Slack No More

October 18, 2008

 

I used to cut George Bush some slack over his mismanagement of fiscal policy.  I figured that he was distracted by the war on terror so he entrusted the management of the budget to his party’s leaders in Congress and to his cabinet. Thus, the unprecedented increase in government spending of $1 trillion on his watch was the price of "compassionate conservatism." The Republicans then ran amok because no one was there to say “no” and piled on the entitlements. While his father squandered the Reagan legacy, this George Bush’s actions have marginalized the Republican party allowing the takeover of the Congress and the Senate by the Democrats and their most incompetent leadership ever. 

However, recent events have changed my mind. When George Bush was focused on the economy, he still did a dismal job. He hyped an absolute dog of a program full of measures that have nothing to do with the source of the problem.  Instead of insisting on a clean bill dealing with the financial crisis he instead signed a bill larded with the same type of pork typical of bills signed during his presidency. I presume you have already heard about the provision in the bailout bill to fund wooden arrows for children, or for rum producers in Puerto Rico, or for Nascar tracks, or for anti-carbon measures that could not get passed in the energy bill. And there are others as well. When I look at the takeover of Freddie Mac and Fannie Mae, the bungling of the Bear Sterns, and Lehman Brothers failures, and the massive bailout bill joke, the only conclusion is that both George Bushes are incompetent. 

As I have written in the Knoxville News-Sentinel, the $1 trillion in additional spending had to be financed. Contrary to popular opinion, the budgetary shortfall was not because of the tax cut which increased tax revenues, it was because the administration and the congress overspent. In order to finance this increase, the Fed essentially monetized the national debt by increasing its purchases of government securities issued by the Treasury through its open market operations. The end result was a driving down of interest rates which in turn led to increased demand for housing and the housing bubble. 

 Now with all the Federal bailouts and guarantees, government spending will rise at least another $1 trillion. How is this going to be paid? First the government will borrow the money from the public which will lead to higher interest rates and lower levels of consumer and business borrowing. The Fed will also again monetize the debt which will be inflationary. Talk about the law of unintended consequences! These are amazing actions from a Republican administration led by a businessman with a Harvard MBA. I guess the only upside to this mess is that both of the presidential candidates will have to put on hold their agendas, neither of which make much sense. But more on that later. But please note that Barack Obama has proposed "reforms" that move the country even closer to socialism with $1 trillion in new spending. So if you like George Bush's economic record, you are going to love Barack Obama's.