March, 2015, Dean Baker

Accounts of the economic policy in the George W. Bush administration usually center on the tax cuts in his first year in office and the economic collapse in his last year, a result of his failure to effectively regulate housing finance. While these policies are important in the context of Bush’s presidency, most discussions miss the underlying dynamics of the economy in the Bush administration. The key here is a backdrop of “secular stagnation” that had its basis in the large U.S. trade deficit. This trade deficit was in turn the result of a severely overvalued dollar, which can be dated to the Clinton Administration’s design of the International Monetary Fund (I.M.F.) bailout of countries affected by the Asian financial crisis. Now that we seem to be experiencing a prolonged period of below full employment levels of output, secular stagnation is again an acceptable view within the economics profession. This analysis puts it at the center of the economy’s problems during the Bush years.

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