“Now Governor Romney believes that with even bigger tax cuts for the wealthy, and fewer regulations on Wall Street, all of us will prosper. In other words, he’d double down on the same trickle-down policies that led to the crisis in the first place.”

— President Obama, in a new two-minute television ad released Sept. 27, 2012

“This election to me is about which candidate is more likely to return us to full employment. This is a clear choice. The Republican plan is to cut more taxes on upper income people and go back to deregulation. That is what got us into trouble in the first place.”

— Former president Bill Clinton, in an Obama campaign ad running since August

When two different people give virtually the same message in two different ads, it’s a good bet that the language has been carefully poll-tested. Both President Obama and former president Bill Clinton assert that Mitt Romney wants to cut taxes for the wealthy and cut financial regulations — which they suggest is a recipe for another economic crisis.

The name “George W. Bush” is never mentioned but is certainly implied. This leads to the question: Did the Bush tax cuts cause the economic crisis?

We’ve been interested in the Clinton comments for some time and never quite got a satisfactory response from the Obama campaign. But Clinton used the vague word “trouble,” which could be broadly defined as also meaning higher deficits. (Clinton’s staff did not respond to queries about what he meant.) Certainly the Bush tax cuts did play some role in higher deficits, though, as we have noted, increased spending played a bigger role.

But Obama is not vague at all. He highlights the tax cuts and then says the “same trickle-down policies” — Democratic code for tax cuts for the wealthy — led to the “crisis.” The campaign’s back-up material labels that as “economic crisis,” thus leaving no ambiguity about his reference.

The Facts

We should stipulate at the outset that Romney adamantly rejects the idea that he has proposed more tax cuts for the wealthy. His plan would cut tax rates, but also eliminate tax deductions, which he says would make the plan revenue neutral. But no one has proven that his numbers add up, and the respected nonpartisan Tax Policy Center concluded that the available details on the Romney plan suggest taxes would decrease for the wealthy but rise for the middle class.

Romney has advocated repealing the Dodd-Frank financial regulation bill. As for the role of deregulation in the crisis, there certainly has been news reporting showing that the Bush administration generally took a hands- off approach to regulating financial institutions.

But others would note the irony of Clinton citing the perils of deregulation under Bush because he also is culpable. Clinton signed into law a repeal of the Glass-Steagall law that separated commercial and investment banks — a policy shift that some have said also played a role in the economic crisis. Moreover, Clinton also signed into law the Commodity Futures Modernization Act, which essentially removed derivatives contracts from regulatory oversight. By many accounts, derivatives, such as the credit default swap, were at the heart of the financial crisis.

Indeed, Clinton has admitted that he was given wrong advice about the need to regulate derivatives contracts. “I think they were wrong, and I think I was wrong to take” their advice, Clinton said of his economic advisers.

The Dodd-Frank bill tightened regulations on derivatives contracts, thus reversing the decision that Clinton — not Bush — had made.

While one can argue whether deregulation under Clinton or Bush played a bigger role in the financial crisis, the notion that the Bush tax cuts “led” to the 2008 crisis is especially puzzling. The campaign’s back-up material for the Obama ad cites only one source — a column by our colleague Ezra Klein. Here is how it is presented:

Washington Post’s Ezra Klein: “Reading Romney’s Policies, You Would Never Know That The Nation Is Still Facing High Unemployment Rates Or That It Just Came Through The Worst Financial Crisis In A Generation … There’s Nothing In His Campaign Platform That Couldn’t Have Been In Bush’s Platform. In Fact, Most Of It Was.”
“Reading Romney’s policies, you would never know that the nation is still facing high unemployment rates or that it just came through the worst financial crisis in a generation. You certainly wouldn’t think we’d just emerged from a decade in which large tax cuts and financial deregulation led to major economic distress. This is not necessarily the fault of Romney’s advisers, who have rethought elements of the Republican Party platform and have taken risks. Mankiw, for instance, has eloquently argued for a tax on carbon emissions and for a looser monetary policy. Hubbard has pushed efforts to encourage mass refinancing. Vin Weber, another Romney adviser, was an advocate of the Bowles-Simpson deficit-reduction plan. But Romney hasn’t gone for any of these policies. There’s nothing in his campaign platform that couldn’t have been in Bush’s platform. In fact, most of it was.” [Ezra Klein, Washington Post, 4/30/12]

There’s one problem though: the column does not back up Obama’s statement about tax cuts. Klein mostly laments the fact that, in his view, the Romney campaign does not appear to have new ideas with which to confront today’s economic realities.

Just to be sure, we checked with Klein, and here is how he responded: “I am absolutely not saying the Bush tax cuts led to the financial crisis. To my knowledge, there’s no evidence of that.”

Klein is right. While some on the left have speculated about some kind of Rube Goldberg phenomenon — that the tax cuts put so much money in the pockets of the rich that they had nothing to spend it on but risky and exotic financial instruments — we are unaware of any respected academic study making this link. The Bush tax cuts have been amply criticized for costing too much and generating too little economic growth, but that’s entirely different from causing the Great Recession.

Indeed, the official government inquiry, the 631-page final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, makes no mention of the Bush tax cuts. The report, endorsed by every Democrat on the panel, does cite deregulation, but 30 years of deregulation across multiple administrations — not just deregulation in the Bush years.

The Obama campaign said that Obama was referring to all of Bush’s policies, not just tax cuts. We think that distinction would be lost on ordinary people. Just like Clinton, Obama mentions only two things: tax cuts and deregulation. He then adds that such “trickle-down policies” led to the crisis — and “trickle down” is Democratic pejorative for “tax cuts for the rich.”

Obama campaign deputy press secretary Kara Carscaden defended the president’s remarks and issued this response:

“While Reagan made ‘trickle down’ famous for tax cuts, the theory is that economic growth is driven by the top. Those like Romney who favor repealing Wall Street reform share the same theory — roll back the rules because when a few people at the top do very well, they will somehow pull the rest of us along.

“The tax cuts contributed to the crisis in multiple ways, including by driving up the deficit, crowding out potential investments that could have promoted sustainable, shared economic growth and leaving the economy vulnerable to speculation-fueled bubbles and high middle-class indebtedness. And they made it more difficult for the federal government to respond to a crisis because it was already facing very high deficits.

“The president’s argument — that our country is stronger when we invest in the middle class rather than cut taxes to the top — is the broad, philosophic question facing our country right now.”

The Pinocchio Test

It is time for the Obama campaign to retire this talking point, no matter how much it seems to resonate with voters. The financial crisis of 2008 stemmed from a variety of complex factors, in particular the bubble in housing prices and the rise of exotic financial instruments. Deregulation was certainly an important factor, but as the government commission concluded, the blame for that lies across administrations, not just in the last Republican one.

In any case, the Bush tax cuts belong at the bottom of the list — if at all. Moreover, it is rather strange for the campaign to cite as its source an article that, according to the author, does not support this assertion.

We nearly made this Four Pinocchios but ultimately decided that citing deregulation in conjunction with tax cuts kept this line out of the “whopper” category. Still, in his effort to portray Romney as an echo of Bush, the president really stretches the limits here.

Three Pinocchios

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