The economic legacy of George W. Bush can only be measured in trillions of dollars—in fact many trillions. And it’s all waste and loss.
First Legacy: The Mountain of Debt
During Bush’s two terms in office more than $3 trillion has been poured down the black hole of wars in Iraq and the Middle East. More than $5 trillion has been served up in tax cuts for corporations and the wealthiest 10 percent households in the U.S.
According to U.S. Federal Reserve Bank data, since Bush assumed office in January 2001 government debt levels have risen by more than $3 trillion—the total as of the end of March 2008. It does not yet include the cost of bank bailouts this past September: $300 billion for Fannie Mae/Freddie Mac, $85 billion for the insurance company giant AIG, and the infamous $700 billion TARP (Troubled Asset Relief Program) bailout at the close of September amounting to another minimum $1.085 trillion.
The above $1.085 trillion also doesn’t include pending bailouts by the U.S. government’s Federal Deposit Insurance Corporation (FDIC), the agency that is tasked with closing down failed banks and reimbursing depositors—banks like IndyMac and others. As of the end of September, the FDIC had only $35 billion in available funds remaining for additional bailouts. It is potentially liable for 8,600 banks in the U.S. with deposits and assets totaling $13.3 trillion. It expects 800-1,000 regional and smaller banks to fail in coming months. Its bailout this past summer of IndyMac Bank cost $8 billion alone. After the November elections, it will have to ask Congress for hundreds of billions, perhaps even a trillion or more additional funding to cover bank failures yet to come. And that’s only banks. What happens when large hedge funds or a pension fund goes under? Will the government bail them out as well? It seems anyone with a corporate balance sheet is now eligible for a government-taxpayer income transfer.
For example, non-financial corporations have already queued up at the bailout trough. Congress handed the three big U.S. auto companies $25 billion in a separate bill that slipped by the public and press, amidst cacophonous wailings for bailout assistance by banks and financial institutions. Even foreign automakers doing business in the U.S. are demanding a piece of that pork as well. And it’s only the beginning. Corporate defaults are expected to rise tenfold in the next 18 months, according to Standard & Poor’s, the corporate rating agency.
But there’s trillions more in the Bush debt legacy picture. Between 2002 and 2007 the subprime mortgage loan crisis was created by the Bush administration. Total mortgage debt in the U.S. more than doubled, rising from $5 trillion in 2001 to more than $11 trillion in 2007. The poor quality subprime and other risky mortgage loans amounted to approximately $2 trillion of that $6 trillion increase.
The Bush administration was forewarned time and again from 2003 on, by regulators and elected officials alike, at both federal and state levels, that the subprime situation was a time bomb. Bush actively discouraged federal intervention and Bush administration officials at the Securities & Exchange Commission (SEC) were instructed to look the other way while banks set up shadow banks operated off their regulated books. The shadow banks, called Structured Investment Vehicles (SIVs), served as the trash receptacles in which various securitized bad subprime mortgage bonds were stuffed. Cooking separate books like this, off balance-sheet, as it is called, was precisely why CEOs and CFOs at Enron went to jail a few years earlier. But similar behavior was apparently not a problem for the Bush administration. When certain investigators and prosecutors got too close, such as ex-New York Attorney General and Governor Eliot Spitzer, the FBI found a way to remove them from the scene.
Bush directly contributed to the subprime bust and financial crisis in yet another way. This required the active assistance of Federal Reserve (Fed) chair, Alan Greenspan. Bush-Greenspan struck a partnership that led directly to the subprime bust. Here’s how it happened: Greenspan and the Fed accommodated Bush by lowering interest rates to 1 percent and then keeping them there far longer than was economically justified. The Bush-Greenspan strategy paid off for both partners. Super low interest rates produced a housing and commercial property driven economic boom from 2003 to 2006. Bush rewarded Greenspan with reappointment as Fed chair in spring 2004 and Bush got his economic over-stimulus in time for the November 2004 elections. Financial speculators, banks, and the mortgage industry were able, as a result of Greenspan policies, to borrow virtually free money from the Fed, which they then leveraged to purchase ten times more volume of subprime mortgage bonds, raking in super profits. Some of the more aggressive investment banks, like Bear Stearns and Lehman Brothers, leveraged themselves 30 times or more. Greenspan’s 1 percent interest rate policy helped fuel the speculative excesses in the mortgage industry that created the subprime boom of 2003-06. When the Fed finally began to raise rates again, this provoked the subprime bust of 2006-07. The end result of it all was a record housing price spike, followed in turn by the consequent subprime mortgage price collapse.
In the process of borrowing for leveraging and housing speculation, banks and financial institutions added roughly $8 trillion in new debt during the first 7 years of Bush’s term—$6 trillion of that during the subprime speculative boom period of 2003-07.
But there’s still another trillion to account for. That’s the amount of new credit card debt that American middle and working class consumers also took on beginning in 2001. It is a lie and misrepresentation that consumers have been increasing their credit card debt in order to engage in spending on luxury and unnecessary items. Most credit card debt is used to pay for big ticket necessities, like college education for children, payment for medical bills their employer insurance plans no longer cover, for medical services by those no longer able to afford insurance at all, for basic transportation needs, for general cost of living by retirees no longer able to survive on social security, and so on. The credit card has replaced the annual wage increase that many employers no longer give. It has substituted for wage increases that unions used to negotiate, but no longer can. Credit cards are relied on by the more than 40 million workers who used to have full time permanent jobs, but who now have to make due with lower paid part time or temporary work; and by the more than 8 million workers whose once decent paying manufacturing jobs have gone offshore and who have had to accept lower paid service jobs.
To the $3 trillion in government debt was thus added $6 trillion in household mortgage debt, $8 trillion in banking debt, another $1 trillion in new consumer credit card debt, and $3.5 trillion in additional non-financial business debt. That’s a total of more than $21 trillion in accumulated debt of various kinds over the course of Bush’s terms in office—or a stack of $500 bills 3,297 miles high, extending roughly the distance from New York City to London.
Second Legacy: System Collapse
The unwinding of the $21 trillion in net debt accumulated during the Bush administration is the root cause of the current financial crisis.
The write-downs and write-offs by banks and other financial institutions, the bankruptcies by companies and consumers, the losses of home values, the foreclosures, etc.—all represent the "unwinding" of that record level of $21 trillion new debt. The September bank bailouts represent an effort by finance capital and America’s corporate elite to shift a major portion of this debt from their corporate balance sheets to the public balance sheet and taxpayer.
The bank bailouts will not stop the debt unwinding as they do not address the fundamental causes of the housing and commercial property price collapse underway since the beginning of the year and now accelerating. The only thing settled by the bailouts—TARP, Fannie Mae, AIG, and others—is who will pay for the crisis, not how to end the crisis.
Since December 2007 the Fed has committed nearly a trillion dollars in special and emergency loans—to no avail. Time and again the Fed has upped the ante and the crisis has deteriorated further. It is amazing that the current chair of the Fed, Ben Bernanke, has not learned that throwing liquidity at the problem, i.e. a money supply solution, is not working after a year of repeated attempts. The problem is not the balance sheets of banks and financial institutions; the problem is the balance sheets and insufficient incomes of workers, consumers, and homeowners—i.e. a demand side problem. The financial crisis is not a liquidity crisis. It is a solvency crisis. It is a general systemic crisis and a deepening crisis of confidence in the financial system itself.
What Bush has left the nation is a classic debt-deflation crisis that has resulted in a near freeze up of the entire financial system. The last time this occurred was 1929-34 and before that in the 1870s and the 1890s.
Third Legacy: Epic Recession
The direct consequence of financial crisis and implosion is a general credit crunch—a system-wide sharp contraction of credit. A credit contraction has been progressively growing in the economy since last January. A credit contraction occurs when banks and financial institutions have, or expect to have, significant losses due to bad loans and investments and are increasingly reluctant to loan out reserves they may have on hand. They may need the cash on hand and reserves to cover anticipated losses and prevent becoming technically bankrupt if their losses exceed their reserves. Over the past year financial institutions have tightened their lending terms. But even the slow down in lending hit a wall and entered a new, more intense and serious stage with the financial events of September.
From housing and commercial property markets to industrial loans to municipal and corporate bonds to commercial paper and even markets in which banks loan to each other, all began to shut down in September. There is no inter-bank lending market at present in the U.S. or even globally for that matter. They have shut down. The Fed and other central banks have become, in effect, the only banks willing to lend to other banks. Even money markets are contracting. Money market funds, mutual funds, pension funds, and hedge funds are all in the process of contracting and reducing lending.
The credit crunch is the transmission mechanism by which the current financial crisis translates into a recession. It is the linking event. Financial crisis and recession are two sides of the same coin, driven by the same set of fundamental causes. What Bush has bequeathed the country is an economic crisis of historic proportions—in terms of debt, systemic financial collapse, and epic recession. In so doing, Bush has turned the clock back on the U.S. economy more than a century.
Fourth Legacy: Record Budget Deficits
With bailouts, with expected losses in tax revenues in 2009 due to the now deepening recession, and with the certain need for further fiscal stimulus by the federal government to save state and local governments from bankruptcy and provide unemployment insurance for the millions more jobless to come, the next U.S. budget deficit will easily double from its current projected level of around $500 billion. (Yes, that’s another $1 trillion.) A mind-boggling trillion dollar budget deficit will all but ensure that whoever wins the November 2008 election, few if any of their campaign promises or programs will see implementation. Instead, a national economic austerity program will likely be the agenda come January 2009. Critical programs like health care reform, student loans, sustainable environment, jobs creation and protection, foreclosure mortgage relief, retirement systems reform, etc., will likely all be sidelined more or less permanently.
The massive budget deficit is the consequence thus far of three primary causes: the $3 trillion Mideast wars, the $5 trillion tax cuts for corporations and the rich, and now more recently the multi-trillion, still rising bailouts of finance capital at taxpayer expense. The fourth is the deepening recession itself, which will result in a major shortfall of tax revenues to the federal government. The fifth is the need for the federal government to spend significantly more in order to stimulate recovery from the downturn.
The full burden of recovery has now shifted to Congress, the president, and fiscal policy. But can the government—having wasted so much on wars, tax cuts for the rich, and bailouts—still afford to stimulate the economy given the deficits? As the fiscal crisis deepens, it may have no recourse but to pull out of the wars it can no longer afford, find some way to raise taxes on corporations and wealthy investors, and slow the free flow of bailout money to the banks. However, it is highly problematic that Congress and the new president will have the political will to do any of the above.
Trillion dollar budget deficits also have serious consequences globally. It means the U.S. government will have to borrow much of that trillion from foreign banks, wealth funds, and investors. But will foreign sources want to loan that amount to the U.S.? If they don’t, it may mean a collapse of the U.S. dollar as a world currency. If the U.S. government cannot borrow enough to cover the deficit, it will have to print money. That will lead to an explosion of inflation, a further decline of the dollar, and even less willingness by foreign sources to make loans to the U.S., and so on.
Fifth Legacy: Chronic Job Loss
More than three million U.S. workers have lost jobs to China alone during the two Bush terms and another million have been lost due to "free trade" with Mexico, Central America, and Canada. It took four years to return to employment levels that existed in January 2001 on the eve of Bush’s first recession. A brief and weak recovery of jobs followed in 2003, followed, in turn, by another jobs decline in 2003-04. It was not until just before the 2004 elections that job levels recovered. By late 2007, after just a brief few years of jobs growth, the economy once again began to gush jobs at an alarming rate.
Officially, more than 750,000 jobs were lost through September 2008. The actual number is much higher, however, given the conservative way the U.S. government calculates unemployment. For example, the government estimated 159,000 jobs were lost, but 337,000 part-time workers were hired that month. That means tens of thousands of U.S. workers were cut back from full time and rehired as part time. The government counts part-time workers as fully employed. The true job loss since the start of 2008 is closer to 1.5 million than the estimated official 800,000 or so.
Sixth Legacy: Income Stagnation
The chronic loss of jobs due to free trade and repeated jobless recessions, the shift to lower paying service jobs, and companies transferring workers from full time permanent employment to more part time-temporary jobs explains a good deal of the stagnant or declining incomes. But not all. The decline of unions and effectiveness of collective bargaining during Bush’s term has also contributed to the income stagnation, as has shifting the cost of rising health insurance, deductibles, and co-payments from employers to workers during Bush’s term.
In stark contrast to the Bush legacy of stagnating and declining earnings for the 91 million majority, the Bush legacy has meant turning a blind eye to multi-million dollar, and even billion dollar, CEO pay packages—including those granted bank executives who received multi-million dollar payoffs even when their companies crash and burn. No wonder the general public were incensed this past September with Treasury Secretary Paulson’s proposal for a $700 billion TARP bailout, which initially failed to provide any effective constraints on executive pay or CEO golden parachutes. This obscene, uninterrupted, and unprecedented explosion of executive pay is one of the more visible hallmarks of the Bush economic legacy.
Seventh Legacy: Chaos and Corruption
Some argue the current financial crisis is the product of financial industry deregulation. But that is only partly correct. Deregulation is only an enabler of the crisis, not a fundamental cause of it. Deregulation has allowed the banks to set up shadow institutions, as noted above, in which to hide and bury their junk securities. It has spurred the process called securitization, in which bad loans were bundled with other bad or good securities, cut up into 5 to 15 pieces, marked up in price to make a superprofit, and sold and resold around the world to other central banks, banks, funds, and private investors. Deregulation allowed banks to work with mortgage lenders to generate record quantities of bad mortgages; allowed banks to spread contagion in the name of spreading risk; and permitted excess leveraging by financial and non-financial corporation alike. But deregulation means nothing if debt is not readily available to borrow at excessively low costs. That’s where the Fed’s 25-year loose monetary policy and below normal market interest rates played a complimentary role. Speculation results in excessive leveraging of bad debt. But leveraging requires easy, low cost borrowing. Deregulation allows leveraging to happen. But super low interest rates by the Fed makes it possible in the first place. The two go hand in hand.
The repeal of the Depression-era Glass-Steagall Act in 1999 and its replacement with the Gramm-Leach-Bliley Act removed a major impediment, while providing a major impetus to financial speculation and excess. But Bush took the opportunity several steps further. Bush’s contribution was to encourage and promote excessive financial speculation; turn over what remained of policing of the banking industry, in particular the investment banks, to the banks themselves; and send the remaining regulatory agency, the Security and Exchange Commission (SEC), to the sidelines. This policy thrust went on from the very beginning of his term in 2001 to late 2007. It is possible to cite numerous and repeated attempts by state and even federal mid-level officials who warned of the dangers of growing financial speculation, in general and with regard to subprimes in particular, from 2002 on. So it is not true that Bush administration regulators "did not see what was coming."
In April 2004 the SEC decided to allow the big five investment banks—Lehman Brothers, Bear Stearns, Merrill, Morgan Stanley, Goldman Sachs—to take on unlimited debt and "leverage" as they began their manipulation of the emerging boom in the subprime market. They were no longer required to keep virtually any reserves on hand for emergency situations. They could borrow without limit from the Fed, hedge funds, and other private funds and leverage to the hilt, which they did. Bear Stearns, Lehman, and the rest typically took on any and all bad debt and leveraged themselves to more than 30 times their available reserves. Moreover, they would be allowed to self-regulate themselves with no further SEC policing or oversight.
Thus the Securities and Exchange Commission did not simply look the other way, but actively participated in and enabled the deregulation and helped dismantle the last vestiges of regulation under Bush. It is also often forgotten that Paulson, the administration’s point person for financial system re-regulation, assumed his current role as treasury secretary in mid-2006 and immediately launched a major effort to deregulate the banking industry still further. His "mantra" was to replace defined rules governing banks’ practices and behavior with vague, undefined principles. He originated a special commission to report proposals to do just that, which it did. As part of the report, while controls were further lifted on banks, more controls and restrictions were implemented, in contrast, on regulators.
The same Paulson is now entrusted with financial re-regulation. It should therefore have been no surprise that his original TARP proposal called for no new regulatory controls on the banks or limits on executive pay, as he simultaneously proposed to give banks a handout of $700 billion.
Deregulation is directly related to corporate fraud. In Bush’s first term, scores of CEOs and senior managers were indicted and convicted for various forms of fraud. These companies were mostly associated with the technology sector in the wake of the dot-com boom and bust. The current financial crisis has yet to produce its own crop of corrupt captains of industry. But it will. Investigations are already well underway by the FBI, SEC, and Congress. The new corruption cases will make the post-dot-com fraud revelations pale in comparison in terms of the dollar value rip-offs. Bush will leave office with one of the worst legacies of corporate corruption on his watch.
It is important to note that Bush’s legacy on deregulation and its huge costs to the economy and U.S. taxpayer was not limited to the finance industry. Space does not permit a chronicling of the devastating consequences of other industries’ deregulation under Bush—transport, communications, cross-industry occupational safety and health, environmental, federal labor and wage standards, food and drug safety, and countless other areas. In all cases, the result has been greater profits for corporations at the expense of consumers, workers, and taxpayers.
Eighth Legacy: Destruction of Retirement
Another Bush legacy has been the destruction of the retirement system established in the immediate post-World War II period. That system was based on the idea of a three-legged stool structure that included Social Security, employer-provided pensions, and personal savings. Bush actively undermined all three, resulting in a crisis of historic proportions for the more than 44 million retirees and the 77 million baby boomers who will join their ranks starting next year.
The crisis in Social Security is not the one described by the Bush administration a few years ago, as Bush desperately attempted to privatize the system. The crisis is the more than $2.3 trillion dollars that has been siphoned out of the Social Security Trust Fund, transferred to the U.S. general budget, and spent in order to pay for wealthy and corporate tax cuts, chronic wars under Bush, and ballooning defense budgets. Social Security payroll tax collections for two decades have actually subsidized the U.S. budget, not undermined it. Every year the Social Security program produces a surplus, at the rate of sometimes hundreds of billions of dollars. And that surplus is diverted in full and spent. Defenders of the historic theft say we owe it to ourselves and can put it all back in the trust fund whenever we need. True. But to replace it requires that the U.S. government borrow back the $2.3 trillion from banks and other private sources, paying interest on that debt, and thus adding at least $200 billion more a year for 10 years to the coming $1 trillion a year budget deficit. In accounting terms it is possible; in economic and political terms it is not. Bush has borrowed over his eight years in office more than $1.3 trillion of the $2.3 trillion Social Security Trust Fund surplus.
The second leg of the stool, private pensions, has fared even worse. When Bush took office there were more than 35,000 defined benefit pension plans, single and multi-employer, in the U.S. Today more than 5,000 have disappeared. That decline has been with the active encouragement of the Bush administration, which allowed underfunded pension plans to defer payments required by law into their pension funds to ensure they were solvent. He called these "contribution holidays." In 2004-05 the practice was particularly abusive, in the run-up to the passage of what he called the Pension Protection Guarantee Act of 2006. That Act, however, was not designed to rescue defined benefit plans, but to hasten their further demise. Key elements of that Act permitted pension funds to invest in risky hedge funds. The latter are about to go bust in large numbers, resulting in a further crisis.
Bush consistently pushed the dismantling of defined pensions and their replacement with 401k plans. In fact, the 2006 Act has allowed companies to force-enroll employees in 401ks. But 401ks are virtually unregulated and studies show they yield far less in returns available for retirement than do traditional pensions. In fact, the average balance in 401ks today is barely $18,000. That means tens of millions face the future of retirement in the 21st century with only $18K of retirement sources, apart from Social Security benefits.
The final leg of the retirement system stool was supposed to be the accumulation of one third of necessary retirement resources from personal savings. However, under Bush the personal savings rate has collapsed. Americans now have a negative savings rate, as they’ve struggled to keep up with the cost of living. In an ominous recent trend, it appears many are having to borrow from their already insufficient 401ks just to cover medical cost and other expenses.
Ninth Legacy: Dismantling Health Care
Bush has been even more successful in privatizing, and thus dismantling, the post-war health care financing system. By allowing health care insurance premiums and other costs to double during his term, rising more than 10 percent every year, he has forced employers and workers alike to give up health care coverage altogether or to reduce that coverage in order to afford rising premiums and other costs. There are now more than 47 million Americans without any kind of health coverage whatsoever, an increase of 9 million since 2000. More than 1.3 million working Americans lost their health insurance coverage in 2006 alone. Approximately 12 percent of all children in the U.S. have no health coverage.
Despite this collapsing coverage, the U.S. spends nearly twice as much, about 17 percent, of its total GDP on health care. That compares with 9 to 10 percent for those countries with single payer health delivery systems in Europe, Canada, and elsewhere. It means the U.S. spends more than $1 trillion a year to mostly insurance companies that push forms around while delivering no health services.
For those still with health insurance, the rising cost burden has also shifted significantly from employers to their workers—by as much as 30 percent, according to some studies. Thousands of companies have been allowed to abandon their health plans altogether, most notably the big auto companies which are dumping their health care funds, underfunded by $50 billion, onto the auto workers’ unions.
Bush’s long run plan has been to fully privatize health care, just as it has been to complete the privatization of defined benefit pensions and privatize Social Security. Bush’s creation of so-called Health Savings Accounts, or HSAs, has been the center of the Administration’s health care insurance strategy. Like 401ks, HSAs are designed to replace group plans provided by employers or negotiated by unions. Bush and employers have as their goal the elimination of any central role by employers providing either retirement or health care coverage. That is what Bush has called his "consumer driven society." That, too, is his legacy—a health care delivery and financing system that is as broken as the retirement system.
Tenth Legacy: Income Shift
Every year for the first five years of his terms in office Bush pushed historic tax cuts totaling more than $5 trillion. Estimations from sources like Brookings, Urban Institute, and others are that about 73 percent of the cuts benefited the wealthiest 20 percent households—30 percent, or $1.5 trillion, of that 73 percent benefited the wealthiest 1 percent households; roughly 1.1 million out of the total 114 million taxpaying households in the U.S. But these figures don’t include tax cuts for corporations. Nor do they include similar massive tax shifting at the state and local levels. Where has all that tax cut money gone, one might ask? A good deal of it into hedge funds, private equity funds, and other forms of private, unregulated banking, thus stoking the fires of speculative investment in subprimes, derivatives, and other unregulated financial securities. Other amounts have no doubt contributed to the explosion of offshore tax shelters. According to the investment bank Morgan Stanley, in 2005 offshore tax shelters increased their funds from $250 billion in 1983 to more than $5 trillion by 2004. More recent estimations by the Tax Justice Network indicate tax shelters now hold more than $11 trillion. A reasonable estimate is that wealthy Americans likely account for at least 40 percent of that total—around $4-$4.5 trillion. Exactly how much is not currently knowable, since there are around 27 offshore tax shelters, according to the IRS, in mostly sovereign nations like the Cayman Islands, the Seyschells, Isle of Man, Vanuatu, and the like that have closed their tax doors and do not cooperate with IRS attempts to investigate how much wealthy U.S. taxpayers have stuffed away in their electronic vaults.
This explosion of income and wealth at the top at the expense of those at the bottom has been estimated in recent academic studies by Professors Emmanual Saez and Thomas Picketty. Based on their analysis of IRS taxes paid over the history of the federal income tax since 1917, the wealthiest 1 percent of households in the U.S. received about 8.3 percent of total income in the U.S. in 1978. By 2006, that wealthiest 1 percent was receiving 20.3 percent of total income generated in the U.S.—not including tax sheltered income or corporations’ retained income or profits diverted offshore. This 20.3 percent represents a return to almost exactly what the top 1 percent received in 1928 (21.09 percent) on the eve of the last Great Depression.
The above ten points represent policies that began in earnest in the 1980s under Reagan and, in some instances, even before that during the last two years of the Carter administration. The policies were continued in various form through the Administrations of George Bush senior and Bill Clinton with different emphases. What characterizes the administration of George W. Bush is that the toxic legacies were carried to the extreme, accelerated in terms of their effects, as well as their inevitable negative consequences. Whether income shift, financial deregulation and crisis, tax shift, budget deficits and fiscal crisis, the destruction of the retirement and health care systems, etc., Bush represents the continuation of the policies and legacies on an accelerated rate, on a magnified scale—i.e., a toxicity legacy writ large.
These legacies are interdependent, one feeding on and exacerbating the other. It is not possible, for one example, to understand the current financial crisis and emerging global epic recession apart from the massive shift and concentration of income in the hands of the wealthiest household-speculators and corporate-speculators. That is not the sole explanation of the present systemic financial collapse or growing threat of global depression increasing now almost daily. But the financial and economic crisis underway at present cannot be fully comprehended apart from the former either. Reversing the legacies, removing the toxic effects on the future of American economy and society cannot take place without correcting the fundamental causes. That includes reversing once again, as in the 1930s and 1940s, the perverse and distorted income and wealth distribution afflicting society itself.