TCS Daily

The President's Macroeconomic Report Card

By Arnold Kling - September 8, 2003 12:00 AM

"...the Bush fiscal policy is the worst policy in over 200 years."
George Akerlof


With school starting up again, my mind is on grading. I am going to argue that on macroeconomic policy, President Bush deserves a B+ or an A-, using as a standard the modified Keynesian model that can be found in the high school Advanced Placement economics curriculum, or on Paul Krugman's web site.


I may be the only economist in the country who would make this claim. Conservative economists would reject the Keynesian metric, and instead would grade President Bush on different criteria. This essay is not addressed to them.


Instead, I wish to speak to my fellow saltwater economists, who accept the Keynesian paradigm. I believe that they would agree with my grade if the President were Al Gore. However, in today's polarized environment, even Nobel Laureates foam at the mouth.


Facts Are Facts


Saltwater economists would characterize economic performance since President Bush took office as poor. While there are conservatives who try to put a positive spin on economic news, I share the saltwater view: Facts are facts. Labor market indicators, such as the capacity utilization measure that I favor, describe a prolonged slump.


However, reasonable economists would agree that President Bush did not cause the recession, and they would agree that the Clinton economic record was partly a matter of luck. As Paul Kasriel and Asha Bangalore put it, "It appears to us that the sweet spot of history that coincided with the Clinton administration has passed...The economy is now reaping the whirlwind of the largest stock market bubble in the history of this country. The G.W. Bush administration inherited this economic mess."


Outcomes vs. Policies


If macroeconomic outcomes are partly determined by luck, how should economic policy be graded? The problem is tricky, as is illustrated by the data in the table below. It gives the values of two macroeconomic variables as they stood in January of 2001 and July of 2003. The first variable is the ten-year interest rate, as measured by the Federal Reserve constant-maturity Treasury index. The second variable is the seasonally-adjusted unemployment rate.



January, 2001

July, 2003

10-year Interest Rate

5.16 %

3.98 %

Unemployment Rate

4.1 %

6.2 %


Let us start with the ten-year interest rate. Suppose that someone were to suggest that the Bush Administration deserves credit for the reduction in that interest rate, and that the Bush tax cuts must have contributed to the decline. My saltwater friends would object strenuously to this interpretation.


Economists of all stripes would agree that the only way to gauge the effect of the Bush tax cuts on interest rates is to compare the performance of interest rates with what those rates would have been without the tax cuts. To perform this analysis, you would use a numerical model of the economy. Some economists favor large computer models, while others prefer "back-of-the-envelope" analysis. In either case, it turns out that most reasonable models would show that the Bush tax cuts caused the ten-year interest rate to be higher than it would have been otherwise.


Naturally, the most objective way to assess the effect of the President's tax cuts on unemployment is to use the same methodology. Comparing the results of a macroeconomic model simulated with and without the tax cuts, one would conclude that the tax cuts lowered the unemployment rate from what it otherwise would have been. My guess is that the effect is small -- probably less than one-half of one percentage point -- but it was favorable.


My point is that the economic models that would be used by President Bush's strongest critics would in fact show that his policies helped to ameliorate the slump that he inherited. Their overheated rhetoric is at variance with their analytical framework.


What Would You Have Done?


Of course, if the unemployment rate is 2 percentage points too high, and the Bush tax cuts only reduced the unemployment rate by less than one-half of one percent, then in hindsight, certainly, there is room for improvement. However, even in hindsight, the saltwater economists have only feeble suggestions. They recommend that tax cuts should have been front-loaded and phased out; however, in macroeconomic models, temporary tax cuts are even less stimulative than permanent tax cuts. They also recommend that tax cuts be given to low-income consumers on the grounds that such consumers would be more likely to spend; however, there is little or no evidence that the distribution of tax cuts makes a large difference in their stimulative effect. None of the saltwater critics today makes a proposal as dramatic and specific as the one that I made right after the 2000 election: "the Federal government might give each state $1,000 for every person living in that state. This would amount to a $280 billion program."


Saltwater economists are not making any radical proposals for fiscal expansion beyond what has already taken place. That is probably reasonable. After all, if a $480 billion deficit makes only a dent in the unemployment rate, then what do we need -- a $2 trillion deficit? The bottom line is that President Bush's critics have no analytical basis for claiming that they could have produced a significantly lower unemployment rate while maintaining any semblance of fiscal responsibility.


The Great Race, Revisited


Orthodox Keynesian policy in a recession would be to cut taxes. The Bush Administration has done that. Orthodox policy would be to increase government spending over what had been planned. The Bush Administration has done that, too. When a student hands in an exam that repeats almost exactly what the professor was saying in class, but the student still gets a low grade, then one can only conclude that the professor has something personal against the student.


I believe that, if pressed, George Akerlof and the other economists who spoke out so vehemently would say that they are giving their bad grade to the Bush Administration on the basis of the long run path implied by tax cuts, taking the path of spending as given. They would have to admit that over the near term their differences with the Bush fiscal policy are almost immaterial.


The economists who worry about long-run fiscal policy may be right. I think that the structure of Medicare is a larger source for concern than the Bush tax cuts, but if the former is not changed then the tax cuts may have to be reconsidered in a few years.

However, one bright spot in the economy is that recent productivity performance continues to shine. If this reflects a long-term increase due to Moore's Law, then the economy is winning what I call The Great Race. Should that prove to be the case, then by the end of this decade the Budget will be well into surplus and Akerlof will be viewed as the worst grader in over 200 years.


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