Although the economic contexts for the start of the Donald Trump and George W. Bush administrations were very different, both presidents responded with essentially the same economic formula — tax cuts, higher spending and aggressive deregulation.
In both cases, as expected, the economy responded to the stimulus with boosted growth of stocks and gross domestic product. For Trump, the good numbers on unemployment, GDP and stocks were more immediate, owing to the much more favorable economy when he took office, than they were for Bush.
Both presidents were also offered a similar opportunity: to put the nation’s finances on more solid ground. What happened under Bush may give us a window into what is coming in the next few years.
When Bush took office, there was a slowing economy, and the stock market was declining. Unemployment was low but rising.
There had also been four straight years of budget surpluses, 1998 to 2001, under President Bill Clinton. As a result, the debt was shrinking fast as a percentage of GDP. Economists even mused about the possible evaporation of the U.S. bond market. In 2001, the national debt stood at 54.8 percent of GDP.
Trump inherited a very different economy. Unemployment was falling (4.4 percent in 2017 from a 2010 high of 9.6 percent) amid a historically long expansion albeit at growth rates that were below average for the post-World War II period. Deficits had dropped from a high of $1.4 trillion to around $650 billion — still high, but falling as the expansion continued. Still, the national debt stood at 104.8 percent of GDP.
The Bush Effect
After Bush took office, tax cuts were phased in over three years, 2001-03, cutting marginal rates at all levels. At the same time, government spending as a share of GDP, which began at 17.7 percent in 2001, increased throughout his administration, peaking at 24.4 percent in 2009, his administration’s last budget.
Economic growth was sluggish for two years, then picked up in the third year of the tax cut, with GDP reaching 2.9 percent. At the same time, the budget went rapidly from surplus to deficit. By election year 2004, the deficit had climbed to $412 billion, a swing of more than half a trillion dollars since the last surplus in 2001.
By 2004, growth was a robust 3.8 percent. The economy crested at just the right time for the incumbent president, who was vulnerable because of his controversial decision to invade Iraq the year before.