The economic consequences of George Bush: Ugly; very, very ugly; will take years to set things right -- if things can be set right
- From: "Kickin' Ass and Takin' Names" <PopUlist349@xxxxxxxxxxx>
- Date: Mon, 10 Dec 2007 18:39:20 -0800 (PST)
The economic consequences of George W. 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
Vanity Fair
December, 2007 issue
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. George Bush 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 George W. Bush.
Remember the Surplus?
The world was a very different place, economically speaking, when 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
George W. Bush in an ideal position to pursue such policies. Remember
the presidential debates in 2000 between Al Gore and 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; Bush
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 -- Bush 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
George 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. 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, 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.
Anya Schiffrin and Izzet Yildiz assisted with research for this
article.
Joseph Stiglitz, a leading economic educator and Nobel laureate, is a
professor at Columbia University. [1]
Copyright (c) 2007 CondéNet
http://www.vanityfair.com/politics/features/2007/12/bush200712
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