As we head into this horrific stagflation economy that I described in my January 18 article "Stagflation Returning to the US Economy after 30 years" http://www.opednews.com/articles/opedne_steven_l_080118_stagflation_returnin.htm and even predicted 13 months ago in this article, "Election 2006 Continued Wrap up The Coming Economic Swoon..." http://www.opednews.com/articles/opedne_steven_l_061208_election_2006_contin.htm I think most people are probably wondering "How did we get here?". It is hard to imagine that we find ourselves in such a bad situation. A severe economic downturn coupled with high inflation and a massive budget deficit, less than eight years after the end of the Clinton era that ushered in balanced budgets and a booming economy. Where did we go wrong?
When an economy goes bad, there is usually no single reason why. While there are several mistakes that the Bush administration made that brought us to this point, there are two actions/issues under the administration's control to which we can point and say, without those, we would not be here. Those acts are the Iraq war and the Bush tax cuts.
Nearly five years of war in Iraq has thus far cost the United States economy $487 Billion dollars. If you include the amounts appropriated through 2008 the amount goes to almost $620 Billion dollars. This averages out to a yearly cost of the Iraq war of nearly $130 Billion per year. In 2006, the entire US Gross Domestic Product was $13 Trillion dollars. That means that expenditures on the Iraq war totaled 1% of the US' Gross Domestic Product every year since its inception. Put another way, one out of every $100 dollars spent in the US economy for the past five years has been on the Iraq war. What one has to keep in mind is that this is money that would ordinarily not have been spent on anything. That means 1% more dollars are circulating as a result of the Iraq war and that by itself is very inflationary. If you want another frightening statistic, the entire World Gross Product in 2006 was approximately $48 trillion dollars. So for every $400 spent worldwide, $1 of it was spent by the US on the Iraq war. I'm not sure anything personifies waste more than that statistic.
We can also look at the Iraq war expenditures as measured against the total amount taken in and spent by the government http://en.wikipedia.org/wiki/United_States_federal_budget%2C_2007 . The 2007 total budget expenditures were $2.8 trillion dollars. Not counted in this total were supplemental expenditures of which the Iraq war expenditures are examples. The approximately $125 Billion dollars spent on Iraq in 2007 represents almost 5% of total Government spending last year. Since total government income was $2.4 Trillion dollars giving us a budget deficit of $400 Billion dollars, we can say that the Iraq war expenditures represent an amount equal to approximately 30% of all deficit spending.
If we also add the Bush tax cuts, some of which have been in effect since 2001, some since 2003, we have the final ingredients of the witches brew that caused our current crisis. We all should have known what was coming since we were warned. In February of 2003, over 450 of the finest economic minds in the country including TEN individuals who had been awarded the Nobel Prize for Economics, issued a statement calling the 2003 Bush tax cut plan "misdirected". The statement read in part:
Passing these tax cuts will worsen the long-term budget outlook, adding to the nation's projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.- Advertisement -
To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment. Such a stimulus plan would spur growth and jobs in the short term without exacerbating the long-term budget outlook.
See http://www.epinet.org/newsroom/releases/03/02/030210-econltr-pr.pdf for the entire text and more background information.
One has to note that the 2003 tax cuts to which the economists were objecting were in addition to those passed in 2001 which cut $1.35 Trillion dollars from government revenues for the past six years. The 2003 tax cuts were described by Wikipedia and the Congressional Budget Office as causing an additional $340 Billion loss in government revenues http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reconciliation_Act_of_2003 . Most of that tax cut money went to the wealthiest Americans who spent a lot of that money on expensive foreign goods or invested a sizeable amount of that money in foreign markets. If you are reviewing the numbers, you can see that without the Bush tax cuts, we would still have a balanced budget, even including the ill conceived Iraq war.
If Bush had never engineered the tax cuts he put into place over the first three years of his tenure, and he had not fought the Iraq war, we would have a federal budget that had a several hundred billion dollar surplus. We would have a lot less government spending and a lot less money in circulation, meaning lower prices and less inflationary pressure. If, in 2001 and 2003, Bush had listened to the consensus of the best economic minds in the country and instead of tax cuts had enacted temporary demand-side stimulus packages, lower and middle income Americans would have had the money they needed to ride out the recession but the government would have not had the loss of $1.7 Trillion in revenue over the last six years. You can talk about the housing bubble and sub-prime mortgages and the lending crisis, but without the loss of $1.7 trillion dollars in revenue and without the expenditures of $600 Billion on the Iraq war, I feel confident in saying we could have dealt with those issues.
The best thing that could be done for the US economy right now would be for us to bring an immediate end to the Iraq war. That would mean $130 Billion dollars that would not need to be spent this year and $130 Billion that would not need to be spent in 2009. We could use that $260 Billion and provide relief to those who are or will become unemployed, or we could hold onto it and partially close the gap between government income and expenditures. We can further boost government revenues and have money available to help those who need it by bringing an end to the Bush tax cuts. But we have to be careful. If we give too much demand side assistance, we will create additional inflation. The actions by the fed to lower interest rates and the upcoming bipartisan stimulus package are incorrect knee-jerk reactions to much bigger and more complex problems. As I wrote in my Stagflation article of January 18, these responses by the Fed and the government stimulus package are the wrong things to do if we are in a stagflation economy. We will see a temporary weak, but slightly positive response in GDP and the financial markets accompanied by rising inflation. This positive response will last less than six months after which the economy will swoon again even more severely with a continued rise in prices. Inflation is the big problem right now, not the negative GDP growth and not the loss of jobs. If we don't deal with inflation, the GDP and jobs will suffer greater and greater problems until we do.