Economic Mismanagement and the Future of America
Joseph E. StiglitzMost economic indicators in the United States look disappointingly opaque today, with the exception of an acceptable 4.6% unemployment rate. Yet Dr. Joseph Stiglitz argues in his article, “The Economic Consequences of Mr. Bush,” that there are abominable fiscal issues looming over the country today: trade and government deficits, the sub-prime crisis and its roots, the country’s deteriorating social and physical infrastructures, ill-conceived tax measures, and the war in Iraq.
The Clinton Years
The 1990s were years of economic hope in the United States. Productivity was up, public debt was under control, and confidence in the economy spurred investment and nurtured the markets. All was not golden, however: as the former chairman of President Clinton’s Council of Economic Advisors, Stiglitz admits that there were misgivings in international trade deals, postponement in infrastructural investment, lack of oversight in certain markets, and failure to visit critical energy questions. Nevertheless, this was the first time since the 1970s that the budget deficit was manageable, and the mobility of the lowest income bracket improved faster than that of the top tier.
From Budget Surplus to Budget Deficit, and How
George W. Bush entered office on an anticipated budget surplus of $2.2 trillion, equivalent to 2.4 percent of GDP. Although there were some signs of economic slowdown at the time, Stiglitz argues that these were precisely the reason that more funds should have been invested into crucial domestic areas such as education, technology, and infrastructure. Reinvigorating these sectors could have prevented a recession, and sown the seeds for further economic prosperity
In contrast, the current administration opted for sizable tax cuts, which largely benefited the wealthiest taxpayers. By 2012, Americans at the bottom 20 percent of the income-scale will receive an average of $45 from these cuts, while those earning over $1 million will be spared about $162,000. Stiglitz shows that the few economic gains of the past six years have benefited people whose financial conditions were robust to begin with, while 5.3 million more Americans are living in poverty, with more headed in that direction.
Over the last six years agricultural subsidies increased at least twofold, the oil and gas industries reaped billions in tax cuts, and the defense budget grew by 70%. US government figures put the price on “in theater” participation in Iraq at half a trillion dollars. Prescription entitlements for Medicare were altered to prevent patients from seeking cheaper Canadian drugs, and pharmaceutical companies profited from the new ban on the US government negotiating prices. The US budget deficit now stands at 3.6% of GDP and growing.
Economic First Aid and the Consequences
America’s desperate economic situation is exacerbated by the astronomical costs in Iraq, what Stiglitz calls a “war of choice.” The final costs—including troop procurement, disability benefits, obstacles to businesses abroad, the weak dollar, and soaring oil prices—could amount to as much as $2 trillion, if not more.
The economy had to be reactivated in some way, so the Federal Reserve lowered interest rates to an all-time low of 1%, which Stiglitz calculates at negative 2% when accounting for inflation. The effects were predictable: the nation embraced easy credit, subprime mortgages boomed, and consumption rose. But by mid-2007 credit-card debt had grown to $900 billion. Stiglitz expects that up to 1.7 million Americans will suffer foreclosure over the next year, and bankruptcy filings have risen over 60% since March 2006.
Moving ForwardStiglitz warns that George W. Bush may take over Herbert Hoover’s place as “worst president” in the collective memory of this century. There are some things that the next president can do to mitigate his policies, however:
- Move the savings rate from zero to around 4%, which would bring discomfort in the short-term but positive outcomes in the long-run.
- Radical attempts to fix the economy might have dramatic negative results. Since the sub-prime crisis is likely to become prolonged, gradual measures might help put-off a recession.
- Do the opposite of the Bush administration: raise taxes for the wealthy, refrain from expending where it is not needed, reduce corporate advantages, reinforce mechanisms to help those in need, and invest in education, infrastructure, and technology.
- The burden on taxes should shift from savings and labor to pollution and other negative areas.
- Government-sponsored self-betterment opportunities for workers and stable health-care access improves the competitiveness of American entrepreneurs vis-à-vis foreign competitors.
- Develop a harmonious trade and financial system with the rest of the world, so others welcome American investment, while agricultural subsidies are scraped in order to re-build confidence on US support for fair trade.
The summary above was prepared by the Atlantic Community editorial team from “The Economic Consequences of Mr. Bush” published in the December 2007 edition of Vanity Fair and available online here.
Prepared by Christian Andreas Morris
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