George Bush’s Philosophy and Victory
George W. Bush campaigned for president in 2000, promising “compassionate conservatism” and a return to morality following his predecessor’s impeachment, Bill Clinton. The pledge gave him a double-digit polling lead over Vice President Al Gore. But by the time of the election, the polls showed the two candidates neck-and-neck. Gore won the popular vote by 543,895 votes, but Bush won the electoral votes 271 to 266. His victory depended on Florida’s electoral votes and ended up being decided by the Supreme Court. George W. Bush won his reelection against Senator John Kerry in 2004 with 51% of the vote. George W. Bush’s administration enacted significant domestic and foreign policies.
Tax Cuts
The 2001 recession was relatively mild, as the unemployment rate peaked at 5.7% that year. President Bush authorized the first tax cut, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), to jump-start consumer spending. Before it had a chance to work, the 9/11 attacks occurred. The Bush administration responded by attacking Afghanistan. In 2003, Bush signed the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) to encourage hiring. It reduced tax rates on long-term capital gains and dividends to 15%.
Prescription Drug Program
In 2003, Congress passed the Bush administration’s Medicare Prescription Drug, Improvement, and Modernization Act. The Medicare Part D prescription drug component of the program was designed to cover prescribed drugs up to a certain point, paid nothing up to another level (leaving seniors on the hook to pay for it), and Medicare paid the rest. The program’s pricing structure created a coverage gap—known as the “donut hole”—for seniors with high drug costs.
Disaster Spending
In 2005, Hurricane Katrina hit New Orleans, causing $161 billion in damage and slowing economic growth to 1.7% on an annualized rate in the fourth quarter. Congress added $33 billion to the fiscal year 2006 budget to help with the hurricane clean-up.
War on Terror
In response to the 9/11 attacks, the War in Afghanistan was launched in 2001 to eliminate the threat from al-Qaida’s leader, Osama bin Laden. In November 2002, Congress passed the Homeland Security Act to coordinate terrorism intelligence. It established a Cabinet-level department that unified the 22 agencies that handled domestic security. In October 2002, George W. Bush received congressional approval to launch the Iraq War. It began on March 19, 2003, and U.S. forces captured Saddam Hussein in December. By 2004, photos revealed the use of torture at the Abu Ghraib prison, worsening the situation. The war then escalated, and Bush sent a “surge” of additional U.S. troops to help transition power to Iraqi leaders in January 2007.
Bankruptcy Prevention Act
With little fanfare, the Bush administration passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, preventing people from defaulting on their debts so easily. It offered protection for businesses but had two substantial negative results for consumers. First, it forced homeowners to take equity out of their homes to pay back their debts. As a result, prime and subprime mortgage defaults rose to 23% and 14%, respectively. Second, people became burdened by the cost of health care, which has been cited as the leading cause of bankruptcy. Without debt protection, some people lost their entire retirement savings and even their home to pay their unexpected health costs.
Bank Bailout
While all this was going on, the subprime mortgage crisis was brewing. Too many homebuyers had questionable credit. Banks pushed loans onto them that were equal to or even greater than the value of the home. Banks were making money reselling these mortgages as part of mortgage-backed securities. To feed the pipeline, they demanded more and more mortgages, eventually making loans to anyone and everyone. Things were fine until housing prices dropped in 2006. The value of the mortgage-backed securities plummeted, and the hedge funds, corporations, pension funds, and mutual funds that owned them were in a panic. Banks stopped lending to each other so they wouldn’t get stuck with potentially worthless mortgages as collateral. As a result, interbank borrowing costs rose in 2007. The Federal Reserve tried to increase liquidity by lowering interest rates, but the London Interbank Offered Rate kept rising. Monetary policy wasn’t going to be enough to restore confidence. In January 2008, Congress approved the Bush tax rebates. This $168 billion package sent checks to families and Social Security recipients. Unfortunately, it also raised the loan limit for mortgage agencies Fannie Mae and Freddie Mac, worsening their balance sheets. In March 2008, these bad debts almost sunk the investment bank, Bear Stearns. The Federal Reserve brokered a deal to save it from bankruptcy. During the summer, Fannie and Freddie were taken over by the federal government. After Lehman Brothers collapsed in September, President Bush agreed with Treasury Secretary Hank Paulson to prevent the U.S. banking system from collapsing by getting Congress to approve a $700 billion bank bailout bill. The bill set up the Troubled Assets Relief Program (TARP). A key component of TARP allowed troubled banks to sell back toxic assets to the program to restore faith in the credit market.
Economic Impact of Bush’s Policies
George W. Bush’s initiatives at home and abroad had significant financial consequences.
Both tax cuts added an estimated $1.5 trillion to the debt from 2002 to 2011. They only increased growth enough to make up 10% of their long-run cost. In addition, they disproportionately benefited high-income households. The top 1% of households gained an after-tax income increase of 6.7%, while those in the lowest fifth made gains of just 1%. Maintaining the cuts has been estimated to cost $4.6 trillion from 2012 to 2021. The Medicare prescription drug bill added an estimated $550 billion to the debt between 2006 and 2015. Employers and healthcare providers received over $125 billion in short-term subsidies due to Bush’s prescription drug program. Spending on the two wars was estimated at $604 billion from September 2001 to the end of fiscal year 2007. Through 2017, the cost plus interest topped $2 trillion. The wars also cost over 6,800 lives, counting military personnel and Department of Defense civilians. TARP was viewed as successful in stabilizing the market at lower costs than expected. But it would be a tough recovery, as the 2008 financial crisis had resulted in steep economic losses. Housing prices fell 33% during the recession—more than during the Great Depression. Unemployment also remained high, reaching 7.3% by the end of 2008 and peaking at 10% in October 2009.
The following table summarizes the economic impacts of these and other policies made in response to significant events during the Bush administration.
