Why Bush Likes a Bad Economy
by James K. Galbraith
The Progressive magazine,
Almost nine million people are unemployed.
Many millions more are underemployed, and most of all, underpaid.
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
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 1 990s 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
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
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
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
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 dosed. 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 rightwingers
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 1 990s-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.