[OPE-L] The Economic Consequences of Mr. Bush

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Nov 09 2007 - 22:44:41 EST

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. Illustration by Edward Sorel.
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
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
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
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
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
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
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
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.

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