During the last couple of years, I've been very impressed with the analyses of James Galbraith, economist at the University of Texas. Fortunately for us, he does not restrict his writing and research to economics. But also fortunately for us, he does bring his professional talents to bear on our current economic problems, as well.
In this post, I'm commenting on some of his ideas that I think provide a good insight into our current economic dilemmas. And for anyone who reads this, to encourage them to keep your eyes open for his work, especially his columns for Salon.com.
For this post, I'm listing the articles at the bottom and citing the quotations by number in my text.
The War Problem
Many Americans have the impression, largely based on the experience of the Second World War in the US as (mis)understood and (mis)interpreted for decades by both advocates and critics of the military-industrial complex, that military spending is automatically good for the economy. In fact, that is true only in special circumstances and in a qualified way. More specifically, in our current circumstances, Iraq War spending provided a quick fix for the US economy. And the "high" is already wearing off. Galbraith observes:
In the near term, more military spending - the Iraq war, the occupation and military restocking - and the portion of the tax cuts that did flow to the middle class are bringing what may perhaps best be described as a false dawn. Indeed in 2003 we again learned two Keynesian truths. First, that a big increase in government spending is a fast and efficient way to pump up the economic growth rate. Second, that most households are income-constrained; increasing their disposable income will increase their spending. But the future tax cuts are weighted even more heavily to the wealthy, and the pace of military spending is unstable and in any event [an] unsatisfactory way to generate an enduring economic expansion. (6) (my emphasis)
Despite the increase in military spending under Bush, both on the Iraq war and elsewhere - notably the spectacularly useless Star War boondoggle - the increase in deficit spending attendant to that is not the more serious problem Galbraith sees in the current war economy. He believes instead that the diversion of public and official attention from critical long-term and short-term problems is a more serious impact.
Not that he thinks that the Bush World Order is anything other than a dangerous undertaking, economically as otherwise. Despite the wealth of the US, we do not have "the financial or material capacity to wage continuing war around the world," despite the power fantasies of the neoconservatives. (2)
A new risk of inflation is one of the potential costs of the Iraq war. A number of factors right now are contributing to inflationary pressures in the global economy that affect the US in particular, including the declining dollar which our chronic trade deficit forces on us, oil being by no means the smallest component of that deficit.
There's also a problem that you won't hear described this way from economists at big banks or brokerage houses:
And there is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short -- due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices -- but many of them don't. Instead, they raise prices to meet their income targets and hope that the market won't collapse. Own a telephone? Cable TV? Electrical connection? Been to a doctor? Filled a prescription? Have a kid in college? Then you know what I mean. (5)
A lot of people still profess to be very relieved that we invaded Iraq to seize weapons of mass destruction that didn't exist. But reality has been crashing in pretty hard on the whole enterprise. And economic realities are affected by it, as well. Bush wants to describe his foreign policy as a War on Terrorism. But limits on war profiteering and higher taxes on the wealthy to pay for all these wars and allegedly vital programs like Star Wars (missile defense) are strictly off the table for the Bush dynasty. Of the latter program, Galbraith writes, "Missile defense is not about North Korea, and still less about Iran or any other 'rogue state'; it's about the contracts." (3)
Establishment economists largely missed the effects of acceleratinginflationary pressures. As early as the first quarter, the economic data were signalling the possibility of a new round of "stagflation" (for those who remember the term from the 1970s). Galbraith took a well-deserved shot at those timid ladies and gentlemen of his profession in June:
Why the surprise? It lies partly in the incurable optimism of members of the business press. They want growth and rising markets. They believe in the psychological power of their own voices. But they have no underlying theory beyond the idea that psychology matters and that optimism leads to growth. Doubters therefore get squelched. Our voices are dissonant, and our arguments are, well, just a bit too difficult. But when bad things happen, we are not surprised. (7)
Yes, there are real costs to empire. This description of the long-term difficulty of sustaining the imperial policies that Bush and his "Vulcans" are pursuing is worth quoting at some length:
The difficulty of empire is that it is expensive in material and moral terms. In Iraq, for a very brief period, the administration pretended that a vast country could be governed from the outside by a skeleton crew, consisting mainly of very young soldiers, trained well for combat but poorly for civil administration in an Arabic-speaking country. The provision of security, infrastructure and civil administration was not adequately prepared for. Instead, the administration has chosen to pursue a version of "shock therapy" - of conversion to unregulated private markets - that would have seemed extreme even to the market Bolsheviks of the collapsing Soviet Union in 1991.
Meanwhile the burdens of empire are growing palpably as time passes. While success
against the Iraqi resistance remains possible, it is also possible that the U. S. will be forced eventually to choose between leaving Iraq or putting in the full force required to control and to run it. One way we lose control, while the other can only add to the miseries of our balance of payments, while forcing the mobilization of hundreds of thousands of young Americans into military and occupation service and exposing them to a high level of violence. In such a contest, the local adversary has great advantages, including considerable cover among the local population and access to cheap and effective means of resistance, including explosives, mines, automatic rifles and rocket-propelled grenades.
How can the cost be met, especially, if the coin of our realm, the U. S. dollar, is at
the same time vulnerable? It may not be impossible, but it won't be easy. The problem of empires, historically, is not military defeat. It is bankruptcy: moral, political, and also economic. (6) (my emphasis)
The Consumer Problem
Galbraith has been focusing in particular on the overextension of the consumer. Ever since the recession began in 2001, consumer spending has largely driven the recovery. That spending has been based to a large degree on heavy loads of debt. As he memorably phrases it, the full employment and prosperity of the 1990s "were based on dreams, illustions and mortgages." (6) Galbraith has argued that until consumer spending retrenches and brings household debt down to a more sustainable level, strong business investment will not occur. He wrote in the fourth quarter of 2002:
[T] the recession in consumer spending cannot be put off forever. American households are still being crushed by debt. After September 11, their spending was held aloft by falling oil prices, falling interest rates, the tax rebate, rising government spending and the auto companies' willingness to unload their inventories at a loss. Interest rates remain very low, alongside a continuing bubble in the price of housing, which supports a continued flow of equity loans. But this source of consumer spending is already nearing its limits. (2)
For those who believe in the magical powers of the Fed - and the believers are legion - he has an important observation in an August column:
Have you seen what happened to mortgage rates since the Fed started raising rates? They first rose and then fell -- from 6.25 percent to as low as 5.5 percent for a 30-year fixed rate in the past few days. That means there aren't many takers anymore. The household debt engine kept the economy moving for four years after the Internet bust, but it seems it's now breaking down. It was, in fact, perfectly predictable that it would. I, for one, predicted it. We just didn't know when. (8)
At the same time, state and local governemnt spending has been in heavy retrenchment mode. in California, the miracle-promising Gov. Schwarzenegger continued the outsted Gov. Gray Davis' approach of cutting services and borrowing money to cover the annual operating deficit. Only he did it with $4 billion less in revenue due to his promised car tax cut.
He also points to the problem of corporate corruption and its effects on the financial markets. While the Sarbannes-Oxley reform legislation and high-visibility prosecution of corporate malefactors address some of those problems, he doesn't expect a thoroughgoing reform to occur while the Bush dynasty holds power. "Failure to attend to these issues is necessarily endemic in an administration build on corporate fraud and committed to war for oil." (2)
The Jobs Problem
Galbraith is clearly not too concerned about ruffling the feathers of respectable Republicans. So he doesn't mince words the way more timid and conventional economists are wont to do:
Team Bush is bent on eroding pay and working conditions, as in their recent assault on fair labor standards affecting overtime.
Possibly, this is intentional. The men in charge under George Bush talk about
growth. Certainly they appreciate the positive growth rates that war spending has brought them. But do they really want full employment prosperity, strong labor unions and rising wages? Probably not. Theoil, mining, defense, media and drug firms who form their constituency rely on monopoly power, patents, and the control of public resources for their profits. They are threatened by strong labor and do not depend, very much, on strong consumer demand. (6)
No, they won't be inviting him to speak at the Republican national convention.
He also observes that Bush is following a strategy that anti-government conservatives don't like to broadcast and election times as a rule, but which influences their support for a strategy of huge taxes cuts and staggering deficit spending that can scarcely be described as "conservative" in most people's understanding of the concept. Which is, squeeze the budget with tax cuts and that makes it easier to cut public services which directly and signficantly benefit working families but not so much the wealthiest Americans who are the heart and soul of the Republican Party's concerns.
Since conventional economists are loath to spell things out this clearly, it's good to have an economist who will:
The Bush years are a study in deliberately wasted effort: Repeal of the estate tax. Tax exemption for stock dividends. Ballistic Missile Defense. The USA PATRIOT Act. The war on Iraq. Each of these initiatives has a clientele. None of them seriously aims to achieve its stated goal, be that economic recovery or homeland security or national security writ large. ...
So it is today on the economy. What does Bush want? He wants a growth rate high enough to get him through the election. That's obvious. After that, he doesn't care. His clientele -- the military contractors, oil companies, pharmaceutical firms and big media that control this government -- make their money on patents, contracts and the exercise of monopoly power. (Case in point: Bush is pressuring impoverished Central Americans, in trade negotiations, to add 10 years to the length of drug patents.) These people have no interest in full employment. They like unemployment, weak labor, low wages and a government that bullies on their behalf. And after the election, if Bush wins, that is what they will get for four more years. (3)
In another description of the sector orientation of the current administration, Galbraith points out how narrow the focus of the Halliburton Republicans really is:
There is irony here for America's wealthy. It is true that a group of great wealth holds the levers of power in the country today. But this group, in large measure a coalition of contractors and monopolists, does not have interests in common with the full range of wealthy individuals in this wealthy land. There are many others - exporters, retailers, the residents of large cities, providers of services to the broad population and many passive investors - whose interests align with those of working Americans and who would prosper even more under an economy investing vigorously at home. They are not well served by a program of stagnation and empire, even partially compensated by tax cuts on capital income. (6)
Galbraith calculated in April that in order to reach the employment-to-population ratio of June 1999 would require 308,000 new payroll jobs per month until March 2008. (4) That's a good number to keep in mind when we see the monthly job numbers reported. The recently-released number for July was 32,000.
He took another jab at the establishment economists in August over the July jobs numbers:
Business economists reacted to the jobs report as they always do. First, they said that no one expected it. Within their community this was largely true: Apart from a handful of honorable people, no one paid by Wall Street ever expects bad news. (And evidently they don't read [Galbraith's column in] Salon.) Second, they blamed oil prices, which could be a transitory factor; then again, maybe it isn't. Finally, some said they found the slowdown reassuring. Perhaps it will lead to a more sustainable path for future economic growth. Ah, yes, that's remotely possible. On the other hand, perhaps it will lead to a full-fledged slump. The business economists do not know. (8)
The pressure of inflation will also provide an excuse for Republicans to pursue policies to increase pressure on jobs and wages even more. Even though a labor shortage can hardly be said to be causing those pressures at this time: "The inflation the United States is experiencing ... [is] a product of the war, oilprice uncertainty and monopolistic manipulations in sectors like healthcare." (7)
The Oil Problem
The longer-term problem Galbraith sees with the Bush dynasty's military crusading is that it diverts attention from the critical longer-term problem of oil. As Keynes famously observed, in the long run we are all dead. But for those who are around for the next few years, it will be hard to escape some of the effects of our current energy situation.
He describes some of the truly grim implications of a unilateralist American policy "under conditions of permanent war":
It is a straightforward fact that if global oil production starts to decline but U.S. consumption does not, everyone else will be required to cut purchases and uses of oil. But how can oil prices be held stable for Americans yet be made to rise for everyone else? Only by a policy of continuing depreciation in everyone else's currency. Such a policy of dollar hegemony amid worldwide financial instability, of crushing debt burdens and deflation throughout the developing world, is perverse. It will make our trading partners' exports cheap, render their imports dear and keep their real wages low. It will price American goods out of world markets and lead to unsustainable dependence on foreign capital. It will be a policy, in short, of beggar-all-of-our-neighbors while we live alone, in increasing idleness and inside the dollar bubble. (2)
In 2002, he pointed out something that probably does have bearing on the current oil price pressures:
Nor is Bush's strategy necessarily irrational insofar as it affects oil -- in the short run. With a new Iraqi government, the United States will gain a client state that is prepared to help keep the oil price within the band that both U.S. consumers and the remaining U.S. oil producers can tolerate -- low enough so as not to fatally drain purchasing power from the former, high enough so as not immediately to ruin the latter. Given the George W. Bush-Dick Cheney commitment to unlimited oil consumption, this will prove useful in putting off a day of reckoning. As total world oil production declines -- credible scientific evidence suggests that this may start happening quite soon -- the Middle East's share of the remaining reserves will rise. So, too, would the potential for cartel control and price manipulation. A robust U.S. military presence in the oil fields, directly or by proxy, will naturally make higher oil prices less of a danger. This is part of the appeal of war with Iraq. (2)
Whether or not oil was the dominant motive for the Iraq War - and I'm personally still agnostic on that issue - we know from the administration's public statements that they expected Iraqi oil production to recover far quicker than it has. Bob Woodward's Plan of Attack tells of a Saudi suggestion that they would try to boost production in time to get oil prices down for Bush's re-election campaign. But a prolonged period of depressed output in Iraq and serious problems with sabotage were simply not contemplated in Bush and Cheney's grand Mesopotamian adventure.
Galbraith wrote in April:
[O]il and gas prices -- a fundamental price in oureconomy -- are already high and still likely to rise. With gasoline averaging $1.80 around the country and hitting $2.49 at the hottest spots, transportation costs for all commodities are rising too. With oil at $37 per barrel -- up $10 in the past six months -- fertilizer and therefore food costs will be affected in the months ahead. (5)
Without a more concerted American policy to conserve energy and develop safe and sustainable alternative resources, at some point the US will face a catastrophic combination of international hostility and investor flight from the dollar. We'll all know when that arrives.
But the country's current international isolation over Iraq and other issues, combined with the momentary spike in the price of oil, provides us a glimpse into the future. Like Calchas the bird-interpreter in the first book of the Iliad, we have a glimpse right now of the things that are to be if we continue on this course.
The Future
As a final note, Galbraith's analysis of the current economic situation and what should be done to cure it is no partisan polemic for John Kerry's cautious proposals. Kerry essentially hopes to repeat the Clinton strategy and pay down the huge Bush deficit so another Republican president can come along in four years or eight and wipe out all the progress made on deficit-reduction by more huge tax subsidies for the wealthy. If Galbraith's view of the economy is accurate, a President Kerry will haveto be willing to adjust his strategies to unpleasant realities in the economy, as he will also have to do in Iraq.
1. The War Economy Levy Economics Institute 2001
2. The Unbearable Costs of Empire American Prospect 11/18/02 issue
3. The no jobs president Salon.com 01/19/04
4. The Bush jobs chasm Salon.com 04/06/04
5. How you will pay for the war Salon.com 04/20/04
6. The American Economic Problem Reprinted from Intervention (Germany) Vol. 1, No. 1 (2004) (*.pdf version available; scroll down to middle of page)
7. Squeezing workers Salon.com 06/28/04
8. Our sinking ship Salon.com 08/10/04
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