The Myths and Harsh Effects of Bush's Economic Class War
By Larry BeinhartGo To Original
George Bush came into office. There was a recession almost immediately. Officially it began in March of 2001 and, officially, it ended eight months later.
The causes of that recession are vague and amorphous, generally credited to the "business cycle."
There is, in addition, a minor Republican industry dedicated to back-dating the onset by five months, to November, 2000, in order to make it a Clinton recession. Or, to inadvertently to say that the very election of George Bush screwed up the economy, he didn't even have to come to power.
Bush came in with a plan for tax cuts. Originally, that was based on the government having a surplus and it was packaged as giving people their own money back. When the surplus disappeared, due to the recession and the tax cuts, he kept pushing the tax cuts as a jobs and stimulus package. The economy went into "recovery" by 2003.
The administration claimed that the recovery was due to the tax cuts. It was an odd and rather limp recovery. Indeed, it was a mysterious one and the mystery was that the US was still losing jobs. This was considered inexplicable.
The administration claimed that the weakness in the economy was due to 9/11 and being in a war. The very same people who used that story would have been the first to say that Roosevelt and the New Deal did not bring the US out of the depression, it was World War II that did it. Historically, wars have produced booms. But their war was somehow different.
Nonetheless, the five years from 2003 to 2007 are now routinely described as having been a "boom," a time of "robust" growth, low inflation, and low unemployment. Now we are in, or facing, a recession.
This recession was brought about by a specific over-expansion, the "sub-prime lending bubble."
This has caused turmoil in the credit markets.
The cure is a "stimulus package." It consists of two parts. Low interest rates and giving cash out to every American, in the hopes that we will "consume" our way out of trouble. It's hard to tell how much anyone believes this will work, but Republicans and Democrats have all signed on, no one is saying it's nonsense, or pointing out the obvious, that's the horse that brought us here. Here's the reality.
The recession of 2001 never ended.
At least not for ordinary Americans.
Ordinary Americans found that their income was declining. From 2001 to 2007, median family income declined - depending on where you get your figures from - by somewhere between $500 and $1,000. Median individual income went down by at least $1,000.
The yearly average number of new private sector jobs created from 2001-2008 was just
369,000, not even keeping up with the growth in population. It should be compared to the average number of new private sector jobs created from '92 to 2,000: 1,760,000 per year.
The number of people in manufacturing jobs decreased by over 3 million.
The number who got health care at work went down, from 64.2 million to 59.7 million. The number of people without health care went up from 38.4 to 46.9 million.
The number of people in poverty increased from 31.6 million to 36.5 million.
The value of America's businesses, at least as measured by the stock market, did not go up. An astonishing thing in what was called a boom. Meantime, the cost of living went up.
Home heating oil went up about 150 percent. Gas at the pump at least doubled. The cost of health insurance went up about 50 percent. The cost of college went up about 30 percent. Now food is going up. How can the myth and the reality be so different?
Part of it is the standard theology and story telling about free markets and America always being number one and the envy of the world. Add to that the great grasp of media manipulation on the part of the administration, the herd mentality in politics, the media, even, and especially, among economists.
The key fact is this: during the Bush administration the US economy "grew" by 37 percent. Give or take, plus or minus, but something around there
What has been ignored is what that growth consists of. And even more, what it cost.
The middle class has shrunk and is less well off. So the growth isn't there.
The stock market is flat, so it's not in business. Manufacturing jobs have been dramatically reduced, so it's not there.
The "growth" in the US economy is a bubble. It consists entirely of debt. Can it be true that the growth in the US economy in the last seven years, such as it is, consists entirely of debt?
Here are the numbers:
The US economy grew by about $4 trillion.
-- The national debt in Jan. 2008: $9.2 trillion
-- The national debt in 2001: $5.7 trillion
An increase of $3.5 trillion
-- Total consumer credit debt in 2008: $12.8 trillion
-- Total consumer credit debt in 2001: $7.65 trillion
An increase of $5.25 trillion
In the course of achieving growth of $4 trillion, we took on $8.75 trillion in debt, combining what we owe as a nation and as individuals.
Since we have nothing to show for it, it's the worst single investment in world history. Is debt innately evil?
There are lots of good reasons to take on debt. But the national choices should be made on roughly the same basis as taking on personal debt. If you can pay as you go, it's cheaper.
But sometimes there are emergencies. If something is vital, like saving your child's life, even when you don't have health insurance, you will hock whatever you can. When the nation is attacked, we normally spend what we have, plus what we can raise with taxes, and then borrow more, for the national defense.
It also makes sense to borrow to do something profitable - start, expand, or improve a business. The government equivalent is building infrastructure. Roads, education, communications, criminal justice and court systems, all facilitate commerce and generate more business, which ultimately creates new tax revenue.
Sometime you borrow to buy something that's worth the extra cost of paying interest, either because of it's utility, like a car, or because you expect it to appreciate more than the interest you pay, like a house.
Nowadays, governments routinely borrow to jump start or stimulate economies.
That idea started during the Great Depression. It's generally credited to John Maynard Keynes and is exemplified in many of the New Deal experiments. As originally conceived, it was trickle up, or ideally, multiply up economics. If you put the unemployed to work, they would spend their income on housing, food and other necessities. That would go to shopkeepers, service people, property owners, farmers and the manufacturers of the goods they all bought. At each step there would be tax revenue so the deficits would ultimately pay for themselves.
Then along came the trickle down people.
They believed that if rich people had more money, they would invest it in businesses, creating more employment, that would produce more things, that people would flock to buy, which would, likewise, create more tax revenue.
The problem is that it doesn't work. If there was a real shortage of investment capital, it might work, but in a generally balanced economy it doesn't. It didn't work under Reagan or Bush the Elder. They each saw it fail and retreated from it.
It doesn't work because rich people with extra money do not say, "Ah hah! I have an extra hundred grand, I'll open a grocery store!" They toss it in whatever market is handy or buy a second, third, or fourth home.
On the other hand, if there are lots of working people with some extra money, because they have good jobs, or because they have any jobs at all, you can bet your social security that someone will come along to sell them something. And the more they have, the more businesspeople will pop up to seize the opportunity, no matter how much they have to pay in taxes to do so. They will bribe, smuggle, go into war zones to make a profit. Here's what happened in Bush the Lesser's experiment.
The government pumped out lots of money by increased spending, much of it going to the military industrial complex, the pharmaceutical and insurance industry, and, of course, a special big chunk on the wars.
They also cut taxes. Mostly for the very rich. So rich people suddenly had lots of money on hand. They didn't go out and open new businesses, they simply sold the money. That is, they put it in "the financial sector," banks, investment companies, brokerages, insurance companies, real estate funds, hedge funds and the like.
The financial sector suddenly had an influx of money. So they went out and sold it. That is, they went out aggressively to make loans, both to businesses and consumers. The government was hand in glove with them, keeping interest rates low and deregulating or signoring regulations.
There was a real estate bubble. That should have been a warning sign. Real estate is a passive investment. It is a signal that there is a lot of money around with no productive place to go. No businesses expanding. No hot new industries. No genuine growth.
The real estate bubble is now routinely described as the root of our current economic problems.
That's not true. It's merely a symptom.
The problem is that the government, the nation, and the individuals in our country have all taken on massive amounts of new debt. Without investing it anything productive. Even our conquests of Afghanistan and Iraq are not profitable (except for specific war profiteers), they are drains, endlessly creating more debts. Debts which are, bizarrely, kept off the books the way Enron used to do it, or more pertinently, the way George Bush used to do it when he was at Harken Energy.
This is quite accurately reflected in the fall of the dollar against such currencies as the Euro. The dollar is now worth one third less than it was in 2001, pretty much the size of the bubble, one third of the economy.
It is also the primary cause of half of the increase in the price of oil. Since oil is priced in dollars, oil producers have had to raise their prices by fifty percent just to keep even. As our energy policy has been to just keep using oil, that makes the problem self-perpetuating, sending more and more money out of the country.
Here's another statistic to make things scarier still: Amount more Americans earned than spent in 2001: +2.3 percent Amount less Americans are earning than spending in 2008: -0.5 percent (State of the Union 2008: By the Numbers, Reuters, 1/28/2008 the source of many of the statistics included here.) The beat goes on.
The solutions that have been proposed so far are more of what has created the problem.
A check sent to every American, paid for by .... debt. Support for failing financial institutions and for defaulting mortgage holders, paid for by .... debt. Artificially low interest rates, so there will be more lending, creating more debt. All to keep the big bubble from bursting. All in the service of denying the big bubble is actually a bubble.
If America is going to get out of this, we will probably have to do it the old fashioned way, work for it. The way to encourage work, is to make doing business - making things, inventing things, providing services - more attractive and profitable than simply lending money.
Credit that's too easy to get encourages careless and wasteful choices among consumers, bankers, and business people. Just as it results in sub-prime mortgages, it results in the sort of corporate takeovers, financed by hedge funds and big banks, that require downsizing, selling off the assets, snatching the profits and leaving a bankrupt wasteland behind.
Fixing it requires raising taxes to pay off the government debts. Cutting military spending, the bloated excesses in the name of the War on Terror and ending the War in Iraq, will help immensely. But good luck in getting that done. Until, as Osama bin Laden planned, we go bankrupt from those wars just as the Soviet Union did from their Afghan War.
It also requires sensible investment by the government, in the sort of infrastructure that will create business that takes place here, in the United States.
More than any of that, it requires a new intellectual and moral standard. One that raises up reality at least to the status of the myths.