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David Wise: “It really irks me that after turning the US from the largest creditor to the largest debtor nation in the 1980s, destroying the economy in the ’00s and then playing chicken with the fiscal health of the US in the debt ceiling debacle, a recent poll showed that the American public trusted the Republicans more on the economy. I thought you might find this article I recently published of interest.”
Tackling Republican myths
By David W. Wise |
At one of the whistle-stop campaign appearances during the epic 1948 presidential campaign while President Truman was delivering a blistering oration about the Republican Congress one of the people in the audience shouted out, “give ‘em Hell, Harry.” The president responded, “I don’t give them hell. I just tell the truth about them and they think it’s hell.”
Well for three years now the present day Republicans have been attacking the economy under President Obama and the truth is that a lot of it sounds like hell. The Republicans ought to know, that hell is largely a consequence of their policies.
The U.S. government is experiencing huge budget deficits resulting in ever increasing national debt. But, how did that come about?
In January 2001, George W. Bush inherited a $128 billion budget surplus and the Congressional Budget Office (CBO) issued a report projecting annual budget surpluses of $800 billion for each of the years 2009-12. In fact, the estimates at that time projected the entire U.S. government debt being paid down.
Fast forward to January 2009, two weeks before President Obama assumed office and the CBO was projecting a $1.2 trillion budget deficit for FY 2009 (with federal spending at 24.9% of GDP) – a fiscal year that was already almost halfway in the books by Inauguration Day. Bush and the Republican policies had not only squandered the sound financial footings that they had been handed, they ran eight consecutive years of budget deficits and brought the United States to its current level of trillion dollar deficits. Given their efforts to avoid responsibility for their handiwork by trying to pin the 2009 budget on Obama, it would not be that surprising if they tried next to blame him for 2008 since the election just happened to have occurred at the end of that year.
The explosion in total national debt began in the fall of 2008 at a time when Senators McCain and Obama were fighting a tightly contested election campaign and the Bush team was still holding the reins. In just less than three months between August 8 and October 22, 2008 the total obligations of the Federal Reserve more than doubled in an effort to prop up the financial sector which was perilously close to collapse.
That was the point in time at which the avalanche of debt began. It was in 2008 when the year-over-year increase in total national debt first increased by double digits (11.29%). Yes, federal spending under President Obama is clearly at an unsustainable level as a percentage of GDP, but that situation is due in no small measure to the combination of increased safety net spending and lower GDP brought about by the Bush Recession.
President Obama did increase spending for a stimulus package necessitated by the Recession, but even when allocating the stimulus to Obama the Wall Street Journal’s Marketwatch concluded that President Obama had increased Federal spending 1.4% over the course of the first four budgets which he submitted (2010-2013) compared with 7.3% for the first four budgets under Bush (2002-2005) – the lowest level of any administration in decades.
Now, it is also quite fair to criticize President Obama for not embracing the recommendations of his own bipartisan deficit reduction panel. Yet, several points can be made.
First, claims that the President stayed hands off because he feared that in the current highly polarized political environment his outright endorsement might have meant the kiss of death ring somewhat true.
Second, last summer the President tried to work out a compromise with Speaker John Boehner that would have put both entitlement cuts and revenue enhancement on the table, but the Republicans refused to consider even one additional dollar towards funding the fiscal obligations of the nation. Although President Obama clearly needs to do more about the deficits and to move beyond aggressive monetary stimulus at least he is talking balance: revenue and spending cuts, deficit reduction balanced against not choking off the recovery.
The Republicans now also decry the persistent high unemployment. Yet, that unemployment is the result of the Great Recession which began during – and was a direct result of the policies of – the last Bush administration. It wasn’t President Obama who appeared on TV in the fall of 2008 warning of the impending collapse of the financial system and it wasn’t President Obama’s Treasury Secretary who presented Congress with an extraordinary three page request for virtually unlimited power that he claimed was necessary to deal with the dire crisis.
No, that was President Bush and his Treasury Secretary Hank Paulson appearing in those roles. In the final quarter of the Bush administration GDP declined 8.9% and the month President Obama assumed office the U.S. economy lost 800,000 jobs. The unemployment rate surged during 2009 as a consequence of Bush’s economic mismanagement and the collapsing economy which Obama had been handed.
The following graph shows each preceding president as being primarily responsible for the economy in the year of transition as each new administration inherits an economy from its predecessor. It takes time to get a new team in place and to have its policies affect the workings of the economy. At $14 trillion the U.S. economy is like a very large ship – it takes time to turn.
What is known, however, is that since President Obama has taken office 3.9 million private sector jobs have been created, bringing the unemployment rate down to a still too high 8.2%. Unfortunately, the horrible fiscal position of state and local governments is producing a huge drag on the economy and massive offsetting job losses in the public sector. The effects of the stimulus bill put in place by President Obama will be debated by economists for years, but a consensus seems to be that it helped prevent the Great Recession from turning into a another Depression and the reversal in the unemployment rate is clear.
While the Republicans allow that the recession started under Bush, they claim that the actions of the Obama administration have made it worse. Now besides asking how it gets worse than the eve of the second Great Depression in September 2008 or whether those responsible for that state of affairs should not be estopped from criticizing the clean-up effort, the facts indicate that the long-term effects of the Bush policies are still impeding the recovery and a return to sound economics.
The Bush tax cuts of 2001 and 2003 were promised to create a new era of prosperity. But, in addition to the fiscal calamity extending far out into the future by reducing government revenue below what is necessary to run the government (according to the CBO they account to $5.4 trillion of the deficits projected over the rest of the decade) the Bush years recorded the most anemic job and economic growth up until that time in the postwar era and that is true even if you are charitable and stop the analysis at 2007 before the financial collapse.
The Bush tax cuts were supposed to unleash the energy of upper income taxpayers or “job creators” as they are sometimes called. Yet, gross domestic private investment as a percentage of GDP was down 9.5 through 2007 and 22.3% through the year he left office.
These same vaunted conservative prognosticators had warned of a disaster when President Clinton raised taxes in 1993, although gross domestic private investment under Clinton more than doubled (114.9%) – the only administration out of the last four when investment increased. In eight years under Clinton following the tax increase 23 million jobs were created. In eight years under Bush the number was 2.5 million jobs. Apparently the faith in tax cuts, like all faith, is not subject to empirical evidence.
One area of significant investment growth during the Bush years was foreign direct investment which grew by 166.5%. So, it is not fair to say that jobs were not created during the Bush years; they were, just in places like China and India as U.S. investors and corporations moved their investment capital offshore.
One of the results of the decline in private investment in the United States, however, was a decline in employment in important sectors such as manufacturing. Although one Republican economist is famous for saying that it does not matter whether the United States makes potato chips or computer chips the manufacturing sector has the greatest multiplier effect for creating jobs in other sectors, creates well-paying jobs, is linked to scientific and technological innovation which is usually performed in close proximity to manufacturing locations and creates national wealth and intellectual capital.
Manufacturing employment which had been steady for two decades collapsed during the Bush years and the want of employment in this sector acts as a significant drag on the recovery today. Now even President Bush came to this realization at the end of his term and began the government support for the U.S. auto industry during the financial crisis in the fall of 2008, a policy embraced and carried through by President Obama.
The problem, however, is that all of this year’s Republican candidates for president say that they would have let GM and Chrysler collapse, erasing millions of jobs and allowing a signature industry to evaporate as there were no private investors at that time willing to invest in a restructuring. Today GM and Chrysler are profitable, GM has regained its position as the world’s largest automaker and auto sector employment is up. The Republicans somehow insist that these actions by President Obama made the recovery worse and feel that their playing the fiddle while Detroit burned would somehow have been preferable.
One area where there was an outburst of domestic economic activity and innovation during the Bush years was the tremendous overinvestment in the housing sector and in the dangerous risk taking through new financial products that set the financial system up for possible collapse in the autumn of 2008 and which lead to the Great Recession both here and around the world. Now, while it is true that some of the seeds for this state of affairs were planted under Reagan and Clinton, the explosion of overinvestment and the virtual abandonment of prudential regulation were taken to new heights during the Bush years while warning signs mounted.
Not only does housing have a much lower national return on investment than investing in new plant and equipment, but the overhang of vacant houses for sale which mushroomed during the Bush years constitutes one of the strongest anchors still hanging around the neck of the recovery which President Obama and his advisors must contend. They can’t blink their eyes and wish that overhang of empty houses morph instead into new domestic plant and equipment employing American workers.
The Republicans having set the house on fire as they handed Obama the keys have the temerity to stand on the sidewalk complaining that the house is ablaze. Having brought the financial system to its knees by weak oversight that permitted wholesale irresponsibility, they promise that if elected they’ll do it all over again. Having ruined the fiscal position of the country by lowering tax receipts to their lowest level in sixty years (14.9% of GDP compared to an average of 18.2% under Ronald Reagan) the Republicans declare that if they are elected they will cut taxes even more which, as history shows, will increase the deficit and national debt even further.
In looking at our fiscal situation in comparison to historic averages and with other advanced industrial economies Bruce Bartlett, one of the authors of the Reagan tax policy has written, “The truth of the matter is that federal taxes are very low and there is no reason to believe that by reducing them further will do anything to raise growth or reduce unemployment.” There is not much to debate. Go back and look at the state to which the country was brought by the end of the Bush administration. Why would we want to go back and do more of the same or, as President Bush once famously tried to say, “Fool me once shame on you, fool me twice shame on me.” Why would the American electorate ever allow itself to be fooled again?
Click here to access other columns by David Wise.
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Burn down your cities and leave our farms, and your cities will spring up again as if by magic; but destroy our farms and the grass will grow in the streets of every city in the country.~William Jennings Bryan
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