates than could have been achieved had it
been refinanced over longer periods of time initially. This also meant that anyone else, as
those in the private sector, would have to pay higher interest rates, as well. So the short
term gain that was a long term loss was even more of an expense to the private sector
which would ultimately be borne by the consumer and middle class. Clinton also 'benefited'
from the vibrancy of several state economies resulting from state level, governor
sponsored tax cuts and the like, though he had nothing to do with them, and indeed many
of his liberal compatriots had vigorously opposed.
When the strength of Republicans in Congress began to grow and then the GOP
captured control of the Congress after 1994 and began to constrain spending, the deficit
shrunk even further. It is curious that they were raked over the coals for their hard-
heartedness and mean-spirited agenda by the same people who would then claim credit for
the reduced deficit which resulted. It should not be overlooked that the constraints did not
constitute 'cuts,' although that is what they were called. It appears that a great many
citizens were taken in by this ruse, as they were sold the perception that the Republican
agenda was to starve and deny health care to the old, poor, children, and infirm. This
message foisted upon them throughout 1995 and 1996 played an important part in the
1996 campaigns, allowing the Democrat liberals to 'have their cake and eat it too.' The
GOP was responsible for the heartless cuts which produced the lower deficits which the
Democrats were claiming credit for having achieved!
What Bush should have done in 1989, and what Clinton should have sought in
1993, and what the American people should have opted for in 1996 is tax reductions. The
15 % tax cut and the 50% capital gains tax cut, et al, proposed by the Dole campaign were
precisely the medicine the economy needed. Far from 'blowing a hole in the deficit,' the
impact would be precisely the opposite.
What people do not realize is that many of the populist measures undertaken in the
last few years amount to little more than tax increases. Among such actions would be
higher taxes on business, the family leave act, and the minimum wage hike, as well as
increased government regulation of business. With the steady increase in government
employment, taxes are raised, too, even if not overtly by higher marginal rates, then by
decapitation of economic growth and development which holds down incomes. By
creation of public jobs there is no new wealth creation. The people holding such jobs do
not gain employment in the private sector and are therefore not productive of wealth. As
the diminishment of any man diminishes all men, so does the diminishment of wealth
creation diminish the wealth of all.
This is not just 'trickle down' economics. It does stem from the supply side, of
course, but it is precisely the formulation Kennedy used in seeking not only a tax cut but
also in enacting accelerated investment tax credits. That this is said to mean 'tax cuts for
the rich' is sheer demogoguery that makes understanding how the economy functions, and
how growth and development are dependent on rising ratios of social surplus, apparently
so difficult for many to comprehend. Demand side tax cuts may be more popular and do
put money in people's pockets to spend, perhaps spurring the economy, but supply side
cuts engender investment and wealth creation and employment, which gives people more
jobs and income.
We may also apply this same analysis to the post 1991 recovery period.
ContinueReturn to Beginning of Fall 1997 IssueReturn to the Beginnning of ejps
