Bush, the Bubble and the Deficit

Wolf Blitzer was kind enough to read a portion of a recent Economix post on CNN this week. Here he is, interviewing Mitch Daniels, Indiana’s Republican governor:

   BLITZER: A columnist in The New York Times wrote recently this, saying if you decide to run for president, you need to explain this. He says this: “why as budget director, he did not try to prevent the Bush administration from turning a big surplus into a huge deficit, not just through the war, but through tax cuts and other policies, too? If he runs for president, that question deserves to be a big part of the vetting.” Do you want to respond to that?

    DANIELS: You know, the nation went into a deficit then because the bubble burst. We had a recession. It wouldn’t have mattered what policies you tried to implement. We’re going to have a great big reversal. Beyond that, I would say that in every fight I ever had on the president’s behalf with Congress, and there were a lot of them, there was never one where I would suggest spending more and they would suggest spending less.

That is not quite right. When President Bill Clinton left office in 2001, the Congressional Budget Office was forecasting an average annual budget surplus of $850 billion for 2009 through 2012, according to an analysis I did in 2009.

The bursting stock-market bubble and recession that Mr. Daniels mentions erased a little less than $300 billion of the surplus. The Bush administration’s policies — including the tax cuts, the wars in Afghanistan and Iraq and the Medicare prescription-drug program — erased another $673 billion.

Mr. Daniels is certainly correct that the bursting bubble of 2000 and beyond helped cause a recession — and that the recession, in turn, shrank the federal surplus. But it is not true that “it wouldn’t have mattered what policies you tried to implement.” The Bush administration’s policies did more than twice as much damage to the budget as the recession did.