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COPYRIGHT 2004 The National Affairs, Inc.
DURING the 1997-98 season, the Chicago Bulls won the National Basketball Association championship after a regular-season record of 62 wins and 20 losses under coach Phil Jackson. In the next season Tim Floyd replaced Jackson, and the Bulls finished in last place with a record of 13 wins and 37 losses (during a lockout-shortened season). Does this contrast prove that Phil Jackson is a better coach than Tim Floyd? Maybe. But the retirement of superstar Michael Jordan and the trading of other key players after the 1997-98 season makes such a comparison difficult.
When Bill Clinton was president of the United States in 2000, the real gross domestic product of the U.S. economy grew 3.7 percent, the unemployment rate was 4.0 percent, and the federal budget ran a surplus of $236 billion. After George W. Bush became president, the economy tumbled into recession from March to November 2001, the unemployment rate rose to 5.8 percent by December of that year, and by fiscal year 2002 the federal budget was $158 billion in deficit. Does this prove that Clinton followed better economic policies than Bush? Maybe. But it might also mean that a certain prominent player--call it the "new economy"--made Clinton's economic record look especially strong, but then retired and made Bush's economic record look unfairly bad.
Indeed, the president of the United States has less power over the U.S. economy than the coach of a basketball team has over wins and losses. A professional basketball coach sets strategies and schedules for a roster of 12 players. But the U.S. economy is not one large corporation with the president as its chief executive officer. In fact, the U.S. economy has five million corporations, two million partnerships, and eighteen million individually owned proprietorships. The U.S. economy is what happens when 140 million workers produce $11 trillion in annual output.
Thus, in evaluating the path of the U.S. economy during the presidency of George W. Bush, we must begin with a look at how the "new economy" of the late 1990s set the stage for the recession of 2001 and has influenced the economy since then. This context also helps to clarify the strengths and weaknesses of federal tax and spending policy from 2001 to 2004.
The unsustainable boom of the 1990s
In the second half of the 1990s, the U.S. economy moved from a moderate economic upswing that had started after the recession of 1990-91 into a turbocharged higher gear. The surge was led by remarkable advances in information and communications technology. The price of business computers and peripheral equipment of a given level of quality fell by 22 percent per year from late 1994 to late 1999. Real investment soared at an average annual rate of 13 percent per year from the end of 1994 to the end of 1999, led by spending on computers, software, and communications equipment like wireless and broadband Internet.
The potential of the new information and communications technology was epitomized by the Internet's evolution from an academic oddity into an everyday business tool. Ubiquitous Internet connections seemed to open the possibility that industries and firms would be transformed in how they bought supplies, managed inventory, collected and processed information, coordinated their chains of production, hired and monitored workers, tracked sales, contacted customers, shipped products, and paid bills. The "new economy" became the catchphrase for this transformation, which seemed as if it might rival the level of social, business, and economic transformation caused by epochal economic innovations like the widespread use of electricity or the internal combustion engine in the first half of the twentieth century.
In the late 1990s, the U.S. economy performed almost unbelievably well. From 1996 to 2000, growth of real GDP averaged 4.1 percent per year. Unemployment sank ever lower, hitting 4.0 percent in 2000. Productivity growth in the business sector, which had averaged 1.7 percent from 1970 to 1995, rose to 2.6 percent per year from 1996 to 2000. The stock market soared; the Dow Jones Industrial Average more than doubled between 1995 and 1999.
The booming economy also brought the sweet surprise of some highly unexpected budget surpluses. Bill Clinton's proposed budget for fiscal year 1998, published in February 1997, predicted a deficit of $120 billion for 1998. But a budget surplus of $69 billion resulted for that year. The next year, Clinton's proposed budget for fiscal year 1999 predicted a balanced budget in 2000--but a burgeoning economy yielded a budget surplus of $236 billion instead. Government spending didn't stray much from the Clinton predictions, but the new economy brought in vast amounts of unexpected tax revenue. For example, Clinton's budget proposal for 1999 projected federal tax revenues of just under $1.8 trillion in 2000, but revenues were actually over $2 trillion--more than $200 billion higher than expected. In retrospect,...
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