WSJ: Bush's Economic Record ... Why He's No Hoover

Editorial, in the WSJ (Sept. 1, 2004):

As the Republican conventioneers proclaim the Administration's infallibility inside Madison Square Garden and protesters build "Bush-villes" outside, is there room out there for a balanced view of President Bush's track record? Since nobody else seems to be offering voters the big picture, here's our take on the Bush economy.

John Kerry and the Democratic talking points compare Mr. Bush to Herbert Hoover again and again, and they are right only in the sense that his Administration has witnessed a net loss of jobs across four years. But the truth is that Mr. Bush has had to steer through some very large hazards that could have produced a much deeper, even a Hoover-like, slump. The tech bubble that began to burst in spring 2000, the 9/11 attacks and the corporate scandals all sapped the confidence of business -- and the seeds of all of these were inherited from the Clinton years.

Even Democratic economists, such as Laura Tyson and Robert Rubin, agree that faced with recession some fiscal stimulus, perhaps including tax cuts, was necessary. That is, they acknowledge the need to run a budget deficit as a countercyclical measure. But their preferred tax cut is the temporary "rebate," putting money into the hands of consumers in the hope of stimulating demand. Beyond that, they favor increased government spending for the same purpose.

Mr. Bush actually tried this in 2001, with his "insurance policy" round of tax cuts, in the form of rebates and marginal-rate income-tax cuts that were phased in over several years. But phased-in cuts are an incentive to defer income, and after 9/11 it became clear this was not sufficient, and that the U.S. economy risked sinking into a deeper slump.

At that point, Mr. Bush deserves credit for not taking the politically easy road of trying more of the same. Instead he doubled down on his tax cut bet, shifting the emphasis from stimulating demand to stimulating the productive elements of the economy. This change in approach, not tax cuts or deficit spending in themselves, is the apostasy that now drives the Democrats crazy.

But the overwhelming evidence so far is that this has worked. The graph nearby shows that while growth bounced back some in early 2002, it retreated later that year and into the beginning of 2003. It was only when the 2003 tax cuts passed Congress in mid-year that the expansion really gained steam.

Those tax cuts are criticized for favoring the rich. In fact, they lowered the burden for all, although because the rich pay the most taxes it is inevitable that in dollar terms they enjoyed the biggest break. The child tax credit took many lower-income workers off the tax rolls entirely. The elimination of the marriage penalty, increased college tuition deductions and higher retirement contribution limits all helped the middle class.

But in retrospect, it's clear that the largest economic boost came from cutting the tax on capital. By reducing the bite on dividends and capital gains to 15% from as high as 38.6%, investors' calculations of the return necessary to justify any given level of risk was immediately reduced. Accelerating the marginal rate cuts to take place immediately also lifted the incentive to invest. The stock market rose and balance sheets improved. Not surprisingly, all of this has led to more investment....