Deconstructing the Bush way of interpreting economics

Joseph E. Stiglitz, Project Syndicate

Last month's American election saw the two sides throw facts, figures, interpretations, and counter-interpretations at the hapless electorate. It is an old trick: Throw enough mud and some of it will stick. Confuse the voters enough, and eventually more will be likely to stay with the horse they know.

Most of the media not controlled by the right wing tried to play the role of honest broker, giving equal weight to each interpretation. If one side said the sky was blue and the other said it was orange, journalists would work hard, for the sake of appearing balanced, to find some academic, even a color blind one, willing to say that the sky was indeed orange.

But is it all just a matter of opinion? Are all interpretations equally valid?

I can answer that question only in my own area expertise, economics. With the election over, the debate itself has much to teach us about economics, economic policy, and media spin.

President Bush cited seeming huge job growth in the last 13 months, claiming that America's labor market turned the corner. Is this true?

The claimed increase in jobs has barely kept up with growth in the labor force. Although job growth in October was robust at last, in September there were only 96,000 new jobs, 50,000 short of what was needed. But at this point in the business cycle, the United States normally should be creating jobs at a rapid pace to make up for job losses earlier in the cycle -- as it did in 1993- 1995. In fact, this is the worst job recovery after any of America's nine postwar recessions.

No spin can alter this fact. America has not turned the corner. On the contrary, most forecasters expect 2005 to be weaker than 2004, with growth insufficient to eliminate the "job deficit" -- the gap between the number of jobs needed during the past four years to provide employment for new labor-market entrants and the actual number of jobs created.

But don't blame Bush. The economy was in a downturn when he took office in 2001, and Sept. 11 and Iraq made matters worse.

True, the economy was slowing when Bush took office, but he also inherited an enormous fiscal surplus, amounting to 2 percent of GDP, which he transformed into a yawning deficit, equaling 4.5 percent of GDP. Normally, a fiscal turnaround of this magnitude would provide massive stimulus. The economy should be going gangbusters. Inflation -- not jobs -- should be the main worry.

This has not happened because Bush pushed a tax cut that was not designed to stimulate the economy, but to benefit the rich. A tax cut to low-income individuals or increased unemployment benefits would have provided far more stimulus to consumption, just as a temporary investment tax credit would have boosted capital spending far more than reducing taxes on dividends did. In fact, fixed business investment as a share of GDP is some 2 percent lower today than 4 years ago.

True, the terrorist attacks on America and the Iraq war hit the economy hard. But it was evident even before Sept. 11 that Bush's medicine wasn't working. In his annual economic report in February 2002, and again in February 2003 and February 2004, Bush confidently -- and wrongly -- predicted that his tax cut would create millions of jobs.

Finally, Bush cannot be given a pass on the Iraq war and its economic consequences. Critics warned that the war would cause instability in Iraq and the Middle East, and that this would lead to high oil prices. Bush ignored these warnings. But the critics were right.

Today, two factors threaten America's recovery. First, high household debt means that if interest rates rise, as they do in a normal recovery, households will find themselves strapped. Moreover, real estate prices might fall dramatically, in which case many households may find the value of their mortgage exceeding the value of their house. U.S. bankruptcy rates are already up 33 percent over four years ago.

But can Bush really be blamed for Americans' borrowing too much? He can and should. Failure to design an effective fiscal stimulus shifted the burden to monetary policy. Interest rates were brought to new lows, which helped the economy, but without stimulating much investment. Monetary loosening worked only because households took on more debt, leaving the economy more vulnerable to rising interest rates.

The second threat to economic recovery is high oil prices. Bush's failed Mid-East policy is only part of the problem. He could, and should, have pushed for strong energy conservation measures; had he done so four years ago, America's consumption -- and oil prices -- would be lower today.

Japan and other developed countries prove that a high standard of living requires only a fraction of the energy per dollar of GDP. Instead, Bush pushed for subsidies to oil companies to encourage more domestic production. This "drain America first" policy will leave America more vulnerable in the future.

We know from the recent U.S. election campaign that facts do not always speak for themselves. Yet it doesn't take much to work out where America's economy is today, where it's heading, and who's to blame.

But more important than assessing blame is correcting mistakes. Unfortunately, President Bush has been as reluctant to admit the mistakes of his economic policy as he has in the case of his Iraqi misadventure. Without grasping what has gone wrong in either area, it will be difficult to avoid repeating the same mistakes.

The writer, a Nobel laureate in economics, is Professor of Economics at Columbia University. His most recent book is The Roaring Nineties: A New History of the World's Most Prosperous Decade.