During the Bush administration, both monetary and fiscal policy have been expansionary, and the growth in real output in the past quarter of more than seven percent indicates that these policies were effective. The Federal Reserve reduced the Federal funds rate from 6.5 percent in 2001 to 1.25 percent in 2002. As described in the "Economic Report of the President, 2003," a reduction in interest rates is expected to stimulate demand by "encouraging consumption (particularly of durables), stimulating business investment (by lowering the cost of capital), promoting residential investment (as seen from the booming housing sector), and lowering the foreign exchange value of the dollar (which tends to raise exports and lower imports)."
In addition to the easy monetary policy, the Federal government's budget shifted from a surplus in fiscal 2001 of $127 billion to a deficit of $158 billion in fiscal 2002 and about $300 billion in fiscal 2003. Such a fiscal policy is also expected to stimulate the economy by increasing aggregate demand. A particular fiscal policy of the Bush administration that probably contributed to the short (six months) duration of the recession of 2001 was the rebate checks ($300 for most single taxpayers and $600 for most married couples filing jointly). Both the monetary and fiscal policies during the Bush administration have worked pretty much as described in economic textbooks.
The counter-cyclical fiscal policy of the Bush administration -- using fiscal deficits to combat recession -- is known as "Keynesian economics" for the famous economist, John Maynard Keynes, who created the economic model on which it is based. When counter-cyclical fiscal policy was first advocated in the early 1950s, it was a radical idea. Before that, it was generally agreed by both political parties that the federal government should always try to balance its budget. A remarkable development in the current political campaign has been the enthusiasm expressed by some candidates for the pre-Keynesian rule of a balanced budget.
Some interesting recent changes in economic thought that are seldom mentioned in the current political campaign are discussed in the "Economic Report of the President, 2003." During the first two years of the Bush administration, the distinguished chairman of the Council of Economic Advisors was Robert Glenn Hubbard, a professor of economics at Columbia University. Hubbard's approach says little about recessions or business cycles. Instead, his emphasis is on policies that promote growth not only in the United States but also in the poor countries of the world -- the global economy. For example, in the current political campaign, the Bush policy that is most often criticized is the reduction in the taxes of the rich. This reflects the view that prevailed throughout the last century that tax policy should be designed so as to redistribute income from the rich to the poor, and that this was the most effective way to help the poor. The new view is that the most promising way to help the poor is to promote economic growth and that Bush's reduction in the marginal tax rate on rich persons is desirable because of its effect on economic incentives. As stated in the "Economic Report of the President, 2003," "Recent U.S. fiscal policy has pursued the goal of promoting economic growth. Among the central components of a pro-growth fiscal policy are measures to reduce disincentives to work, save, and invest."
The new emphasis on economic growth is probably a result of the increasing awareness of the remarkable growth that has occurred in the output per worker in the United States. Statistical data in the "Economic Report of the President, 2003" show that output per worker adjusted for inflation increased two and a half times -- from $13,095 in 1959 to $32,352 in 2001. This economic growth undoubtedly did much to improve the conditions of the poor in the United States and might do the same in poor countries.
To an economist, a disturbing development in the current political campaign is the support of policies that would reverse the free trade policies of the United States during the past 50 years. Our low tariff rates have been one of the major conditions contributing to the rapid economic growth of countries such as South Korea, Hong Kong, Taiwan and Thailand. In the "Economic Report of the President, 2003" Bush's economic team strongly supports free trade.
