In the Bush economy, everything that can go wrong is going wrong
www.balochistanpost.com Thursday, February 20, 2003 By Donald Coxe, Macleans.ca
To a large number of Canadians and Europeans, George W. Bush is an imperialist bent on undermining the UN and making war. He is a moron, a menace, or both.
To a large number of Americans, he's the Yale and Harvard grad who grew up in back-country Texas, a serious guy who understands their concerns about Islamic terrorism. Their main reservation about him is his ability to manage the economy.
The Democrats devote at least 90 per cent of their criticism of W to his alleged mismanagement of the economy. They daily cite the sustained growth in jobs and budget surpluses in the good old days when good ol' boy Clinton ran things, compared with the sustained growth in unemployment and deficits now. Bring us back and the good times will return.
That Mr. Bush retains high poll standings despite a weak economy and the threat of war suggests that most Americans aren't convinced that Democrats deserve all the credit for the 1990s, or that Republicans deserve all the blame for this decade. But polls confirm that the public is more worried about the economy than about Iraq.
Bush's budget-busting stimulus package shows more signs of stimulating debate than growth. To the Democrats, his proposals prove he can't manage the economy. They are probably right: in a federalist democratic capitalist system, central governments have limited powers to "get the economy moving." What they can do is follow the medical rule: primum non nocere -- first do no harm. (The rare exception to that principle was the Canadian Liberals' implementation of the Tories' stimulus package -- free trade and the GST; although it took nearly three years to do its work, it put Canada on the road to the fastest growth in the G7. By breaking their election pledges, the Grits got the economy moving and the budget in balance.)
What confronts Bush is the serial operation of Murphy's Law: virtually everything that can go wrong is going wrong. Here is a partial list:
- 9/11.
- China has graduated from being a lesser contributor to the U.S. trade deficit to being No. 1 at taking away manufacturing jobs. China's rise has also taken jobs and economic growth from Mexico, which had been a fast-growing buyer of U.S. goods.
- A brutally cold winter has sent heating oil and natural gas consumption skyward. While demand soars, prices for gas and oil and gasoline for cars are up roughly 50 per cent from last year. The biggest culprit is Venezuela's Hugo Chavez, whose confrontational tactics to move his country closer to Castroism triggered a strike that slashed output from a country that supplied roughly 14 per cent of U.S. oil imports. The Iraq standoff is also worth a few dollars per barrel of oil. Combined effect on consumer discretionary incomes: roughly the same as a big tax increase -- a burden that is far more than the tax cuts Bush seeks.
- The drought across the Midwest and West threatens to become a national problem because of minimal snowfalls and rain in the nation's breadbasket, from the Rockies to Indiana. Grain futures prices are rising despite big global crop carryovers. Nightmare scenario: rising prices for food at a time of rising prices for fuels.
- The exactly opposite problem bedevils the Atlantic coast. Washington has received far more snow this winter than Chicago. From Maine to the Carolinas, winter storms have caused enormous damage.
- The technology and telecom crashes not only took US$7 trillion out of stock market values, they smashed the most dynamic job-creating sector of the 1990s economy. As this worst financial excess of all time continues to unravel, millions of Americans contemplate ravaged personal savings, and many -- if not most -- corporate pension plans contemplate serious deficits.
- Trial lawyers have become the biggest success story of any American occupational class now that tech entrepreneurs are struggling. They made billions of dollars out of tobacco litigation, and stand to make billions more from asbestos. Hundreds of U.S. companies have declared bankruptcy, and others are struggling to survive. Runaway malpractice litigation boosts costs of what is already -- by far -- the most expensive health-care system in the world, and a major contributor to the nation's declining competitive position. (Other nations, including Canada to an extent, pay health care through domestic consumption taxes; in the U.S., corporations pay their employees' and retirees' health-care costs by building those costs into their products and services. Result: a significant proportion of the cost of a ton of steel, a car, a machine or a plane is health care, and the manufacturers cannot take those expenses out when trying to sell abroad. Foreign competitors simply waive domestic sales or VAT taxes when exporting.)
- State and local governments were big winners from the 1990s boom because of soaring receipts from sales and income taxes. Most of them responded by raising expenditures as rapidly as incomes. The biggest tax winner was California's state government, which went on a spending spree, financed by huge tax gains from stock options -- US$85 billion in option-related tax liabilities in the year 2000 alone. State and local governments now face painful deficits, with California in its biggest crisis since the Depression. As the states slash expenditures, unemployment climbs. Many observers believe the states' problems will more than offset any stimulus Bush could deliver.
Bush is as unlucky as Clinton was lucky. Clinton cashed the peace dividends accruing from the Reagan victory in the Cold War, and was in power when the tech mania spawned the faith that the good times would last forever. Bush gets the unemployment and the bear market.
And Saddam, Osama, and North Korea.
Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca
Wednesday, February 19, 2003