December 12, 2007

The Bush Economy

The US mortgage crisis and the falling prices for houses have now been making headlines for months. The stock market is also jittery because consumer spending seems certain to fall, as homeowners react to this news. Even though most people are not selling their homes this Christmas, when the value of a house drops, it has a psychological effect. When Jones hears that Smith, just down the street, had to sell for $75,000 less than he expected, Jones is deeply sympathetic, and worried.

How is this problem related to George Bush's 7 years in office? Before his election, in 2000, the country was economically strong. The economy had created 1 million new jobs a year during Clinton's presidency. The federal budget was in robust surplus, and Americans were rapidly paying off their national debt. After Bush came into office, not by virtue of a clear electoral victory but thanks to a 5-4 decision in the Supreme Court, he chose to lower taxes, especially for the wealthiest people. So those who least needed a tax break got one, and the budget once again went into the red. The national debt started to rise again, and the US government had to borrow more money every year. Ronald Reagan did the same thing, so one can say that Republican presidents since 1980 have a clear track record on the economy. Republicans spend more than they take in. They drive up the deficit. Republicans are tax cut and overspend conservatives, who pass the bill on to the next generation. In other words, they are not conservatives at all, in the classical understanding of the term.

Part of the bill for these economic policies comes due now in the form of a crumbling housing market. Why is that Bush's fault? First, by lowering taxes, Bush gave people, especially wealthy people, more money to spend, and much of it went into houses. This drove up prices, and it encouraged all home owners to borrow on the value of their property. It also drew many to invest in real estate. So, something of a housing bubble developed, thanks in part to Bush's profligate policy.

Second, more than $1 billion a day of Bush's deficit spending has gone into the War in Iraq. Had he gone out in the desert and simply burned $1 billion a day, it would have had almost as negative an impact on the economy, except that some of the huge war expense did come back, not to ordinary people, of course, but into the coffers of US corporations like Bechtel. But overall, considered as an economic program, the Iraq adventure is hardly a money-making activity.

Indeed, think about all the money that has gone into military hardware. Building a tank or a military jet does not do much to stimulate the American economy after it is built. A big piece of military equipment itself does not create jobs, improve transportation, or upgrade education. A tank does not innovate. A missile does not start a new business. There is far more economic payoff if a government invests in human beings. A better educated workforce generates more national income. A more highly trained hospital staff provides better care. Job training programs help workers make the transition to a new position. Investment in innovation more than pays for itself. In short, the huge military expenses of the Bush years have siphoned off more than $1 trillion and blasted most of it to bits in Iraq. Think about how much stronger the economy would be if that $1 trillion had been spent on health, education, rebuilding roads, and developing alternatives to imported energy. And in a stronger economy, the housing market would not weaken.

Third, one of the arguments for going into Iraq was that the nation could not let all that oil be controlled by Saddam Hussein. But the War has hardly stabilized the price of oil. For much of the time since the US "won" the war Iraq has had trouble supplying even its own population. Meanwhile, the war itself angered many of those who control Middle East oil production, and they are not rushing to increase production. For some reason, they like getting over $95 a barrel. The high cost of fuel obviously does not help the American economy in general, or the housing market in particular.

Bush Administration policies encouraged housing prices to soar while undermining the strength of the economy as a whole. A correction is unavoidable. One hopes it will not be too severe. It is happening even as I write, and we can only hope that the hard work and innovative activity of ordinary Americans has been a sufficient counter force to Bush's over-spending.