The Economy, Deficit and Debt at George W. Bush's Inauguration

From some of the searches that have led readers to visit my post entitled Obama Did Not Inherit the Economy from Bush, I can see that some people were curious about the economy, deficit and debt when George W. Bush was sworn in as the 43rd President of the United States on January 20, 2001.

Note I did not say that Bush "inherited the economy," for, as noted in previous posts, government is not responsible for the economy; therefore, one president cannot inherit it from another. Similarly, a president cannot inherit the budget deficit totally, as he takes office part way through the fiscal year. Thus, he can sign spending recisions into law, or, conversely, sign new spending bills. However, a president does "inherit" -- metaphorically -- the public debt, which is the accumulation of all previous deficits, which currently date back to 1837.

The Economy

When Bush was inaugurated, the economy, after a record-long period of growth, was beginning to decline. The tax cuts he signed into law began to stimulate economic growth, but a recession became unavoidable later that year after the trillion-dollar blow of the September 11 Attacks. In other words, although the economy was not in recession when Bush took office, it was in a decline that weakened it enough that it was unable to continue to grow after September 11, until the Bush tax cuts more fully took effect an began to return the economy to prosperity.

Another significant drag on the economy at the time Bush took office, as it was later discovered, was that some corporations had misstated their financial conditions. These misstatements slightly inflated the measurements of growth during the 1990s under the Clinton Administration, and their corrections, and the bankruptcies that followed, correspondingly reduced it during the Bush Administration.

The Deficit

At the time Bush became president, the budget was in surplus of several hundred billion dollars, thanks in part to the Republican Congress in the 1990s that cut spending and taxes. However, Bill Clinton kept income taxes at the level to which he had raised them. In other words, the surplus was generated partly by the overtaxation of income. In generating the surplus, the federal government had taken hundreds of billions of dollars out of the economy that it did not need for its annual expenditures. In short, large surpluses are bad for the economy, although Clinton, Albert Gore and the Democrats continued to boast about the huge surplus their overtaxation had caused. However, political pressure began to mount to refund the surplus, which suggested that the relatively high income tax rates were not justified.

Both George W. Bush and Gore campaigned on promises to eliminate the surplus by various means, including refunding at least part of it to the taxpayers, although they disagreed on how much, with Gore preferring to spend more of it than Bush. After Bush's inauguration the Democratic Congress promised to refund $900 billion of the surplus through tax cuts, while Bush succeeded in getting Congress to approve refunding $1.3 trillion. Thus, the Congressional Democrats had proposed refunding over 75% of the surplus. Yet Democrats and other liberals have continued ever since to take cheap shots at Bush for "losing the surplus." In fact, by refunding the surplus generated by overtaxation, Bush was keeping his campaign promise, with which both his opponent and the Congressional Democrats agreed with, in part.

The Debt

The debt was $5.7 trillion at the time George W. Bush became the 43rd President. But this astronomically high figure was destined to increase not so much because of the refund of the surplus and the tax cuts, which actually increased federal revenue by helping to stimulate growth, but because of the economic downturn at the time Bush took office, followed by the corporate scandals and September 11. In addition, the Clinton Administration had made drastic cuts to the military. Bush had promised to restore the military during his campaign. In short, although the debt was already high when Bush took office, the situation he "inherited" from Clinton made an increase in the debt at that time inevitable.

It is not necessary to discuss the economy, deficit and debt throughout the Bush Administration, as my intent was only to describe the situation at the time he took office, one that was not the worst situation in history, but one that was nonetheless relatively challenging.