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Although a lot of liberals would rather die then admit it, the Bush administration has been very good for the US economy. In fact, it has been a long time since this country has had it so good. Tax revenue is up. Unemployment has stayed low. People complain about the widening disparities in wealth, but in absolute terms, blue collar working class families seem to be doing pretty well.

But why has the Bush administration been good for the economy? I would argue that is it because he has brought in over one trillion dollars of investment into the US economy that otherwise would have never showed up. How do I think he did this? By being stone cold stupid.

Of course, that might be a little unfair. The Chinese leadership is arguably stupider than President Bush. If they were not so stupid, maybe President Bush would have taken a different course. (I should note here that I am perfectly aware that there are other actors in my little story besides the Chinese political leadership and the American leadership, but I think their policies have been driving everyone else’s actions and besides, I want to keep this story simple).

Now it is pretty common for people in this day and age to refer to Bush as stupid, but most people seem to think the Chinese are these devious little buggers who are going to overtake the US and become the economic powerhouse of the world. But if you will remember your recent history (which nobody seems to be able to do) you will remember that people were saying the same things about the Japanese 20 years ago. So let us not get too caught up in the current growth of the Chinese economy. Such growth does not prove that the Chinese know what they are doing.

In fact, the way in which the Chinese’s political leadership is trying to encourage growth strongly suggests that they should be confined to a mental institution where they can gibber at the walls without causing any harm. If that seems unduly harsh, let us look at a few basic facts.

China’s economic growth has been export-driven. This is largely a result of a deliberate policy of the Chinese government. They looked around at Japan, South Korea, and Taiwan and they decided that the way you become a rich country is by exporting things to the rest of the world. To that end, the Chinese leadership seems to have decided to do whatever it takes to help their export sector.

Now I happen to believe that any country that is willing to help its export sector at the expense of domestic consumption is heading down the wrong path. But the stupidity of relying on exports to make you rich is proportional to how big your country is. A small country can become get rich by selling things to a large country. But a large country cannot get rich by selling to a small country.

In other words, focusing on exports was less stupid for Japan (which has less then half of the US population) then it is for China (which has more then 4 times the US population). Heck, China way outnumbers the US and the EU put together. There is just no way that China can possibly become a wealthy nation on par with the US and the EU through exports.

But those people who are responsible for China’s economic policy don’t seem to have gotten the memo. They have been hurting the rest of their economy so that they can subsidize their export sector. In fact, they have spent close to a trillion dollars subsidizing their export sector in an effort to keep it growing strongly.

That brings us to President Bush. As best as I can figure out, his economic philosophy consists of the idea that you can have your cake and eat it, too. He has pushed for tax cuts, more spending on education, more spending on health care for elderly, a couple of wars (or one big war on terror if you prefer), and more money for border security. To top it all off, he has never seriously objected to any pork barrel project Congress might wish to have and he has supported massive spending on New Orleans.

Now depending on your political persuasion, any one of these things might be justifiable. But taken together, any economically literate person must describe our President’s economic policy as stupid. After all, economics is all about the study of the various tradeoffs we must make in life. You can’t have it all without paying a serious price.

Except that George Bush has had it all without paying a serious price. In fact, in the short term his policy of going for it all has actually proved to be very beneficial for the US economy as a whole. To understand why it has worked out this way, all you need to understand is that China’s leaders are insanely committed to the idea that exports are the key to wealth. Their insane commitment to this idea has caused them to make sure that everything that George Bush does turns out well for the US.

What this means in practice is that the Chinese were determined from the very outset of Bush’s presidency that the dollar would not drop against their currency, the Yuan. But from the very outset of George Bush’s presidency there were economic forces that put downward pressure on the dollar. Part of this pressure was made up of things that had nothing to do with Bush, like the fact that the Fed lowered rates to try to contain the fallout from the bursting of the tech bubble. But George Bush’s determination to lower taxes and raise spending, and thus run a large deficit, did not help the dollar, either.

If free market forces had been left to do their thing, the result would have been a weaker dollar and higher interest rates, as the Fed would have had to contain the inflationary fallout from Bush’s fiscal deficit. The problem with this from the Chinese perspective is that free market forces would have meant that Chinese exports to the US would have had to drop sharply as well. The insane Chinese leadership decided that they could not tolerate that.

To make a long story short, since Bush became President, the Chinese government has spent almost a trillion dollars trying to make sure that the dollar stayed strong. This spending by the Chinese government has had a knock off effect on governments that are similarly delusional about the nature of trade, such as South Korea and Taiwan. They feel they have to keep their currencies competitive with China’s. The result of all this madness?

Reserve growth has exploded since George Bush became President. According to Financial News On-line, world reserves went from 2 trillion in the year 2000 to 4.6 trillion this year. Since the dollar makes up at least 65% of world currency reserves, this means that the world’s Central Banks have spent 1.5 trillion dollars on supporting the US economy since Bush took office. And that 1.5 trillion dollars is a very conservative figure. Brad Setser has argued quite convincingly that official figures don’t account for all of the reserve growth that has taken place over the last 8 years.

The really funny thing about all this is that China effectively subsidizes US purchase of oil even as China competes with the US for world oil supplies. After all, oil is priced in dollars but China has been bending over backwards to make sure that the Yuan does not appreciate against the dollar. That makes oil more expensive for China and cheaper for the US.

But the biggest benefit to the US from the collective insanity that has afflicted the developing world has been the low interest rates that we have been enjoying. The low interest rates are what enables everyone in America to have their cake and eat it, too.

So why do I say that George Bush brought in one trillion dollars of free money if it was the Chinese desire to keep exports strong lead them to give us that money?

The answer to that question is that I don’t think that the Chinese wanted to increase their reserves by as much as they did. If macro policy in the US had not been putting pressure on the dollar I think dollar reserves would have only grown by a half a trillion dollars instead of 1.5 trillion dollars. Thus, if the US government had pursued more sensible fiscal policies, I don’t think we would have gotten that extra one trillion dollars. The world has rewarded the US government for being economically irresponsible.

When you think of how much infrastructure that trillion dollars would have built in China you have to marvel at the Chinese’s willingness to throw their money away. They could have used that money for better roads, more health care, or improved water supplies. Instead they gave it to richest country in the world for free.

Oh sure, supposedly we are going to pay them back. But in practice all we have to do is let the dollar depreciate against the Yaun at a rate greater than the real interest rate in this country and the money will be effectively free. And that is what I see happening once the Chinese give up fighting market forces, as eventually they must.

Yet they are determined to make the process as painful as possible for themselves. At the rate they are going this year, the Chinese are going to spend almost 400 billion dollars supporting the dollar. That is almost as much as the US has spent on the Iraq war to date.

One of the reasons they are spending so much now is that many other people are trying to get out of the dollar. So if the Chinese are not careful, they will wind up holding the bag.

It is all so insane I can’t believe the whole world is not laughing (or crying).

6 Responses to “How George Bush got a cost free trillion dollars for the US economy.”

  1. […] When Ape Man starts calling people stupid in print, it is best just to sit back and let him blow of some steam. In this rant he pours out scorn onto President Bush and the political leadership of China. Hopefully he will recover his sense of decorum soon. […]

  2. on 14 May 2007 at 3:41 pmJohn

    “As best as I can figure out, his economic philosophy consists of the idea that you can have your cake and eat it, too. He has pushed for tax cuts, more spending on education, more spending on health care for elderly, a couple of wars (or one big war on terror if you prefer), and more money for border security.”

    I’m borderline economically illiterate myself, but isn’t there some semblance of “logic” behind the Bush tax cuts in that they are justified to him and his advisors by his (or rather his advisors’) interpretation of supply side economics? By this I mean they think that cutting taxes will raise tax revenue because of the extra wealth created, as we are to the right of the Laffer curve, etc. . . .

    I’m not saying they are right, or even necessarily believe in supply side theory as anything more than a rhetorical tool to justify tax cuts beneficial to their constitutes. But I still dispute Bush and co. haven’t pursued spending paired with tax cuts blindly unconscious of the contradictions inherent within this policy as your description makes it seem.

    But then again, what do I know?

  3. on 14 May 2007 at 5:34 pmApe Man

    John,

    This post was a rant, not an essay. It was all about me blowing off steam. If I intended to write a rigorous argument, I would have been more careful with my language.

    As my language stands, I cannot make a rigorous rebuttal of the narrow point that you wish to disputes (i.e . Bush and co. haven’t pursued spending paired with tax cuts blindly unconscious of the contradictions inherent within this policy). There is no way that I can know what Bush and co think any more then I can know what you think. Who knows, maybe they do know that they are being inconsistent and just don’t care.

    So if your main concern was the way in which I used the word stupid then I will accept the rebuke. Using the word stupid did not accomplish much except communicate my contempt.

    But rightly or wrongly, I understand your real point to be that there is an economic theory out there that justifies tax cuts with out cutting spending and so it is unfair to call George Bush stupid for doing just that. If I understand you correctly, you are arguing that there is an economic theory that one could argue that Bush is consistently following.

    I don’t think that is the case. To make my point as simple as possible, you can justify the tax cuts. You can even argue that the tax cuts (in certain cases) will result in more government revenue. But to believe that, you must adopt an understanding of economics that would lead to you to believe that Bush’s education plan and prescription drug plan were bad ideas.

    Crudely put, supply side economics argues that if the government gets out of the way, then economy will grow faster. But Bush’s education plan (to take just one example)rest on the assumption that the Federal Government needs more control over education.

    There is a fundamental disconnect between those two ideas. One is demanding maximum flexibility. The other is demanding rigorous control. That is why I said…..

    Now depending on your political persuasion, any one of these things might be justifiable.

    You can argue for control and you can argue for flexibility. But pursuing both at the same time is putting you at cross purpose to your self. It is not demonstrating a coherent understanding of economics. I think that it is fair to say that Bush is not following the ideas of supply side economics. In my opinion, he can’t be said to be following the ideas of any economic school of thought.

    Now that explanation was so simple as to be misleading. Supply side economic theory takes a bit of time to properly explore and the reasons why supply side economics does not get along with Bush’s education plan or his prescription drug plan could be a post in and of itself.

    If you are interested, I am game to give it a shot. But given the fact that you describe yourself as borderline economically illiterate, I would imagine that a post that got into the details of supply side economics would put you to sleep.

  4. on 14 May 2007 at 5:36 pmApe Man

    John,

    I forgot to thank you for taking the time to let me know what you thought. I do appreciate that.

  5. on 31 May 2007 at 4:56 pmScott Peterson

    While I realize your post is a rant, I have to take issue with the idea that Chinese leaders are acting out of stupidity. You state that
    “China’s economic growth has been export-driven. This is largely a result of a deliberate policy of the Chinese government. They looked around at Japan, South Korea, and Taiwan and they decided that the way you become a rich country is by exporting things to the rest of the world. To that end, the Chinese leadership seems to have decided to do whatever it takes to help their export sector.”

    That is a reasonable statement of China’s economic policy. You point out that Japan has had a similar policy and essentially say “Look where Japan is now”…

    I think that up until now, the Chinese policy of subsizing exports has been rational in that at the time that Deng decided to implement this policy China had no coherent domestic economic systems at all, and therefore no domestic market to build the country’s economy on. So China took what it had, which was cheap labor, and used that to build up a manufacturing and export sector. Still, a rational policy. Today, I believe that Chinese leaders are perfectly aware of the negative consequences of the massive buildup of foreign reserves and dependence on exports.

    The problem is that it will be extraordinarily difficult to shift to a more balanced economic system without serious financial and social shocks. It’s not a question of stupidity, but rather of having difficult choices to make. If the yuan is allowed to float it will rise relative to other currencies and exports to the US will plummet as the price of Chinese goods goes up, damaging the export sector which is the source of the highest paying jobs in China. That would likely lead to serious social unrest in China. Plus, the rise in the value of the yuan would leave the PBoC with capital losses on all of the US debt that they have piled up.

  6. […] My latest rant to attract attention was called “How George Bush got a cost free trillion dollars for the US economy“. So far, comments on that post are evenly matched between those who are taking issue with the fact that I called George Bush stupid and those who are taking issue with the fact that I called the Chinese leadership stupid. […]

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