The economic consequences of Mr. Bush?

by on November 10, 2007 at 6:00 am in Political Science | Permalink

Joseph Stiglitz writes:

You’ll still hear some — and, loudly, the president himself — argue that
the administration’s tax cuts were meant to stimulate the economy, but this was
never true. The bang for the buck — the amount of stimulus per dollar of
deficit — was astonishingly low. Therefore, the job of economic stimulation
fell to the Federal Reserve Board, which stepped on the accelerator in a
historically unprecedented way, driving interest rates down to 1 percent. In
real terms, taking inflation into account, interest rates actually dropped to
negative 2 percent. The predictable result was a consumer spending spree. Looked
at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in
everyone else.

Stiglitz seems to claim that Bush will go down with a lower reputation, in economic terms, than Herbert Hoover.  I have not been a huge fan of Bush’s fiscal policy, but I can add: a) Bush is not to blame for loose Fed policy, b) it remains debatable among honest Democratic economists whether loose Fed policy was bad, c) U.S. consumption has been robust for a long time, and d) changes in real interest rates do not explain much of the variation in private consumption, and that’s even assuming you manipulate the ex ante vs. ex post distinction to suit your convenience.  The first two sentences of this paragraph are plausibly true but then the text deteriorates rapidly and is determined to blame as many things on Bush as possible.  The paragraph ends up attacking Bush for promoting a "consumer spending spree" when Stiglitz had started by arguing for traditional Keynesian fiscal stimulus, the purpose of which is to promote…a consumer spending spree.

Stiglitz also argues that Bush is in large part (he won’t say how large) to blame for high oil prices.  In his view the war in Iraq led to political instability and stifled investment in the region, I say that Saudi oil wells are running dry anyway and increased demand — most of all from China — is the fundamental issue.  Note also that for many plausible parameter values, political instability leads to more pumping today and thus lower prices; the counterweighing cycle of less exploration and exploitation can take a long time to kick in.

It’s also worth noting how much the arguments run counter to Stiglitz’s own (earlier) writings on macroeconomics.  He used to preach that a) banks are excessively reluctant to lend to risky borrowers (compare to his discussion of the subprime crisis), b) changes in real interest rates generally don’t matter much, c) adverse selection makes it hard to sell non-transparent assets for a reasonable price (compare to his discussion of securitization), and d) we cannot expect monetary policy to be especially effective but rather we must focus on the extent of credit rationing.  Stiglitz of course has the right to change his mind, but if the shift is so big surely this is news.

There are many good arguments against many of Bush’s economic policies, and many other arguments which are maybe wrong but at least plausible or possibly true.  But essays such as this are not promoting the public’s understanding of economics.

The pointer is from Mark Thoma

A Tykhyy November 10, 2007 at 6:55 am

I say that Saudi oil wells are running dry anyway
Ha! Do you then think peak oil theory is at least plausible?

odograph November 10, 2007 at 8:19 am

Just curious, was “traditional Keynesian fiscal stimulus” meant to stimulate full employment, or to go beyond that to high consumption? I would guess that the old frame of mind was that stimulus was in response to an high unemployment situation, and it is only our modern spin that it is to keep the DOW climbing.

Rich Berger November 10, 2007 at 9:02 am

When I see phrases like “Keynesian financial stimulus” I feel reminded of a lost world. When I studied economics in the early 70′s, Keynsian economics was dominant. Does anyone still believe in it?

Daniel Klein November 10, 2007 at 9:40 am

Awesome, Tyler. We are so lucky to have you.

When is public prominence and writing daily going to turn your mind to mush? No sign of such yet. You’re obviously of superior mettle.

Jay November 10, 2007 at 10:27 am

“There is no inconsistency for Stiglitz to call stimulus via for beneficial investments while decrying the public and private waste that led to record bankruptcies. As for Tyler’s claim on oil prices that Saudi Arabia was running dry anyway and China is growing, Stiglitz points out that pre-war oil futures markets knew all that an yet predicted $25-$30 per barrel oil. Clearly, something changed for the much worse after Bush’s invaded Iraq and took so much Iraqi oil off the market.”

A (presumably undergraduate) student of economics: You do realize that in 2000 the market predicted the Q’s were worth about 5,000 right?
Now that we are on common footing that the markets can’t price everything perfectly always, I don’t remember anyone in 2002 calling for the USD to dive as much as it did. Go chart the changes in the price of oil and the trade weighted value of the USD. You might learn a lesson about how to value commodities.
So now lets examine why the USD fell. Iraq proved to be the catalyst to the naked eye, but there was much more going on. Even before the war our trade deficit was growing (which every liberal donkey will tell you is always bad, hint: it’s part of a healthy forex market). Now that we are on common footing that the trade deficit might be linked to the trade weighted USD, go chart the trade weighted dollar index vs. a 4 year lagged U.S. trade deficit(surplus).

Markets aren’t perfect (but governments in many cases are much worse), so the huge lag on foreign trade elasticities, and protectionist policies, has led to many booms and busts in exports and imports. All those great years of U.S. productivity growth in the 1990′s (Thank Bill Gates, not Bill Clinton) boosted the USD to a level that would predictively send the trade deficit past equilibrium. We haven’t been hurt yet, because our major trading partners have been reluctant to appreciate their currency, but with the yen pushing 110 now, the next stage of USD depreciation against the Yen, Won, Yuan, etc. will hurt if the EU sticks to its isolationist policy and continues to protect domestic producers from the big bad U.S. importers.

Chris November 10, 2007 at 12:02 pm

I thought that one of the most objectable statements in the article was:

“Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president† when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover.”

Huh???? What policies did FDR reverse? Hoover pressured businesses to refrain from lowering wages. FDR put this behavior on steriods (NRA anyone?) Hoover believed in public works, so did FDR (TVA anyone?) As Rex Tugwell famously stated, the New Deal was an extension of policies started by Hoover. Sure, the money supply contracted severely during Hoover’s administration, but its not clear that FDR understood that any better than Hoover, and most of the blame for this lies with the Fed rather than the executive.

kebko November 10, 2007 at 12:39 pm

Yes, I’ve never understood why it’s conventional wisdom that Hoover is a failure for helping create 2 years of economic depression, but FDR is an American hero for making sure it lasted another 12 years. It seems like FDR’s rhetoric won the day, and its repetition over the decades has established it as truth, so that it can simply be averred to nodding heads that he was our savior. Why doesn’t this seem odd to people, since his presidency saw an unprecedented poor economic period, and its reversal roughly coincided with his death?

Barkley Rosser November 10, 2007 at 1:28 pm

“a student” does pinpoint one issue of relevance. The invasion of Iraq did reduce oil production
there, although that amount was not by nearly enough to give us the price we have today. The market
in 2000 simply did not forecast either the decline in production out of al Ghawar, Cantarell, or
Daicheng, as well as the rate of growth of demand for oil that China would generate. The price was
going to go up, but the futures markets just did not foresee it accurately.

OTOH, I think that Tyler’s claim that production is higher due to war-induced political uncertainties
is not defensible. Where would that have been, Tyler, maybe Saudi Arabia? I can’t think of anywhere
else, and production in KSA is down by a million barrels a day from about two years ago, although that
is probably mostly due to the problems in al Ghawar, even though they deny publicly that there are any
problems there.

Yancey Ward November 10, 2007 at 1:47 pm

Yes, it was news to me that the Great Depression ended in 1933. The history books had it wrong the whole time.

Really, Stiglitz should be deeply ashamed of himself.

jean November 10, 2007 at 2:07 pm

Economic disaster? 6 years of continuos growth.
6 year of employment grwoth
6 years of low inflation
Credit for the poor.Or dont you know that subprime borrower means poor or minority
Exports on the rise
In 1929 , the Fed tightened credit then you know…
or you really want another Depression.
The Dow climbs and the poor keep her home.
BTW: in 1987,1996, 1999 the Fed( Volker and Greenspans) did the same with the applause of those who attack Bernake
Stiglist owes his Nobel to Bush.Without him to bash no Price.What has he do in economics? NOTHING

Peter Schaeffer November 10, 2007 at 3:59 pm

“In his view the war in Iraq led to political instability and stifled investment in the region†

The first point should be obvious. The oil/gas resources of the region are all controlled by governments. Private capital simply can not respond to higher prices by investing more. All investments are either directly state run or tightly state controlled.

It is far from clear that governments are subject to the same incentive structures as private entities. A government could easily decide to reduce production investment, in response to higher prices, simply because a smaller amount of oil will now (with higher prices) yield the revenues needed to run the state. Indeed, there is evidence that some regional governments think this way.

At a different level, a region government may conclude that the real rate of return on oil in the ground (unproduced) exceeds the return on the cash that might be obtained by producing and selling an incremental barrel. Considering the course of oil prices from 2000 to 2007, not producing oil was the wiser course of action.

Beyond that, additional investments in existing fields, don’t change total future production that much. They generally change the time structure of production. In other words, barrels that might have been pumped in 2020 get produced sooner. If one assumes that oil prices will rise faster than the returns on external investment, then incremental investments in shifting production forwards have negative returns.

In any case, investment in the region has risen. Check out the Baker Hughes rig count. If was 560 worldwide (404 oil, 133 gas, 23 misc) and 140 in the Middle East (121 oil, 19 gas) back in 2000. The latest counts are 1024 worldwide (778 oil, 229, gas, 17 misc) and 268 in the Middle East (184 oil, 84 gas). Note that Middle East gas rig counts, have risen much more than oil. This probably reflects the lower level of gas development in the region.

Inverting this question for a second. Where in the Middle East could additional resources be invested in oil production? The only country that comes to mind is Iraq. However, if the US hadn’t invaded Iraq, the sanctions regime would probably still be in place. Either way, investment would be constrained.

Foobarista November 10, 2007 at 5:25 pm

I think the more interesting question isn’t why oil is high now but why it was low in the late 1990s. The 1997 East Asia crisis depressed consumption, and China was not yet a major oil importer. Herr Hugo was just starting to take over Venezuela, Ahmadinejad wasn’t running Iran yet, and Nigeria was marginally less weird than it is now. Iraq was off the (legal) oil market due to sanctions, although Saddam and UNocrats were getting rich off of Oil-For-Food.

A less noticed change was that energy input per dollar of GDP was starting to drop enormously in the mid 1990s, and has continued in most places with the significant exception of China. China has had to use an energy-intensive manufacturing strategy to bootstrap itself and will continue to do so. India was also showing up on oil radar significantly for the first time in the 2000s.

In general, it’s hard to imagine how a President Gore would have been any different with any of the above.

TJIT November 10, 2007 at 9:22 pm

A student of economics said

That’s like saying Bush’s incompetence with Fema etc. shows that gov’t doesn’t work. What it actually shows is that the Bush/GOP approach doesn’t work. Fema worked fine under Clinton.

Like most people trying to make the case that the problems in New Orleans were caused by Bush and his alleged mismanagement of FEMA they miss one crucial little detail that wrecks their argument.

The US government(Corps of Engineers)designed levees that were supposed to protect New Orleans had a fatal design flaw. This flaw would cause the levees to fail far below their rated load during Katrina.

These levees were approved and built with a fatal design flaw long before Bush came to office.

If the government levees had not failed New Orleans would have been mostly undamaged and FEMA would have had little to do.

The failure of the levees provided abundant evidence that (contrary to students protestations) government often does not work.

jb November 10, 2007 at 9:33 pm

FDR may have had poor economic policies, but if GWB had said “The only thing we have to fear is fear itself” after 9/11, instead of “Be SADDAM terrified 9/11 of SADDAM every 9/11 boogeyman SADDAM possible 9/11″ then the world would be in a much better place.

Politics is more than economics.

Paul Zrimsek November 10, 2007 at 11:51 pm

but if GWB had said “The only thing we have to fear is fear itself” after 9/11, instead of “Be SADDAM terrified 9/11 of SADDAM every 9/11 boogeyman SADDAM possible 9/11″ then the world would be in a much better place.

Ayah; it would still have Saddam in it.

Nathaniel November 11, 2007 at 11:24 am

@jb: I believe the point of Paul’s post was about Bush’s destructive fear mongering as opposed to a statement about the benefits of Saddam’s exiting the scene.

Lord November 11, 2007 at 2:05 pm

Instead of blaming Hoover, perhaps we should blame the Fed. Instead of blaming Bush, perhaps we should be blaming those who supported him.

Michael Fisk November 12, 2007 at 8:46 am

Well, after reading Stiglitz’s book on Public Finance, you realize how strong of a welfare economist he really is… this sort of stuff is part for the course for a redistributionist.

Anthony November 12, 2007 at 12:57 pm

Stiglitz exaggerates the reputational damage Bush will suffer (unless the current downturn gets bad before 2009, and HRC extends it through both of her terms), but some of Bush’s policies have been pretty bad.

While Greenspan was directly responsible for the Clinton-Bush inflation, both presidents encouraged it, particularly Bush. The inflation first came through in the stock market, then in real estate; we’re seeing the effects of a slowdown of the inflation right now. If Ben Bernanke is a strongly partisan Republican, he’ll stop inflation in about 2009. We’ll all blame the dislocations caused by that on HRC, and the Republicans will be guaranteed the White House in the elections from 2012 to 2032.

M. Bowling November 12, 2007 at 5:32 pm

It is astonishing to me that the intent of Bush’s tax cuts were to stimulate the economy and that the amount of stimulus per dollar of deficit was severely low. It is even more astounding to realize that in the period of these tax cuts, the deficit has continued to increase substantially. In light of this, I think Bush’s intents were less to stimulate the economy and more to win over the public. Just on the periphery, the public view tax cuts as a benefit. This means they can keep more of their money. Therefore, in running for office this helped Bush’s campaign, and throughout his term, this was used as an effort to better the public’s waning opinion of himself in a ruthless war. What better attempt to keep the public happy than give them more money while increasing the public debt. If anything, the consumer spending spree will just make the chance of inflation riskier.

I think the biggest question to be asked, is that of the legacy Bush will leave to the following Presidents. The war in Iraq, the political instability of neigboring countries, the enormous public debt, and the rocky relationships with other countries will all be issues left for subsequet Presidents to deal with. What affect will this have? Economically, will the next President be forced to raise taxes or reduce government spending to lower the debt? What will this do to the nation? Perhaps, as is the case with Bush, economic stimulation will result from the Fed’s monetary policy.

In addition, the current state of the economy must be considered. The economy is low right now, especially the mortgage sector, and who knows when it will turn around. Currently, intervention by the Fed to stimulate the economy by lowering interest rates could have a reverse effect. Lower interest rates could result in a consumer spending spree as with Bush, which could eventually lead to demand-pull inflation. With the economy in the situation it is currently, every move must be made with caution.

鑽石 April 2, 2008 at 11:16 pm

Comments on this entry are closed.

Previous post:

Next post: