Default avatar user thumb

Kevin Wei

United States

I'm a reviewer at FantasyLiterature.com and love economics, history, and politics.

Message to Readers

This is a very rough draft of a paper I'm hoping to get published (in a small journal). The topic is very broad, so that might call for some significant reworkings. Mostly looking for literary edits (not copyedits). Any help appreciated :)

Lessons From The Past: Economic Policy Failure in the U.S.

June 18, 2015

FREE WRITING

0

It was the Roaring 20s all over again in the United States,[1]  and the old “American Dream,”—the large house, the picket fence, the annual vacation—was dead. Out of its ashes, there rose a new dream, one bathed in the reincarnated, luxurious splendor of the 90s. No longer were citizens comparing themselves to the Joneses next door; instead, they were comparing themselves to those making six digit incomes, and by 1991, almost all Americans were aspiring to become part of the top two percent.[2] Society was feeling the benefits of a skyrocketing stock market, booming business earnings, and low interest rates, while technology was advancing at an exponential rate—search engines such as Google were founded, Dolly was cloned, Amazon.com was launched.[3] As a result, consumers began consistently upgrading their gadgets and appliances, always buying newer, better, costlier products.[4] Computers, microwaves, cable television, and air conditioning all became “needs” instead of “wants.” As bigger and bigger houses were bought, with hundreds of thousands being spent on pools, garages, and media rooms, marble countertops, cabanas, and mahogany floors, the luxury home market shot up, up, and up, and the rich splurged on ultra-luxury goods: Rolexes, Montblancs, art collections. Consumer spending increased by as much as seventy percent,[5] significantly boosting the American economy.

Yet today, a mere fifteen years since the end of the 90s era, the American economy is in a miserable condition. With the burst of the dot-com bubble resulting in massive losses for investors, the arrival of the twenty-first century signaled the beginning of America’s current economic troubles. Just as it had at the end of the Roaring 20s, the economy abruptly ground to a halt. In 2001, the World Economic Forum ranked America second internationally both in its potential for growth and in its economic competitiveness and pro-business atmosphere;[6] thirteen years later, the United States holds the decidedly lower ranks of fifth.[7] During the Clinton era, the government was set to pay off the entirety of its debt by 2011 with $2.3 trillion to spare;[8] as of November 2014, total federal debt was at $17.83 trillion.[9] While the roots of this change in fortunes may not appear evident at first glance, a closer examination of empirical evidence reveals the culprits behind America’s economic deterioration—unwise policy decisions and failed government actions. Since the Bush Administration in 2001, the decline of the U.S. economy has been due to a combination of extravagant tax and defense expenditures that caused an explosion in federal debt and produced a stifling business environment.

Prior to the Bush administration and the economic crunch of the 2000s, the United States had been the undisputed economic hegemon since the end of World War II.[10] Underwriting the Bretton Woods system that created the International Monetary Fund (IMF) and the General Agreements on Tariffs and Trade, America had become the world’s foremost creditor nation. When after 1959 members of the IMF began accumulating enormous dollar reserves, the United States Dollar emerged as the universally dominant currency and became an integral part of the international economic system. Buoyed by large exports, inexpensive imports, and extensive foreign investment, the U.S. economy grew at a rapid rate, weathering the financial crises in East Asia, Japan, South America, and Europe up until the turn of the century—when the federal deficit exploded.

Paradoxically, one of the largest contributors to the deficit thus far was a single fiscal policy instituted out of fear that the deficit would vanish and large federal spending programs would be initiated: the Bush-era tax cuts.[11] During his terms in office, Bush did not enact a single tax increase and introduced the most tax cuts of any administration,[12] promising that the cuts would not damage the federal budget, but would create new jobs, “generate new wealth, and…open new opportunities.”[13] In the end, Bush’s supply-side economics proved to be a spectacular disaster on all counts—the economy managed to post a net loss in jobs during the first three years following the institution of the policy, while business investment and income growth decreased to levels far below the average post-World War levels.[14] Moreover, from the year they were enacted in 2001 to the year 2010, the Bush tax cuts curtailed government tax revenues by $2.11 trillion.[15] Because the reductions were financed through deficit spending, the federal government was then forced to pay $379 billion of interest to fund the cuts. The end result of Bush’s policies was a complete budgetary fiasco; his cuts directly cost America many times more than contemporary healthcare policies.[16] As de Rugy of George Mason University wrote in 2009, “it was hard to see how a Democratic administration could be worse than the Bush administration’s eight years—until Barack Obama became the 44th President of the United States.”[17]

Much to America’s consternation, Obama in his first term succeeded in accumulating more debt through tax expenditures than Bush did in his.[18] Although he is known more for supposedly raising taxes, in reality, Obama quietly established a deluge of slow, temporary tax cuts. In 2009, he signed the American Recovery and Reinvestment Act (ARRA), a bill meant to provide stimulus to an economy devastated by the Great Recession but that contained an astounding assortment of tax credits. Not only was the Making Work Pay credit introduced, but the child, earned income, American opportunity, and first-time homebuyer credits were augmented; the ARRA also lowered both the Alternative Minimum Tax and some business taxes. Roughly twelve months later, the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In addition to cutting estate taxes, the Act included a two year extension for the pernicious Bush tax cuts and lowered both business taxes and the Alternative Minimum Tax—again. As Obama boasted in his 2010 State of the Union address, taxes were reduced for 95% of American workers.[19] In fact, they were reduced so much that in 2011, the government paid some households more in transfer payments than it collected from them in taxes.[20] In Barack Obama’s first term as President, the American government lost over $900 billion as a direct result of his tax expenditures,[21] putting the total revenues lost to egregious tax policies from 2001 to 2012 at roughly $3.4 trillion. Because these costs were then absorbed into the federal debt, a business environment was birthed that is even now reducing productivity, diminishing employment, and, ironically, putting pressure on the government to either elevate taxes or stop spending.

Despite the soaring price tag of the tax cuts, the astronomical defense budget, more specifically the expenses incurred in the Iraq and Afghan Wars, proved far more deleterious to the American economy. When the Bush administration intervened in the Middle East, it claimed that the wars would cost somewhere roughly $50 billion.[22] To the administration’s dismay, the economic ramifications turn out to have been grossly underestimated, and the wars in the Middle East raged on to become some of the most expensive conflicts in American history.

The economic expenses of the wars are twofold; firstly, the ongoing direct costs of the wars are immense as a result of numerous factors. Half of all veterans from the Middle East applied for permanent disability benefits and more than 56% are receiving government medical care; these rates are “much higher than in previous wars.”[23]  Many have received disability compensation, and nearly a third have mental conditions such as PTSD, resulting in countless federal dollars being poured into funding mental health clinics, hiring medical personnel, etc. In addition, the federal government also chose to increase compensations and benefits for both veterans and Pentagon personnel—for example, TRICARE, a health care program for Uniformed Service members, was expanded to allow all veterans to receive five years of free, federal health care; the expenses of these benefits continue to haunt America in the status quo.

Furthermore, the Middle East Wars were subject to a variety of gargantuan cost overruns and wasteful spending.[24] The military seized upon the wars as an opportunity to inappropriately allocate capital to purchase and perform maintenance on military equipment,[25] and when the United States withdrew from Afghanistan, it discovered that it had vastly over-purchased and instead of transporting the gear elsewhere for continued usage, it simply destroyed $7 billion worth of equipment.[26]

As a result of these combined costs and the decision to fund the wars with deficit spending, the Iraq and Afghanistan Wars added $2 trillion to the national debt, around two fifths of the total from 2001-2012; factoring in the ongoing overheads of veteran benefits, etc., an astonishing $4-6 trillion will have been spent in total by the U.S. when it finishes paying for the wars.[27] $6 trillion, though, does in no way complete the tally. Although government expenditures on the wars already appear to be ski-high, there is yet another set of repercussions from the wars: the indirect and unquantifiable ones.

                America plunged headlong into the Iraq War with hopes of obtaining large quantities of cheap oil, but those dreams were quickly crushed when crude prices spiked from $25/barrel at the onset of the hostilities to upwards of $130/barrel in mid-2008.[28] Though the entirety of this increase cannot be attributed to Iraq, the Iraq War was responsible for roughly 63% of it.[29] On a macroeconomic level, the rise in oil prices has been utterly devastating. Because the price spike increased the cost of oil imports, consumers were forced to spend more on oil and less on American goods, decreasing demand for and production of American products. Higher oil prices also had an impact on foreign economies, lowering incomes for consumers in Europe and Japan, America’s major trading partners. Those countries then imported fewer American goods, further weakening America’s struggling economy and widening the U.S. trade deficit. Together, the indirect costs alone to America were $3.42 trillion in GDP,[30] close to what the Bush and Obama tax cuts added to the federal debt.

                It is thinkable, however, that the economic damage to America would have been severe but livable, if the consequences of the struggles in the Middle East were limited to a rapid escalation in debt and a sharp decline in GDP. The problem, though, is that contrary to popular belief, the Great Recession of 2008 was a direct result of the oil price spike.[31] In a retroactive forecast by UC San Diego economist James Hamilton, it was discovered that although high oil prices were not the sole cause of the recession, they worsened the economic decline triggered by the housing crisis and thus amplified temporary weakness to full-out recession. Because high oil prices contributed to low income and high unemployment rates, which then diminished the demand for housing, the economy was pushed “beyond a threshold at which the overall solvency of the financial system itself came to be questioned, and the modest recession of 2007:Q4-2008:Q3 turned into a ferocious downturn in 2008:Q4.”[32] Though the conclusion seems counterintuitive, Hamilton’s results have been independently validated in other statistical studies, such as those by Professor Melike Bildirici.[33] Nobel-winning economist Joseph Stiglitz further postulates a direct link between wartime spending and the recession because the wars were an ineffective economic stimulus, necessitated ejecting funds out of the domestic economy, and required, in order to sustain further military expenditures, loose monetary policy that sparked the low interest rates that birthed the housing bubble.[34] Add to that the extraordinary deficits acquired through wartime and tax spending and the stark reality was a government that could no longer afford to provide sufficient stimulus into the American economy, constraining the efficacy of the government response to the crisis.[35] Ergo, if a majority of the harms caused by the 2008 debacle—unemployment, deficits, and global economic depression to name a few—are attributed to the wars in the Middle East, then it becomes patently clear that the fault for the current appalling state of America’s economy may be laid at the feet of the tax and foreign policies pursued by Bush and Obama in this millennia.

Much to the distress of policymakers and politicians in Washington, the fundamental problems in America’s economy show no signs of repairing themselves. The problem with the status quo is that members of the American government do not seem to have recognized the dangers presented by the policies that have so damaged the economy in the past. While the Heartland Institute, Forbes, the Wall Street Journal, and the Heritage Foundation loudly proclaim that the corporate tax should either be reduced or eliminated,[36] the Senate Foreign Relations committee authorizes a military campaign against the Islamic State in Iraq and Syria.[37] Both the media and the policymakers are blatantly ignoring the inconvenient empirics that spell doom for their enterprises. Despite the counterexample of the Bush tax cuts and the most recent Brookings study demonstrating that the costs of eliminating the corporate tax outweigh the benefits,[38] the legislature has debated and will continue to contemplate further tax cuts, and although past U.S. entanglements in the middle east proved to be utter disasters, it is nevertheless decided that military action will be taken once again. The status quo represents a dangerous disconnect between the historical and the present because the government appears to be caught in the same abortive chains of logic that spurred it to enact the first tax cuts and Middle East wars; the federal government has failed to recognize that it is its own faulty governance that has placed the U.S. in such a disadvantaged economic position. Without reconciling itself with its past, without identifying faults in the policymaking process, without learning lessons from past policy catastrophes, America and its government are doomed to reiterate its short, calamitous history of the second millennia, trapped within a web of unending error replication. If the U.S. federal government decides to pursue its current ruinous policies, then the question becomes not whether history will repeat itself, but how much more can the American economy withstand?

 

 

[1] For more, see Robert J. Gordon, "The 1920s and 1990s in Mutual Reflection," in Understanding the 1990s: The Long Term Perspective (n.p.: Duke University, 2005), 1, accessed April 7, 2014, http://faculty-web.at.northwestern.edu/economics/gordon../P367_PDF.pdf.

[2] Juliet B. Schor, The Overspent American: Upscaling, Downshifting, and the New Consumer (New York: Basic Books, 1998), 1-24.

[3] Colin Harrison, American Culture in the 1990s (Edinburgh: Edinburgh University Press, 2010), 171-172, accessed April 7, 2014, Questia Online Library.

[4] Elizabeth Levitan Spaid to The Christian Science Monitor newsgroup, "American Dream of the 90s: Palatial Is Appropriate," April 17, 1997, accessed April 7, 2014, http://www.csmonitor.com/1997/0417/041797.us.us.3.html.

[5]  Schor, The Overspent American: Upscaling, 1-24.

[6]Klaus Schwab, Michael E. Porter, and Jeffery D. Sachs, eds., The Global Competitiveness Report 2001-2002, 7-25, 2001, accessed April 7, 2014, http://www.nectec.or.th/pld/indicators/documents/WEF-%20Global%20Competitiveness%20Report%202001.pdf.

[7] Klaus Schwab and Xavier Sala-i-Martin, eds., The Global Competitiveness Report 2013-2014, 382-383, 2013, accessed April 7, 2014, http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf.

[8] "U. S. National Debt," infographic, The White House, July 26, 2011, accessed April 7, 2014, http://www.whitehouse.gov/infographics/us-national-debt.

[9] Bureau of the Fiscal Service, Debt Position and Activity Report, Doc. (). Accessed December 13, 2014. https://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_0914.pdf.

[10] Price Fishback et al., Government and the American Economy: A New History (n.p.: University of Chicago Press, 2007), 510, accessed April 7, 2014, Questia Online Library.

[11] Glenn Kessler, "History Lesson: Why the Bush Tax Cuts Were Enacted," The Washington Times, December 19, 2012, accessed April 7, 2014, http://www.washingtonpost.com/blogs/fact-checker/post/history-lesson-why-the-bush-tax-cuts-were-enacted/2012/12/19/55a93ac6-4a1d-11e2-ad54-580638ede391_blog.html.

[12] Bruce Bartlett, The Benefit and the Burden: Tax Reform--Why We Need It and What It Will Take (New York: Simon & Schuster, 2012), 215.

[13] George W. Bush, "Remarks to the United States Chamber of Commerce," speech presented at U. S. Chamber of Commerce, April 16, 2001, The American Presidency Project, accessed April 7, 2014, http://www.presidency.ucsb.edu/ws/index.php?pid=45653.

[14] Pat Garofalo to Think Progress newsgroup, "Ten Years of the Bush Tax Cuts," June 6, 2011, accessed April 7, 2014, http://thinkprogress.org/progress-report/ten-years-of-the-bush-tax-cuts/.

[15] Citizens For Tax Justice, The Bush Tax Cuts Cost Two and a Half Times as Much as the House Democrats' Health Care Proposal, 1-5, September 8, 2009, accessed April 7, 2014, http://www.ctj.org/pdf/bushtaxcutsvshealthcare.pdf.

[16] Ibid.

[17] Veronique de Rugy, "Spending under President George W. Bush" (working paper, George Mason University, March 2009), 11, accessed April 7, 2014, http://mercatus.org/sites/default/files/WP0904_GAP_Spending-Under-President-George-W-Bush_v2.pdf.

[18] Michael Linden and Michael Ettlinger, "Obama Vs. Bush: Who’s the Bigger Tax Cutter? Different Cuts Reflect Different Philosophies," Center for American Progress, last modified September 13, 2011, accessed April 7, 2014, http://www.americanprogress.org/issues/tax-reform/news/2011/09/13/10287/obama-vs-bush-whos-the-bigger-tax-cutter/.

[19] Obama, Barack. Remarks by the President in the State of the Union Address. (Speech, Washington, DC, January 27, 2010) White House Office of the Press Secretary. http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address

[20] Amey Stone to MSN Money newsgroup, "U.S. Households Getting More from Uncle Sam than They Pay In," April 20, 2011, accessed April 7, 2014, http://money.msn.com/tax-tips/post.aspx?post=63c403d6-0a2f-4506-a8b8-25124d49889b.

[21] Linden and Ettlinger, "Obama Vs. Bush: Who’s," Center for American Progress.

[22] Seth Cline to U.S. News newsgroup, "The Underestimated Costs, and Price Tag, of the Iraq War," March 20, 2013, accessed April 7, 2014, http://www.usnews.com/news/blogs/press-past/2013/03/20/the-underestimated-costs-and-price-tag-of-the-iraq-war.

[23] Linda J. Bilmes, "The Financial Legacy of Iraq and Afghanistan: How Wartime Spending Decisions Will Constrain Future National Security Budgets" (working paper, Harvard University, 2013), 4, accessed April 7, 2014, http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/mrcbg/publications/fwp/MRCBG_fwp_2013-01_Bilmes_financial_legacy.pdf.

[23]  Bilmes, "The Financial Legacy of Iraq," 20-21.

[24] For more, see James Warren to The Swamp newsgroup, "Sen. McCain Reminds Us Of a True Outrage: Astronomical Military Cost Overruns," November 7, 2013, accessed April 7, 2014, http://www.nydailynews.com/blogs/theswamp/2013/11/sen-mccain-reminds-us-of-a-true-outrage-astronomical-military-cost-overruns, and Gregory Sanders et al., Cost and Time Overruns for Major Defense Acquisition Programs (2011), May 17, 2011, accessed April 7, 2014, https://csis.org/files/publication/110517_DIIG_MDAP_overruns.pdf.

[25] Bilmes, "The Financial Legacy of Iraq," 20-21.

[26] Tom A. Coburn, Wastebook 2013, publication no. 4, Wastebook, 14, December 2013, accessed April 7, 2014, http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&File_id=d204730e-4a24-4711-b1db-99bb6c29d4b6.

[27] Bilmes, "The Financial Legacy of Iraq," 20-21.

[28] Mamdouh G. Salameh, "The Oil “Price Rise” Factor in the Iraq War: A Macroeconomic Assessment" (working paper, June 2008), 4-6, accessed April 7, 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1140333.

[29] Ibid.

[30] Ibid.

[31] Hamilton, James. "Causes and Consequences of the Oil Shock of 2007-08." Working paper, Department of Economics, University of California at San Diego, 2009. http://econweb.ucsd.edu/~jhamilton/Hamilton_oil_shock_08.pdf.

[32] Hamilton, “Causes and Consequences of the Oil Shock of 2007-08.”. 40.

[33] For more, see Bildirici, Melike, Elcin Alp, and Tahsin Bakirtas. "The Great Recession and the Effects of Oil Price Shocks and the U.S. Recession: A Markov-Switching and Tar-Vec Analysis." Journal of Energy and Development. no. 2 (2011). http://www.researchgate.net/publication/216239454_THE_GREAT_RECESSION_AND_THE_EFFECTS_OF_OIL_PRICE_SHOCKS_AND_THE_U.S._RECESSION_A_MARKOV-SWITCHING_AND_TAR-VEC_ANALYSIS (accessed December 16, 2014). And Bildirici, Melike, and Fazil Kayici. "Global Imbalances in Current Account Balances." Journal of Applied Finance & Banking. no. 6 (2012): 83-93. http://www.scienpress.com/Upload/JAFB/Vol 2_6_7.pdf (accessed December 16, 2014).

[34] Joseph E. Stiglitz and Linda J. Blimes to The Washington Post newsgroup, "The True Cost of the Iraq War: $3 Trillion and Beyond," September 5, 2010. Accessed April 7, 2014. http://www.washingtonpost.com/wp-dyn/content/article/2010/09/03/AR2010090302200.html.

[35] Ibid.

[36] For more, see the following: Hanlon, Michelle. The Wall Street Journal, "The Lose-Lose Tax Policy Driving Away U.S. Business." Last modified June 11, 2014. Accessed December 16, 2014. The Lose-Lose Tax Policy Driving Away U.S. Business. Glans, Matthew. The Heartland Institute, "Research & Commentary: Illinois Corporate Income Tax Reform." Last modified February 13, 2014. Accessed December 16, 2014. http://heartland.org/policy-documents/research-commentary-illinois-corporate-income-tax-reform. Collender, Stan. Forbes, "How To Abolish The Federal Corporate Income Tax Without Increasing The Deficit." Last modified August 27, 2014. Accessed December 16, 2014. http://www.forbes.com/sites/stancollender/2014/08/27/how-to-abolish-the-federal-corporate-income-tax-without-increasing-the-deficit/. Golub, Harvey. A Populist Argument For Eliminating The Corporate Tax, "Forbes." Last modified May 22, 2013. Accessed December 16, 2014. http://www.forbes.com/sites/realspin/2013/05/22/a-populist-argument-for-eliminating-the-corporate-tax/. Ligon, John, Rachel Greszler, and Patrick Tyrrell. The Heritage Foundation, "The Economic and Fiscal Effects of Eliminating the Federal Death Tax." Last modified September 23, 2014. Accessed December 16, 2014. http://www.heritage.org/research/reports/2014/09/the-economic-and-fiscal-effects-of-eliminating-the-federal-death-tax

[37] Peters, Jeremy. New York Times, "Senate Panel Approves Limited Fight Against ISIS, Reopening War Powers Debate." Last modified December 11, 2014. Accessed December 16, 2014. http://www.nytimes.com/2014/12/12/us/politics/senate-panel-approves-limited-fight-against-isis-reopening-war-powers-debate.html.

[38] For more, see Gale, William, and Andrew Samwick. Effects of Income Tax Changes on Economic Growth. Manuscript, The Brookings Institution, 2014. http://www.brookings.edu/~/media/research/files/papers/2014/09/09 effects income tax changes economic growth gale samwick/09_effects_income_tax_changes_economic_growth_gale_samwick.pdf.

Print

See History
1

Login or Signup to provide a comment.