Economy: The Democrats Cry Wolf
(written by Lancelot Finn, January 2004)
“The worst economy in the US since the Great Depression.” This was how a lot of Democrats were describing the economy around the middle of last year. Does that disturb you? It should.
To see why, I’ll start by explaining a little about the economy. There are a lot of ways to measure the economy, called “indicators,” of which the most important are GDP—the total value of the goods and services the nation produces—unemployment—how many people are out of work and actively seeking a job—and inflation—how much prices rise from one year to the next. We want GDP to be high, and unemployment and inflation to be low, but not too low. Negative inflation, or deflation, can lead to recession, while unemployment beneath some “natural rate of unemployment” means the economy is overheating and turbulence is ahead. Estimates of the natural rate for the US range from about 3-5%.
So how was the economy doing under Bush at, say, the beginning of 2003. Well, GDP was the highest it had ever been. Inflation was almost nothing. And unemployment was around 6%, higher than it was in the late 1990s but below the average for the 1970-95 period. Is that good or bad? Well, it’s all relative, and subject to interpretation. No one is very impressed that GDP was the highest it had ever been, because it usually is. We expect GDP to grow year after year, and we typically judge the economy’s performance by its growth rate, which has been a bit slower under Bush than it was under Clinton. It was a rough couple of years for business, and for the stock market, which were battered as the corruption and excess of the late Clinton years was exposed. But consumer demand did not falter, and the federal government stepped in, spending a lot at a time when business investment was nil, and making the recession one of the mildest in history.
How can you justify calling this “the worst economy since the Great Depression?” You can’t. There is no remotely plausible sense in which the statement is true. It’s always hard to know, when politics are so full of spin and manipulation and selective quotation and rhetoric and honest mistakes, when the word “lie” is applicable. Maybe this one doesn’t quite make the grade (too much of an element of “opinion”), but it comes awfully close. The question is, which is more disturbing: if the Democrats really believed it when they said that, or if they didn’t. If they didn’t believe it, it was a cynical ploy and showed contempt for their constituency. If they did, it is frightening to imagine that such ignorant people could end up running the country.
Here’s my appraisal of Bush’s economic performance.
The recession was not Bush’s doing. We had had a very long, strong boom, and every boom leads to a bust sooner or later. The recession was, anyway, one of the mildest in history, but the recovery was a bit feeble and jerky. The growth rate over the full four years of the first Bush administration looks like it will be a healthy 2-3%, maybe more. Not spectacular, but healthy, certainly compared to Europe and Japan.
I was never a big fan of the tax cut, the increase in discretionary spending, or the return of the deficit, but I’m keeping an open mind. Bush has acted, in essence, in Keynesian fashion, on a grand scale, responding to a recession with a huge fiscal stimulus, following in the footsteps of John F. Kennedy and Ronald Reagan. That wouldn’t have been my advice. My personal theory is that Keynesianism is passé. I think the private economy has become more flexible, so that the old Keynesian assumption of price stickiness no longer holds, and macroeconomic management should be less activist. Unlike a lot of Republicans, I do not insist that small government is best. We need smart government, which can be either big or small. I think the recession would have been a little deeper if Bush had been less Keynesian, but the recovery would have been stronger. I could be wrong. We’re recovering now. Let’s see where that takes us.
One thing Bush did right: let the dollar fall. A weak currency is a smart prescription for an economy in recession, particularly one that runs a chronic trade deficit. The weak dollar will help to strengthen the manufacturing sector and create jobs in the heartland without resorting to protectionism. Main Street likes a weak dollar, Wall Street likes a strong dollar. Bush is on the right side of that divide.
I think we will see a few changes in the second Bush administration. I would anticipate some effort to control the deficit, especially if the economy continues to strengthen. Hopefully, there will be no new tax cuts. It is the Bush administration’s conscience and courage rather than its economic wizardry that makes me like him. I’m not expecting anything truly brilliant from them. But they did well enough in the first four years, and I think they’ll do a bit better in the second four years, and that’s good enough for me.