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How Jeb Bush can overcome his brother's disastrous economic legacy
After a series of contradictory, baffling blunders, Jeb Bush has finally figured out his position on the Iraq war. (For the record: "I would have not gone into Iraq.") So what's next? The ex-Florida governor with aspirations of becoming America's third President Bush should probably give some thought to that other unpleasantness during his brother's presidency: the Great Recession and financial crisis.
Republicans have failed to fully reckon with the reality that they presided over the worst economic downturn since the 1930s. Although Democrats controlled Congress back in 2007 and 2008, Republican George W. Bush occupied the Oval Office. Fair or not, presidents and their parties get most of the blame and credit for what happens to the economy on their watch. Not many voters remember who was House speaker or Federal Reserve chairman when Herbert Hoover was president. But plenty do remember that the last time they elected a tax-cutting Republican named Bush, the economy collapsed.
We can debate whether W's economic policies are to blame for the catastrophic economic freefall of 2008. But in some sense, it doesn't matter: For Republicans, the political damage is done. You can see it in the form of two presidential election disasters and an electorate more skeptical of typical Republican policies, such as tax cuts. Gallup finds 52 percent of Americans now favor wealth redistribution via heavy taxes on the rich.
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The legacy of the Great Recession and financial crisis has also given Democrats an obvious line of attack on Jeb Bush and the other Republican 2016ers who favor tax cuts and financial deregulation: Been there, done that, almost killed the economy. Hillary Clinton (or some guy who will lose to Hillary Clinton in the Democratic primaries) could do worse than some variation on what her hubby said at the 2012 Democratic National Convention:
[At the GOP convention], the Republican argument against the president's re-election was actually pretty simple — pretty snappy. It went something like this: We left him a total mess. He hasn't cleaned it up fast enough. So fire him and put us back in. … [Yet they] want to [return to] the same old policies that got us in trouble in the first place. They want to cut taxes for high-income Americans, even more than President Bush did. They want to get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts. … As another president once said, there they go again. [Bill Clinton]
Fair? Not really. Among all the plausible or semi-plausible reasons for the crisis — failed financial regulation, a breakdown in Wall Street corporate governance, lax lending standards, high household debt, too tight/too loose monetary policy — Bush II's cutting the top tax rate from 40 percent to 35 percent isn't very high on the list. What's more, many experts think Bush's bank bailout was key to restoring investor confidence in the shaky U.S. financial system. And, of course, Bill Clinton himself signed the 1999 financial deregulation bill that removed the barrier between commercial and investment banks.
Perhaps Republican policymakers will eventually be successful in persuading the public that it was mainly the Fed or perhaps Fannie Mae and Freddie Mac that caused the downturn and not Bush and the big banks. But it will likely be a long, hard slog to win that PR battle. After all, most Americans still think it was Wall Street and Hoover that caused the Great Depression — even though economists have mostly blamed the Fed since the 1960s. Headlines like these, from The New York Times this week, don't help the GOP case either: "Wall Street Is Back, Almost as Big as Ever"; "Many on Wall Street Say It Remains Untamed."
So how should Jeb Bush respond when asked why voters should trust Republicans — let alone another Bush — to deal with the economy after what happened last time? He should start with something like this:
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Look, a number of factors contributed to the financial crisis, including bad behavior by Wall Street. Let me be clear about that. But is that really so surprising when you tell bankers that no matter how reckless the risks they take, Uncle Sam and the taxpayers stand ready to bail them out? Unfortunately, we've been doing that for decades — under Ronald Reagan, Bill Clinton, and my brother. And that's crony capitalism, not free market capitalism. It's a Washington problem, not just a Republican problem.
So no more, okay? We need to end Too Big To Fail, once and for all. But ever-more complex regulation — written by lobbyists and managed by revolving-door regulators — won't cut it. Neither will just letting big banks fail whenever they get in trouble, which they will eventually.
That's why I support much higher capital requirements for the megabanks. IMF research suggests a simple equity buffer of at least 15 percent would be a good start. So let's begin with that. Such a cushion makes it less likely that a bank would ever need a bailout. And it might also cause the biggest banks to shrink. That would be good, since too much financialization seems to be bad for productivity.
And while we're at it, let's get rid of what The Economist recently called "The Great Distortion" — how the tax code subsidizes debt and makes the economy more brittle. Now, concerning my plan for tax relief for working-class Americans…
James Pethokoukis is the DeWitt Wallace Fellow at the American Enterprise Institute where he runs the AEIdeas blog. He has also written for The New York Times, National Review, Commentary, The Weekly Standard, and other places.
