Deconstructing Deregulation

Amid the current economic contraction, there is one thing in abundant supply: blame. Equally abundant is the desire to blame George W. Bush for the recession. Indeed, writers on these pages and others have used our shrinking economy as an excuse to indict President Obama’s predecessor on everything from poor health care to climate change to racism.

There is no denying that previous administrations helped to create the conditions from which our current crisis stems, but a closer inspection suggests that Democrats deserve the most blame. Both the Bush and Clinton administrations (but especially Clinton’s) recklessly pushed to expand home ownership, fuelling the bubble in housing prices and its collapse. Former President Bush’s failure to regulate Fannie Mae and Freddie Mac permitted the crisis in subprime mortgages to build, though congressional Democrats bear the lion’s share of blame for their obstructionism: They opposed a Bush administration proposal for greater regulation, even though Fannie and Freddie’s own executives favored the change. The lack of broad oversight in financial markets led investors to rely too heavily on faulty investment ratings by firms like Moody’s.

Economists of all political stripes agree that the recession grew largely from certain issues: An unsustainable boom in home prices—propped up in part by daredevil lending—led to a rapid depreciation in home values. When transmitted through securitization, this loss of wealth resulted in a crisis of confidence in credit markets and a downturn in economic activity.

Noticeably absent from this explanation of the recession is any mention of Bush’s tax policy, health-care plans, climate-change proposals, education programs, or foreign policy. Reading The Crimson, however, you’d think the president’s policies broke the economy by themselves. Bush-hating revisionists use the unpopularity of our 43rd president to discredit conservative policies in general. But Bush’s failure to regulate financial and housing markets should not be confused with his success in economic growth, trade, education, and health care.

A common refrain of revisionists is that Bush foolishly pursued “deregulation” by cutting taxes. They simply throw out the term “Bush tax cuts” followed by a non sequitur explaining why the economy is suffering. However, tax cuts are not deregulation. Deregulation implies a change in the rules and restrictions that structure markets, while tax cuts instead put money in the pockets of American consumers to use within the existing regulatory environment. Plus, not all deregulation is created equal: The poor accounting standards that led to the Enron scandal have nothing to do with the lax supervision of securities that resulted in the current crisis. Still, revisionists continue to lump tax cuts in with lax oversight in their vapid judgments of Bush.

Revisionists also ignore the success of the 2001 and 2003 tax cuts: After their implementation, GDP grew uninterrupted for five years at an average rate of 4.1 percent, businesses created five million new jobs, and lower top marginal rates created incentives for unforeseen innovation. In fact, without the Bush tax cuts the economic downturn might have been harder on the poor. His plan increased the child tax credit and reduced rates for lower-middle-class families. The only substantive critique leveled by revisionists at the Bush tax cuts is that they widened budget deficits. But, if deficits caused the recession, it’s curious that Democrats now propose to fix the economy with even more deficit spending.

Other than tax policy, Bush’s efforts in other areas of the economy led to significant successes that have likely mitigated the current recession. Besides the Central American Free Trade Agreement, he more than quadrupled the number of trade agreements between the U.S. and other countries and would have implemented others with nations like Colombia had congressional Democrats let him. Expansions of free trade offer a potential first step to economic recovery: After all, in the beginning throes of the crisis in 2007, it was double-digit annualized export growth that kept GDP growing despite lagging consumption and investment.

Meanwhile, the No Child Left Behind Act has led to steady if modest improvement in education performance (especially among minorities), which is needed to prepare Americans for the 21st-century jobs that will lead us out of recession. Private health care and Medicare benefits also increased substantially under President Bush. Incidentally, they are the reason that wages, which are only part of employee compensation, were supposedly stagnant under his administration. Productivity expanded, in part because Bush avoided dangerous policies like card-check, which President Obama, in the middle of a recession, now foolishly advocates. Finally, the administration’s efforts on climate change resulted in 2006 in the first decline in carbon emissions in a non-recession year since 1990, without draconian or punitive regulations that would weigh down business in today’s economic climate.

Bush’s actions on taxation, trade, health care, education, and climate more likely cushioned the economic collapse than contributed to it. The Bush administration, the Clinton administration and both Republican and Democratic Congresses all deserve blame for their failures in financial market regulation and shortsighted home ownership initiatives. To blame Bush’s entire domestic policy agenda for the economic crisis, however, mistakes correlation for causation in the worst way.


Colin J. Motley ’10 is an economics concentrator in Winthrop House. He is the president of the Harvard Republican Club.