Bu-lat-lat (boo-lat-lat) verb: to search, probe, investigate, inquire; to unearth facts
Volume 2, Number 24 July 21 - 27, 2002 Quezon City, Philippines
If This is a Hangover, the Exuberance was Rational
Is it Morning in America, Again? President Bush seems to think so. But the type of morning he has in mind is, well, not exactly bright and cheery. We've been on a "binge," the president declared last week in Birmingham, and we've got a "hangover."
a difference two years make. As late as mid-2000, no less an authority than
Federal Reserve Chairman Alan Greenspan had a very different view. We were, he
wrote, living through a technological transformation that could permit full
employment, balanced growth and low inflation to continue for a long time.
has rejected Greenspan's view. For this, given the news, he can't be blamed. But
what about the image of binge and hangover? Does it succeed as diagnosis -- and
as a guide to what we should now do? Were the '90s lived in a stupor, and is
recovery merely a matter of sleeping it off? Is a drinking problem, in short, a
good metaphor for our economic problem?
do know that the tech boom was mainly bubble. Its scientific component was
vastly oversold. Huge capital sums were raised, and wasted. Meanwhile,
throughout corporate America, profits were overstated under the relentless
pressure of the markets. And billions were diverted to the pockets of corrupt
directors, officers and CEOs.
the fact that profits were lower than we thought is not all bad news. Living
standards were actually higher than many realized at the time. The '90s were a
good time for American workers, who enjoyed full employment, rising wages and
unprecedented access to credit. Poverty fell during these years, health
improved, crime declined and inequalities in pay (though not wealth) diminished.
Home ownership reached record levels. These things, unlike profits, cannot be
gains in the '90s were also real. But they owed more to full employment than to
technological change. When labor is tight, businesses find ways to save on
labor. But the benefits of these gains did not especially show up in profits, as
equity investors imagined that they would. Instead, they flowed back to
households, in lower prices and higher quality -- the fruits of competition. As
such, productivity gains contributed not so much to profits as to rising living
this was wonderful. The problem was only that this prosperity could not be
sustained. The tech bubble, which Greenspan failed to discourage in good time
(by raising margin requirements), was bound to burst. Meanwhile, broader growth
was fueled by rising corporate and household debt. From 1997 onward, for the
first time in history except for brief periods, Americans ceased to save.
Instead they financed spending out of loans -- against their homes mainly and
also against their stocks. This, too, could not go on forever, not once asset
prices ceased to rise.
tech bubble popped back in April 2000, of course. And we are only now learning
just how much damage it did. By the summer of 2001, it looked as though the boom
in household spending was ending. But Sept. 11, in tragic irony, gave America's
families a boost. Government spending soared, raising private incomes. The
earlier revisions of a Bush tax cut to include a cash rebate also helped.
Interest rates were cut. Oil prices dropped. American automakers slashed prices
(which, incredibly, they continue to do). Good weather prolonged the
construction season. And so the consumer hung on, bringing us the inventory
bounce and the false recovery -- ballyhooed by paid optimists on Wall Street --
of early 2002.
is where the hangover metaphor breaks down. Because we are "fundamentally
strong," Bush tells us, our troubles will pass. (Greenspan claims to
agree.) Recovery is underway; the hangover evident in the markets will be only
an unpleasant memory, soon enough.
in fact, we won't be all right by lunchtime. Consumer finances are getting
worse, not better, as debts rise and asset prices fall. All of the Sept. 11
stimuli have ended, and some (like the price of oil) have been reversed. (True,
there is strength in housing, which may keep things going for a while yet.)
Meanwhile states and localities are in fiscal crisis, and they will be cutting
spending and raising taxes all through the coming year.
of what sustained the U.S. economy in the late 1990s was an influx of foreign
capital after 1997. But capital that flows in can flow out -- now that a
seemingly stable place to go has appeared in pedestrian, social-democratic
Europe. The almighty dollar is, it appears, not invincible, as shown by its drop
to parity with the euro last week. The falling dollar will further undermine
financial markets, raise some import prices, and yet crush developing countries
that export to us but buy from the larger world. Long-term benefits, such as
higher exports, may not materialize unless we first get serious about rebuilding
both our industrial base and the global financial architecture on which stable
short, we face major threats: unsustainable private debts, rising oil prices, a
confidence crisis, fiscal woes at all levels of government and a falling dollar
amid weak export markets. Not a hangover, in other words, in a healthy organism
-- but an underlying disease. Call it debt dependence. Or, perhaps,
political parties are in denial. Bush's platitudes about fundamental strength
and the need for "confidence" reveal the emptiness of his recovery
program. The Democrats have not escaped from their own rhetoric of years past.
They had claimed to discover the one true elixir for perpetual health:
"fiscal responsibility," low interest rates and an indomitable belief
in technological change. It is true, this formula worked in the 1990s. But that
does not mean it will work now.
would work? Only major changes in policy. The Senate's action on corporate
scandals was a start. Here is a five-step program for what should come next.
Save the cities and the states. Last week the governors owned up to their
problem: a $50 billion shortfall this past fiscal year in the states' budgets
and no one knows how much in the year to come. Local government deficits are
probably equally big. There is no justification for allowing cutbacks in
schools, health care, roads, and mass transit and environmental safety. Congress
should ride to the rescue, with a revenue-sharing block grant to prevent such
cuts. Former ambassador to France Felix Rohatyn (the financier who helped save
New York City from bankruptcy in the '70s), California Treasurer Phil Angelides,
New York Comptroller Carl McCall and I presented such a proposal to
congressional leaders in February. It's time now to get moving.
Find new ways to help American households. Enact a prescription drug benefit.
Raise the minimum wage. A new round of tax rebates could help. So would
expanding the Earned Income Tax Credit. A temporary cut in payroll tax rates,
say for three years, would cut the cost of new employment and spur hiring. To
make sure the Social Security trust funds stay whole, corporate and estate taxes
could be credited to the funds to make up the difference.
Freeze and repeal the out-year or future tax cuts. The need is for action --
necessarily involving larger federal deficits -- in the short- and medium-term.
The U.S. government remains an excellent credit risk, and we can afford this
action. But the federal deficit should not be allowed to rise forever. Thus we
can no longer afford Bush's gifts to the wealthy in the form of lower income tax
rates, and especially the phased repeal of estate taxes -- which would
perpetuate the ill-gotten fortunes of so many corporate crooks.
Start conserving oil. This administration's determination to increase (and
control) oil supplies rather than to conserve energy is a formula for permanent
war. The only serious recourse is to invest now, at home, on transport systems,
using light rail, subways and trains, exploiting every alternative to
gas-guzzling cars and our vulnerable airlines. Investment in energy
conservation, by increasing auto fuel efficiency, for example, could not only
stimulate the economy, but reduce our trade deficit. Such would be a true
homeland security program.
Rebuild the global financial system. The age of the high dollar -- of cheap
imports and unlimited trade deficits, financed by the world's poor -- seems to
be ending. The 30-year-old system of free global capital markets has failed to
produce the development on which our export prosperity, not to mention global
peace and security, depends. A rush to the euro would be disastrous for us, yet
we cannot afford to raise interest rates to defend the dollar. And so we need a
new system of international reserve assets and stabilizing control over global
capital flow. We must shut down overseas tax havens, impose excise taxes on
foreign exchange transactions and more. We have now seen the devastating
consequences of unregulated private power in our capital markets. This should
help us understand the complaints of so many other countries in recent years.
true recovery cannot happen overnight. But it will not happen at all unless we
begin to discuss it now. We can begin by shaking off the illusion that we are
okay. The 1990s were a golden and a gilded age, but we cannot return to them --
and we should not want to. So we must also discard Bush's hangover illusion.
That metaphor implies an invitation, after all, to get ready for the next binge.
(On Sept. 1, James Galbraith will become Lloyd M. Bentsen Jr. Professor of Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.)