Clinton vs. Bush

People love to compare how the economy performed under the Clinton and Bush administrations. There are a number of things both administrations did right and wrong.

Economic freedom: Clinton vs. Bush

Both changes in economic freedom and the overall Economic freedom ranking have been associated with faster economic growth. For example, De Haan et al. find:

"There are strong indications that liberalization, i.e. an increase in the EF index, stimulates economic growth." [1] 

Additionally, John Dawson uses Granger Causality tests to see whether economic freedom causes economic growth and concludes:

"The results [of the Granger tests] suggest that the overall level of economic freedom appears to cause growth, while changes in freedom are jointly determined with growth. Among the underlying areas of economic freedom, levels of freedom relating to use of markets and property rights appear to be driving the causal relationship between economic freedom and growth. These results emphasize the importance of economic freedom, in general, and the role of free markets and property rights, in particular, in fostering long-run economic prosperity." [2]

It is clear that economic freedom is important in fostering economic growth. Judging by these findings one would expect the Clinton Administration (1993-2001)to have higher economic growth rates. However, there are other factors that come into play which effect growth rates.

The Price of Gas: 

When the price of gas is cheap, people and businesses tend to consume more of it. This means that economic activities reliant on the price of gas will increase. Additionally, as gas becomes cheaper, people and businesses have more money to spend and invest elsewhere, expanding output in other industries. Low energy prices are great for the economy. So what was the price of gas under the Clinton and Bush administrations?

It is clear that the price of gas was at historic lows under the Clinton administration. Unfortunately for President Bush, the price of gas rose exponentially to near all time highs during his time in office. It appears as though President Obama is facing the same problem, which is probably a contributor to the slow growth recovery following the recent recession. These findings suggest that the Clinton Administration had the advantage of low energy prices in comparison to the Bush administration. 

Government Spending: 

Numerous studies have found a negative relationship between the size of government (measured as a % of GDP) and economic growth. According to Economists Andreas Bergh and Magnus Henrekson:

"When we focus on studies that examine growth of real GDP per capita over long time periods, the research is actually close to consensus: In rich countries, there is a negative correlation between total size of government and growth...[when controlling for numerous variables most studies find] that an increase in ten percentage points in tax revenue [or expenditure] is associated with annual growth between  one-half and one percentage point lower" [3] 

This is significant because a lower growth rate means that it takes much longer for a country to become more wealthy. Bergh and Henrekson note:

"An annual growth rate of 2% means that the economic standard of living doubles in thirty-six years. But if the annual growth rate is instead 3%, a doubling of the standard of living takes a mere twenty-four years" [3] 

[This graph shows a simple correlation between the size of government and economic growth- see citation #4]

How does this relate to the Clinton and Bush presidencies? Well, as you can see below, Clinton (1993-2001) shrunk the size of government (measured as a % of GDP) whereas Bush (2001-2009) increased it a few percentage points. If the empirical research cited earlier is correct, then one would expect the Bush administration to have a slightly slower economic growth rate holding other variables constant. 

Taxes: 

According to the Heritage Foundation, the economic growth rates under Clinton improved after congress cut the capital gains and other taxes.

"Business investment skyrocketed after the tax cut, and the economy grew at an annualized rate of 4.4 percent (33 percent faster than after the Clinton tax hike) from 1997 through the end of the Clinton presidency. Real wages reversed their downward trend and grew 1.7 percent per year during the same time." [5]

However, it's worth noting that the NASDAQ Bubble was inflating during this time, and that Clinton's high growth rates could be attributed to that.

The Heritage Foundation continues, praising the Bush Tax cuts:

"In June 2001, President Bush signed into law the first wave of tax cuts. The relief included reductions of marginal income tax rates and tax relief for families, for example, doubling the child tax credit from $500 to $1,000. To reduce the budgetary impact, Congress phased in the tax cuts over several years.

Since the tax cuts were slow to go into effect, they were slow to help the economy. In fact, the economy continued to lose jobs after the tax cuts even though the recession officially ended in November 2001.

Realizing the error of its ways, in May 2003 Congress accelerated the tax cuts to make them effective immediately. In addition to reducing marginal income tax rates, Congress also lowered the tax rates on capital gains and dividends." [5]

There's no doubt that Clinton's economy created more jobs than Bush's economy did. However, Bush started his term with a recession brought about by the crashing of the NASDAQ Bubble. It is apparent that the economy was losing jobs until the second Bush Tax cuts occurred, at which point employment growth exploded. The Heritage Foundation also notes that there was a 24% increase in taxable income during Clinton's time in office in comparison to a 44% increase in taxable income under the Bush administration despite the tax cuts. Then again, who knows how much of Bush's success is attributed to the Housing Bubble? Credit bubbles are the equivalent of economic IEDs so one shouldn't be too hast to dismiss the gains made during the Clinton and Bush presidencies by attributing them solely to credit bubbles. 

Conclusion: 

In the end, Clinton did have a better economic record than Bush, but he also had the advantage of low energy prices and came into office during a strong economic expansion. However, Clinton shrunk the size of government and presided over a time period where American economic freedom was very high. Bush on the other hand, presided over a time where economic freedom declined substantially in the US and energy prices soared. While these are not the only factors that contribute to economic growth, they may explain the differences between the economic performance records of the Clinton and Bush economies. 

Citations:

[1]http://scholar.google.com/scholar_url?hl=en&q=http://www.researchgate.net/publication/4991841_Market-oriented_institutions_and_policies_and_economic_growth_A_critical_survey/file/50463529e023bd8a20.pdf&sa=X&scisig=AAGBfm2YcGeAO6yMaXl5VaJzBBVT7x9xBQ&oi=scholarr

[2] http://webcache.googleusercontent.com/search?q=cache:xs1e6MPoZs4J:www.researchgate.net/publication/222674979_Causality_in_the_freedomgrowth_relationship/file/79e4150991d3adc52c.pdf+&cd=1&hl=en&ct=clnk&gl=us

[3] http://www.aei.org/book/economics/government-size-and-implications-for-economic-growth-book/

[4] http://frihetspartiet.net/function.pdf

[5] http://www.heritage.org/research/reports/2011/09/setting-the-tax-record-straight-clinton-hikes-slowed-growth-bush-cuts-promoted-recovery