It would not be so bad for the president if a sizable fraction of the electorate shared his continuing optimistic delusions. Instead, in cities, towns and countryside, plain people of both political parties now fear that even twice 20,000 new US troops sent to Iraq would fail to create a viable and prosperous Iraqi democracy. There is, perhaps, one area where President Bush is enjoying some unearned luck. That area is the US macro-economy.
In terms of economics the six Bush years have not lived up to the Kennedy-Johnson 1960s growth era; nor to the Clinton epoch of 1994-2000. Still, during 2001-06 the record for real growth and freedom from inflation has been moderately OK on Bush’s watch. Don’t think that it was Bush’s promised program of “compassionate conservatism” that fended off unemployment and persistent recession. It was certainly not faith-based compassion that lowered tax burdens on my affluent neighbours in the comfortable suburbs.
In writing up for the future record books, top economic historians will give major credit to the Greenspan and Bernanke Federal Reserve. As with most of today’s central banks, the Federal Reserve policy-makers are accorded a degree of independence from both the executive and legislation branches of government. I cannot award Alan Greenspan a perfect A-plus grade: Unwisely he did opt to let the late-1990s Wall Street stock market bubble run its course for too long. And, rashly, Dr Greenspan did given his blessing to the Bush tax giveaway to the most affluent.
However, in comparison with the general run of past US and global central bankers, Greenspan did exercise canny flexibility. Will Gov. Ben Bernanke’s new bid for explicit inflation targeting work out better than Greenspan’s flexibility? Only time will tell. Two new unforeseeable complications have been testing Bernanke’s preferred strategy. First came the recent supply-side shock from OPEC’s oil-price rise that for a time doubled petroleum price to $80 per barrel. Second, the Federal Reserve did have to lower interest rates more than a dozen times to fend off the recession brought on by the bursting of Wall Street’s late 1990s stock market bubble. Inadvertently, this contributed to a housing and real estate bubble. I write ‘contributed to’ because in any case the US was susceptible to similar real estate bubbles experienced in both Europe and Asia.
If we are ever tempted to think economics has become an exact science, reality disabuses us from our hubris. No experts predicted that those many lowerings of US interest rates would principally stimulate consumption spending rather than, as Keynesians used to think, principally stimulate capital formation. Why think expanded consumption spending to be worse than expanded investment spending? The answer is this: Bush already inherited a US society opting to save less than the country will need down the road when 10 years from now the post-1946 baby boom generation will be retiring.
A cautious and sound Republican fiscal policy would certainly not concentrate on cutting out inheritance taxes on the ultrarich. That tactic perforce shifted the emphasis onto monetary rather than fiscal policy to counter the 2001-03 recessionary forces. Some approving words can be said for reducing the tax rates on corporate dividend receivers to 15 percent and reducing the long-term capital gains tax rate also to 15 percent. Admittedly these new measures will not serve to reverse globalisation-induced inequality of incomes. Still, objective experts must concede that they do get some credit for stepping up the US’s ‘total-factor productivity.’ It is this last process that America’s future growth pace must depend upon most.
What about the new Democratic control of both houses of Congress? This will serve to check the bale influences of lobbyists and tendencies toward ‘plutocratic democracy.’
Raising the minimum wage will be irresistibly popular. But its macro impact will not be great. Market wage rates have already risen to beyond $7-plus per hour. Don’t expect material reduction in inequality to come from this measure. The 2006 electoral landslide against the Republicans provides no mandate for a new burst of trade union militarism. Under globalisation that path would markedly speed up loss of American jobs to lower-paid workers in Asia and Eastern Europe. It is centrist democratic actions that will maximise the probability of a Democratic president being elected in 2008.
A stampede to protectionism ought, in my judgment, to give way to restoration of regulatory programmes and fiscal programmes that go some cautious distance toward transferring some of the winnings from globalisation to the lower-middle classes, who are both numerous and hurting. Easy for me to map out such realism, but it will be devilishly hard to contrive the compromises necessary to evolve toward a ‘golden mean’ mixed economy.
© 2007 Paul Samuelson, Distributed By Tribune Media Services, Inc.
