October 2003 Issue
Why Bush Likes a Bad Economy
by James K. Galbraith
Almost nine million people are unemployed. Many millions more are underemployed, and
most of all, under-paid. Millions more lack health insurance. States are cutting basic
public services everywhere, while the taxes (property and sales, mainly) to pay for those
that remain are rising. And the gates of opportunity--for instance, to attend college--are
closing on millions more.
George Bush did not entirely create this problem. The bubble and the bust of high
technology, the obsession with a strong dollar, the debt build-up of American
households--these existed before we got George Bush. The late 1990s were a moment
of prosperity and that rarest of economic achievements--full employment. But the boom
was based on dreams, illusions, and mortgages. These set the stage for a slump that
began in late 2000, from which we have not recovered and will not recover soon.
But Bush has done nothing to make our economic problem better and much to make it
worse. We have lost around 2.6 million jobs since he took office, and about 650,000 just
since the 2002 election. In the face of this, the bulk of the Bush tax cuts went,
notoriously, to the very wealthy, whose spending is little affected. Many middle class
Americans will get hit by rising property and sales taxes--at the state and local level.
And meanwhile, Bush is bent on eroding pay and working conditions, with the most
recent outrage being the assault on fair labor standards affecting overtime. As for the
minimum wage? Forget about it.
In the near term, it is true that new tax cuts and more military spending may bring
another false dawn. The second quarter GDP growth of 3.1 percent was a sign of this.
Meanwhile Federal Reserve Chairman Alan Greenspan is doing his best to keep the
housing bubble aloft. Greenspan knows about blowing bubbles, but not even he can
forever prevent them from popping. Short-term fiscal expansion and continued low
interest rates may prevent an early renewal of recession. They will not, however, bring
us back to full employment.
The reason for this lies in the financial position of the private sector. American
households in the late 1990s embarked on an unprecedented period of sustained
spending above their incomes, financed by borrowing that was supported by rising home
equity and the stock bubble. This was a remarkable event: For fifty years following
World War II, Americans had always spent a little less than they earned. Never before
on record here--and rarely anywhere--did an entire population go into a position of
dissaving. But it happened. And it could not last.
The collapse of stocks in 2000 started an effort to get consumption and incomes back
into line by cutting the growth rate of spending. But the continuing reduction of interest
rates has kept that adjustment from completing. The potential therefore remains for a
substantial future deceleration in household spending, something that would be much
aggravated if interest rates go up. Since household spending is well over 60 percent of
national expenditures, the further depressing effect of this, when it eventually occurs,
will be substantial. It hasn't happened yet, but that doesn't mean it won't.
The other big problem is our weak position in foreign trade. We have a propensity, now
deeply entrenched, to run huge foreign deficits at full employment. Given that
propensity, the economy needs a huge net stimulus to reach full employment in the first
place. In the late 1990s, the impulse came from the tech boom and the willingness of
households to borrow. But the investment boom is over, and the debt capacity of
households seems to be nearing exhaustion. Even the mortgage-refinancing boom,
brought on by successive cuts in interest rates, is now evidently nearing an end.
So long as households, businesses, and also state and local governments are still
retrenching, one of two things must happen to support a sustained expansion and return
to full employment. Either federal budget deficits must rise by a phenomenal further
amount--probably to somewhere between $800 billion and $1 trillion--or the United
States must find a way to increase exports and reduce imports relative to GDP, thus
making it possible for a smaller budget deficit to do the job on domestic employment.
If a budget deficit double its current size is unfathomable, and the trade regime inviolate
(as one must suppose they are, for political reasons), then the implication is plain. We
face a long period of economic stagnation, in which a return to full employment cannot
be obtained--until the household and business sectors make a full financial adjustment on
their own. For that, we would have to wait.
Can the falling dollar square this circle, giving us lower foreign deficits and so reducing
the need for fiscal expansion? This appears unlikely. On one side, estimates of the price
elasticity of American exports suggest that a lower dollar will not increase foreign
demand for American products by leaps and bounds. On the other side, the imports of
U.S. consumer goods come substantially from countries (such as Mexico and China)
against whose currencies the dollar has not declined, and who are prepared to suffer
considerable hardship to prevent such a decline in order to maintain their present access
to the U.S. market. Therefore these imports are not becoming markedly more
expensive, and the demand for them is unlikely to be choked off by considerations of
cost. Things could change on their own: American households might tire of cheap
clothing, fancy athletic shoes, and electronic toys. But given how much these items
contribute to the modest comforts of American life, this also seems very unlikely.
Finally, one may doubt the willingness of the Treasury and Federal Reserve to tolerate a
declining dollar--even one that is falling only against the euro--for an indefinite period.
At some point, speculators will kick in, considerations of national pride will be raised,
some Latin American debtors may default, and U.S. banks may begin to object to the
erosion of their international position. A dollar defense, effected by raising interest rates,
could quickly throw the internal economy into deep recession.
The baseline outlook, then, is not one where a return to full employment prosperity might
be achieved by modest changes in policy. A little "stimulus"--pushing a few well-chosen
buttons in the tax code--will not do it. Nor can Greenspan be counted on; the Federal
Reserve has largely run out of tricks. An Administration committed to changing this
situation will have to be prepared with strong measures.
No such measures are coming from George Bush. The men in charge under Bush talk
about growth, of course. One might think that they must be disappointed by this dilemma
if they understand it. They do, after all, face an election next year.
But, in fact, we are seeing an interesting departure from the normal pattern of
Republican election-year populism. Richard Nixon in 1972 and Ronald Reagan in 1984
ran strong-growth policies that reduced unemployment and produced whopping election
margins. (Nixon even imposed price-wage controls, which drove real wages through the
roof.) Under Bush--despite the seemingly large fiscal deficits brought about by
recession, tax cuts, and war--the expansionary impetus is weaker. And Administration
policymakers are making no concessions in their war on labor rights.
Why not? It may be that economic stagnation is to their taste. They don't want a new
recession, obviously, and they look set to avoid that. But do they really want full
employment and strong labor unions and rising wages? Probably not. The oil, mining,
defense, media, and pharmaceutical firms who form the core of their constituency rely
on monopoly power, patents, and the control of public resources for their profits. They
do not depend, very much, on strong consumer demand.
As for the election, there are no Bush Democrats. The Nixon Democrats in the South
long ago turned Republican, while the Reagan Democrats up North seem to have
largely returned to the fold. (Michigan, for instance, went comfortably for Gore.) In a
weaker economy, too, it may be that turnout will decline, helping Bush. The calculation
is therefore plain: A strong economy won't help that much, and a weak economy won't
hurt that much, either. And if it does, the effect can be drowned in a sea of grateful
campaign money--or perhaps by some new national security crisis.
Stagnation, moreover, helps to justify more tax cuts. The Administration's core policy
objective in this area is to shield financial wealth from all taxation. Two years ago,
estate and income taxes were cut. This year, it was capital gains, dividends, and again
the top tax rate. Next year, the sunset provisions in these measures will probably be
removed. As things are going, quite soon, taxes will fall mainly on real estate, payrolls,
and consumption. This is to say that taxes will be paid mostly by the middle class, by the
working class, and by the poor. That is what the Administration wants, and what--if not
defeated--it is exceedingly likely to get.
Finally, stagnation and the Bush tax policy promote rightwing plans to cut and privatize
essential services, including health, education, and pensions. As financial wealth escapes
tax, neither states nor cities nor the federal government can provide vital
services--except by taxing sales and property at rates that will provoke tax rebellions,
especially when middle class incomes are not rising. Every public service will fall
between the hammer of tax cuts and the anvil of deficits in state, local, and federal
budgets. The streets will be dirtier, as also the air and the water. Emergency rooms will
back up even more than they have; more doctors will refuse public patients. More fire
houses and swimming pools and libraries will be closed. Public universities will cost
more; the public schools will lose the middle class. Eventually, federal budget deficits
will collide with Social Security and Medicare, putting privatization back on the agenda.
I am from Texas, where you can see this future happening now.
Say what you will, the leaders of the Bush team are plainly not pandering after votes.
They are pursuing a governing agenda that favors the factions they represent: tax cuts
for the misanthropic wealthy; tax increases for the middle class; imperial control over
oil; deregulation, privatization, and cuts in public services at all levels; defiance of
international agreements; a systematic spoilage of the environment; an all-out offensive
against labor rights; and the placement of right-wingers in government, most insidiously
in the courts.
In the face of this reality, full economic recovery is going to be hard, even if a Democrat
wins the next election. It cannot be done, certainly, by a return to policies of the Clinton
era. Nor can it be done by stimulus alone--a simple matter of spending more and finding
the right taxes to cut. We will need to rewrite--once again--the tax code. We will need a
revenue-sharing program to stabilize the states and cities. We will need to reestablish
the rule of law in the corporate world. We will need to help labor reset minimum fair
standards. We will need a new energy and environmental strategy consistent with
geophysical realities and the dangers of, among other things, climate change, and
including, as we just learned, a public initiative to re-regulate power and rebuild the
electricity grid. We will need a new international financial structure and possibly a new
trade regime. Along the way, there will be the hard economic challenge of overcoming
the financial obstacles left over from the late 1990s--compounded as they are by the
indifference and corruption of the Bush gang.
It would be good if the Democrats were to begin, fairly soon, to think seriously about
these issues. It is, of course, possible that Bush has miscalculated. The election next
year may turn out to matter after all. If so, some poor Democrat could end up in very
deep trouble, come January 2005.
James K. Galbraith teaches at the LBJ School of Public Affairs at the University
of Texas at Austin. He is also Senior Scholar at the Levy Economics Institute. |
