October 04, 2004

by Joseph E. Stiglitz

Professor of economics at Columbia University and a member of the Commission on the Social Dimensions of Globalization.
He received the Nobel Prize in Economics in 2001.

Many around the world are surprised at how little attention the economy is receiving in President Bush's re-election campaign. But I am not surprised: if I were President Bush, the last thing I would want to talk about is the economy. 

Yet many people look at America's economy, even over these past three and half years, with some envy. After all, annual economic growth—at an average rate of 2.5 percent—may have been markedly slower than during the Clinton years, but it still looks strong compared to Europe's anemic 1 percent growth.

But these statistics mask a glaring fact: The average American family is worse off than it was three and half years ago. Median real income has fallen by more than $1,500 in real terms, with American families being squeezed as wages lag behind inflation and key household expenses soar. In short, all that growth benefited only those at the top of the income distribution—the same group that had done so well over the previous 30 years and that benefited most from Bush's tax cut.

For example, some 45 million Americans today have no health insurance, up by 5.2 million from 2000. Families lucky enough to have health insurance face annual premiums that have nearly doubled, to $7,500. American families also face increasing job insecurity. This is the first time since the early 1930s that there has been a net loss of jobs over the span of an entire presidential administration.

Bush supporters rightly ask: is Bush really to blame for this? Wasn't the recession already beginning when he took office?

The resounding answer is that Bush is to blame. Every president inherits a legacy. The economy was entering a downturn when Bush took office, but Clinton also left a huge budget surplus—2 percent of GDP—a pot of money with which to finance a robust recovery. But Bush squandered that surplus, converting it into a deficit of 5 percent of GDP through tax cuts for the rich.

The productivity growth that was sustained through the downturn presented both an opportunity and a challenge. The opportunity: If the economy was well managed, the incomes of Americans could continue to rise as they had done in the 1990s. The challenge: to manage the economy so that growth would be robust enough to create the new jobs required by new entrants to the labor force. Bush failed the challenge, and America lost the opportunity because of his wrong choices.

True, the economy was stimulated a little bit by Bush's tax cuts; it was probably stronger in the short run (though arguably not in the long run) than it would have been had there been no tax cuts. But there were other policies that would have provided far more stimulus at far less cost. Bush's objective, however, was not to maintain the strength of the economy; it was to push forward a tax agenda that shifted the burden away from those who could best afford to bear it.

Bush's failed policies have not only cost the economy dearly; they have left the economy in a far weaker position going forward. The non-partisan Congressional Budget Office agrees that even without Bush's new expenditure initiatives and tax proposals, costing trillions of dollars, the deficit will not be eliminated in the foreseeable future—or even cut in half, as Bush has promised. Expenditures on which America's future economic health depends—on infrastructure, education, health and technology—will be crowded out, jeopardizing long-term growth.

Because fiscal policy did not stimulate the economy, a greater burden was placed on monetary policy. Lower interest rates worked (a little), but for the most part by encouraging households to refinance their mortgages, not by stimulating investment. The increased indebtedness of households is already leading to higher bankruptcy rates and will likely dampen the recovery.

National debt, too, has risen sharply. The huge trade deficit provides the spectacle of the world's richest country borrowing almost two billion dollars a day from abroad, contributing to the weak dollar and representing a major source of global uncertainty. 

There might be some hope for the future if Bush owned up to his mistakes and changed course. But no: Bush refuses to take responsibility for the economy, just as his administration fails to take responsibility for its failures in Iraq. In 2003, having seen that its tax cuts for the rich had failed to stimulate the economy as promised, the administration refused to revise its strategies, but instead just prescribed more of the same medicine. It now promises to make those tax cuts permanent. The real risk is that this is one promise that Bush, if re-elected, will try to keep.

At the end of August, I joined nine other American Nobel Prize winners in economics in signing an open letter to the American public. It is hard to get any two economists—let alone two Nobel Prize winners—to agree on anything. But in this case our concerns were so grave as to overcome any disagreements.

We wrote: "President Bush and his administration have embarked on a reckless and extreme course that endangers the long-term economic health of our nation…. The differences between President Bush and John Kerry with respect to leadership on the economy are wider than in any other Presidential election in our experience. President Bush believes that tax cuts benefiting the most wealthy Americans are the answer to almost every economic problem."

Here, as elsewhere, Bush is dead wrong, and too dogmatic to admit it.

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