Was George W. Bush a supply-sider?

At the Library of Economics and Liberty, David Henderson recently reviewed Bruce Bartlett's book, "The New American Economy."

The whole piece is worth reading, but Henderson makes one particularly important point.

Bartlett's... facts show that Bush missed the fundamental insight about supply-side economics, which is the importance of getting marginal rates down. As Bartlett notes, "Bush himself was responsible for watering down the supply-side elements."

Doubling the child credit, in particular, is the opposite of a supply-side policy. Bartlett writes, correctly, "the vast bulk of Bush's tax cuts in dollar terms involved rebates and tax credits that had no supply-side effects whatsoever."

This is a vital point, and good for Bartlett and Henderson for highlighting it.

Two of the three tax cuts signed in the G.W. Bush Era were not supply-side in that they were not long-term reductions of marginal tax rates on income or capital. The cuts of 2001 and 2008 were designed as short-term rebates to stimulate consumption, i.e. demand, by putting "more money in people's pockets."

In the supply-side view, such tax cuts are a waste of money as they cost Treasury billions and clutter the IRS code without reforming the tax system to incentivize new economic growth or investment.

Any how, only the 2003 tax cut was a true supply-side bill, thanks to the efforts of House Ways & Means Committee Chairman Bill Thomas, and the sluggish economy accelerated. Despite the tax bill's $650 billion price tag, the fiscal deficit fell from 2004-2007, and President Bush was re-elected.

While tax policy is vital to understanding the Bush era, both Bartlett and Henderson ignore the supply-side policy mix's other half, sound money, which was notably absent.

From 2001-08, the dollar fell against other major currencies:



And gold rose four times, from $250 to $1000:



In hindsight, it is obvious U.S. monetary authorities in the GW Bush years pursued a weak dollar policy, a Keynesian idea intended to promote exports. Such currency manipulation is fundamentally at odds with the supply-side principles of fixed exchange rates among world currencies and a stable gold price.

As Nobel Laureate Robert Mundell has explained, trade deficits in an open global economy balance when a current account deficit's flipside is a capital account surplus, as has been the case for America for most of its history. By definition, in an open-economy model, all trade balances.

Today, it is clear that the weak dollar dollar policy was the great economic mistake under President Bush, as it pushed the housing boom into a bubble, raised oil prices to record levels, and damaged trade partners. Mundell believes the dollar's instability was the primary culprit in the 2008 financial crisis and resulting recession. He argues Europe's current economic problems are a direct result of the dollar's instability too.

It should be clear then, that the G.W. Bush years were not a period of supply-side policy, especially for monetary policy. If anything, the era confirms the danger of deviating from the supply-side formula.

(Note: John Tamny has made many of these arguments previously. As have Bret Swanson and David Malpass.)