|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
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
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
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