(POST SOVIET UNION TO CLINTON and BUSH – continued)
Going into the 21st century, people with wealth were still able to make money faster than those with less. But what to do about it? Some believed in government wealth redistribution – accomplished by taxation. Some but not all conservatives were adamantly opposed to such taxes, and among those hostile to taxes were those who believed in what was called supply-side economics – a phrase coined in 1975 by a journalist who referred to the ideas of economists Robert Mundell and Arthur Laffer. With the supply-side theory was the Laffer Curve, which was supposed to demonstrate that higher taxes reduced incentive to pursue wealth. At the high end of the curve, of course, were taxes so high that entrepreneurship would be non-existent. Lower taxes according to supply-side theorists would encourage investment and the creation of jobs. It was seen as an alternative to a Keynesian approach of restoring the economy by getting more money into the hands of common people.
Some who preferred the Keynesian approach called supply-side economics "trickle down economics," meaning that wealth that went to producers of goods and services would eventually trickle down to the masses. Those who favored wealth distribution derided what they called "trickle down" economics and claimed that an economy works best when wealth distribution gives the masses more money to buy what they need and would like to have.
The Reagan administration, except for a few, had embraced what was called supply-side economics. When George W. Bush entered the White House in 2001 he too believed in supply-side economics. He adhered to the economic philosophy of the new conservative movement that any interference with the market process decreased social well-being. Bush believed in voluntary regulation, and he and his fellow conservatives believed that unregulated free markets corrected themselves. For them there was no such thing as a bubble in an economy; free markets would maintain an equilibrium hostile to bubbles.
Government spending on publicly owned projects – roads, ports, bridges – was to be kept at a minimum or left to local governments, except for military projects for the sake of national security. As president, Bush was to ask no sacrifices from the upper or middle class for the wars the U.S. was engaged in. Shopping at the mall was to reign while war was pursued.
In 2003, President Bush signed into law a tax plan designed to reduce taxes and stimulate economic growth. The act reduced the long-term individual income tax rate on capital gains to 15 percent, and it significantly reduced the amount of tax paid by investors on dividends and capital gains. A statement signed by 450 economists, including 10 Nobel Prize Laureates, opposed the bill. Two economists called the tax cuts a reverse government redistribution of wealth. The liberal economist and New York Times columnist Paul Krugman claimed that the great bulk of the tax cuts would benefit the top 2 percent of the population and a full 42 percent of the tax cuts would benefit people making more than $300,000. More than 50 million taxpayers, he claimed, would receive no tax cut at all. A supply-side economist and pundit, Larry Kudlow, credited President Bush's supply-side economics and tax cut of 2003 with having triggered an "economic boom." In 2005 he called it the "Bush boom."
The budget deficit returned. By late October, 2008, it was around 2.7 percent of GDP. Military spending was a little more than 4 percent of GDP. Interest on the national debt for 2008 was rising to more than $500 billion. Military expenditures for the year were to be a little more than $600 billion, and health and human services a little more than 700 billion. By September 2008 the national debt had risen to around 70 percent of GDP.
Rather than adhere to the idea that markets were self-correcting, one of the world's most successful financiers, George Soros, was speaking of over-investing. In his book The Crisis of Global Capitalism, published in 1998, Soros had described the view of markets adhered to by some in the United States as "market fundamentalism." Some predictions by Soros did not happen. But by October 2008 a large bubble burst. The greatest economic crisis since the Great Depression began.
The regulatory system in the U.S. was described as not having caught up with new financial structures. Washington Post columnist David Ignatius described hedge fund managers who had "fooled themselves" into believing they had engineered highly leveraged investments without risk. Ignatius wrote that their "make-believe world" had begun to crash in August 2007. He wrote that they had created paper assets out of pools of mortgages, and in a falling market nobody knew what they were worth.
A crisis of confidence and a banking crisis developed, with lenders across the globe as part of the credit crisis. President Bush joined other world leaders in trying to keep the economy working by bailing out financial institutions – lending money being a necessary grease that kept the economic machine functioning. A few conservatives in the U.S. stuck to their commitment to free market capitalism and opposed government bailouts, but their opposition was unsuccessful.
There were economists who complained that across the decades there had been too much credit buying. Fareed Zakaria wrote that "Household debt [had] ballooned from $680 billion in 1974 to $14 trillion today." He described every city, county and state wanting to preserve its proliferating operations without raising taxes, and doing so by borrowing. He described Federal Reserve chairman Alan Greenspan as having "refused to inflict pain."
The U.S. was described as entering a new era. There had been decades of trade imbalance, with China among others buying up U.S. assets and sitting on piles of U.S. currency.
Copyright © 2000-2011 by Frank E. Smitha. All rights reserved.