Undoing Bush: the economy

Harper’s magazine – of Mr. Fish and the Harper’s Index fame – has in the June issue the series Undoing Bush: how to repair eight years of sabotage, bungling, and neglect. It covers:

Impressive, no? Quite the breadth of critical discussion. We will discuss the economy, because I agree, more or less, with the argument, whereat:

Two economic calamities have occurred on George W. Bush’s watch. The first has been a radically overvalued dollar, which, it should be noted, is a legacy of the Clinton years: by the date of Bush’s inauguration in January 2001, the real value of the dollar was already 27 percent higher than its low in July of 1995, the surge due in part to the stock bubble, in part to the financial crises in East Asia and elsewhere, and in part to high-dollar cheerleading by the Clinton Administration’s treasury secretaries. And yet despite these unsustainable highs, Bush did almost nothing to reverse the run-up; the value of the dollar actually increased in 2002. It has fallen since then, but it is still 12 percent above its 1995 low. The problem that a high dollar poses for manufacturing is straightforward: if the dollar is expensive relative to other currencies, then it is very cheap for Americans to buy imported goods and very expensive for foreigners to buy U.S. exports. In effect, an overvalued dollar provides a subsidy to imports and imposes a tariff on exports. Not surprisingly, this high dollar has led to a rapidly rising trade deficit, which in 2006 grew to more than $760 billion, or nearly 6 percent of GDP. This, in turn, has been the major factor contributing to the loss since 2001 of 3 million manufacturing jobs, or more than a sixth of the entire sector.

The other major economic disaster under Bush has been the unchecked growth of the housing bubble, and although this, too, was inherited from his predecessor, Bush in this case deserves an even greater share of the blame. By the start of the Bush Administration, housing prices (which over the prior forty years had just kept even with the overall rate of inflation) had on average, and after adjusting for inflation, risen approximately 23 percent over their mid-nineties levels—a substantial but still containable surge. In 2001, however, when the stock bubble collapsed, Alan Greenspan, the Federal Reserve Board chairman, seized on the expanding housing bubble as the best tool for boosting the economy out of the recession. He pushed the short-term interest rate down to 1.0 percent—the lowest level in almost fifty years—and, more important, assured investors of the safety of the housing market, telling Congress in the summer of 2002 that “recent sizable increases in home prices . . . reflect the effects on demand of low mortgage rates, immigration, and shortages of buildable land in some areas.” By 2006, prices were 73 percent higher than their pre-bubble values, for a total of more than $8 trillion in unsustainable wealth.

The extent to which these were inherited problems is, I think, related greatly to the former Chairman of the Federal Reserve. Which I do not say lightly (“smash the IMF” is the sort of thing I say lightly). The extent to which these were inherited also in no way obsolves Bush or his administration of faulting for their handling of it. Show me a president who did not inherit problems. I say that I agree ‘more or less’. The ‘more’ is with regard to the problems, and at whose feet to lay them; the ‘less’ with the use of words like ‘calamity’ and ‘disaster’ – I would prefer we save those words, because I’m rather afraid we shall need them. In any event, using them now only facilitates being ignored (yes, I know, the other side gets to call things ‘crusades‘ and a ‘struggle for civilisation‘. No, it is not fair).

Policy and other responses suggested?

  • Patiently and publicy (i.e. not just people like me railing at the darkness) explain – as the government – that house prices are wrong, and that they will once again, inexorably, return to representing market value. I.e., go down, and interest rates will rise. Anybody buying a house today had better realise that going in.
  • Use regulatory tools at their disposal (the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Federal Housing Enterprise Oversight – yes, it exists) to put a stop to risky lending.
  • Make a serious and credible committment to lowering the value of the dollar – thereby preventing unwanted speculation. This would work well with the sort of thing the Bank of International Settlements has warned us about, but I’m not sure how it would go. Amongst other things there are many non-US reasons for the value of the dollar, and deliberately lowering it will have an effect on NGOs, corporations, and many smaller countries (especially those who happen to use it as official or semi-official currency – East Timor, for example, does).
  • The Fed, along with the Treasury Department, should take the kinds of proactive measures detailed above to prevent the sort of asset bubbles that have afflicted the stock market, the dollar, and the housing market during the past decade. I’m all for independence of central banks – fewer things are more important for macroeconomic management, but one that managed to understand that boom-and-bust = bad would be nice.
  • Tax cuts and the budget deficit. Frankly, this hardly needed to be written down at all. If the next administration doesn’t understand what a cock-up fiscal management has been, there’s no saving us.

The series of articles as a whole are a bloody interesting read. I think there ought to be a lot more on there – telecommunications, transit, etc., but those are merely missed opportunities. They aren’t very big, very dark clouds, on the horizon for (one would have thought) all to see. Sadly, the immediate economic health needs to be assured before long-run economic growth can be built back into the economy.


1 comment so far

  1. […] real question is, is the US economy storming back? Will Bush turn out to have been right all along? Will Bernanke and Paulson turn out to have been the best type of idiots of all: the idiots […]

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