Reckoning:
The Economic Consequences Of Mr. Bush
By
Joseph E. Stiglitz
26 November,
2007
Vanity
Fair
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.
Anya Schiffrin
and Izzet Yildiz assisted with research for this article.
Joseph Stiglitz,
a leading economic educator, is a professor at Columbia.
Copyright
© 2007 CondéNet
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