The Bush legacy
From Saturday's Globe and Mail
October 31, 2008 at 8:02 PM EST
Long before the credit crisis that almost buried Wall Street and forced the U.S. government to effectively nationalize a chunk of the American financial system, President George W. Bush had shown himself to be a dismal caretaker of his country's economic and fiscal well-being.
Then the housing bubble exploded, the value of complex, mortgage-related securities plummeted and credit markets froze solid. The ensuing collapse of some of the biggest and best-known names in banking, the controversial bailouts and the serious slowdown that has reached every corner of the globe will always colour the way economic historians evaluate Mr. Bush's presidency.
Much like President Herbert Hoover in the Great Depression, Mr. Bush's main contribution to the crisis was his failure to recognize its dimensions until irreparable damage had been inflicted.
His administration's belated move to flood the financial system with credit and capital and to prop up ailing institutions may well prove the correct response. But it will inevitably worsen the dire fiscal situation that will face Barack Obama or John McCain, one that Mr. Bush's misguided policies caused in the first place.
President Bush was spending like a Texas oilman on a Las Vegas gambling spree long before emergency rebates and massive bailouts became administration policy. In eight years, a supposedly conservative president made big government considerably bigger and more intrusive, and destroyed years of hard work by the Clinton administration to balance the books. His reckless combination of heavy tax cuts – even as the costs of the Iraq war climbed into the stratosphere – and significantly higher spending has left the government so awash in red ink that his successor has little hope of resurrecting even a modest surplus and still keeping the sputtering economy from crashing. The record budget deficit of $454.8-billion (U.S.) in the latest fiscal year pales in comparison to cautious forecasts of about $750-billion for this year. A figure as high as $1.6-trillion has been kicked around.
Long-term deficits are not benign. They raise the cost of capital, restrict growth and, in normal times, undermine the currency. Panicky investors have recently flocked to the U.S. dollar as a rare safe harbour in a wide sea of uncertainty. But people will soon reassess the greenback's long-term future, in light of the sky-high debt and severe structural problems left untouched or worsened by Mr. Bush's policies or lack of them. The net result will be bad for the United States, and also for Canada and for the global economy, which still depend on a buoyant U.S. market. That, too, is part of the Bush legacy.
The Bush administration is not directly responsible for the current mess. Cheap credit, subprime mortgages, greedy investment bankers and opaque derivatives trading on a massive scale were already features of the landscape before Mr. Bush became president. But his strenuous efforts, along with those of Treasury Secretary Henry Paulson and Ben Bernanke, the chairman of the Federal Reserve Board, to play down the potentially devastating consequences of the bursting credit bubble inspired a dangerous level of complacency.
That brings us to the ignominious end of Mr. Bush's economic management. But what about the beginning?
It is not hard to pinpoint where and how he went off the fiscal rails. He squeaked into office in 2000 on the promise of deep income-tax cuts, which seemed the right medicine when the Internet stock bubble was bursting and the U.S. economy was showing serious signs of stress after a long period of growth. But then came 9/11 and the enormous security and military expenditures that followed. The war in Iraq cost billions, and the peace has proved many times more expensive. The final tally will be in the trillions.
Yet, even as the U.S. economy pulled out of the doldrums, Mr. Bush stubbornly refused to abandon the low-tax, big-spend policies that were weakening public finances. What's worse, after 9/11, he narrowed his focus dramatically, dropping ambitious plans to reform Social Security and allowing the United States to become even more dependent on foreign capital and foreign oil.
When government borrowing is rocketing skyward to pay for military adventures, that is not the time for unaffordable tax cuts, increased subsidies or a major expansion in Medicare for which there was no money.
Fortunately, Mr. Bush never proceeded with his idea to have Americans take responsibility for managing their own assets set aside for retirement. Had he succeeded in pushing through this privatization, the cost to the public purse could have been as high as $2-trillion. And the damage to Americans' pension prospects after the credit meltdown and stock market plunge would have been incalculable.
But that does not mean the U.S. social safety net should have been left to slowly unravel. His successor is now saddled with that problem, as well as a raft of other costly domestic issues ignored or mismanaged by the current administration. Raising the necessary capital may well require scaling back the “temporary” Bush income-tax cuts, which are due to expire by 2010, imposing a national sales tax along the lines of the GST and even a gasoline tax. None would be popular. But there may be little choice.
Any Canadian leader who left people so vulnerable to future financial risk would have been run out of politics after a single term, regardless of the shape of the economy.
For three-quarters of Mr. Bush's time in office, the U.S. economy was quite robust, which only underlines the poverty of his policies. Instead of taking advantage of the windfall revenues to cap the rising deficit, pay down debt, repair crumbling infrastructure and reduce dependence on Middle Eastern oil, he earmarked large expenditures to cover the spiralling costs of his domestic security agenda and the disastrous war. He also proffered more tax breaks and higher subsidies to favoured industries, including oil and agriculture, which saw its trade-distorting federal handouts double between 2002 and 2005.
It was an opportunity squandered, and it will haunt U.S. policy-makers for years to come.
Today, the steady drumbeat of economic success is a distant memory. President Bush is not to blame for that. But the most profligate leader in U.S. history certainly bears a large share of responsibility for the dangerous holes in the leaky ship of state left for his successor to patch.
