A Policy Analysis on the Macroeconomic Performances in the United States under Three Presidents: Bill Clinton, George W. Bush and Barack Obama

Transcription

1 Evan C. Hackney Huda S. Al-Sammarraie Hsin-Ta Tsai Brenda E. Wamala Professor Manamperi Economics December 2013 A Policy Analysis on the Macroeconomic Performances in the United States under Three Presidents: Bill Clinton, George W. Bush and Barack Obama Gross Domestic Product (GDP) is by far the most embraced indicator of a nation s level of wealth. The changes in GDP over time often give people an idea of how well developed a nation is, given it is often implied that with greater wealth comes better living standards. GDP as an economic indicator offers a picture that is aggregate; therefore, in this paper, we compare and contrast the differences in the GDP change during the terms of President Bill Clinton, George W. Bush, and Barack Obama. More specifically, we will investigate and analyze governmental policies and macroeconomic performance under these presidents using selected economic indicators that demonstrate major changes in the economy. These indicators include total public debt (government deficit) measured in billions, real gross private domestic investment measured in billions, real personal consumption expenditure measured in billions, consumer price index for all urban consumers (CPI), and the effective Federal funds rate (interest rates). Furthermore, we will also analyze how strongly these indicators are correlated with GDP and also with each other. First of all, retrieving data from the Bureau of Economic Analysis under the U.S. Department of Commerce (fig 1.), we obtain the quarterly GDP percent change based on current U.S. dollars from the year of 1993, when President Bill Clinton was in office, to present. Bearing

2 1993q1 1993q4 1994q3 1995q2 1996q1 1996q4 1997q3 1998q2 1999q1 1999q4 2000q3 2001q2 2002q1 2002q4 2003q3 2004q2 2005q1 2005q4 2006q3 2007q2 2008q1 2008q4 2009q3 2010q2 2011q1 2011q4 2012q3 2013q2 the graph in mind, we begin our analyses chronologically and began with President Bill Clinton fig 1. Quarterly GDP percent change based on current dollars Bill Clinton The first President this paper will discuss is Bill Clinton, who assumed office from the year of 1993 to Clinton campaigned on the economic platform of balancing the budget, lowering inflation, lowering unemployment, and continuing the traditionally conservative policies of free trade (Pear). Monetary policies-wide, Clinton had economist Alan Greenspan as the Chair of the Figure 2: CPI Trend Figure 3: United States Balance of Trade

3 Federal Reserve s board of governors throughout his presidency; he also appointed two widely considered moderate advocates of tight money", Alice Rivlin and Laurence Meyer (Burns and Taylor). The effect of this policy of appointing tight money proponents to the Fed was that the CPI never went above 5 percent during the Clinton presidency ( ) (Figure 2). This strategy also lead to a huge growth in the Dow Jones Industrial Average from in January 1993 to in early 2000 (Burns and Taylor). However it may also have contributed to the expanding of our trade deficit. From 1996 to 2000, there was a steady growth of the trade deficit from -$100 billion to an all-time low at the time of nearly -$400 billion (See Figure 3). For macroeconomic policies during Bill Clinton s presidency, they can best be looked at through three main categories: gross domestic product (GDP), inflation rates, and unemployment rates. The first factor we will examine will be the GDP. Bill Clinton inherited from his predecessor, George H. W. Bush, a deficit of 4.7% of GDP (Bartlett). Although the deficit was not a large priority in Clinton s initial macroeconomic policy, he made its reduction a higher priority later in his term (Burns and Taylor). Among many parts of Clinton s policy to lower the deficit, he allowed for the passing of laws that raised the money in the US Treasury (Burns and Taylor). Clinton also cut federal spending and also raised taxes on the wealthy to lower the deficit (Bartlett). The pursuit of low inflation rates was another large aspect to Bill Clinton s macroeconomic policies. He, unlike most other post-war Democrats, worked to keep the inflation rates low, and succeeded (Burns and Taylor). The mean inflation rates of Bill Clinton were at 2.3% (Burns and Taylor). Lower unemployment rates were another large part of Clinton s macroeconomic policies. Many argue that Clinton cost many Americans jobs because he supported free trade, which some argue caused the U.S. to lose jobs to countries like China (Burns and Taylor). Even if Clinton did cost Americans some jobs because of free trade support, he allowed for more jobs than were lost

4 because the unemployment rate of his presidency, and especially his second term, were the lowest they had been in thirty years (Burns and Taylor). Finally, we should discuss the macroeconomic effects. Clinton took the deficit of 4.7% of GDP in 1992 and turned it into a surplus of 2.4% of GDP in 2000 (Bootle). Federal spending fell to 18.4 percent of GDP. In 2000 from 22.2 percent in 1992 (Cline). Although Clinton raised taxes in 1993, he cut them in 1997 (Bartlett). Clinton also lowered inflation rates down to 2.3% (Bartlett). His lowering of interest rates contributed greatly to the good economic health exhibited during Clinton s presidency (Bartlett). Furthermore, Bill Clinton s policies achieved a thirty year low in April 2000 with an unemployment rate of 3.9% (Burns and Taylor). However, Clinton did receive notable criticism. Clinton has been heavily criticized for overseeing the creation of the North American Free Trade Agreement (NAFTA), which made it more affordable for manufacturing companies to outsource jobs to foreign countries and then import their product back to the United States (Teslik). This policy caused a significant decrease in the amount of unskilled jobs in the United States (Teslik). Some liberals and progressives believe that Clinton did not do enough to reverse the trends toward widening income and wealth inequality that began in the late 1970s and 1980s. The top marginal income tax rate for high-income individuals (the top 1.2% of earners) was 70 percent in 1980, then lowered to 28 percent in 1986 by Reagan; Clinton raised it back to 39.6 percent, but it remained far below pre-reagan levels (Piketty and Saez). George W. Bush Later from the year of 2001 to 2009, the incumbent president was George W. Bush. In this portion of the essay we will be examining President George W. Bush based upon the governmental policies that were enacted during his presidency, and also the effects these policies had on the economy as a whole. The economic indicators that will be analyzed during the Bush Administration Era are Gross Domestic Product (GDP), governmental spending, investment

5 (factories, equipment, inventories and housing), consumption of goods and services, tax rate, Consumer Price Index (CPI), interest rate and unemployment rate. To get a better understanding of the health of the economy during the presidency of George W. Bush, we need to better explain the government policy that was used by his administration. When George W. Bush took office in January of 2001, the United States was in a recession caused by the Y2K economic scare. To battle this, President Bush enacted his first set of tax cuts that were designed to try and create an economic boom by providing U. S. citizens with lower tax debt. To address the 2001 recession, President Bush launched tax cuts. The first tax rebate, EGTRRA, was designed to jumpstart consumer spending. Checks were mailed to households in August 2001 (Amadeo). This tax cut saved citizens an estimated $1.35 trillion over the ten year span that the tax cut was in effect. (Amadeo) This governmental policy might have been more effective if not for the September 11 th terrorist attacks on that United States. After the September 11 th attacks the United States economy took an initial hit due to the closing of the stock market for a short period of time. This created a major overall drop in the stock market which could have been recovered from if not for the decision of President George W. Bush to start the War on Terror Campaign. This war cost the U.S., By the end of Bush's term in office, the War on Terror cost $ billion (Amadeo). The final governmental policy that the Bush administration used to try and boost the economy out of the impending recession fueled by both the Y2K scare, and the September 11 th attacks was the Jobs and Growth Tax Relief Reconciliation Act of The idea behind this act was in order to create more jobs to boost the economy, business s needed a relief from investment taxes to free up money for increased employment. Both major government policies that were enacted under George W. Bush were designed to help bring the United States economy out of recession by the use of tax relief. Neither policy seemed to boost the economy during his presidency, and can be seen in the further investigation of the economic indicators throughout the rest of this portion. (Amadeo).

6 The first economic indicator that will be analyzed based upon economic data from the Bush Era is Gross Domestic Product, or GDP. GDP is very important when analyzing a country s economic performance because it is viewed as the single most important factor that looks at a country s economic health. When President Bush took office on January 20, 2001 the United States GDP was $36, million. Barring the economic recession that the country was in at the time, as previously mentioned George W. Bush used personal tax cut government policy to try and boost the economy. By the end of 2001, the United States GDP was at $37, million. This was a very low increase based upon the growth rate of previous years, and did not show an economic boost. By the end of President Bush s presidency the United States GDP had increased from the initial level previously mentioned to $47, in the final quarter to be analyzed (bls.gov). The next economic indicator to be considered in the performance of the United States economy is governmental spending during this time frame. When George W. Bush took office the United States budget was in the positive with a balance of $128.2 billion. Considering the 2001 recession, which led to the initial tax cuts approved by President Bush the budget was pushed into a deficit of negative $157.8 billion by the end of Also affecting this ever increasing budget balance was the increased defense spending on the new War on Terror that the United States entered under President Bush. Directly relating to this deficit was also the previously mentioned second set of tax cuts enacted by Bush to relief financial pressure from businesses. Both sets of tax cuts, and the increase in government spending eventually led to the staggering budget deficit of negative $458.6 billion by the end of President Bush s presidency (bea.gov). The next economic indicator to be analyzed during the Bush Era is the level of investments that were being made in the United States at this time. During the first quarter of Bush s Presidency government investment spending was $163,500 million. By the end of his presidency the government spending related directly to investments was at $285,652 million. This

7 shows in positive increase in the government s efforts to produce capital. Directly relating to this economic factor is the factor of consumption of goods and services by the United States. This economic factor is looked at to show the amount spent in the economy on the available goods and services. During the first quarter of the Bush s presidency the total spent on goods and services was $8332 billion. Throughout the duration of his presidency this number fluctuated regularly due to the economic uncertainty of the country. Only during the first quarter of his presidency did the number drop below the previous total, showing that even during such uncertain times the United States was still spending. The ending total of President Bush s presidency was $ billion. An increase of $ billion in consumption (bea.gov). The tax rate, or Federal Funds Rate during Bush s presidency was an indication of the economic turmoil of this time period. When Bush took office the Federal Funds rate was at 4.33%. This shows that the Federal government was not purchasing securities to promote lending. With the event that s occurred in the early portion of Bush s presidency, by April of 2004 the rate had dropped to its lowest level of the presidency of 1.00%. This showed that the banks were not lending, and the economy was struggling. There was an increase in the rate back up to 5.26% in January of 2007, but it then dropped off dramatically to 0.51% by the end of his presidency showing economic weakness (bls.gov). The next indicator to be analyzed is the Consumer Price Index. The CPI, or the inflation rate during this presidency shows an ever increasing inflation rate in the economy barring the recession during At the beginning of his presidency the CPI was , this number fell marginally during the initial portion of the recession, but then continued to climb to by the end of the Bush Era. The last economic indicator to be analyzed in this portion is the unemployment rate during this era. At the beginning of Bush s presidency the rate was 4.2%. This is close to the ideal

8 level of unemployment. By the end of his presidency the unemployment rate had reached 7.3%. A number that left millions unemployed, and showed financial and economic trouble for the United States (bls.gov). Barack Obama Our last President who assumed office since 2009 was Barack Obama. Under the Obama administration, the United States economy was slowly recovering from the 2008 financial crisis. In 2009, the U.S. Congress and Obama passed the American Recovery and Reinvestment Act (ARRA), which was a $787 billion package that included a $286 billion tax cut and a $501 billion spending rise that increased the U.S. real GDP in the following years (Elwell). In terms of investment spending, on average, investment spending represents the third largest component of aggregate spending. It is also very sensitive to economic conditions and is considered more volatile than consumer spending. This is due to its being postponeable, i.e. people can always delay investment projects to when the economic conditions are better (Elwell). Investment represented an economic growth when it has risen during the economic recovery in years 2010, 2011, and 2012 when real GDP increased to 12.7%, 13.5%, and 14% consecutively (Elwell). Investment has increased under Obama s administration from approximately $2000,000 billion in January 2009 to almost $2600,000 billion in July CPI increased Under Obama s administration by 10% as a result of an increase in oil prices, as well as other commodity prices. This rise, however, is not permanent and it does not generate any inflationary pressure on the economy because it only involves food and energy prices (Elwell). On the other hand, other indicators that affect inflation immensely remained fairly stable, such as wages, productions costs, and yields on long-term securities which influence the longer term inflationary expectations. Government deficit went down to its smallest annual budget due to the reduction in government spending and increasing the tax revenue. The national deficit increased by $750

9 billion in 2013, which is comparatively small compared to the increased in the previous year, which reached $1.16 trillion. This shows an improvement in the fiscal policy under Obama s administration (Hicks). Since 2009, interest rate has remained fairly stable yet had slight fluctuations. From 2009 to early 2010, interest rate fell to 11% while it increased drastically to 20% in April It then fell down gradually until it reached 7% in October 2011 and was followed by slight fluctuations between 8% and 16%. These fluctuations are caused by three main economic indicators: Gross Domestic Product, Inflation (CPI), and the Unemployment Rate. As for consumer spending, the rise in oil prices from October 2011 through April 2012 by 30% had a major impact on household budgets and led to a reduction in consumer spending in that period. This is due to the fact that the demand for energy is inelastic, and hence, when consumers spend more on energy, they are likely to spend less on other commodity, which consequently slows down the economy (Elwell). As soon as the oil prices went down in April 2012, the economic growth started recovering as the consumer spending increased from around $9,863 billion in July 2009 to $10,732 billion in July Correlation Analysis This part of the paper includes a simple correlation analysis between real GDP and the five economic indicators and among the indicators themselves. Made possible by the data tool provided in Excel, the correlation results show how strongly correlated each indicators are with one another, with 1 being perfectly correlated and 0 being perfectly uncorrelated. The level of correlation also reveals growth trends, negatively or positively, of all variables compared. First, we look at the correlation result during Clinton Administration: GDP Consumption CPI Investment Deficit GDP 1 Consumption Interest Rate

10 DOLLARS IN BILLION CPI Investment Deficit Interest Rate Table 1: Correlation Result during Clinton Administration Figure 4: Growth Trend of GDP, Consumption, Investment, and Deficit GDP Real Personal Consumption Expenditures in billions Investment in billions Total Public Debt in billions 0.0 Linear (GDP) TIME (QUARTERLY) As the table shows, total public debt (government deficit), real gross private domestic investment, real personal consumption expenditure, and consumer price index for all urban consumers (CPI) are all highly (almost perfectly) and positively correlated with GDP. Only the effective Federal funds rate (interest rates) shows moderate level of correlation with GDP. These relationships are shown in figure 4, 5, and 6, where the growth trend lines of total public debt (government deficit), real gross private domestic investment, real personal consumption expenditure, and consumer price index for all urban consumers (CPI) (placed in a separate graph because of different units of measurement) move consistently with the GDP growth trend line. In a separate graph, figure 6

11 PERCENTAGE CPI shows how the Effective Fed Funds Rate (Interest Rates) exhibits a correlation with GDP that is only moderate fig.5 Growth Trend of CPI TIME (QUARTERLY) fig. 6 Growth Trend of Effective Federal Funds Rate TIME (QUARTERLY)

12 BILLIONS OF DOLLARS Secondly, we have the correlation result during Bush administration: GDP Consumption CPI Investment Deficit Interest Rate GDP 1 Consumption CPI Investment Deficit Interest Rate Table 2: Correlation Result during Bush Administration According to the table, total public debt (government deficit), real personal consumption expenditure, and fig. 7 Growth Trend of GDP, Consumption, investment, and deficit GDP Real Personal Consumption Expenditures in billions Investment in billions consumer price index for all urban consumers (CPI) are Total Public Debt in billions Linear (GDP) all highly and almost TIME (QUARTERLY) perfectly correlated with GDP. However, real gross private domestic investment went from highly-correlated during Clinton time to moderately-correlated during Bush time. The effective Federal funds rate (interest rates) demonstrates a weak correlation with GDP this time. These correlations are shown in figure 7, 8, and 9, where the growth trend lines of total public debt (government deficit), real personal consumption expenditure, and consumer price index for all urban consumers (CPI) (placed in a separate graph because of different units of measurement) move consistently with the GDP growth trend line. However, the graph also shows that real gross private domestic investment exhibits less consistency. In a separate graph, figure 9 shows how the

13 EFFECTIVE FEDERAL FUNDS RATE CPI Effective Fed Funds Rate (Interest Rates) demonstrates a correlation with GDP that is only moderate fig.8 growth trend of CPI TIME (QUARTERLY) fig. 9 growth trend of Effective Federal Funds Rate 0.00 TIME (QUARTERLY)

14 The last correlation result we have is during the on-going Obama administration: GDP Consumption CPI Investment Deficit GDP 1 Consumption CPI Investment Deficit Interest Rate Interest Rate According to the table, total public debt (government deficit), real personal consumption expenditure, real gross private domestic investment, and fig.10 Growth Trend of GDP, Consumption, Investment, and Deficit GDP Real Personal Consumption Expenditures in billions Investment in billions Total Public Debt in billions consumer price index for all urban consumers (CPI) are all highly and, again, almost perfectly correlated with GDP. The result also shows that the effective Federal funds rate (interest rates) has a weak and negative correlation with GDP during Obama s time. These correlations are shown in figure 10, 11, and 12, where the growth trend lines of total public debt (government deficit), real personal consumption expenditure, real gross private domestic investment, and consumer price index for all urban consumers (CPI) (placed in a separate graph because of different units of measurement) move consistently with the GDP growth trend line. In a separate graph, figure 12 shows how the

15 EEFECTIVE FEDERAL FUNDS RATE CPI Effective Fed Funds Rate (Interest Rates) demonstrates a correlation with GDP that is weak and negative fig.11 growth trend of CPI TIME (QUARTERLY) fg. 12Effective Federal Funds Rate TIME (QUARTERLY) Conclusion With all the policy analyses and data analyses, we see clear differences of macroeconomic performance across these three presidents. However, this paper is not presented in an attempt to judge a particular president or to show favoritism towards one over the other two. It is imperative to notice that [normal] economic cycles mean that growth is likely to be less

16 impressive for a president who enters office at the end of a boom, as George W. Bush did, and better for one who enters when growth is weak, as Bill Clinton and Ronald Reagan did (Norris). Overall, we are able to see effects from the implementation of policies to show on GDP changes and that the selected indicators in this paper almost all exhibit strong correlation with GDP and mostly with one another.

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