In Monday’s debate Secretary Clinton said:

We had the worst financial crisis, the Great Recession, the worst since the 1930s. That was in large part because of tax policies that slashed taxes on the wealthy, failed to invest in the middle class, took their eyes off of Wall Street, and created a perfect storm.

Supplementing Glenn Kessler’s excellent analysis in today’s Washington Post, let’s examine Secretary Clinton’s argument that the Bush tax cuts “in large part” caused the 2008 financial crisis.
The Kessler column cites Alan Kreuger and Simon Johnson, offered by the Clinton campaign to back up her argument. Neither does. Each defends his own reinterpretations of what she might have meant or could have said.

Folks on the left often have other reasons to oppose (or to have opposed) the Bush tax cuts, and I am happy to debate those points. Similarly, the argument that President Bush and Congressional Republicans “failed to invest in the middle class” is a common refrain. But those arguments are separable from whether these policies caused or contributed to the financial crisis. To me linking tax policy to the crisis is nonsensical, as is the “failed to invest in the middle class” causal linkage to the crisis. The “in large part” further amplifies her error.

Some (e.g., Simon Johnson) argue that higher debt levels restricted fiscal flexibility in responding to the crisis. I was enmeshed in the design, proposal, enactment, and initial implementation of all financial crisis rescue actions. With debt then at 38% of GDP, fiscal flexibility did not constrain our financial rescue efforts in the last months of the Bush Administration.

As Kessler points out, the same appears to be true for Team Obama’s big initial macroeconomic recovery effort, the early 2009 fiscal stimulus. Larry Summers’ December 15, 2008 transition memo to then president-elect Obama says their fiscal stimulus recommendation was constrained by their inability to figure out how to spend money any faster, not by debt levels.

More importantly, whether higher debt resulting from the Bush tax cuts (and other spending policies) constrained the response to the crisis is irrelevant, because Secretary Clinton claimed these policies caused the crisis, not that they made it harder for policymakers to respond once the crisis had occurred. “Tax policies that slashed taxes on the wealthy,” she argued, “created a perfect storm.”

Others argue: The Bush tax cuts increased high-end income, and increased income inequality —> increased purchase of mortgage-related lending by the rich –> credit/mortgage bubble –> over-leverage –> financial crisis.

There are at least two problems here.

  • Income inequality has been increasing for more than three decades, and the housing bubble began in the late 90s, a few years before the initial round of Bush tax cuts. Her timing doesn’t work.
  • The most prominent explanations for the 00s’ credit bubble point instead to some combination of increased global capital flows (mostly from China and oil-producing nations to the U.S. and Western Europe) and U.S. monetary policy. I have not seen anyone argue that in an open economy like ours the 2001 or 2003 tax cuts and resulting higher incomes for the rich caused either the credit bubble or the bubble in housing-related financial assets.

Many on the policy and political left argue the 2008 crisis was “Wall Street’s fault, stemming from greed, arrogance, stupidity, and misaligned incentives, especially in compensation structures.” Had she stuck with this argument Secretary Clinton would have been able to point to others who make similar arguments and she would have had a more defensible position (albeit one with which I still disagree). Senators Sanders and Warren, Brooksley Born, and Phil Angelides all fall into this camp.

Instead, her argument that fiscal policy “in large part … caused a perfect storm” broke new ground. I think this argument was politically driven and this new ground is intellectual quicksand.

U.S. fiscal policy, including the Bush tax cuts, did not cause or contribute to the 2008 financial crisis. Secretary Clinton was incorrect in arguing that it did.