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Scapegoats and deficits

By Peter Morici
web posted August 1, 2011

It is an article of faith among Democrats that the Administration of George Bush caused plagues, pestilence and the nation's economic woes -- and by derivation the political morass that bests Washington.

The New York Times asserts huge budget deficits have resulted from the Iraq and Afghanistan wars and Bush tax cuts -- which by the way lowered tax burdens for all Americans not just millionaires and billionaires.

Consider, in 2007 -- the last fiscal year before the Great Recession and the Democrats took control of Congress -- the deficit stood at $161 billion -- about one-tenth its present size. Two wars were at full tilt, and the Bush tax cuts and prescription drug benefits, which congressional democrats are always inclined to cite, were in place -- all for several years.

Hmm, how can that be? If Mr. Bush's policies caused the current big deficits, why did those require a change in party control, in congress and then the presidency, to happen? Simple observation indicates those policies were not the cause, and huge deficits, like a lot of ills, were caused by the economic collapse of 2008, which was motivated by bad economic policies that political parties had a hand in creating.

Mr. Bush, like Mr. Obama, inherited a country with deep economic troubles -- granted Mr. Obama's situation was much worse, because the nation's structural problems have been cascading through cycles of expansion and recession for several decades.

Mr. Bush did pursue pro-growth policies and got unemployment down to about 5 percent before the Great Recession.

The terrible event was caused by "financial reforms" Treasury Secretary Larry Summers persuaded President Clinton to push through Congress. Those repealed Glass-Steagall and other constraints on abusive behavior by financial institutions that now plague Wall Street and America, and a gapping trade deficit that is nearly all accounted for by excessive reliance on imported oil and a massive trade deficit, mostly with China, and the rest of Asia. The latter deficit is a major component of the imbalance in demand for goods and services between the economies of Asia and the United States and Western Europe, and a significant reason Asia grows at near ten percent and the West at only about two.

Together, Wall Street abuses and the trade deficit resulted in shoddy mortgages, a housing bubble and huge foreign-sovereign capital inflows that financed the bubble with little attention to the soundness of loans banks were making.

Democrats in Congress have made it national policy to shift oil production from the United States, where environmental risks may be managed, to developing countries, where they may not as well be supervised. President Bill Clinton negotiated China's entry into the WTO without creating suitable constraints on China's exchange rate and other mercantilist policies that make free trade a unidirectional affair.

Mr. Bush and Republican Congresses turned a blind eye to growing abuses by bankers of their new freedom and China's protectionism -- those responses get an E from this professor.

Subsequent to the 2008 meltdown, though, stimulus spending and targeted tax cuts -- passed at the behest of Presidents Bush and Obama, and Democratically controlled congresses -- have failed to adequately lift the U.S. economy.

Additional expensive regulation of Wall Street has not slowed damaging financial practices but only inspired new tactics and for big banks to cut off lending to their regional brethren, which chokes lending to small and medium sized business. For example, the nation's leading bank -- J.P. Morgan -- is working as hard as it can to develop offshore business and neglecting responsibilities to assist a domestic economy that heavily financed the Wall Street bailout.

Moreover, President Obama has made war on oil companies and manufacturing by indiscriminately tightening regulation, raising employee health costs and failing to aggressively address China's abuse of the international currency system and mercantilism.

The economy has not recovered, many Americans are without jobs, and the President and his defenders spend their time blaming Republicans and engaged in new math. For example, how is it that a two income family earning $250,000 are millionaires as the President again asserted last Monday evening? Also, why the obsession with repealing the Bush tax cuts to that group when the revenue yield would be about $80 billion or five percent of the $1.6 trillion deficit?

More progress would be accomplished if everyone stopped blaming one President or the other, scapegoating oil companies and the well-off, and recognized the need to trim spending. Since 2007, that's up $1.1 trillion--$900 billion more than was needed for inflation -- and tax increases won't solve the deficit problem. Even if taxes were increased on everyone by 50 percent the deficit would still be outsized -- likely about $1 trillion each year.

Simply, raising taxes won't do it. The government is spending beyond what the economy can bear, and scapegoating won't change that. ESR

Peter Morici is an economist and Professor of Business at the University of Maryland, and served as Director of Economics at the U.S. International Trade Commission from 1993 to 1995. Find him on Twitter here.

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