Guest Contribution: “The Lesson from George H.W. Bush’s Tax Reversal”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate on December 10th.

When President George H.W. Bush was laid to rest earlier this month, the remembrances appropriately remarked on his general decency and competence. In public commentary, the encomiums tend to be followed by a “but.” For journalists and historians, it is “but he was only a one-term president.” He lost the election of 1992, in part because of the recession of 1990-91. For members of his own political party, the “but” is, “but he broke with the legacy of Ronald Reagan and with his own ‘no new taxes’ pledge.” They have always blamed his failure to win re-election on that perceived betrayal.

But President Bush’s mistake was making the anti-tax pledge in 1988 in the first place and sticking to it in the first part of his presidency. The 1990 reversal on fiscal policy set the stage for a decade of economic growth that eventually achieved budget surpluses.

The budget deal that Bush reached with Congressional Democrats in 1990 may indeed have contributed to his failure to win re-election in 1992. There is no question that the timing of this otherwise-impressive achievement was terrible. The move to fiscal discipline came just as the recession was hitting. (The economy peaked in July 1990 and reached its trough in March 1991.) This instance of pro-cyclical fiscal policy probably made the recession worse than it would otherwise have been and slowed the subsequent recovery.

Did the broken tax pledge cost Bush re-election?

But it is not as clear as some believe that the tax reversal is what cost him re-election. Another drama ran simultaneously with the budget negotiations and the recession: Iraqi forces invaded Kuwait on August 2, 1990. (This reckless act was arguably attributable to the coddling of Sadaam Hussein, another misguided policy that Bush had inherited from Reagan.) The invasion sent oil prices higher and may well have caused the recession.

In any case, President Bush’s prosecution of the campaign to push Iraq out of Kuwait was skillful, both diplomatically and militarily. Project Desert Storm achieved its aims on 28 February, 1991. Consequently, his job approval rating reached a sky-high 89 per cent. It was only in the fourth year of his term that the poll rating sank miserably (hitting its low-point of 29% in July 1992. Anger at the reversal of the tax promise can’t directly explain the 29 percent poll rating, because the 89 per cent rating came in between.

Bush during the Reagan Administration

George H.S. Bush actually had known better than to support the claim that Reagan’s 1981-83 tax rate cuts would boost the US economy so much as reduce the budget deficit. When he had run against Reagan for the Republican nomination in 1980, at one point he had famously called such claims “Voodoo economics.” But he put his doubts aside when he accepted the position as Reagan’s vice president. Even more famously, when Reagan’s second term was ending and Bush was nominated to be his successor in August 1988, his acceptance speech at the Republican National Convention predicted that Democrats would repeatedly ask him to raise taxes. He promised that he would forever refuse: “read my lips, no new taxes.”

The economy at the end of the 1980s was at the peak of the business cycle. This was a proper time to begin to address the long-term budget deficit problem. As Keynes famously said… “The boom, not the slump, is the right time for austerity at the Treasury .” But Bush agreed to double-down on the Reagan policies that had produced the record deficits in the first place. And the ploy worked, in the sense that the pledge helped him not only get the Republican nomination but also win election.

Bush’s historic reversal

After a year and a half in office, the 41st president courageously (though belatedly) decided to address the long-postponed budget deficit problem that he had inherited. He entered into difficult negotiations with the Congressional leadership. The Democrats had the majority in both houses of Congress and they refused to agree to restrain domestic spending unless taxes also contributed to the budget package. Thus in June 1990 Bush admitted that any agreement to cut the deficit would require not just spending restraint but also tax increases. This was universally viewed as a retraction of his “no new taxes” pledge. The taxes that were raised were in fact old taxes, but that was considered just a technicality. On October 8, the House and Senate finally agreed on a budget plan (narrowly avoiding a government shutdown).

The Budget Enforcement Act of 1990 legislated caps on discretionary spending and created constraints known as “pay-as-you-go” (PAYGO) rules which essentially said that if Congress wanted to cut a tax or increase entitlement spending it had to pay for the cost in some other part of the budget. When Bill Clinton became President in January 1993, persuaded to prioritize the budget balance by his Treasury Secretary, Robert Rubin, he sent to Congress legislation to renew the system of spending caps and PAYGO. It passed, though without a single Republican vote. (The Democrats controlled Congress then — until, in the mid-term elections of November 1994, Newt Gingrich successfully marshalled Republican anger at what had effectively been four years of fiscally responsible legislation and re-took the House.)

The fiscal system remained in place throughout the remainder of the Clinton Administration. The budget policy, together with good economic growth, steadily reduced the deficit and converted it to rising surpluses in 1998, 1999 and 2000. But in January 2001, the second Bush assumed office. The Republicans allowed the budget caps and PAYGO rule to lapse. They cut taxes and rapidly raised spending, with the results that record deficits soon returned.

Lesson: Avoid pro-cyclical fiscal policy

This is not irrelevant ancient history. George H.W. Bush showed a “profile in courage” when he decided to meet the Democrats halfway in order to achieve fiscal responsibility; it is the last time any Republican president has tried to live up to the label of fiscal conservative. But the timing of the 1990 switch was pro-cyclical. Republicans repeated the economic mistake of pro-cyclicality when they engaged in fiscal expansion during the recovery of 2001-2007 and then fought President Obama’s attempts to respond to the 2007-09 recession with fiscal stimulus after he arrived at the White House in January 2009. As a result of this fiscal pro-cyclicality, the recovery from the Great Recession was slower than it had to be, just as had been the case with the 1990-91 recession.

Over the last year, President Trump has pursued an even more flagrantly pro-cyclical fiscal expansion, with ill-timed tax cuts and spending increases. It too will end badly.

This post written by Jeffrey Frankel.

29 thoughts on “Guest Contribution: “The Lesson from George H.W. Bush’s Tax Reversal”

  1. pgl

    An excellent essay but permit me to qualify two of his arguments:

    “The move to fiscal discipline came just as the recession was hitting. (The economy peaked in July 1990 and reached its trough in March 1991.) This instance of pro-cyclical fiscal policy probably made the recession worse than it would otherwise have been and slowed the subsequent recovery….The invasion sent oil prices higher and may well have caused the recession.”

    Of course, the Greenspan FED could have dramatically lowered interest rates to offset both of these factors. Barkley rightfully blames the 1990/91 in part on overly tight monetary policy. Yes, the high Federal Funds rate fell slightly but the interest rate on long-term corporate bond rates continues to rise.
    In our earlier comments on this matter – I decided to go to the NIPA accounts over at The one category of aggregate demand that took a big and sustained hit was investment demand, which did not recover until the fall of 1992. As such, the employment to population ratio stayed low until the end of 1992. This is what gave Clinton his edge over Bush41. And this lays at the feet of the allegedly great Alan Greenspan.

    1. Bruce Hall

      pgl,, you might find the abstract interesting:

      Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts, they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates.. Of course, the immediate spending cuts never actually happen by the federal government no matter who is in charge. We’d have to have the tax rates of the 1950s to finance the spending of today. I wonder how that might affect growth?

      1. 2slugbaits

        Bruce Hall To begin with, your statement “Of course, the immediate spending cuts never actually happen by the federal government” is incorrect. You might want to consult BEA table 1.1.10, Line 23. Spending as a percent of GDP has fallen, just not under Republican administrations.

        As to the paper you cited, it’s a fairly standard overview of plain old vanilla macroeconomics, but it’s also a good lesson as to why you should really read the paper itself and not just the abstract. From page 25:

        The analysis of tax cuts financed by reductions in government purchases is subject to an
        important caveat. The models assume that government purchases either represent resources that
        are destroyed or that government purchases enter utility in a separable fashion from private
        consumption. For some purposes, like national defense, the latter assumption might be
        appropriate. In those cases, the cut in spending would reduce households’ utility and thus
        impose welfare costs but would not affect choices at the margin. However, in all of the analyses,
        it is assumed that there is no investment component of the government purchases – so the
        analysis would not be representative of the effects of cuts in, for example, education, research
        and development, or infrastructure investment.

        You should also read the important Ramsey model assumption caveat as discussed on page 24.

        You also opined: “We’d have to have the tax rates of the 1950s to finance the spending of today. I wonder how that might affect growth?”

        Well, it turns out that the authors have an explicit answer to that question. They cite lots of empirical evidence showing that the per capita GDP has been the same since forever irrespective of the tax rate regime. The main point that the authors are making is that tax rates don’t have much effect at all on economic growth. They do suggest the possibility that tax reform could lead to a level shift in income, but that is not the same as a change in the long run growth rate. This is just basic Solow growth model stuff, and I’m quite sure that pgl is very familiar with it. Also, note that the authors point out that we really only have one example of true “tax reform”, and that was the 1986 tax change, which was proposed by Sen. Bradley (a Democrat) and initially opposed by Reagan. But to Reagan’s credit, he eventually came around even though it effectively reversed virtually all of his disastrous 1981 tax changes.

        1. pgl

          Any decent macroeconomist is indeed familiar with the basic argument. The truth is that national savings as a share of output fell dramatically in the 1980’s which is why real interest rates skyrocketed – crowding out investment and leading to a strong dollar that gave us those current account deficits. I used emailed Donald Luskin after one of his dumb supply-side rants asking him to explain in what model a reduction in national savings is good for long-term growth. I did not get a real answer – only a testy “do you know who I am”!

      2. pgl

        William Gale is one of the best! BTW – the overall growth rate during the 1950’s was quite strong. But we did endure 3 recessions. I blame a naive Federal Reserve for the yo-yo pattern of business cycles. But Ike’s fiscal policies were quite excellent for a Republican!

      3. pgl

        Section IV: Empirical Analyses of Particular Tax Reforms

        First they note that the short-term changes in real GDP were driven by monetary policy and exchange rate changes. They also dismiss any positive long-term benefit. They suggest the 2001 tax cut may have lowered long-term growth.

        Co-author Andrew Samwick may be the last honest Republican economist. Art Laffer, Stephen Moore, and Lawrence Kudlow are the Three Stooges who lies as much as Trump!

  2. Jeff Frankel

    To pgl: Thanks for the overall compliment.
    As regards the August 1990 oil shock, I subscribe to the usual view that there is not much the central bank can do to offset an adverse supply shock. If Greenspan had lowered interest rates to prevent output from falling then there would have been more inflation.

    1. pgl

      I had to go back and remind myself what was happening to the consumer price index back then. Inflation was creeping up in the late 1980’s and past 5% by 1990. Now by the time Clinton took office, it had declined to less than 3%. So one could make the case for tight money back then. I guess there is too much of the fromer and late James Tobin in me when I decide to blast the Greenspan FED for its tight money.

  3. 2slugbaits

    Nice and I mostly agree, but in addition to pgl’s comments, I think we need to keep a couple of other things in mind. All of this was against the recent and still lingering effects of the S&L crisis; and here Bush 41 was not just an innocent bystander. If you look at the target FFR leading up to the recession, you’ll see a kind of roller coaster pattern from mid-1988 through mid-1991. First steadily rising rates. Then the FED had to sharply cut rates between Jun 1989 and Dec 1989. Then flat until the recession was already upon us. The S&L crisis pushed the FED towards a more expansionary policy in the second half of 1989, but an expansionary fiscal policy pushed the FED towards a “wait and see” kind of policy until the recession was underway. The S&L crisis made the FED’s job a lot harder. Another thing we need to keep in mind is that by 1992 the recovery was well underway and the economy was humming along pretty well, so that should have improved Bush’s re-election chances. Given normal lags between when a fiscal policy is implemented and when it starts to affect the economy, the fact that the economy was out of recession by 1991Q2 suggests that the contractionary and pro-cyclical effects of the 1990 tax and spending bill may not have been all that bad. Finally, we need to ask the counterfactual as to what the FED would have done if Bush 41 hadn’t agreed to the tax increase. Is it likely that the FED would have lowered rates throughout the recession and beyond if those tax increases hadn’t been in place?

    And you’re right. Trump’s strongly pro-cyclical policies are a disaster waiting to happen and it will end badly. My personal pet theory is that pro-cyclical thinking is a natural outcome for people who think of the macroeconomy as a very large household economy. Families spend money when times are good and tighten their belts when times are bad. It’s intuitive and if you’ve never studied economics it makes sense. You see various posters here who seem to buy into that household analogy, but those same posters brag about never having read a macro textbook.

    1. pgl

      “The S&L crisis made the FED’s job a lot harder.”

      I have long thought the same thing. Reagan ignored the S&L crisis whereas Bush41 attempted to resolve it. The resolution also likely put new stresses on the banking system that the Greenspan FED was struggling to grasp. I have long wondered if anyone has written about this aspect of how the S&L crisis and resolution changed how we should view monetary policy. To date I have not seen such a paper but if someone else knows of one – it would be a useful contribution to the discussion.

  4. pgl

    “Families spend money when times are good and tighten their belts when times are bad.”

    Another interesting possibility but remember this is Donald J. Trump and his kids. For them – when times are bad, they either run to Fred Trump or borrow money from the Russians. After all, Donald has no issues with defaulting on his debts.

    1. baffling

      i have often wondered, if trump is so confident that the mexicans will pay for the wall, and trump is also a multibillionaire, why not let trump foot the bill for the wall today and be paid off by the mexicans when they fund the wall? he should have no concerns if he knows the wall will be built and the mexicans will pay for it. put your money where your mouth is donny. but i think this goes against his plan of building the wall and sticking the bill with the us taxpayer.

      1. pgl

        “trump is also a multibillionaire, why not let trump foot the bill for the wall today and be paid off by the mexicans when they fund the wall? he should have no concerns if he knows the wall will be built and the mexicans will pay for it. put your money where your mouth is donny”.

        Truth be told – Trump’s net wealth is overstated as everything else he brags about. Value of assets are overinflated and his true debt is sky high. But wait I forget to factor in the present value of what he can rip the rest of us for with his being President. By that metric, he is a trillionaire!

        1. baffling

          my guess is that donny has no intention of having mexico actually pay for the wall. in addition, i don’t think he has the capital to put a down payment on the wall if given the opportunity, anyways. once you subtract his liabilities from his assets, i would be surprised if it was a net positive. past bankruptcies indicate he has a problem with that balance. of course, if he uses the corev accounting rules, perhaps he will never have to count those liabilities, or even pay them off.

  5. Moses Herzog

    I’m going to give “H.W.” two things. He was better than Reagan, and he was a better President than his own son. That’s all I’m giving him. Any other positive comparisons are so self-apparent they aren’t worth stating. “H.W.” also did well not to do a public victory jig on the Gorbachev concessions related to East Germany and other things. I believe Gorbachev was the real MVP for East Germany. But H.W. also deserves the “assist” on getting the ball in the basket as regards East Germany. But Gorbachev was the real hero (the one who slam-dunked the ball off of Bush’s assist) and gave East Germans their freedom, and that fact has never been accurately or measurably recognized. It was a HELL of a political risk Gorbachev was taking, and after Gorbachev took that hellish risk for humanity “H.W.”, with near zero risk, took all the bows. That’s bullshit in my book.

    “H.W.” was competent in his presidential duties, and that’s all this filthy dirty bleeding-heart liberal is going to give him. That’s the full extent of my generosity today.

    1. baffling

      i will agree with you that gorby has been pushed aside in history. one can claim a reagan victory all they want, but without gorbachev executing the path towards a freer nation, the fall of communism does not occur (at least without bloodshed).

    2. ilsm


      Gorby and Reagan/Bush 41 laid the groundwork for a peaceful central Europe, while Clinton (Wm J would not preside over the end of [war] history) etc reneged on the NATO expansion deal and now Putin has a short western flank…… like 1811.

      From a cold warrior’s memory INF treaty was a big deal, negotiated under Reagan, implemented in a solid manner with verification under 41. Busting ABM (1972 – 2002… ‘breeching’ INF should not be considered without looking at “Aegis Ashore” in Japan, Rumania and Poland) is also a very bad process.

      Bush 41 formulated pentagon budget reductions that cleared some of the war burden from the economy! Might have hurt his support in the military industry complex and give the closet neocon an edge with MIC PAC support. His SecDef Cheney canceled Navy’s stealth bomber the A-12 a major breakthrough in installing technical sanity after the Reagan splurge, not popular in “pentagon supporters” view.

      HW lost to the “slick” factor in 1980 and 1992.

  6. don

    Certainly agree with JF’s dire prediction. State governments are especially in line for hard times in the next downturn. Most of them have been playing a shell game with their citizens and state workers, satisfying the former with government services beyond what they have been paying for. They accomplished this by paying state workers partly with promised future benefits and then failing to set aside enough to fund them. (Part of the problem is they use overly optimistic projections for the rate of return on assets set aside to fund the benefits.) I think unexpected inflation is the only thing that can save many of them.

    1. Moses Herzog

      @ don
      I always had mixed feelings about this lady. I think some people gave her too much credit, and some people gave her a lot of undeserved flack (I expect some of that was “blowback” from the TBTF banks, who used WSJ and other media outlets the TBTF bankers give advertising revenues to, to vilify her). Did she get it wrong?? I’m not so certain. If they kick the can down farther, so that your prognosticated time ends up being premature, does it mean your base point or your base contention was wrong?? Each person has to weigh for themselves—I think she made a deep point that still many had missed. In my subjective view, Meredith Whitney has yet to be proven wrong.

      This is why the Rick Santelli’s of the world, frankly I often fantasize about bashing his face in—as Santelli enjoyed making tons of money selling debt instruments to people, then turns around and waves the naughty finger at government debt—-sorry Supreme Hypocrite Rick—you can’t have it both ways.

      1. baffling

        agree on both points. when responding to idiots like corev and peaktrader, i imagine them to look and talk a lot like santelli. whitney was right about more than she was wrong, but a woman is not permitted to chastise the good old boys club.

    2. pgl

      Looking at:

      Table 1.1.6. Real Gross Domestic Product, Chained Dollars
      [Billions of chained (2012) dollars] Seasonally adjusted at annual rates

      Real state and local government purchases were $2015 billion in 2009. This year they will be around $1950 billion. We need to see state and local purchases increase substantially. Does that require higher taxes or more Federal revenue sharing?

  7. baffling

    doesn’t anybody find it ironic that team trump continuously crucifies the “fake news” mainstream media, while using the national enquirer to buy and bury damning behavior by trump as well as promote false stories about clinton’s health and criminal history throughout the election? i guess one would have a problem with mainstream media if one believes the national enquirer is a legitimate news source. projection!

    1. pgl

      Did you ever seen Men in Black? They trusted the New York tabloids over the regular news to get the story first!

  8. Moses Herzog

    I believe Mr. Frankel had something to say about a Miss Gopinath in a prior post. I said a couple things, that I thought were flattering that got filtered. Maybe some of our good regular readers can guess “the gist” of the filtered comments. Be that as it may, being a degenerate that wanders the internet a decent amount, well sometimes you find something “off the beaten path”. I thought that BOTH Mr. Frankel and Professor Chinn would get a kick out of this. I enjoyed it, and thought he represented himself and his daughter quite well. The man has A LOT to be proud of.

  9. Moses Herzog

    I’m uncertain if this is part of the Republican Party’s “family values” platform. Maybe Reince Priebus or Ronna Romney McDaniel can leave a small note in this blog thread and let us know how imprisoning children, sexually molesting children, and letting them die due to Republican officials’ decisions is part of Republicans’ “family values” platform.

    I know Republicans were concerned about fictional future “death panels” (that in fact insurance companies ALREADY had death panels if you had a “pre-existing” condition), so is it safe to assume Republicans “care” about children being drugged, molested, and dying from Republican policies??

    Ronna Romney, like her uncle is a big donald trump supporter, she enjoys licking trump’s boots after trump insulted her uncle every chance he got.

    Now, Ronna has never met Hillary Clinton—Ronna spent most of her 2015-2016 time in Michigan and Hillary doesn’t take campaign buses to states such as Wisconsin or Michigan because Hillary’s phobic fear of acquiring the Ebola virus from shaking hands in those two states. That’s because of Putin and people discussing her emails and the Russian Kremlin had incubated severe Wisconsin and Michigan Ebola so Hillary could not take a campaign bus to those two states. Damned Putin. He made all those rural female voters deplorable sexists due to the Kremlin incubated Wisconsin and Michigan Ebola. Shameful. Hillary really “wanted” to go to Wisconsin and Michigan, but with the Kremlin incubated Ebola which magnetizes to campaign bus interiors, what could Hillary do???? Sick Deplorables!!!!!

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