Economists are admitting to confusion, always a bad sign. The American economy has entered "a baffling twilight zone," writes Robert J. Samuelson. "People yearn for clarity and confidence, while the new stagnation provides mainly uncertainty and contradiction."
The Federal Reserve seems particularly vexed. Profits and productivity are up, but growth is negligible and employment is down. The Fed's governors have been cutting interest rates since January 200112 separate cuts, taking interest rates on overnight bank loans from 6.5 percent down to 1.25 percent, the lowest level in 40 yearsyet the layoffs keep coming. Fed Chairman Alan Greenspan has been predicting recovery, but recovery hasn't appeared. Testifying before Congress in late April, Greenspan prophesied a better second half of 2003. "I think it includes jobs," he said.
Companies, the Fed complains, aren't expanding as they should. "An undercurrent of pessimism has persisted among business leaders for some time now," Fed governor Ben Bernanke recently grumped, "more so than can be accounted for by what seem to be the generally good fundamentals of the U.S. economy."
Official unemployment now stands at 6 percent; 8.8 million Americans are unemployed, an increase of 3 million since October 2000. The specter stalking the Fed is that of deflation, something that our central bank has not concerned itself with since the Great Depression. The Fed's most recent report warns, in ever-cloudy Fedspeak, of an "unwelcome substantial fall in inflation." No one is anticipating a 1930s-style collapse of prices, wages and employment, but the threat of prolonged stagnation, with all its quiet human disasters, is very real.
Several decades ago, French social commentator Alain Minc wrote evocatively of a "slow 1929," in which the economy, bolstered by the safety nets put in place in response to the real 1929, does not crash; it sags. We seem to be in a slow 1929 right now: Wages decline slightly (by 1.5 percent over the past year for workers at the median income level), workweeks grow shorter (to 34 hours, the lowest level since the government started measuring workweeks in 1964), health-insurance premiums and co-payments grow more costly, and factories don't run at full speed. (In fact, they're running at the lowest level of capacity since 1983.) Growth creeps along (rising at a 1.6 percent annual rate in the first three months of 2003) but productivity grows faster (at nearly 2.5 percent). America can increase its output by 2.5 percent, therefore, without hiring more workers. To hire more workers, growth has to outpace productivity. It's not.
Disasters occur, but discretely and discreetly: Medicaid is cut, and seniors can no longer afford their medication; college tuitions are raised, and students have to leave school.
And jobs are lost: The private sector has shrunk by more than 2.6 million jobs since George W. Bush became president. That is, by any standard, quite a record: No American president has presided over a net loss of jobs during his term in office since Herbert Hoover grappled so disastrously with the real 1929. When Bill Clinton was in the White House, America gained an average of 239,000 jobs per month. Since Bush took office, the number of jobs has declined at a monthly clip of 69,000.
On the basis of no credible evidence whatsoever, the White House boasts that Bush's proposed tax cut would create 1.4 million jobs by the end of 2004. Even if it did, Bush would still have presided over a net loss of 1.3 million jobs during the 20012005 presidential term.
Presidents do not really pay a penalty for holding office when the economy first implodes. Americans did not turn against Hoover because the market crashed; they turned against him because his recovery program, such as it was, failed to produce a recovery, because the economy cascaded downward for three and a half years while he rejected one plausible remedy after another. Likewise, no one holds Bush accountable for the dot-com bust or the shock of September 11. His problems are that he's enacted and proposed nothing that would arrest the current slide, and that his policies have actually worsened it.
More precisely, his policy has actually worsened it. For it is the distinctive feature of the Bush presidency that there is but one economic policy come boom or bust, fire or flood. That, of course, is tax cuts, preponderantly for the rich. As a candidate in 2000, Bush argued for tax cuts because the government was actually running a surplus, and it was a more productive use of funds to return that money to taxpayers. Then the bubble burst, the surplus turned to deficit and those same tax cuts were repackaged as an economic stimulus. The $1.6 trillion tax cut of 2001 was so advertised, though it didn't really kick in for the better part of the decade, and most of it was targeted to the wealthythe class of Americans least likely to spend it. Since it was enacted, it has stimulated the economy to the tune of 1.7 million jobs lost.
Undeterred, the administration is back at it again with its proposed $726 billion tax cut, more than half of which takes the form of eliminating the taxes on dividendswhich, again, will go overwhelmingly to the rich. It's difficult to find anyone not working for the administration who believes this cut will really stimulate the economy. Though virtually no one noticed (there was a war on), in mid-March the Congressional Budget Office (CBO) issued its study of the Bush tax cut. "Taken together," the report concluded, "the proposals would provide a relatively small impetus in an economy the size of the United States." The study had been supervised by Douglas Holtz-Eakin, who came to the CBO after serving as chief economist for Bush's Council of Economic Advisers.
The hallmark of the Bush approach to the economy is its absolute rigidity. On matters economic, Bush is a monomaniac with a bad idea, a doctor who prescribes the same all-purpose snake oil no matter what the ailment. And while Bush is not responsible for the post-boom bust in which America finds itself, his refusal to contemplate any remedy save his own for the economy is directly responsible for the increasing longevity and severity of the bust.
Rigidity should be the last thing you want in a president forced to navigate a treacherous economy. "If we can't get a president with a fluid mind," noted Raymond Moley in the spring of 1932, "we shall have some bad times ahead." Moley at that time was just beginning his stint as head of Franklin Roosevelt's brain trust, the academic advisers on whom Roosevelt relied to help formulate fixes for the Depression. Moley needn't have worried about Roosevelt, who mixed and matched, embraced and abandoned a range of economic strategies during his '32 campaignand then his first three years in the White Housebefore settling upon the policies we now think of as the core of the New Deal. Surrounding himself with advisers who favored a centralized, planned economy, others who recommended stronger antitrust enforcement and more regulation, and still others who argued for bolstering working-class purchasing power, FDR's credo for a nation in trouble was, "Above all, try something."
"This country is big enough to experiment with several diverse systems and follow several different lines," Roosevelt once told adviser Adolph Berle. "Why must we put our economic policy in a single systemic straitjacket?" A sentiment more alien to Bush is hard to imagine.
With the economy going nowhere but south, the administration has been obliged to come up with an explanation for the downturn that directs responsibility away from the White House. Until 9-11, the recession was Bill Clinton's fault; thereafter, it was Osama bin Laden's and, more recently, Saddam Hussein's. Here, from a recent stump speech, is the president's explanation of the economy: "We've got a deficit because we went through a recession. We've got a recession because we went to war, and I said to our troops, 'If we're going to commit you into harm's way, you deserve the best equipment, the best training, the best possible pay.'"
If the president's account is accurate, we've just gone through the first defense buildup in modern history that depressed rather than boosted the economy. A more plausible calculation, from Larry Mishel of the Economic Policy Institute, is that new defense spending will add 0.4 percent to the gross domestic product this year alone. The somewhat more sophisticated version of Bush's self-exculpatory account is that business refused to invest more due to the uncertainty attending the coming war. But that gainsays almost everything business leaders themselves are telling us.
"There's a wide gap between economists and business executives," Sung Won Sohn, the chief economist (though one who's business executivefriendly) of Wells Fargo, remarked recently. "Businesses are basically shell-shocked. They want to see demand rising first."
In fact, what the economy is going through is a classic case of excessive productive capacity built up in a boom time in anticipation of a demand that never came. In 1998 productive capacity was increasing at an annual 8 percent rate in manufacturing, with huge investments in telecommunications and high-tech that were helping drive the boom. Not surprisingly, it's here that the bust is concentrated today. Since July of 2000, America has lost 2.2 million jobs in manufacturing; indeed, manufacturing jobs have now declined for 33 consecutive months, which is the longest period of job loss in the postWorld War II era. And because manufacturing jobs pay significantly better than retail and service-sector jobs, the impact on the economy is magnified.
The other engine driving the boom was the market itself, in which investors placed bets on the future value of companies that proved to be largely, if not entirely, illusory. Thanks to the deregulation of financial endeavorbringing with it the decline of accounting standards, the systemic overvaluation of stocks by analysts, the fictitious bookkeeping of Enron and the like$7 trillion invested in U.S. stock markets has been lost since the bubble burst in 2000. This has not worked wonders for consumer confidence.
Alongside the problems of vanishing capital and manufacturing decline is that of inadequate purchasing power. Median earnings grew consistently during the near-full employment years of 19982001, but they've been falling now for the past four quarters. With wages drifting downward, American consumerseven if they saved some money by refinancing their homesare not going to shop their way out of the current downturn.
In sum, the current economy is one in which any number of classical Keynesian remedies to boost purchasing power could be applied, particularly with the Fed warning of deflation, not inflation. The administration not only shuns contact with Keynesians, however, it shuns contact with any economistssave supply-siderswho've endorsed its tax cuts, as a number of deficit-conscious business economists have been heard to complain.
By insisting on tax cuts for the rich, moreover, the administration blocks any efforts at real stimulus. In the White House's legislation, no federal funds will flow to the states, which are experiencing the same revenue decline the federal government is. Unlike the federal government, however, they have to balance their budgets. The estimated $68 billion in deficits that the states are running this year (a total that is expected to rise to $140 billion over three years) is coming out of health-care coverage for children and the poor, out of K-12 classrooms, out of the pockets of students who can't afford the tuition increases at public colleges and universities. It is coming out of the jobs of state, city, public-health and school-district employees. By his obsession with cutting taxes on the rich, George W. Bush is not only failing to provide an urgently needed stimulus, he's actually deepening a downturn he could alleviate.
He could, if he chose, boost purchasing power or halt layoffs by directing his tax cuts to low- and middle-income families, or by providing relief to state governments, or by funding a massive renovation and construction of schools. He could ease the rising burden of costs experienced by nearly every American family by creating a system of universal health coverage. But as Bush sees it, he is in office precisely not to do these things. On matters economic, he is there to shrink the role of the public sphere and magnify the market. Recovery is all well and good, but it is not his primary purpose as president.
Can Bush get away with it? Can he turn in the most dismal economic performance of any president in decades and still win re-election?
Perhaps. The economy will have to loom larger in voters' minds than the amorphous war on terrorism, in which, we can be certain, the administration will find new threats and exploit old ones. The Democrats need a candidate who stands for homeland and defense security, andin contrast to Busheconomic security as well. And their candidate needs an economic agenda that plausibly addresses Americans' anxieties about their health care, their jobs and their children's educations. A program that merely contains economic insecurity rather than attacking it will only guarantee a second term for Bush.
But even if the economy doesn't improve, and even if the Democrats put forth a credible economic program, that's still no guarantee of a Democratic victory. To begin with, the politics of a slow 1929 don't resemble those of the original article. Slow 1929s don't wipe out tens of millions of families. According to some recent polling, the most ubiquitous way in which families are experiencing the downturn right now is having to cope with increased medical expenses. In some households, that will mean more illness; in a relative few, death; in many, increased anxiety and cutting back on other necessities. In aggregate, though, these do not portend a political groundswell to sweep Bush from the White House.
"Six percent unemployment won't turn Bush out of office," says a consultant to one of the Democratic presidential candidates. "It will have to go to 8 or 9 percent, just for starters. Besides, the public has less and less confidence that the government can manage the economy. Their understanding of the economy comes largely from the business and right-wing press; if there's anyone they hold responsible, it's Greenspan. I'm not sure the Democrats have anything programmatic to say that will convince people the economy will perk up."
Whatever short-term fixes the Democrats may offer, then, they also need to find a way to talk about the larger economic health of the nation. Above all, they need to draw a clear line between Bush's preference for tax cuts and their own preference for a major national investment in health care, education and transportation. On this question, in poll after poll, the public unambiguously favors the Democrats' investments over Bush's cuts. Among the presidential candidates, Missouri Congressman Dick Gephardt has already begun this discussion; his fellow candidates would do well to snipe at him less and develop their own alternatives more.
As for Bush, the responsibility for dealing with the economy is now entirely his. With interest rates hovering at 1 percent, Greenspan is running out of tools to fix this mess. With the election year now taking shape, Bush's one-note obsession with tax cuts presents the Democrats with their best opportunity. And the economy with its gravest threat.