The central mantra of President Obama’s campaign is false. That mantra is: “The Republicans tried their plan for the economy and it failed. I tried a new plan and it worked.” As I pointed out on National Review Online yesterday, the facts are otherwise. Closing out his fourth year in office, President Obama has an 8.3 percent unemployment rate. He also boasts the lowest rate of participation in the labor force in 30 years (63.7 percent). More Americans are out of work than at any time in the preceding 30 years. There are 7 million more persons in poverty than when he took office, a jump from 39.8 million to 47 million. When pressed to explain these figures, the president points his finger at the state of the economy when he took office. That’s his excuse.
But the reasons for the 2008 economic calamity were set forth at least eight years before its onset by colleagues of mine at the American Enterprise Institute, led by the prescient, intrepid, and persistent Peter Wallison.
Wallison and the others did their best to strip the disguises off the darling ideas about housing held by Democrats Barney Frank in the House and Christopher Dodd in the Senate. Through Fannie Mae and Freddie Mac, those two and other Democrats (with a minority of Republicans) were force-feeding government-guaranteed mortgages to borrowers who had no reasonable chance to keep up with monthly payments. Such borrowers would never before have been approved for mortgages. These empty-headed, thoughtless (albeit well-intentioned) approvals undermined the whole U.S. (and world) financial sector.
The collapse of 2008 was not due to a lack of revenues taken in by the IRS. In fact, the total revenue taken in by the IRS that year was very nearly the highest in IRS history. More impressive, 70 percent of all that revenue was paid by the top 10 percent of earners. The top 1 percent alone paid over 38 percent of all income taxes. The burden on the middle class (that is, the next 40 percent below the top 10 percent) was down to just over 27 percent of all income taxes paid. The bottom half of Americans paid only 3 percent of income taxes. Many from the bottom half got money back for the income taxes they did pay, and their payroll taxes went into their Social Security accounts.
Just who did not pay their fair share of the income taxes under George Bush in 2008? The top 10 percent? Does Obama really mean that paying 70 percent of income taxes all by themselves is not enough? Does he really mean that the top 10 percent should pay something approaching all the income tax, for the whole population? And that the bottom half should contribute almost nothing?
Bush began his presidency in the mild recession he inherited, which was exacerbated by the dramatic collapse of the dot-com bubble. Far worse than that recession were the orange balls of flames exploding from the Twin Towers on 9/11. In ashes and in smoke, heroes worked by lights against the darkness to pull the many dead bodies (and, amazingly, a few still-living ones) from the foul-smelling rubble.
That act of terrorism crippled the U.S. airline industry — it made millions of us afraid to fly for some weeks — and wrecked tourism, the restaurant industry, hotels and entertainments, some banks, and the stock market for many months to come. It caused the U.S. economy to lose a trillion dollars. It weakened the reserves of the financial industry. It taught the world how much damage could be inflicted by so small a blow — so primitive a blow — to a vast, complex, interrelated modern economy.
But Bush also had learned from Reagan that incentives (more than anything else) drive a free economy right back up. So Bush adopted the Reagan recovery pattern. My colleague Peter Wallison recently recounted how: first, one set of across-the-board personal tax cuts retroactive to the beginning of 2001. Followed by another series of tax cuts in 2003 to reduce investment taxes. That gave new businesses a fresh incentive. Once these incentives were in place, the nation sprang out of that nightmare-time quite quickly. Just as it had under Reagan (and as it had under Jack Kennedy in the 1960s).
As Wallison points out, the Bush tax cuts “stimulated consistent job and salary growth: an average of almost 1 percent a year in job growth between 2001 and 2007 and almost 1.8 percent growth in real wages and salaries over the same period.” Under Bush, U.S. GDP grew at a rate of 2.8 percent through 2007.
Wallison compares this with the Obama record in the 36 months between the end of the recession in June 2009 and June 2012: “In that period, when one would expect the fastest GDP growth — after a steep recession — the average has been 2.4 percent ... [while] job growth has averaged .64 percent per year, and real wages and salaries have been stagnant. Not a very good return on an $800 billion stimulus investment.”
A pitiful result, many of us think. Which only a naif would boast of.
In fact, 2007 was one of the economy’s five best years ever, in terms of the unemployment rate (4.6 percent) and the actual numbers employed (14.6 million); and also in terms of inflation (2.8 percent) and mortgage rates (6.34 percent for a 30-year fixed-rate mortgage). The Bush economic policy worked smashingly well, until — the crash.
What crashed in September 2008 was the housing market. That crash was not caused by Bush-era tax cuts. It was caused by the house of cards that Congress had built of home mortgages, the bread-and-butter underpinning of many financial institutions. As Wallison points out, Bush did not do enough to stop the flood of very weak mortgage payments, often behind schedule, often in serious default, that were about to engulf the entire financial system. At that point, Wallison adds, the U.S. financial system was supporting half of all U.S. mortgages on very weak grounds, and “74 percent of these were on the balance sheets of government agencies like the GSEs [government-supported agencies] and the Federal Housing Administration.”
President Obama’s mantra blames President Bush for the collapse of 2008. But President George W. Bush did better in overcoming his recession in four years than Obama has done in his four years. And, as I noted yesterday, President Reagan did better than both, from a deeper hole.
To be blunt: President Obama’s economic policies have dug a hole far worse than the one he stepped into in 2008, and his mantra blames exactly the wrong economic theory. Pity his successor. Think of the mess that poor man will inherit.