By Greg Ip 

WASHINGTON -- Though George H.W. Bush was president for just four years, his economic legacy on taxes, banking and trade reverberate today.

Mr. Bush owed his election in 1988 in part to the low inflation and solid growth during the administration of Ronald Reagan, whom Mr. Bush served as vice president. Yet imbalances that took root under Mr. Reagan would haunt his successor's presidency.

One imbalance was the budget deficit. In his losing campaign for the presidential nomination in 1980, Mr. Bush famously derided Mr. Reagan's supply-side tax cuts as "voodoo economics." Yet as vice president he faithfully defended those tax cuts and in his 1988 campaign declared, "Read my lips: no new taxes."

The clock was ticking, though. The tax cuts had bequeathed persistent deficits and Congress had passed laws in 1985 and 1987 to trigger across-the-board spending cuts if deficits weren't addressed. To avert those provisions, Democrats, who controlled Congress, insisted that spending cuts be accompanied by tax increases. Mr. Bush acquiesced and broke his pledge in 1990.

Conservatives have ever since blamed that decision both for the recession that began that year and Mr. Bush's defeat in 1992. Reality is more complicated. The recession was mild, ending in March 1991, long before Mr. Bush would face the voters again. But it didn't feel that way because unemployment continued to rise into 1992. Such jobless recoveries were unheard of at the time but have since become commonplace.

The jobless recovery can be traced to a second imbalance Mr. Bush inherited: a banking system, including thousands of savings and loan institutions, unable to lend because of bad real-estate loans attributable to lax oversight and haphazard deregulation. Mr. Bush's Treasury officials were preoccupied with cleaning up that mess and implementing sounder regulations. One of them, Jerome Powell, would take those lessons with him to the Federal Reserve where, as chairman, he remains acutely sensitive to how financial imbalances can threaten growth.

Despite his foreign policy triumphs -- driving Iraq out of Kuwait and smoothing the fallout from the end of the Cold War -- Mr. Bush lost to Bill Clinton and his relentless focus on the economy. Another factor: a loss of support to third-party candidate Ross Perot who was motivated in part by opposition to another Bush decision: negotiation of the North American Free Trade Agreement with Mexico and Canada.

Nafta was a watershed in globalization. It was quantitatively less important than the integration of billions of workers from Eastern Europe and China into the global economy, the creation of the World Trade Organization in 1994, and advances in technology. But as the first free trade pact between two rich countries and one poor one, Nafta came to symbolize the collision of interests between blue collar workers on one hand and consumers, corporations, and geostrategic cooperation on the other. Opposition to it was a centerpiece of President Trump's campaign.

Mr. Bush left a substantive economic legacy: his record on deficit reduction, bank repair and trade liberalization paved the way for the long expansion of the 1990s, budget surpluses and a global trade boom. The political consequences are much more contentious.

While Mr. Bush signed Nafta, it was up to President Bill Clinton whether to seek its ratification. His decision to do so marked a pivot by Democratic presidents and presidential candidates toward an embrace of globalization and away from the party's blue-collar base. Contemplating how rust-belt workers flocked to Mr. Trump's stridently nationalist message in 2016, many Democrats now regret that pivot.

For Republicans, Mr. Bush's 1992 loss has become a cautionary tale; inflexible opposition to higher taxes is now integral to the party's identity. No Republican president since has raised taxes. It is one of the few things on which Mr. Trump and his party's establishment agree.

These political pressures are coming to a boil. There are no longer enough free traders in either party to push globalization forward; the question is whether there are enough to keep it from sliding backward. Mr. Trump has renegotiated a new U.S.-Mexico-Canada Agreement to replace Nafta yet this past weekend promised to exit from the old agreement even if the new one isn't ratified.

The tax cut passed by Republicans and signed by Mr. Trump has caused the budget deficit to balloon when a strong economy should be shrinking it, setting up battles over whose programs will be cut and whose taxes will be raised for years to come. Though a product of the divisive climate that prevails today, these tensions all have roots in decisions George H.W. Bush took nearly three decades ago.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

December 03, 2018 06:14 ET (11:14 GMT)

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