The History of the Prior Boom and Bust

I’ve written about this before, prior to the last election, as the same false narrative was being played out as now: that Bush inherited a giant surplus, wasted it, and then the market collapsed as a result. We should remember what happened to us.

We don’t.

We are told a new memory to replace the old — and it’s repeated enough to become what we think actually happened. We’re told that all eight years were wonderful under Clinton, and bad under Bush.

We don’t remember that Clinton’s economy was so bad during the first years that he was convinced he would not be re-elected — and the voters gave Republican majorities to Congress as a result. And Clinton sought to bring in donations to the Democrat party that were drying up because of his recession — so he reached out to Communist China, producing the Chinagate travesty that had dozens of Democrats and donors indicted or fleeing the country.

The triggering event that caused Clinton to go hat in hand to China was America handing him his head in the 1994 mid-term elections. Republicans swept into both the Senate and House, establishing substantial majorities. Those Republican majorities pushed through reforms that Clinton later took credit for (with media help) for and Clinton was re-elected against the comparatively lackluster candidate Bob Dole. In fact, recently Clinton described as “healthy” a lesser economic performance than he had called “the worst in fifty years” during his previous campaign.

In 1997, the Republicans pushed through the Taxpayer Relief Act of 1997. In fact, the idea that tax cuts would stimulate the economy was not at all controversial — Democrats voted for this in high measure as well (80% or more of Dems in the Senate and House supported it, as did 99%+ of Republicans). Under this law, the capital gains rate fell from 28% to 20%, which (in combination with and tied to a computer investment frenzy) ignited the economy.

The years 1997 through 1999 were great years. And for the first time, Joe and Jane Average got involved in the stock market.  It became very fashionable, and even fairly common, to be a “day trader.”

But Congress tends to spend, and a race was on. Could Congress actually spend money faster than the Dot Com boom was bringing it in?  No, as it turned out — but the spending increases had now been programmed in, so that when it did collapse, the situation would be made worse by the revenue-drunk spending spree (sadly, even in a Republican Congress).

But could Bush be blamed for the Dot Com collapse?

We don’t remember that the Dot Com bubble began its collapse in March of 2000 — eight months before Bush’s election. I don’t blame this on Clinton, incidentally: The Dot Com bubble had serious conceptual problems. It created thousands of companies that “did IPOs” in the manner that later companies would “do housing”.

Let me show you that the peak was 2000, not 2001: First and most obvious, the NASDAQ chart:

2000: The Dot Com bubble peaks in March. By April 2000, launches of new businesses and IPOs have been all but shut down., perhaps the most notorious of IPOs, is postponed multiple times and finally canceled in June 2000. Here’s the chart of industrial production:

The line indicates that the NBER officially dates the PEAK at March 2001 — which is because of this employment chart, in part:

This was a time of rapid government spending and expansion — the decline of private employment during the last half of 2000 was offset by the expansion of government employment. And the media’s “there’s no problem” news tended to help keep this going longer. But here was the chart of “real manufacturing” — again showing the decline from early 2000:

It’s odd, to me, to show March 2001 as a “peak” in the light of all indicators but one putting it much earlier. The solid lines are data, the dashes are the average from previous business cycles.

Ah, but there was another, completely weird effect: personal income continued to rise during the early part of the Bush administration, despite the dot com collapse AND the effects of September 11:

Strange, and counter-intuitive.

The media, however, barely hinted that there is anything wrong in the markets. With the economy not a major focus of discussion, other than “how to keep the wonderful news coming”, GW Bush gets a narrow victory.

By December 2000, before Bush has taken office, the market is falling rapidly. But in January, the Office of Management and Budget projects income levels based on 1999, ignoring the recent data, and projects that this income level will continue for the next ten years. This gives rise to the “surplus” that Bush is said to inherit. And the decline, which started eight months before the election, is blamed on Bush.
The attacks and crisis and financial shutdown of September 2001 steepen the decline, but tax cuts had already been discussed. Despite the attack on the US financial center, the Recession of 2001 is one of the shortest in history. Tax cuts go into effect, with a second round following.

The Office of Management and Budget predicted that the tax cuts would create a LOSS of revenue. It was the largest INCREASE of revenue in US history. (The OMB assumed that the economy remains level — this is the same assumption that created the wrong estimates in 2000.)

The next few years boomed with a new phenomenon — people taking tens or hundreds of thousands of dollars out of their homes’ equities, producing unusual effects. But that’s another post.

===|==============/ Level Head