Friday, May 27, 2005


Reality vs. The Bush League: Paying for the Bush Economic "Plan"

Remember how all those tax cuts were going to get the US economy going again? Unfortunately, all that cash freed up for investment went overseas to build infrastructure for outsourced jobs. We've been surviving on increased consumer spending and "greater worker productivity" gained via real wage cuts (wage increases less than the inflation rate.)

The problem with an economy running on lowering workers' wages and ever-increasing consumer spending is their mutually exclusive nature. Sooner or later, workers run out of cash to spend on consumer goods.

We've been borrowing against our investments for a long time, and we're starting to run out of them. Paul Krugman explains:
In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.
But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.
Source: Paul Krugman Running out of Bubbles, New York Times, May 27, 2005
Had W and the Bush League passed fewer tax cuts for their rich buddies, they'd have more leeway to deal with this problem. Unfortunately for us all, the tax cuts and the Iraq War bills have drained our country's resources as badly as consumer spending financed by mortgage refinancing has drained the American taxpayers' assets.

More and more, it looks like Mr. Bush will go down as the President who destroyed the US economy and relegated this country to "has-been" status. I expect he'll blame liberals and Congress' failure to pass Enron's oops, I mean Cheney's energy plan.


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