The economic consequences of Mr. Bush?
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
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.