The Bankruptcy Boom
In breathtaking disregard for the most basic rules of fiscal propriety, the Bush administration continued to cut taxes even as it undertook expensive new spending programs and embarked on a financially ruinous “war of choice” in Iraq. A budget surplus of 2.4 percent of gross domestic product (GDP), which greeted Bush as he took office, turned into a deficit of 3.6 percent in the space of four years. The United States had not experienced a turnaround of this magnitude since the global crisis of World War II.
Tax breaks for the president’s friends in the oil-and-gas industry increased by many billions of dollars. In addition, the five years after 9/11 saw and increase in defense expenditures of about 70 percent, even though much of the growth wasn’t helping to fight the War on Terror at all, but was being lost or outsourced in failed missions in Iraq. Meanwhile, other funds continued to be spent on the usual weapons (that too often don’t work), for enemies the Bush administration inadvertently created. In a nutshell, money was being spent everyplace except where it was needed. During these past seven years the percentage of GDP spent on research and development outside defense and health has fallen. Little has been done about our decaying infrastructure—be it levees in New Orleans or bridges in Minneapolis. Coping with most of the damage will fall to the next occupant of the White House.
Although it railed against entitlement programs for the needy, the administration enacted the largest increase in entitlements in four decades—the poorly designed Medicare prescription-drug benefit, intended as both an election-season bribe and a sop to the pharmaceutical industry. As internal documents later revealed, the true cost of the measure was hidden from Congress. Meanwhile, the pharmaceutical companies received special favors. To access the new benefits, elderly patients couldn’t opt to buy cheaper medications from Canada or other countries. The law also prohibited the U.S. government, the largest single buyer of prescription drugs, from negotiating with drug manufacturers to keep costs down. As a result, American consumers pay far more for medications than people elsewhere in the developed world.
Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Qualified at birth” became the drunken slogan. Hundreds of millions of credit card offers were mailed to one and all. Credit-card debt grew to a whopping $900 billion by the summer of 2007. “American households took advantage of the low interest rates, signed up for new mortgages with “teaser” initial rates, and went shopping bolstered by their new (but ultimately illusory) sense of wealth and success.
All of this spending made the economy look better for a while; the president could (and did) boast about the economic statistics. But dire consequences for many families would become apparent within a few years, when interest rates rose and mortgages proved impossible to repay. The president undoubtedly hoped the reckoning would come sometime after 2008, but it arrived 18 months too early -- as many as 1.7 million Americans are expected to lose their homes in the months ahead. For many, this will mean the beginning of a downward spiral into poverty. It will also mean greatly reduced spending, that would have helped keep the economy out of recession.
Between March 2006 and March 2007 personal-bankruptcy rates soared more than 60 percent. As families went into bankruptcy, more and more of them came to understand who had won and who had lost as a result of the president’s 2005 bankruptcy bill, which made it harder for individuals to discharge their debts in a reasonable way. The lenders that had pressed for “reform” became the clear winners, gaining added leverage and protections for themselves, while people facing financial distress got the shaft.And Then There’s Iraq, which will in all probability cost us more than $2 trillion
The overall cost of the conflict could be much more than quadruple the amount originally estimated that the war would cost. Even the Congressional Budget Office now concedes that total expenditures are likely to be more than double what we will spend on operations. The official numbers do not include, for instance, other relevant expenditures such as the soaring costs of recruitment, with re-enlistment bonuses of as much as $100,000. They do not include the lifetime of disability and health-care benefits that will be required by tens of thousands of wounded veterans, as many as 20 percent of whom have suffered devastating brain and spinal injuries. Astonishingly, they do not include much of the cost of the equipment that has been used in the war, and that will have to be replaced. If you also take into account the costs to the economy from higher oil prices and the depressing domino effect that war-fueled uncertainty has on investment, and the difficulties U.S. firms face overseas because America is the most disliked country in the world, then the total costs of the Iraq war mount, even by a conservative estimate, to at least $2 trillion. To which one needs to add these words: so far.
Had even a fraction of that $2 trillion been spent on investments in education and technology, or improving our infrastructure, the country would be in a far better position economically to meet the challenges it faces in the future, including threats from abroad. For a sliver of that $2 trillion we could have provided guaranteed access to higher education for all qualified Americans.
In retrospect, the only big winners from the war have been the oil companies, the defense contractors, and al-Qaeda
The dangers of America’s ever increasing indebtedness
During the past six years, America—its government, its families, the country as a whole—has been borrowing to sustain its consumption. Meanwhile, investment in fixed assets—the plants and equipment that help increase our wealth—has been declining.
What’s the impact of all this down the road? The growth rate in America’s standard of living will almost certainly slow, and there could even be a decline. The American economy can take a lot of abuse, but no economy is invincible, and our vulnerabilities are plain for all to see. As confidence in the American economy has plummeted, so has the value of the dollar—by 40 percent against the euro since 2001.
As families default, the owners of the mortgages find themselves holding worthless pieces of paper. The originators of these problem mortgages sold them to others, who packaged them, in a non-transparent way, with other assets, and passed them on once again to unidentified others. When the problems became apparent, global financial markets faced major tremors, for billions in bad mortgages were found hidden, like bombs, in portfolios in Europe, China, and Australia, and even in star American investment banks such as Goldman Sachs and Bear Stearns. Indonesia and other developing countries—innocent bystanders, really—suffered as global risk premiums soared, prompting investors to pull money out of these emerging markets, as they looked for safer havens. It will take years to sort out this mess, and many will suffer in the meantime.
Meanwhile, we Americans have become ever more dependent on other nations for the financing of our own debt. Today, China alone holds more than $1 trillion in public and private American IOUs. Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion. Most likely these creditors will not call in their loans—for that would bring a global financial crisis that would hurt them too. But there is something bizarre and troubling about the richest country in the world not being able to live even remotely within its means. Just as Guantánamo and Abu Ghraib have eroded America’s moral authority, so the Bush administration’s fiscal housekeeping has eroded our economic authority.
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