A new Center for American Progress report released today -- Understanding Bushonomics: How We Got Into This Mess In the First Place -- documents "the extraordinary transfer of wealth that took place between ordinary households and the extremely well-to-do and the effort by this administration to address the consequences of that problem without addressing the root cause." Senior Fellow Scott Lilly argues that while the "economy did in fact grow at a reasonably strong pace through most of the Bush presidency" and "the hourly productivity of American workers" increased by "more than 19 percent," average Americans did not reap the benefits of economic expansion. Instead, President Bush's economic policies redistributed wealth to the richest Americans and left the majority with stagnating wages and declining household incomes. The transfer "drained the American consumer of the resources needed to keep the economy humming" and led the administration to stimulate the economy by expanding credit -- an action that only weakened "our long term capacity for growth," he concludes.
WEALTH GOES TO THE RICH: The Bush administration directed its economic policies and the benefits of economic growth towards a narrow segment of the population, the wealthiest Americans. Looking at the effects of the first three Bush tax cuts, the Congressional Budget Office concluded that "the percentage by which the effective tax rate was cut for high-income families was nearly twice the rate cut for those in the middle of the income spectrum." Meanwhile, the administration's failure to raise the minimum wage coupled with its poor enforcement of federal wage and hour laws, trade agreements, and union rights further undermined the economic security of middle and lower-income Americans. Consequently, between 2000 and 2006, "those among the top 10 percent of all households on average increased their income by about 2 percent, while those in the bottom 90 percent lost more than 4 percent." The "biggest beneficiaries of U.S. economic growth that occurred between 2000 and 2006 were U.S. corporations," the report concludes. While corporate profits grew "at a little less than two-thirds the growth rate of the gross domestic product" during the second half of the 20th century, between 2000 and 2006, "corporate profits grew nearly four times as fast as GDP," increasing by an estimated 66 percent.
NO TRICKLE DOWN: The newfound prosperity of the top 10 percent of families, "which accounted for 95.3 percent of the nation's income growth between 2002 and 2006," did not trickle down the economic spectrum, and left most Americans incapable of absorbing the rising output of consumer products. Recognizing the precarious condition of the U.S. consumer, corporations retained their extra profits, invested little in new commercial structures such as factories and office buildings, bought back their own stock, and "increased dividends rather than expand capacity." High-income individuals absorbed some of the extra output by consuming luxury items, but most of their "increased income went to savings rather than consumption," Lilly writes.
A POOR FIX FOR DEMAND: With families unable to absorb the extra production, the Bush administration tried to keep the economy growing by ordering the Federal Reserve to drastically lower the Reserve's Discount Rate, "the interest rate charged by the Federal Reserve to member institutions for short-term lending." By 2002, the Fed Reserve Discount Rate dropped to 0.75 percent and "the dramatic reduction in the cost of money to member banks began a frenzy of economic activity." The biggest effect was in-home mortgage refinancing. "Extremely low interest rates...made it possible for hard-pressed consumers to maintain and even improve their living standards by taking equity out of their homes," Lilly notes. But "the dramatic expansion of credit created excessive debt and distorted the price of housing. It also weakened the dollar, pushing up oil prices."