The Afghan Effect?
By James K. Galbraith
Salon.com
Tuesday 21 September 2004
The president can no longer blame Osama bin Laden for economic stagnation and
job loss - his war in Iraq has been abysmal for business.
The White House now says that, in addition to everything else, Sept. 11 wrecked our economy.
Bush may be the "no-jobs president," but Osama bin Laden is to blame. Let's look at the evidence.
The chart shows that "W" entered office on a rough note. Real GDP growth had already slumped
in the summer and fall of 2000. It bounced on the edge of recession for
several quarters and then fell into one in the third quarter. Much of that,
no doubt, came in the three weeks following Sept. 11. (I've always said
Bush should get a pass for his first year.)
In the fourth quarter beginning on Oct. 1, 2001, investment collapsed.
But the overall economy did not. Instead, it rebounded. Why? Tax
rebates went out, interest rates fell and automakers (among others) cut
their prices. Auto and home sales soared. Federal government
spending also surged - on reconstruction, homeland security and the
military. The stock market had recovered almost all its losses by year's
end.
And we went to war. After our quick "victory" in Afghanistan investment surged, but only for one
quarter. After that, growth fell off as household and government spending faded away. This was the
second loop of the "W" slump. Indeed, we nearly slipped back into full recession at the end of 2002.
That fact could have cost the Republicans at the polls in the midterm elections had the electorate
been focused on it, but the voters were distracted. From September 2002 until its launch, we were
engaged in the run-up to the war in Iraq.
And when that war came, the "Afghan" economic pattern repeated on a larger scale. Federal
military spending added almost 1.5 points to growth in the second quarter of 2003, kicking an anemic
growth rate above 4 percent for the first time under Bush's rule. Then, in the rush of the Baghdad
"cakewalk," the economy finally fired on all cylinders at once. Consumption and investment both
jumped, pushing the growth rate to 7.4 percent in the third quarter of 2003.
That was the peak, the top of the Bush economy. It has been downhill since then. In the second
quarter of 2004, consumer spending contributed only 1.1 points to growth. The investment surge still
had some spark to it, contributing 2.6 points. But every sign so far suggests that the third quarter of
2004 will be worse on both fronts. Meanwhile, the contribution of government spending to the growth
rate has fallen to half a percent overall.
So what went wrong? Why did we lose so many jobs and never get them back? Yes, Bush
inherited a weakening economy. Yes, jobs were lost after Sept. 11. But the key is that they didn't
come back in spite of two bouts of supposedly good news: the aborted start of a recovery in 2002 and
the now-fading start of a real recovery in mid-2003.
Jobs were lost, in the main, because of a deep slump in business investment, which fell almost 10
percent between 2000 and 2003. Some of that happened before 9/11. Much of it happened
immediately afterward. And then we lumbered on for a year and a half during which investment
contributed nothing to growth and in consequence nothing to jobs.
Was all of that due to 9/11? Did the bin Laden effect last for two years? If it did, one reason is that
Bush failed to finish the Afghan war. Soon after bin Laden escaped at Tora Bora, the Special Forces
were diverted to Iraq. But there is a larger issue. What could Bush have done to help the economy that
he did not do?
First, he didn't change his tax program. Bush's focus remained on cutting taxes for the wealthy in
the long term. Congress had added some "stimulus" measures in 2001 and again in 2003, which
boosted consumption and total spending for short periods. But they didn't create jobs - a lesson for
future Keynesians seeking cheap solutions. The long-term tax cuts to which they were coupled also
failed to ignite business investment and job creation.
The tax cuts meant that other vitally important things could not be done. In particular, states and
cities, once a mainstay of growth (contributing an average of almost half a point to the GDP every
quarter from 1997 through 1999), have since the end of 2001 contributed just a little more than a tenth
of a point per quarter. Under Bush, states and localities have been strapped - and the federal
government hasn't helped them out.
And then we went to war, and found that war fever is not very good for jobs. The seemingly quick
victory in Afghanistan led to an investment jump in the following quarter, but the effect was small and
quickly evaporated.
The war in Iraq raised total government spending by much more. When it appeared to end in swift
victory, the effect, at first, was galvanic. Investment surged (alongside consumption), adding three
points to growth in the third quarter of 2003. Within a few months employment started to grow as well.
In the year since, we have gained about a million jobs. That's about half of those lost, about a third of
what the administration's economists thought they'd get - and about a fifth of what would restore full
employment.
But all that happened when people thought the war was over. Now it's clear that the war isn't over.
It's clear that we didn't win it when Bush declared, "Mission accomplished." In fact, it's obvious that we
aren't winning it now. And it looks like this phase of rising investment, too, is fading.
What's the missing ingredient? Here's a wild guess: optimism. Vision. A sense of direction.
Perhaps even leadership. A truly sustained investment boom requires optimism. It requires confidence,
among other things, that peace, stability, growth, development and strong markets will be there in six
months' or a year's time. To an extent few appreciate, our economy runs on imagination.
More than any other nation on earth, we have to create the future's business, and with it the jobs of
the future. That means we have to think through what they are. As with the long buildup to the Internet
boom, we must come to believe, as a community, that the future will take some particular shape. Only
then will private investors put up the money. This is hard work, easy to get wrong. And a nasty war
has gotten in the way. A war can have an insidious effect on the national ability to think. (It can also
impair key calculations such as the future of oil prices.) Peace and prosperity are associated in
economic history, for good reason.
So long as we're stuck in Iraq, bleeding harder every day (and building toward crises with Iran and
North Korea), I bet against a strong and long revival of private business investment. That means I also
bet against strong and sustained growth of decent jobs, and against a return to full employment. And
I'd keep to that bet even in the face of new stimulus measures, such as new tax cuts or making the
old ones permanent.
If I'm right, the decrease in private investment could be the largest economic cost of the Iraq war.
More important than what it has taken from the budget is the confidence it has ripped from the heart
and soul of American business, from investors' willingness to gamble, big time, on our future at home.
It's a fair point that Osama bin Laden hit us hard. The war against him, in Afghanistan, was a
necessary evil. Moreover, war helps the growth rate - as Bush's wars have twice confirmed. But on a
deeper level, war is bad for business. And it's terrible for jobs.
Unfortunately for Bush, the important war for our economy isn't the one in Afghanistan but the one
in Iraq. The president can no longer blame bin Laden for where we stand now. Three years after 9/11,
blame for the economic situation lies with "W," which stands for "wreckless."
James K. Galbraith is Professor at the Lyndon B. Johnson School of Public Affairs and
Department of Government, The University of Texas at Austin, and co-author of Macroeconomics, a
textbook from Houghton-Mifflin. |
