Thursday, October 14, 2004

You Don’t Have to Outrun the Bear

Despite the recent increase in the price of crude oil, the world economy seems to be doing pretty well. Indeed, much more than fears of political instability, it is the growth of countries like China and India that has caused the rise in oil prices and will surely cause further price increases in the future. In this context, the poor performance of the American economy cannot be blamed on the business cycle or a lack of international demand. And America’s economy is performing dismally. Numbers released today show that our trade deficit is increasing. September was the second worse deficit on record. 2004 will be the worst year on record. Meanwhile, claims for first time unemployment insurance were up this morning for the fifth week in a row and the economic recovery from the recession is easily the slowest and weakest of the last 60 years.

Defenders of the administration’s economic policies like to contrast our situation with Europe’s—they are notably quiet about China, Taiwan, India, Indonesia, and the other Asian nations. Unfortunately, the European comparison is not really favorable either. The unemployment rate in France and German is higher than ours, but that result is a statistical artifact that reflects the way that unemployment is counted in those countries. Truly comparable numbers, the percentage of adults gainfully employed, for example, tell a different story. The lower growth rates of some European countries is also systematically misleading because the populations of many European nations are stable. In view of the demographic dynamism of the U.S., our lackluster GNP growth is all-the-more significant.

The policies of the current administration are obviously not the fundamental reason for our competitive disadvantage since the problem has been building for many years. The Bush response to the challenge has been inadequate and wrong-headed, however. Even the steps that made some economic sense—fiscal stimulus, for example—were carried out in the least effective and most expensive way. The recession provided a new excuse for a tax policy whose true motives were a mix of political cynicism and ideological fervor. In any case, economic stimulus is properly a short-term measure that addresses a business cycle problem and not a policy designed to address a long-term structural problem. Indeed, because the tax cuts are essentially permanent, they have put us at an continuing disadvantage relative to other countries by weakening our national credit, especially in view of the huge increases in government spending necessitated by our aggressive foreign policy,

Reasonable people can disagree about what economic policy is best; and even if they aren’t reasonable, you still have to deal with them. I certainly don’t claim any prescience in these matters. What does seem clear, however, is that the economic health of the United States is not the first priority of this administration; and that treating it as an important but secondary goal does not suffice. I’m sure that Mr. Bush would prefer healthy job growth—I don’t think he kicks his dog, either—but the record indicates that in practice rewarding the political base comes first. It has been reported that when Bush himself worried aloud about the bias of the tax cuts, Carl Rove admonished him to stick to the program. Rove’s probably right. Bush’s political support is rooted in those who benefit from the current economic system and he cannot cross them. Everybody understands, for example, that companies are reluctant to hire because of the rapidly increasing cost of the health insurance they have to provide full-time workers. Any serious attempt to improve American competitiveness must address the gross inefficiency of a medical system that delivers a mediocre standard of care at an inflated price. Bush dare not undertake such reforms because the insurance and drug companies are among his most important supporters and potentially his deadliest enemies. Dealing with the health problem is hard enough. Dealing with the health problem while continuing to pay off your friends is simply impossible.

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