THE BUSH ECONOMY

It is often cried out that the Bush administration favors the wealthy, increases inequality, or even incites class warfare, but this is rarely backed up by statistics. In an econ course I took in college on poverty, inequality and welfare, we saw tables showing that inequality increased steadily from 1968 until the late 1990s, but that this reversed around 1999 and inequality started to tick downward. Did this trend reverse in the last couple of years? I wondered. Well, finally someone presents an argument with statistics. It seems that the recession hit the rich hardest. My guess why: the high-tech and knowledge sectors suffered, while the weak dollar helped the manufacturing sector. Of course, we all hear about how the manufacturing sector is suffering, but it was suffering under Clinton, too. David Friedman wrote in August 2001 that:

Today, while experts debate whether the U.S. economy is nearing recession, the nation's manufacturers are in full-blown depression. In the last year, 837,000 production jobs were lost, and more than 1 million since 1999. Yet, beguiled by a still-expanding service sector, few economists seem deeply concerned by the nation's production tailspin.

Moreover, the rich now shoulder a larger share of the tax burden than they would have without the Bush tax cut.

Gregg Easterbrook shows that any rise in inequality in recent years owes mostly to immigration:

There is no question that statistics show a rise in inequality. The main reason: America welcomes more immigrants - legal and illegal - than all the other countries of the world combined. These newcomers typically start on the bottom rung of the economic ladder. Exclude them from the statistics, calculates Easterbrook, and the increase in inequality disappears. Indeed, for the nine out of ten Americans that are native born, inequality is declining. And here is the reason that will surprise America's critics: the decline in inequality is due in good part to the rising affluence of African Americans.

(I couldn't find the original source for this and had to lift it from a Glenn Reynolds column...)

The Heritage Foundation sums up recent economic performance this way:

In sum, economic pessimists are likely to point to the GDP growth rate of a mere 3 percent as proof that the economy can do better. John Kerry may be dead right that the economy can do better, but an honest assessment has also to admit that the economy is doing very well to start with.

I pretty much agree with this. We must always remember that these are growth rates. None of the gains from the Clinton era have been lost. On the contrary, there have been further gains. We're just not increasing our wealth as rapidly as we were in the late 1990s. (Just almost as fast.) So we complain. There's a word for that, folks. We're spoiled.

More troubling, though, is unemployment. The Bush years have seen, if anything, a retreat from the free-market model, relative to the Clinton years (and if anything Kerry or Edwards says is to be believed, their administration would represent a further retreat.) One lesson of the 1990s may be that restraining the growth of government and giving the market free rein is a pretty good way of generating economic growth, but a really good way to create jobs. Bush is pro-business rather than pro-free market. What does business want? Here's my suspicion: business wants the economy just a little below full employment, because that makes workers fear losing their jobs more, so they're more productive-- and productivity has indeed been zooming upwards. I'm not saying, let me be clear, that Bush is deliberately engineering unemployment for the sake of his business allies, but rather that the broad engagement of the administration with the interests of business may make its policies more sensitive to businessmen's emphasis on production and efficiency, and less to economists' theories of free markets and full employment.

Now here's an interesting question. Suppose the economy will grow faster in the medium run if unemployment stays at 5-6% rather than falling to 4%. But some people will have real trouble finding a job. Which is better? The argument for the latter is that full employment is in some sense part of America's social contract. If a poor person asks you why you are entitled to keep your wealth, you answer "I earned it, and you could earn it too: get a job!" But if there aren't enough jobs available, this is undermined. The specter of unemployment spurs workers to work harder and be more productive, but to make it credible we have to sacrifice a few people to unemployment.

This dilemma (if I'm right about any of this) could form a very interesting framework for two-party competition. Republicans could be the pro-business party, willing to tolerate somewhat higher unemployment; Democrats could be the Clintonomics party, embracing free markets and full employment, but sometimes walking into financial bubbles and productivity slippage. Unfortunately, the Democrats are not playing that role. Instead, they are promoting the policies that lead to stagflation.