Chron: Bush apologists can't wish away the economic truth

Corrective Measures
John Kerry can turn this economy around -- but things will get worse before they get better. By Robert Kuttner

A feeble economy could help make John Kerry president. But then it would suddenly be his economy and his problem. Despite high deficits and low interest rates, both of which provide economic stimulus, this economy is barely treading water. Last month, the best the economy could manage was a paltry 32,000 new jobs. And it's now clear that the jobs created since 2001 pay several thousand dollars less, on average, than the jobs that were destroyed.

The economic growth rate fell to 3 percent in the second quarter. That's not awful, but it's not nearly as good as the growth rate of the boom years of the 1990s. And given the almost unprecedented combination of huge fiscal stimulus (large deficits) and equally huge monetary stimulus (very low interest rates) the economy ought to be doing much better.

Why isn't it? Several reasons.

The first problem is purchasing power. With less real money going to working families, people are buying less at the stores. That, of course, slows down the economy.

Second, the trade deficit keeps going up and economic activity keeps moving overseas. That means that a lot of American purchasing power goes to create jobs and economic activity outside the United States. Yes, foreign consumers do buy products from us, but the trade deficit reflects the fact that we import hundreds of billions of dollars more products every year than we export.

Third, George W. Bush's deficit is a lot less effective than it might have been. It's mainly the result of tax breaks for the wealthiest Americans -- a strategy that creates relatively few jobs. If that money had gone more to working families or to strapped state and local governments that are cutting back services and laying off workers, it would have been a better economic tonic.

A fourth reason is the rising price of oil, which operates as a kind of tax on economic activity. Though it's often missed, there's a connection between oil prices and budget policy. When deficits are huge, foreigners lose confidence in the dollar. A cheap dollar costs oil-exporting countries money, because oil exports are priced in dollars. Oil exporters make up their loss by raising the dollar price of oil. (European consumers have not suffered at the gas pump, since their oil is priced in euros and the euro has risen about 40 percent against the dollar.)

All of this is likely to get worse before it gets better. You can't run immense deficits forever without real damage, and the Federal Reserve is also beginning to raise interest rates. In the short run, smaller deficits and higher interest rates will both slow growth.

The situation in January 2005, despite superficial similarities, will not be like the one that Bill Clinton inherited in January 1993. At that time, there was also a relatively jobless recovery and a legacy of big deficits. But in 1993, interest rates were much higher. Clinton was able to strike an implicit bargain with the Federal Reserve and the money markets, trading deficit reductions for lower interest rates -- and gunning the economy. Today, however, rates have no place to go but up.

So what could Kerry possibly do?

For starters, he could reverse the composition of the budget deficit -- and provide more money for public services and for working families and less for the very wealthy. That would be a more effective stimulus. As I've written in a previous column, he could bring down the deficit by more aggressive tax enforcement directed against offshore corporations and high-income tax cheats.

Second, Kerry could think even more boldly about energy independence. Major public investment in the next generation of clean energy technology would be a three-fer. It would reduce the dependence on foreign oil and thereby reduce the trade deficit. It would reduce the prices that consumers pay for energy, and could create potentially millions of well-paid domestic jobs in a new, dynamic industry.

Third, Kerry could pursue policies to raise the earnings of working families, through more legal protection of the right to unionize and higher minimum wages and work supports such as childcare.

The effect of wrongheaded economic policies is only now being felt, and things will probably get worse before they get better. That reality may be good news for John Kerry on Election Day. But if frustrated citizens do vote to throw the rascals out, Kerry will have a lot of heavy lifting to do beginning the morning after -- or he, too, will face the retribution of unhappy voters.


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Where's GWTJ?

 

I've yet to see anyone really refute the information in my post. I'm always up for a discussion and to listen to different views, but insults are a waste of time.

With the corporation issue, the goal of the corporation is profit for its shareholders. With Sam, I agree the consumer dictates policy as well, but its simply a cost-benefit analysis for the corporation. If an individual does not agree they may simply not use the product or service, but to infer that it is their right to have a job or for a company to 'take care' of someone is ludicrous.

Going back to my European economy example, the last 10 years have had a growth in socialization of services and a barrier to fire people and give the company the latitude to focus on profits. The socialization of services and higher tax rates decreased productivity and the laws against job cutting etc. caused many firms to not be able to afford new technology which has decreased productivity even more in Europe. It is slowly, slowly drifting downward as the people push for more social services and expect to have the government take care of a great deal of their lives. Its a vicious cycle with no outcome and I fear electing John Kerry will push us more into this cycle.

 

That's because there really isn't much to refute. For the most part you are on target. I've said something similar a few times without a response. I've read pieces of the same idea from TJ before (of course he would throw in pointless jabs, as well).

The only arguments I have with your analysis are:

1.) Lowering interest rates really had nothing to do with W. Greenspan and his crew would have done it regardless of who was in office, b/c they were raising rates much after the slowdown started and they needed to correct their mistake.

2.) I'm not sure how much of the spending increase was spent in the US, as opposed to in Iraq. To the extent the spending increases are due to Iraq, and if you don't believe the war was worthwhile, that was "wasted" spending and could have had a better impact in the US.

 

FDK, for your amusement:

Left unspoken here is the method he chose to do this: send the bulk of the tax breaks to the very rich who are less likely to consume and more likely to save -- stimu-what? (and don't tell me it wasn't possible to cut taxes without giving the majority to the rich -- see payroll taxes)

Also left unspoken here is that a large proportion of his two tax cuts didn't phase in till 2004 and beyond -- years after the recession. Stimu-what?

Well, now you should. Ihaven't even mentioned the pervasive waste of long term deficits yet

Well, apparently you didn't consult the hundreds of distinguished economists who pronounced his fiscal policy a disaster.

http://news.bbc.co.uk/2/hi/business/2735269.stm

In the short term correct, in the lthe long term, by creating massive deficits, the government can have a defiinite impact.

He's analyzing the short run employment numbers in contrast with the ridiculously rosy picture the Administration likes to paint via sleight of hand.

Also in chapter 4 is the factor price equalization model. I don't need to explain to you how this might have nasty domestic consequences in certain instances.

Also, the empirical data as of late tends not to match chapter 4, and as I mentioned before, there is theoretical research to match. See Baumol and Gomory.

Which actually isn't happening -- most firms are sitting on their capital, there was an article about it today whic I don't feel like digging up.

The train just went off the tracks. I don't see any part of Kerry's platform where "decreasing international trade" is specified. Further, his few initiatives in this area -- mostly tax incentives to discourage outsourcing -- are political window dressing which would likely have little practical impact. As for the tax cuts, you're right that he wants to eliminate the top portion of them. You didn't, howver, factor in the corresponding stimulus or the value of deficit reduction, depending on how this dividend is used.

And Bush pushes for billions of dollars in allocations for catastrophically wasteful programs like Missile Defense, that don't work....etc. Why don't you outline what his health care program would cost, and how exactly it would effect productivity -- and please explain why you factored out every single externality -- etc. Oh, and also describe the interrelationship between it and Medicare, and the current prescription drug plan, and....etc.

Really? So the European economies just implemented health care over the last few years and have been expanding social services just recently? Nonsense (btw, France and Germany just came off of 4%+ gdp growth quarters -- of course that will eventuallly slow because of high energy prices -- which we're immune to)

Do you honestly think Kerry would be able to turn us into a version of Norway (which has a higher standard of living than we do, btw) in 4 years, with a republican congress? Naive, to say the least.

you can do better than that.

 

Out of curiosity (and as an economist myself) who are these people that you've been talking to? The consensus amongst the field is that Bush's fiscal policy has been far from optimal.

I'm just curious who you were talking to, because they're obviously out of the mainstream. MIT has taken great exception with what the administration has done. Chicago has taken great exception with what the administration has done. Harvard, Berkeley and Stanford have taken great exception with what the administration has done.

I'm told that Mankiw himself (though he obviously can't say it) takes great exception to many policies of the administration. Take it with a grain of salt because that's just gossip though.

Where are you finding these people?!?!

 

Ain't no way John Kerry can get us back to pre-Bush levels of economic prosperity in four years. Not a chance in hell.

What Bush has done to the American economy will take decades to repair -- and even then, our grandkids' grandkids will be picking up the bill. And to think -- four years ago, our biggest concern was what to do with the record budget surplus. The Credit Card President changes all that.

What Kerry *can* do, however, is right the ship, lay the groundwork and cross his fingers. But that's it. What Bush has wrought will require *immense* changes in both political and economic policies. It'll get worse before it gets better.

 

Am I on your ignore list?

 

While GWB is a stupid boob, I don't think you can really lay all of this on his feet. Gore, had he been elected, would have had the same economy and 911 to deal with. I would be very surprised if Gore would not have wrung up half of the debt that GWB has. Gore certainly would not have gone for the tax cuts, or at least to the extent that GWB did. Gore also would not have grown the domestic military spending programs like GWB and he certainly would not have entering into the $1 billion a week Iraq regime change. This adds up to less spending, but there would still have been a deficit (mainly due to the increase outflows for unemployment benefits, decrease inflow of tax receipts, and decrease in the capital gains revenue.)

There are large fundamental, structural problems with the federal government budget. GWB has ignored them; Kerry if elected will likely follow suit.

 

Sheesh, I had no idea things were so bleak.

Now if you'll excuse me, I'm going to go home and listen to some Tracy Chapman.