If you’re hoping Donald Trump will be a one-term president, one way it could happen is if the US is hit with a massive bout of inflation. That’s what happened to Gerald Ford and Jimmy Carter; as a result, they were one-term presidents. Let’s discuss.
Gerald Ford: Put in office after President Nixon Resigned in 1974: 1-Term President Jimmy Carter: Elected 1976: 1-Term President
The 1970’s in the US are sometimes called the Lost Decade. The country was plagued with massive inflation that did not subside until a couple years into President Ronald Reagan’s presidency.
President Gerald Ford, a Republican, had it slightly worse than Carter. Some say that he never wanted to be president, but found himself in the position after the Watergate scandal drove both Richard Nixon and his vice-president, Spiro Agnew, out of Washington. When Ford took the presidency from Nixon, the federal government was in crisis. The Vietnam War was about to end in failure, Nixon’s Watergate scandal had shocked the country to its core, and the economy was in a miserable state, plagued by stagflation.
The country was so distrusting of the government that when Gerald Ford was sworn in, he made the following comment in a national address:
“I am acutely aware that you have not elected me as your president by your ballots, and so I ask you to confirm me as your president with your prayers.”
When Jimmy Carter took office in 1977, the country was still struggling with a depressed economy and a high inflation rate. Inflation was slowly being tamed by the Federal Reserve’s high interest rate policy. Those high interest rates had a nasty side-effect; they threw the US into multiple recessions, throughout the 1970’s and early 1980’s.
Between 1970 and 1985, there were 4 recessions, and 2 of them were prolonged. Since 1985, there have been 4 more recessions, with only only 1 of them prolonged.
The take-away? Inflation, and the recessions it creates, makes presiding presidents one-termers.
George H.W. Bush: Elected 1988: 1-Term President
This brings us to President Bill Clinton’s predecessor, the last one-term president. If we look again at the graph of US recessions above, we can see that there was a Recession during George Bush’s term as president. In addition, the following California-Berkeley piece tells us that,
“…the early 1990s recession lasted just eight months, conditions improved slowly thereafter, with unemployment reaching almost 8% as late as June 1992. The sluggish recovery was a key factor in George H.W. Bush’s defeat for re-election to the U.S. presidency in November 1992.”
The recession of the early 1990’s caused an unexplainable rise in unemployment that persisted beyond the relatively short length of the actual recession.
A year after the end of the recession in the summer of 1991, the unemployment rate continued to rise. People were still being laid off. This is the reason why President Bush ended up losing re-election. As the saying goes, people vote with their wallets, and only jobs can fatten wallets.
Earlier when we talked about the Kasich-Clinton Balanced Budget Act of 1997, Joshua Gordon at the Concord Coalition stated that a lot happened during the Bush administration to actually put in place the foundations for the BBA. One was a,
“…bipartisan agreement between George Bush and the Democratic congress to raise taxes on high-income earners, and enact discretionary spending caps and Pay As You Go Rules.”
This was a compromise between Dems and Republicans; the trade-off for higher taxes on high-income earners was the spending caps. The Democrats wanted the higher taxes, and the Republicans wanted to reign in spending. The two put together worked wonders in putting the budget on track toward balance.
We can see proof of this in the above table. Notice that between 1990 and 1992, the deficit increased from $221 Billion to $290 Billion. Why? The reason for this initial increase in the deficit was the 1990 Iraq War. Recall that the US sent 500,000 troops to Saudi Arabia to force Saddam Hussein out of Kuwait.
The cost of the Iraq War, according to this article on CNN, was $61 Billion. Some of that was covered by allies, so it wasn’t entirely a burden for the US. By the way, compare that number to what the second Iraq War cost, from Reuters:
“The U.S. war in Iraq has cost $1.7 trillion with an additional $490 billion in benefits owed to war veterans, expenses that could grow to more than $6 trillion over the next four decades counting interest.”
In addition to the Persian Gulf War, the recession of the early 1990’s forced the government to spend money. Unemployment claims and the lessening of tax revenue that came with it all added up to a justifiable increase in the deficit between 1990-1992.
Notice in the FRED graph above that the deficit peaked at exactly the same time the unemployment rate peaked, in July of 1992. After 1992, the deficit decreased until 1997, when the BBA was passed; in 1998 the deficit became a surplus, and it stayed as such for years. Without the 1990 agreement between President George Bush and the Democratic congress, this would not have been possible for at least several more years, if at all. Why? Because September 11th, 2001, and the 2008 Financial crisis began a government spending spree never before seen in history, with no end in sight.
Some will say that the Bush tax hikes caused the 1990 recession. First, let’s look at how the top tax rate has changed over the years.
The Bush tax hike was phased in; in 1990, it was 28%, a carry over from the Reagan era. In 1991, it went to 31%. This was the first hike from the Bush Tax Increases. In 1992, it stayed at 31%, and finally, in 1993, it went to its terminal value of of 39.6%. By that time, Bush had been kicked out of office by a Democrat, Bill Clinton, but the deficit was well on its way to surplus. And it was thanks to George H.W. Bush.
In 2014, George Bush was honored by the John F. Kennedy Library Foundation for his bi-partisan selflessness in pushing thru the tax hikes that put the country on the path to fiscal discipline. It’s plausible to say he sacrificed his presidency, knowing that the optics of the tax increase would not go down with Republican voters. An article in Reuters agrees. The John F. Kennedy Library Foundation said,
“Former U.S. President George H.W. Bush showed courage in breaking his “read my lips: no new taxes” campaign pledge to broker a 1990 budget compromise that may have cost him re-election two years later.”
Reuters elaborated on the tax increases, with some details on who/what they targeted:
“In September 1990…despite the potential political backlash, Bush announced a compromise with congressional Democrats that would cut $500 billion from the deficit in five years, in part by raising “luxury taxes” on items including yachts and pricey cars, among other tax hikes.”
If that is not evidence of sacrifice, I don’t know what is. The new taxes specifically targeted the ultra rich, the constituency most influential in presidential elections from a funding perspective. Most of them tended to be Republican.
The next time we reminisce about the days the government had a balanced budget, we should take the time to acknowledge President Bush’s role. In today’s politics, there is plenty of talk of Reaganomics and the Reagan tax cuts of 1981 and 1986. The fact is they were unsustainable; they took the top tax rate too far (from an ultra high 70% to an ultra low 28%) too fast.
To see unsustainable such a dramatic drop in the top tax rate is, one only need to refer back to the below table from the Office of Management and Budget at WhiteHouse.gov.
And the accompanying chart of the above data…
The 1980’s, under President Reagan, saw the deficit soar. A few things happened that should not have happened:
First, the rule of thumb is that the government should take advantage of economic booms to terminate spending programs. These programs are known as fiscal stimulus, and they are not required when the free market economy is self-sustaining. Socialist programs that stimulate the economy should be cut, and taxes should be gradually raised, to replenish the money that was spent on fiscal stimulus, unemployment claims, subsidization, etc…. Under Reagan, the opposite happened. From Berkley’s Slaying the Dragon of Debt,
“From November 1982 to July 1990 the U.S. economy experienced robust growth, modest unemployment, and low inflation. The “Reagan boom” rested on shaky foundations, however, and as the 1980s progressed signs of trouble began to mount. On October 19, 1987 stock markets around the world crashed. In the U.S. the Dow Jones Industrial Average lost over 22% of its value.”
There were a number of explanations for Black Monday in 1987. But many people saw it as a sign that during economic booms, the government budget deficit should not be increasing dramatically, as it did during the 1980s. When deficits are increase during economic booms, the only conclusion possible is that the boom is being fueled by debt. That means that instead of value being created in the now, it is simply being borrowed from the future, priced in as equity today.
How can we explain this concept? Think of buying a house. When you buy a house, you take out a loan. Let’s say the loan is a 30 year mortgage from your local bank. That loan symbolizes you borrowing money from your future earnings, and you are paying an interest rate on borrowing from those earnings. The only way you can afford that home today is borrowing money from your future earnings. If you lose your job, and suddenly your future earnings decrease sharply, your equity in your home decreases, until it goes to 0 when the mortgage company repossesses your home. The takeaway is that when you borrow from the future, any small hiccup can dramatically reduce your equity.
The same thing is the case when government debt increases along side private corporate equity. Debt fueled equity is borrowing future economic value and bringing it to the present. It is not the same thing as creating economic value today. This is why the stock market crashed on Black Monday, 1987. When both debt and equity increased, as did throughout the 1980’s, many took high stock market prices as simply a sign of inflation, and not a sign of increasing economic value.
In 2016, the Bank of International Settlements, the central banker of central banks, asserted that it is time to stop the debt fueled growth model. From a CNBC article on the story:
“It [BIS] also calls on governments to adjust their fiscal – or budgetary – rules to make them more countercyclical and reduce implicit guarantees, which may encourage risk-taking. Another policy that deserves consideration, according to BIS, is to use the tax code to restrict or eliminate the bias of debt over equity or reduce the effect of financial cycles.”
The counter cyclical approach to government spending means exactly what we just talked about; governments should decrease spending during periods of economic growth, and increase spending during economic declines.
Basically, if taxes are going to go down when the economy is shrinking and people are losing their jobs, they should go up when everyone has a job and money is plentiful. Government stimulus should not be permanent; unfortunately, it has been. One reason is geopolitical conflict, the wars in Iraq and Afghanistan, and the arms race between the US, China, and Russia, on-going.
Ten years into an economic boom, the budget deficit is once again projected, by the White House OMB, to hit nearly $1 Trillion. What this means is that we are repeating the mistakes of the 1980’s. Private sector equity values are skyrocketing, along with public deficits. How long before the market has a Black Monday 1987 realization?
If the Dow Jones did have a Black Monday moment, it would fall 22% in one day. A 22% decline in the Dow Jones from today’s (September 29, 2019) closing price of about 26,500 would be a 5,830 point decline. Wow!