The Terrible Cost of Bush II’s Deficit

Popular Economics Weekly

It is now becoming evident just how much damage the GW Bush budget deficit has done to the U.S. In part from the tax cuts of 2001 and 2003, which sharply reduced taxes on income, capital gains, and corporations, two wars, and the Great Recession that began halfway through Bush's second term, the deficit now threatens not only our fiscal soundness, but status as the world's economic powerhouse.

It was VP Cheney who maintained that Reagan had said deficits don't matter, but President Reagan raised taxes 11 times during his tenure to save the budget, and economy, as his Budget Director David Stockman described so well in The Triumph of Politics. In other words, President Reagan didn't dare go as far as Dubya and VP Cheney in creating a deficit that siphoned off revenues to the wealthiest 1 percent and raised corporate profits to the highest in history as a percentage of GDP, while almost causing the disappearance of our middle class and endangering Medicare and social security.

So it shouldn't be a surprise that Republican Paul Ryan's 2013 budget proposal passed by the Republican House follows in GW Bush's footsteps. President Obama assailed it as "...a Trojan horse, disguised as deficit-reduction plans," said the president at an Associated Press luncheon in Washington on April 3. "It is thinly veiled social Darwinism."

Obama was referring to the fact that Ryan's plan doesn't really reduce deficits. Because it calls for $trillions in spending cuts without raising revenues, 62 percent of which would come from low-income programs, just as the Bush II budgets did. And both revenue increases and spending reductions are necessary to pay down the budget deficit. In fact, the new tax cuts at the top would dwarf those for middle-and lower-income families, says The Center for Budget and Policy Priorities, a non-partisan think tank. After-tax incomes would rise by 12.5 percent among millionaires, but just 1.9 percent for middle-income households. It's Bushonomics all over again.

What was most unconscionable about the Bush tax cuts was that they occurred during his first recession -- from March to November 2001, caused mostly by the dot-com bubble bust. In fact, he was starving the government of revenues at the same time that he was planning two wars, as has been revealed in several books by Ron Susskind, including The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neil.

Now we have a yawning federal deficit that continues to grow past $15 Trillion. Bush Treasury Secretary Paul O'Neill, who was fired by VP Cheney for advocating that the four Clinton years of budget surpluses be used to put social security and Medicare on a more secure footing, described the result of the debate that led to such a disastrous decision in The Price of Loyalty. It was return government to its 1900 size, the era of William McKinley and the Robber Barons, by reducing government spending enough "to shrink it down to the size where we can drown it in the bathtub", said Grover Norquist once famously, architect of the no tax increase pledge signed by more than 200 Republican legislators.

So we now know what makes up the current $15 trillion federal debt. Most of the deficit was created by the Bush tax cuts, war spending, and the second Great Recession that occurred under the Bush presidency -- from December 2007 to June 2009-- says the CBPP. It resulted in the most anemic recovery since WWII, with just 5 million jobs created, not even recovering from the 8 million jobs lost since 2000, and the median household income decline from $56,000 in 2000 to $52,000 in 2011 dollars, where it was in 1997, according to the New York Times and Moody's Analytics.

Graph: CBPP

That cost of the Bush II deficit is just now becoming evident, because of its growing size and the fact that budget matters are so arcane and hard to understand by the public and politicos alike. But all of the Bush tax cuts contributed to the deficit, because they weren't paid for. GW Bush wouldn't cut back spending to match the loss in revenues because he wanted to pay for his wars, so he borrowed the monies. Whereas during the Clinton era, legislators had agreed to pay-as-you-go rules, where spending cuts had to match tax cuts.

And the Great Recession has continued to grow the deficit. In fact, if just the Bush tax cuts were extended it would increase that deficit by $4.6 trillion over the next 10 years, says Andrew Fieldhouse and Ethan Pollock of the Economic Policy Institute, a labor think tank. That means we are now facing its terrible cost. Republicans have proven their ideology of starving the beast of government ends up starving the economy of growth, except for the 1 percent who are their supporters.

Harlan Green © 2012

The Confidence Fairies Love Austerity

Popular Economics Weekly

January’s economic numbers are in, so we can say government stimulus spending has worked; there is just not enough of it. Whereas the views of those Paul Krugman characterizes as “confidence fairies” doesn’t work. Austerity and budget cutting during recessions doesn’t boost growth for the simplest of reasons—consumers and private sector businesses can’t spend the money they don’t have.

The confidence fairies so loved by small government types somehow believe when budget deficits are reduced that businesses and consumers will invest and spend more. But how, when workers are laid off and salaries cut to achieve that result? This results in lower incomes, so lower spending, hence lower demand for the very goods and services that would spur growth.

The U.S. now seems to be entering a virtuous growth cycle just because we didn’t follow the advice of the confidence fairies. Increased stimulus spending has increased hiring, causing in turn increased demand, which then spurs more hiring, and so on. Whereas the Eurozone economies are falling into another recession.

 

Paul Krugman has been telling Europeans what would happen if EU leaders continued to listen to their confidence fairies: “Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of 00spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.”

So it is our experience with the Great Depression and President Roosevelt’s New Deal that has kept us from following the path of austerity economics, even in the face of continued cries for less government involvement in our recovery. That doesn’t work, as ‘Hoovernomics’ proved. In fact, it was GW Bush’s attempts to follow Hoover’s path that led us into the Great Recession. Bush decided on all those tax breaks, instead of using Clinton’s 4 years of budget surpluses to fix social security and Medicare, resulting in the largest budget deficits since Ronald Reagan, told in telling detail by Bush Treasury Secretary Paul ONeill and Ron Susskind in The Price of Loyalty.

Meanwhile, the U.S. economy continues to grow. Retail sales are one of the best indicators of consumers’ financial health. Excluding autos, retail sales surged 0.7 percent in January after decreasing 0.5 percent in December (due to lower auto sales, said the report). But that may be an anomaly due to a small sampling of auto dealers, because other data show auto sales have been increasing. The Fed’s January Industrial Production report said the output of motor vehicles and parts surged 6.8 percent following an upwardly revised increase of 3.8 percent in December.

Graph: Econoday

Overall industrial production was unchanged in January after a 1.0 percent jump the month before, but the manufacturing component jumped 0.7 percent, following a 1.5 percent comeback in December.  In January, utilities dropped 2.5 percent while mining output declined 1.8 percent, was the reason for overall production being flat. The manufacturing sector was strong in several Fed regions. Both the Empire State (New York Fed), and Philly Fed manufacturing surveys jumped.

Graph: Econoday

These factors also led the index of leading economic indicators to a solid 0.4 percent gain in January following upwardly revised gains of 0.5 and 0.3 percent in the prior two months. Other areas showing strength in January include credit activity and building permits, gains that underscore the improving outlook for the housing and construction sectors.

Graph: Econoday

What makes me think this is really a virtuous growth cycle, rather than another early-in-the-year spurt that might die later is that the nation's inventories are lean and well managed—meaning there are no headwinds from excess inventories. Business inventories rose a moderate 0.4 percent in December, below the 0.7 percent rise for sales and pulling down the stock-to-sales ratio by 1 tenth to 1.26. That means demand is keeping up with production, since the stock-to-sale ratio hasn’t increased.

Graph: Econoday

“Now the results are in”, says Krugman, “and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.”

“Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.”

Harlan Green © 2012