Bush castastrophe includes the economy

QUOTE

The Economic Consequences of Mr. Bush
The next president will have to deal with yet another crippling legacy of
George W. Bush: the economy. A Nobel laureate, Joseph E. Stiglitz, sees a
generation-long struggle to recoup.
by Joseph E. Stiglitz December 2007

The American economy can take a lot of abuse, but no economy is invincible.

When we look back someday at the catastrophe that was the Bush
administration, we will think of many things: the tragedy of the Iraq war,
the shame of Guantánamo and Abu Ghraib, the erosion of civil liberties. The
damage done to the American economy does not make front-page headlines every
day, but the repercussions will be felt beyond the lifetime of anyone
reading this page.

I can hear an irritated counterthrust already. The president has not driven
the United States into a recession during his almost seven years in office.
Unemployment stands at a respectable 4.6 percent. Well, fine. But the other
side of the ledger groans with distress: a tax code that has become
hideously biased in favor of the rich; a national debt that will probably
have grown 70 percent by the time this president leaves Washington; a
swelling cascade of mortgage defaults; a record near-$850 billion trade
deficit; oil prices that are higher than they have ever been; and a dollar
so weak that for an American to buy a cup of coffee in London or Paris-or
even the Yukon-becomes a venture in high finance.

And it gets worse. After almost seven years of this president, the United
States is less prepared than ever to face the future. We have not been
educating enough engineers and scientists, people with the skills we will
need to compete with China and India. We have not been investing in the
kinds of basic research that made us the technological powerhouse of the
late 20th century. And although the president now understands-or so he
says-that we must begin to wean ourselves from oil and coal, we have on his
watch become more deeply dependent on both.

Up to now, the conventional wisdom has been that Herbert Hoover, whose
policies aggravated the Great Depression, is the odds-on claimant for the
mantle "worst president" when it comes to stewardship of the American
economy. Once Franklin Roosevelt assumed office and reversed Hoover's
policies, the country began to recover. The economic effects of Bush's
presidency are more insidious than those of Hoover, harder to reverse, and
likely to be longer-lasting. There is no threat of America's being displaced
from its position as the world's richest economy. But our grandchildren will
still be living with, and struggling with, the economic consequences of Mr.
Bush.

Remember the Surplus?
The world was a very different place, economically speaking, when George W.
Bush took office, in January 2001. During the Roaring 90s, many had believed
that the Internet would transform everything. Productivity gains, which had
averaged about 1.5 percent a year from the early 1970s through the early
90s, now approached 3 percent. During Bill Clinton's second term, gains in
manufacturing productivity sometimes even surpassed 6 percent. The Federal
Reserve chairman, Alan Greenspan, spoke of a New Economy marked by continued
productivity gains as the Internet buried the old ways of doing business.
Others went so far as to predict an end to the business cycle. Greenspan
worried aloud about how he'd ever be able to manage monetary policy once the
nation's debt was fully paid off.

This tremendous confidence took the Dow Jones index higher and higher. The
rich did well, but so did the not-so-rich and even the downright poor. The
Clinton years were not an economic Nirvana; as chairman of the president's
Council of Economic Advisers during part of this time, I'm all too aware of
mistakes and lost opportunities. The global-trade agreements we pushed
through were often unfair to developing countries. We should have invested
more in infrastructure, tightened regulation of the securities markets, and
taken additional steps to promote energy conservation. We fell short because
of politics and lack of money-and also, frankly, because special interests
sometimes shaped the agenda more than they should have. But these boom years
were the first time since Jimmy Carter that the deficit was under control.
And they were the first time since the 1970s that incomes at the bottom grew
faster than those at the top-a benchmark worth celebrating.

By the time George W. Bush was sworn in, parts of this bright picture had
begun to dim. The tech boom was over. The nasdaq fell 15 percent in the
single month of April 2000, and no one knew for sure what effect the
collapse of the Internet bubble would have on the real economy. It was a
moment ripe for Keynesian economics, a time to prime the pump by spending
more money on education, technology, and infrastructure-all of which America
desperately needed, and still does, but which the Clinton administration had
postponed in its relentless drive to eliminate the deficit. Bill Clinton had
left President Bush in an ideal position to pursue such policies. Remember
the presidential debates in 2000 between Al Gore and George Bush, and how
the two men argued over how to spend America's anticipated $2.2 trillion
budget surplus? The country could well have afforded to ramp up domestic
investment in key areas. In fact, doing so would have staved off recession
in the short run while spurring growth in the long run.

But the Bush administration had its own ideas. The first major economic
initiative pursued by the president was a massive tax cut for the rich,
enacted in June of 2001. Those with incomes over a million got a tax cut of
$18,000-more than 30 times larger than the cut received by the average
American. The inequities were compounded by a second tax cut, in 2003, this
one skewed even more heavily toward the rich. Together these tax cuts, when
fully implemented and if made permanent, mean that in 2012 the average
reduction for an American in the bottom 20 percent will be a scant $45,
while those with incomes of more than $1 million will see their tax bills
reduced by an average of $162,000.

The administration crows that the economy grew-by some 16 percent-during its
first six years, but the growth helped mainly people who had no need of any
help, and failed to help those who need plenty. A rising tide lifted all
yachts. Inequality is now widening in America, and at a rate not seen in
three-quarters of a century. A young male in his 30s today has an income,
adjusted for inflation, that is 12 percent less than what his father was
making 30 years ago. Some 5.3 million more Americans are living in poverty
now than were living in poverty when Bush became president. America's class
structure may not have arrived there yet, but it's heading in the direction
of Brazil's and Mexico's.

The Bankruptcy Boom
In breathtaking disregard for the most basic rules of fiscal propriety, the
administration continued to cut taxes even as it undertook expensive new
spending programs and embarked on a financially ruinous "war of choice" in
Iraq. A budget surplus of 2.4 percent of gross domestic product (G.D.P.),
which greeted Bush as he took office, turned into a deficit of 3.6 percent
in the space of four years. The United States had not experienced a
turnaround of this magnitude since the global crisis of World War II.

Agricultural subsidies were doubled between 2002 and 2005. Tax
expenditures-the vast system of subsidies and preferences hidden in the tax
code-increased more than a quarter. Tax breaks for the president's friends
in the oil-and-gas industry increased by billions and billions of dollars.
Yes, in the five years after 9/11, defense expenditures did increase (by
some 70 percent), though much of the growth wasn't helping to fight the War
on Terror at all, but was being lost or outsourced in failed missions in
Iraq. Meanwhile, other funds continued to be spent on the usual high-tech
gimcrackery-weapons that don't work, for enemies we don't have. In a
nutshell, money was being spent everyplace except where it was needed.
During these past seven years the percentage of G.D.P. spent on research and
development outside defense and health has fallen. Little has been done
about our decaying infrastructure-be it levees in New Orleans or bridges in
Minneapolis. Coping with most of the damage will fall to the next occupant
of the White House.

Although it railed against entitlement programs for the needy, the
administration enacted the largest increase in entitlements in four
decades-the poorly designed Medicare prescription-drug benefit, intended as
both an election-season bribe and a sop to the pharmaceutical industry. As
internal documents later revealed, the true cost of the measure was hidden
from Congress. Meanwhile, the pharmaceutical companies received special
favors. To access the new benefits, elderly patients couldn't opt to buy
cheaper medications from Canada or other countries. The law also prohibited
the U.S. government, the largest single buyer of prescription drugs, from
negotiating with drug manufacturers to keep costs down. As a result,
American consumers pay far more for medications than people elsewhere in the
developed world.

You'll still hear some-and, loudly, the president himself-argue that the
administration's tax cuts were meant to stimulate the economy, but this was
never true. The bang for the buck-the amount of stimulus per dollar of
deficit-was astonishingly low. Therefore, the job of economic stimulation
fell to the Federal Reserve Board, which stepped on the accelerator in a
historically unprecedented way, driving interest rates down to 1 percent. In
real terms, taking inflation into account, interest rates actually dropped
to negative 2 percent. The predictable result was a consumer spending spree.
Looked at another way, Bush's own fiscal irresponsibility fostered
irresponsibility in everyone else. Credit was shoveled out the door, and
subprime mortgages were made available to anyone this side of life support.
Credit-card debt mounted to a whopping $900 billion by the summer of 2007.
"Qualified at birth" became the drunken slogan of the Bush era. American
households took advantage of the low interest rates, signed up for new
mortgages with "teaser" initial rates, and went to town on the proceeds.

All of this spending made the economy look better for a while; the president
could (and did) boast about the economic statistics. But the consequences
for many families would become apparent within a few years, when interest
rates rose and mortgages proved impossible to repay. The president
undoubtedly hoped the reckoning would come sometime after 2008. It arrived
18 months early. As many as 1.7 million Americans are expected to lose their
homes in the months ahead. For many, this will mean the beginning of a
downward spiral into poverty.

Between March 2006 and March 2007 personal-bankruptcy rates soared more than
60 percent. As families went into bankruptcy, more and more of them came to
understand who had won and who had lost as a result of the president's 2005
bankruptcy bill, which made it harder for individuals to discharge their
debts in a reasonable way. The lenders that had pressed for "reform" had
been the clear winners, gaining added leverage and protections for
themselves; people facing financial distress got the shaft.

And Then There's Iraq
The war in Iraq (along with, to a lesser extent, the war in Afghanistan) has
cost the country dearly in blood and treasure. The loss in lives can never
be quantified. As for the treasure, it's worth calling to mind that the
administration, in the run-up to the invasion of Iraq, was reluctant to
venture an estimate of what the war would cost (and publicly humiliated a
White House aide who suggested that it might run as much as $200 billion).
When pressed to give a number, the administration suggested $50 billion-what
the United States is actually spending every few months. Today, government
figures officially acknowledge that more than half a trillion dollars total
has been spent by the U.S. "in theater." But in fact the overall cost of the
conflict could be quadruple that amount-as a study I did with Linda Bilmes
of Harvard has pointed out-even as the Congressional Budget Office now
concedes that total expenditures are likely to be more than double the
spending on operations. The official numbers do not include, for instance,
other relevant expenditures hidden in the defense budget, such as the
soaring costs of recruitment, with re-enlistment bonuses of as much as
$100,000. They do not include the lifetime of disability and health-care
benefits that will be required by tens of thousands of wounded veterans, as
many as 20 percent of whom have suffered devastating brain and spinal
injuries. Astonishingly, they do not include much of the cost of the
equipment that has been used in the war, and that will have to be replaced.
If you also take into account the costs to the economy from higher oil
prices and the knock-on effects of the war-for instance, the depressing
domino effect that war-fueled uncertainty has on investment, and the
difficulties U.S. firms face overseas because America is the most disliked
country in the world-the total costs of the Iraq war mount, even by a
conservative estimate, to at least $2 trillion. To which one needs to add
these words: so far.

It is natural to wonder, What would this money have bought if we had spent
it on other things? U.S. aid to all of Africa has been hovering around $5
billion a year, the equivalent of less than two weeks of direct Iraq-war
expenditures. The president made a big deal out of the financial problems
facing Social Security, but the system could have been repaired for a
century with what we have bled into the sands of Iraq. Had even a fraction
of that $2 trillion been spent on investments in education and technology,
or improving our infrastructure, the country would be in a far better
position economically to meet the challenges it faces in the future,
including threats from abroad. For a sliver of that $2 trillion we could
have provided guaranteed access to higher education for all qualified
Americans.

The soaring price of oil is clearly related to the Iraq war. The issue is
not whether to blame the war for this but simply how much to blame it. It
seems unbelievable now to recall that Bush-administration officials before
the invasion suggested not only that Iraq's oil revenues would pay for the
war in its entirety-hadn't we actually turned a tidy profit from the 1991
Gulf War?-but also that war was the best way to ensure low oil prices. In
retrospect, the only big winners from the war have been the oil companies,
the defense contractors, and al-Qaeda. Before the war, the oil markets
anticipated that the then price range of $20 to $25 a barrel would continue
for the next three years or so. Market players expected to see more demand
from China and India, sure, but they also anticipated that this greater
demand would be met mostly by increased production in the Middle East. The
war upset that calculation, not so much by curtailing oil production in
Iraq, which it did, but rather by heightening the sense of insecurity
everywhere in the region, suppressing future investment.

The continuing reliance on oil, regardless of price, points to one more
administration legacy: the failure to diversify America's energy resources.
Leave aside the environmental reasons for weaning the world from
hydrocarbons-the president has never convincingly embraced them, anyway. The
economic and national-security arguments ought to have been powerful enough.
Instead, the administration has pursued a policy of "drain America
first"-that is, take as much oil out of America as possible, and as quickly
as possible, with as little regard for the environment as one can get away
with, leaving the country even more dependent on foreign oil in the future,
and hope against hope that nuclear fusion or some other miracle will come to
the rescue. So many gifts to the oil industry were included in the president's
2003 energy bill that John McCain referred to it as the "No Lobbyist Left
Behind" bill.

Contempt for the World
America's budget and trade deficits have grown to record highs under
President Bush. To be sure, deficits don't have to be crippling in and of
themselves. If a business borrows to buy a machine, it's a good thing, not a
bad thing. During the past six years, America-its government, its families,
the country as a whole-has been borrowing to sustain its consumption.
Meanwhile, investment in fixed assets-the plants and equipment that help
increase our wealth-has been declining.

What's the impact of all this down the road? The growth rate in America's
standard of living will almost certainly slow, and there could even be a
decline. The American economy can take a lot of abuse, but no economy is
invincible, and our vulnerabilities are plain for all to see. As confidence
in the American economy has plummeted, so has the value of the dollar-by 40
percent against the euro since 2001.

The disarray in our economic policies at home has parallels in our economic
policies abroad. President Bush blamed the Chinese for our huge trade
deficit, but an increase in the value of the yuan, which he has pushed,
would simply make us buy more textiles and apparel from Bangladesh and
Cambodia instead of China; our deficit would remain unchanged. The president
claimed to believe in free trade but instituted measures aimed at protecting
the American steel industry. The United States pushed hard for a series of
bilateral trade agreements and bullied smaller countries into accepting all
sorts of bitter conditions, such as extending patent protection on drugs
that were desperately needed to fight aids. We pressed for open markets
around the world but prevented China from buying Unocal, a small American
oil company, most of whose assets lie outside the United States.

Not surprisingly, protests over U.S. trade practices erupted in places such
as Thailand and Morocco. But America has refused to compromise-refused, for
instance, to take any decisive action to do away with our huge agricultural
subsidies, which distort international markets and hurt poor farmers in
developing countries. This intransigence led to the collapse of talks
designed to open up international markets. As in so many other areas,
President Bush worked to undermine multilateralism-the notion that countries
around the world need to cooperate-and to replace it with an
America-dominated system. In the end, he failed to impose American
dominance-but did succeed in weakening cooperation.

The administration's basic contempt for global institutions was underscored
in 2005 when it named Paul Wolfowitz, the former deputy secretary of defense
and a chief architect of the Iraq war, as president of the World Bank.
Widely distrusted from the outset, and soon caught up in personal
controversy, Wolfowitz became an international embarrassment and was forced
to resign his position after less than two years on the job.

Globalization means that America's economy and the rest of the world have
become increasingly interwoven. Consider those bad American mortgages. As
families default, the owners of the mortgages find themselves holding
worthless pieces of paper. The originators of these problem mortgages had
already sold them to others, who packaged them, in a non-transparent way,
with other assets, and passed them on once again to unidentified others.
When the problems became apparent, global financial markets faced real
tremors: it was discovered that billions in bad mortgages were hidden in
portfolios in Europe, China, and Australia, and even in star American
investment banks such as Goldman Sachs and Bear Stearns. Indonesia and other
developing countries-innocent bystanders, really-suffered as global risk
premiums soared, and investors pulled money out of these emerging markets,
looking for safer havens. It will take years to sort out this mess.

Meanwhile, we have become dependent on other nations for the financing of
our own debt. Today, China alone holds more than $1 trillion in public and
private American I.O.U.'s. Cumulative borrowing from abroad during the six
years of the Bush administration amounts to some $5 trillion. Most likely
these creditors will not call in their loans-if they ever did, there would
be a global financial crisis. But there is something bizarre and troubling
about the richest country in the world not being able to live even remotely
within its means. Just as Guantánamo and Abu Ghraib have eroded America's
moral authority, so the Bush administration's fiscal housekeeping has eroded
our economic authority.

The Way Forward
Whoever moves into the White House in January 2009 will face an unenviable
set of economic circumstances. Extricating the country from Iraq will be the
bloodier task, but putting America's economic house in order will be
wrenching and take years.

The most immediate challenge will be simply to get the economy's metabolism
back into the normal range. That will mean moving from a savings rate of
zero (or less) to a more typical savings rate of, say, 4 percent. While such
an increase would be good for the long-term health of America's economy, the
short-term consequences would be painful. Money saved is money not spent. If
people don't spend money, the economic engine stalls. If households curtail
their spending quickly-as they may be forced to do as a result of the
meltdown in the mortgage market-this could mean a recession; if done in a
more measured way, it would still mean a protracted slowdown. The problems
of foreclosure and bankruptcy posed by excessive household debt are likely
to get worse before they get better. And the federal government is in a
bind: any quick restoration of fiscal sanity will only aggravate both
problems.

And in any case there's more to be done. What is required is in some ways
simple to describe: it amounts to ceasing our current behavior and doing
exactly the opposite. It means not spending money that we don't have,
increasing taxes on the rich, reducing corporate welfare, strengthening the
safety net for the less well off, and making greater investment in
education, technology, and infrastructure.

When it comes to taxes, we should be trying to shift the burden away from
things we view as good, such as labor and savings, to things we view as bad,
such as pollution. With respect to the safety net, we need to remember that
the more the government does to help workers improve their skills and get
affordable health care the more we free up American businesses to compete in
the global economy. Finally, we'll be a lot better off if we work with other
countries to create fair and efficient global trade and financial systems.
We'll have a better chance of getting others to open up their markets if we
ourselves act less hypocritically-that is, if we open our own markets to
their goods and stop subsidizing American agriculture.

Some portion of the damage done by the Bush administration could be
rectified quickly. A large portion will take decades to fix-and that's
assuming the political will to do so exists both in the White House and in
Congress. Think of the interest we are paying, year after year, on the
almost $4 trillion of increased debt burden-even at 5 percent, that's an
annual payment of $200 billion, two Iraq wars a year forever. Think of the
taxes that future governments will have to levy to repay even a fraction of
the debt we have accumulated. And think of the widening divide between rich
and poor in America, a phenomenon that goes beyond economics and speaks to
the very future of the American Dream.

In short, there's a momentum here that will require a generation to reverse.
Decades hence we should take stock, and revisit the conventional wisdom.
Will Herbert Hoover still deserve his dubious mantle? I'm guessing that
George W. Bush will have earned one more grim superlative.

http://www.vanityfair.com/politics/features/2007/12/bush200712

END QUOTE


.

Loading