Political analyses tend to be exercises in confirmation bias, as shown by most treatments of the last two U.S. presidents, George W. Bush and Barack Obama. Now that they are both former presidents, hopefully we can look at their records a bit more dispassionately.
The fiscal performance of the Bush years are marred by then-record budget deficits following the balanced budget of the late Clinton administration (with no small amount of pressure from a Republican Congress). Bush made gratuitous cuts to the top marginal income tax rates, which were fiscally irresponsible and unnecessary. If we look at the actual fiscal history, however, these “tax cuts for the rich” were not the driving force of the deficits. From 2003 to 2007, total revenue actually increased, but the problem was that expenses from 2000 to 2007 nearly doubled. No one can seriously contend that the budget could or should have been balanced by increasing revenue, as if doubling taxes were viable.
A distinct issue is whether Bush’s profligate spending in any way caused the subsequent sharp recession. It is astounding that so many analysts, including the neo-Keynesian Paul Krugman who should know better, have blamed Bush’s fiscal policy for the recession, without offering a coherent mechanism by which this might occur. Nearly a century after Keynes’ revolutionary work, most people are still beholden to the view that a nation’s economy is to be run like a household, with expenses never to exceed revenues. Worse, they confuse the government’s budget (fiscal policy) with national prosperity (economic policy). A brief look at two historical examples should explode these myths.
By conventional Keynesian accounts, New Deal spending, followed by the massive expenses of WWII, with fiscal deficits of over 100% of GNP, brought the U.S. out of the Great Depression. Even if we do not accept this causality, it is incontrovertible that massive deficit spending is sometimes compatible with sustained economic growth. We also know that austerity measures during recessions can be disastrous, since this shrinks the money supply, creating a vicious cycle of contraction.
Reagan’s first term is generally considered successful by most economic measures, yet federal revenues increased only nominally from 1980 to 1984, and actually decreased in real dollars. Nonetheless, there was strong real GNP growth starting in 1982-83. Again, fiscal deficits are compatible with strong growth.
To sustain the thesis that Bush’s deficit spending somehow caused the recession of 2008, one needs to adopt the pre-Keynesian conservative myth that defict spending causes recessions. That liberals are willing to reverse their economic theories for the sake of condemning a conservative president is one of the stranger manifestations of confirmation bias.
As a counterexample, Spain, for all its pre-recession fiscal discipline, was hardest hit by the financial crisis. There is simply no correlation to be found between budget deficits and economic recessions.
Another supposed culprit is banking deregulation. This is blameworthy only in the trivial sense that if banks were forbidden from swapping derivatives, there could be no derivatives crisis. When we get more specific, however, the argument evaporates. For one thing, American critics of deregulation seem to forget that the financial crisis was a global phenomenon. Before they blame the repeal of the Glass-Steagall Act’s separation of commercial and investment banking, they should consider that most European countries had no such legal restriction in the first place. Further, financial deregulation had a bipartisan consensus, beginning with Clinton, Greenspan and a GOP Congress.
It may be safely said that the 2008 crash reflected a general overvaluation of assets and derivatives, much like the Dot com crash at the end of the Clinton years. Few would blame Clinton for the Dot com bubble, so why is Bush blamed for the housing bubble? In the latter case, the housing market has heavy government regulation and intervention, so government gets scrutinized when this market collapses.
It is common to blame subprime lending and predatory practices that led people into foreclosure. While these may be rightly deplored, they do not account for the fact that the houses themselves were overvalued, not just the creditworthiness of borrowers. Granted, easy lending is one factor driving up prices, but an asset bubble can occur even apart from borrowing. It has long been a myth that home ownership is a way to build wealth, when in fact residential real estate does no better than gold over the long term, so it is effectively a storehouse of wealth, not an engine of growth. The use of home ownership as a substitute for decentralization of real capital is not sustainable indefinitely. People cannot live off their homes, and will need income-generating capital in their retirement.
Regardless of what causes a housing bubble, there is little that government can do to stop it. You cannot freeze house sales, as you might freeze a stock exchange when there is a sudden drop. At best, you can improve lending practices going forward, but there is no remedy for the devaluation that must happen. This may sound liquidationist, except we are not dissolving companies, only recognizing that we cannot force people to pay more for an asset. Granted, some houses may be abandoned due to oversupply, but we can hardly force people to live in more than one home.
The remedy of Keynesian liberalism is to constantly stimulate demand. When you reach the point where the market does not meet demand (a crisis of oversupply), then the government should intervene with deficit spending and expanding the money supply, offering easy credit. What should be done when easy credit was part of the problem?
The last resort is to export inflation, relying on cheap labor from other countries to make products affordable to those with devalued assets. Yet even this game can only be played for so long, as the Chinese minimum wage has risen to over $1.50/hr. The race to the bottom must end, and as the populace of various nations rise up in revolt against global neoliberalism, perhaps someone will propose the real remedy of decentralizing capital, instead of shifting it between political and financial elites.
In the next post, we will examine the Obama legacy, as compared with that of Bush, finding some remarkable similarities.