The librarians at the new George W. Bush presidential center should buy this book on Amazon: The Great Recession: Market Failure or Policy Failure by Robert Hetzel. The author, a Richmond Fed economist, persuasively argues the nasty downturn and ensuing Financial Crisis were caused by the Federal Reserve’s overly tight monetary policy in 2008. The Great Recession was a minor replay of the Great Depression, which most economists also blame on the Fed – including its boss today, Ben Bernanke.
In the 1930s, it was Wall Street and the Hoover Republicans that earned public opprobrium. So too, most Americans blame the 2007-2009 unpleasantness on the Bush Republicans and the bankers. The dedication of the Bush library is as good a time as any for some mythbusting. Hetzel’s key insight: Not only did the Fed leave rates alone between April 2008 and October 2008 as the economy deteriorated, but central bankers “effectively tightened monetary policy” in June by pushing up the expected path of the federal funds rate through hawkish statements. Without the Fed’s foul up, the housing slump might have led to a mild downturn at worst and no financial collapse. Indeed, from the end of the peak of the housing market through April 2008, the unemployment rate was virtually unchanged.
If the US were like Mexico, President Bush’s big-picture, macroeconomic reputation might be viewed much differently. Mexican presidents serve single, six-year presidential terms. And Bush’s six-year economic record, from 2001 through 2006, was OK, actually. GDP growth was 2.7%, roughly at trend. And although job growth was anemic, the average unemployment rate was 5.4% — a level that Obama White House economists consider a healthy economy’s natural rate.
Why weren’t those pre-recession years stronger, particularly the labor market? Some possibilities:
1. The 2000 bursting of the Internet stock bubble and resulting mild 2001 recession.
2. Uncertainty from 9-11 terror attacks and the Iraq War buildup.
3. Simple mean reversion: The Clinton boom and bubble years were balanced off by a flat recovery after the mild 2001 downturn.
4. Globalization and automation cost 4 million manufacturing jobs between 1999 and 2007. (These trends also explain much of the three-decade rise in income inequality.)
The Bush administration policy response was actually more or less the right one: Reform education, entitlements, health care, and the tax code. Some plans never got off the drawing board, others died on Capitol Hill, still others didn’t work quite as well as hoped. Katrina and the war consumed massive amounts of political capital. The Bush administration did make some key mistakes, particularly in adding to Bill Clinton’s housing miscues. As AEI’s Peter Wallison has put it: “Regulators, in both the Clinton and Bush administrations, were the enforcers of the reduced lending standards that were essential to the growth in home ownership and the housing bubble.”
The point here isn’t a Bush restoration or to nudge W up a couple of spots on some Ivy League historian’s presidential ranking. The Bushies can handle that task themselves. Rather, it’s so America draws the proper lessons from the Bush years: Free markets aren’t fragile. But a free-market economy works best when it operates against a stable monetary background. Bush didn’t fail America. The Fed failed Bush — and us.