The Truth About "The Bush Recession": What Really Caused It

Vertical Lines Legend:

1st (Black) Line: March 2000 ... Dot-Com Crash And The Resulting Recession Begin

2nd (Blue) Line: January 2001 ... Bush Sworn In

3rd (Yellow) Line: Bush's First Tax Legislation Passed

4th (Red) Line: Bush's Second Tax Legislation Passed

Here are the key points on which I’ll elaborate below:

1. The so-called ‘Bush Recession’ actually began in March 2000, ten months before(!) Bush took office.

2. It was caused by the Dot-Com Bust, not Bush policies (because he wasn’t even in office yet)

3. It was very severe, in some ways worse than the latest ’great’ recession of 2008-2010.

4. The NASDAQ lost nearly half(!) its value before Bush took office and was still headed sharply downward

When it looks like a recession may be in progress, economists like to use the GDP as a metric by which to determine whether we’re actually in one. To be specific, two successive quarters of declining GDP confirms to them that we‘re in a recession. That’s a completely useful tool because it helps us know for sure whether we‘re in a recession so we can make relevant policy changes to address it. The unanswered question for which the GDP is a totally inadequate measure is when the recession actually began and what event(s) or circumstances caused it.

It can be difficult at the beginning of a recession to ascertain the underlying causes of it. In most cases we must take a historical look at it to know with greater certainty. It’s easier to see and analyze the unfolding of events looking back some time later on everything that happened. So it is with the “Bush Recession”.

For some time after that recession became fact, economists called it the “2001 - 2003” recession. That assumed it actually started in March 2001. The symptom they rely on, GDP, suggested it began then. However, a clearer view of the whole picture today, with which economists now agree, shows without doubt that everything began unraveling when the NASDAQ began a historic dive in March 2000, a year earlier than economists pegged it at the time based on what the GDP was doing. What caused that dive starting in March 2000? Clearly now and without a doubt, the Dot-Com Bust. That bust began in March 2000 and is what precipitated the so-called Bush Recession. I’ll refer to it more accurately as the 2000 - 2003 recession hereafter.

Nearly all economists now agree on what I said above. In addition, most of them also now agree that several interest rate increases under Clinton precipitated that Dot-Com Bust. It’s completely true that the NASDAQ was ‘overheated’ and was headed for a crash at some point anyway. All it needed was a trigger. The interest rates didn’t cause it all by themselves so blaming Clinton’s economic policies for it isn’t entirely fair either. It was pretty much inevitable. The important point I want to make is, neither is it true that Bush did anything whatsoever to cause it. After all, the recession began nearly a year before Bush was sworn in. To put it in the same kind of context as Obama‘s comments about what was going on when he came into office, Bush inherited not only that recession but a NASDAQ that was already 10 months into in a severe(!) decline and was still headed sharply downward (toward its eventual 77% loss).

The severity of the Dot-Com NASDAQ collapse matters in a couple of important ways. A severe recession isn’t easily turned around as Obama has also discovered. The fact that the NASDAQ lost 50% more of its value in the 2000 - 2003 recession than in the 2008 - 2010 recession tells us something about the difficulty of recovering from the worse one that began under Clinton in 2000. Also, when speaking about the effectiveness of Bush’s subsequent tax cuts, one must put them in the context of a severe market collapse to accurately assess their effectiveness. More about that in my next blog on these subjects.

Here are the links I used to assemble the information above:

1.  Dot-Com Bust: http://en.wikipedia.org/wiki/Dot-com_bubble

2.  NASDAQ closing price history: http://finance.yahoo.com/q/hp?s=%5EIXIC

3.  When the 2001 – 2002 recession actually began (check out the section titled “UNITED STATES”): http://en.wikipedia.org/wiki/Early_2000s_recession