How will we remember George W Bush? The US president might go down in history as the man who waged war on terror. But he might also stick in the collective memory as the man who steered the world’s biggest economy into recession.
From boom to gloom
The president inherited from Bill Clinton’s administration a healthy economy, a booming stock market and a budget surplus. But fast forward nearly a decade and economic growth is faltering, the stock market has gone into decline and the budget surplus has turned into a forecast deficit of $410 billion this year and $407 billion in 2009.
The situation is so bad that Bush was recently forced to admit that the US economy was facing “uncertainty”. In his final Sate of the Union address, Bush said: “At kitchen tables across our country, there is concern about our economic future.” He would not, however, admit defeat, assuring Americans they could “be confident about our economic growth”.
But can they? It might be unfair to blame President Bush for all of America’s economic woes, but it is also difficult to absolve him of all responsibility.
Take the budget on Monday. Bush’s final budget for the 2009 fiscal year, which begins on October 1, proposes spending of $3.1 trillion, yes that’s $3.1 trillion – and it’s up 6% from previous forecasts. Now that’s a lot of money for a country that is staring recession in the face.
But he’s a president who likes to spend money. Or to put it more accurately, he likes to spend money on wars and tax cuts. The budget includes $70 billion for the wars in Iraq and Afghanistan in 2009, although the figure is widely believed to be understated. Even Dana Perino, the White House press secretary, told reporters that the war effort in 2009 would “certainly” cost more.
Tax cuts for a premium price
The budget also included a $145 billion package of tax giveaways to try to stimulate consumer spending and stave off a recession. Tax cuts are a signature of Bush budgets. When the president first took office he introduced a controversial tax cut, targeted at wealthier citizens. He stuck with it even during the recession in 2001 and even when he needed to spend big bucks to finance the military operations in Iraq and Afghanistan.
So, the policies sound familiar; they also sound wrong. If the economy is in freefall and you don’t have any spare cash in the public purse, surely you don’t implement tax cuts and go on a spending spree. The time would seem to be right for a dose of good old British prudence.
The president is, of course, desperate to revive America’s flagging economy. Growth slowed to an annual rate of 0.6% between October and December 2007, half the rate forecast and compared with a brisk 4.9% growth rate in the previous three months.
House prices are also on the way down, dropping by about 8% over the past year. Then there’s the spectre of rising unemployment. The economy shed 17,000 jobs in January, the first fall in four-and-a-half years.
The Federal Reserve is trying its hardest to boost the economy. At the end of January interest rates were chopped for the second time in nine days to 3% from 3.5%. The previous week the Fed cut the cost of borrowing by a chunky three quarters of a percentage point in an emergency move. The last time the Fed cut rates so deeply was in August 1982, almost 26 years ago. Interest rates have now been cut five times since September 2007.
Little interest in spending
The idea is to stimulate consumer spending, but critics accuse Ben Bernanke, the Fed chairman, of panicking. There are also downsides to savage cuts in rates – and interest rates in the US have been as low as 1%.
Yes, low interest rates can revive consumer spending, but they can also encourage people to take on more debt. It’s a fine balance but a spending boom can quickly turn into a debt boom. And building an economy on debt is a bit like building a skyscraper on a fault line – it’s risky. The strain is already showing in the American economy. The subprime crisis and the resulting credit crunch were also felt in Britain – and the worst could still be to come.
There’s another downside to low interest rates – they tend to send the currency into a tail spin. A weak dollar might be good for British tourists, but it makes goods costly to import to America. It also has a nasty habit of pushing up oil prices.
Addicted to oil
America is the world’s biggest consumer of oil. So when the price pushes above $100 a barrel, people on the streets of the US feel the pain. So too do people on the streets of Britain. The knock-on effect of inflation is also widespread.
The president recently urged the members of Opec to step up production to ease the pressure on oil prices, but he has done little else to reduce his nation’s dependency on the black stuff. He is a well-known sceptic on the subject of climate change and his aggressive foreign policy has arguably stirred up antagonism in some of the oil-producing nations.
It ain’t over til the weak president leaves
Let’s give credit where it’s due – if you’ll excuse the rather weak pun. The US economy did grow at an acceptable 2.2% in 2007, so it’s not over yet. And as Irwin Stelzer, the economist and commentator, recently pointed out, after a period of rapid growth, slow growth will feel as bad as a recession, especially in an election year.
Who knows? The package of budget measures and interest rate cuts might just work. But it’s looking increasingly unlikely, which means that Bush could leave office in January 2009 with two defeats on his hands – a military one and an economic one. Both are serious and both reach far beyond the US shores.