As GOP power seems closer, should it discard some Bush economic policies? 

With President Barack Obama’s poll numbers low and congressional Democrats’ ratings even lower, the idea of Republicans taking one or more houses of Congress is becoming a lot closer to reality.

The agenda of a hypothetical Republican congress is still a bit up in the air but one thing it ought to consider is a reevaluation of the economic policies which were put in place by the former Bush administration. That is the contention of software entrepreneur Louis Woodhill who makes the case in an article for RealClearMarkets that the previous administration was not as blameless as some Republicans would like to believe. He focuses on five key areas, two of which, monetary policy and tax structures, are currently on the minds of Republicans:

The biggest single economic error Bush made was his “weak dollar” policy. While the president has no direct control over monetary policy, it is said that a president always gets the monetary policy he wants. Bush (and his Treasury Secretaries) wanted a weak dollar, and they got one. The dollar lost 69% of its value against gold during the Bush years. This accounted for almost 80% of the decline in the Real Dow during his presidency.

The unstable dollar during the Bush years was the root cause of the financial crisis of 2008. The dollar fell almost continuously during the first seven years of his term. By February 2008, it had lost 72% of its value. This long, deep slide engendered a speculative asset bubble that was fueled by massive increases in leverage and a proliferation of derivative instruments. Then, in mid-March, 2008, perhaps shocked by the gold price breaching the $1000/oz level, the Fed reversed course.

Highly leveraged inflation hedging strategies cannot survive deflation. During the next six months, from mid-March to mid-September 2008, the value of the dollar rose by more than 30%. On September 15, 2008, Lehman Brothers filed for bankruptcy. The ensuing financial crisis crashed the real economy, sent unemployment skyrocketing, and elected Barack Obama president. [...]

The third biggest economic error under Bush was the design of the 2001 tax cuts, which phased in the reductions in the top income tax rate over 5 years. As we learned in 1981-1982, phased-in tax cuts guarantee economic sluggishness, because people defer income until the lower rates take effect. The result was a “jobless recovery”, slow growth, and escalating deficits. The 2001 tax cuts also wasted $58 billion on futile Keynesian “stimulus”, an error that Bush was to repeat in 2008.

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Matthew Sheffield

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