While I’ve tried to be open to more optimistic possibilities, it’s far more likely that the second Bush Administration will be more of the same, and worse. The problem for the winners is that the consequences of the Administration’s policies, still debatable in 2004, will be grimly evident by 2008, and there will be no one but Republicans to take the blame. In purely partisan terms, as I argued several times before the election, this was a good one to lose.
It’s impossible to predict in detail how things will turn out in Iraq, or on foreign policy more generally. But Bush’s first term made one thing clear. If there’s a way to stuff things up, these guys will find it. I expect there will be some initial talk on both sides about rapprochement with Europe, but it won’t last long: if the assault on Fallujah turns out as bloody as appears likely, that could easily be enough to any such process to an end.
Things are much clearer on the economic front. As I mentioned in my previous post, Reagan’s first term saw the implementation of crackpot “supply-side” theories in which tax cuts would produce long-run budget surpluses, but when they produced huge deficits instead, the orthodox Republicans took control and raised taxes, among other measures to bring the deficit under control. In the Bush administration, by contrast, not only have the crackpots become the orthodoxy, but they don’t even bother (much) with Laffer-curve theories about an eventual return to surplus. The current view is that sustained deficits are entirely harmless. It’s virtually certain that the first-term tax cuts will be made permanent, and probable that there will be some additional cuts, as well as relief from the Alternative Minimum Tax. On the spending side, I expect there will be some severe cuts in non-defence discretionary spending, but there’s not a lot to cut, especially if you exclude areas like agriculture, that have strong Republican protection, and the policy initiatives of the last Congress, like the prescription drug policy.
An even bigger problem, not mentioned at all in the campaign as far as I know[1] is the trade deficit. The deficit has grown steadily, exceeding 5 per cent of GDP in recent months. Although it’s a mistake to view the trade and budget deficits as twins, the combination of a budget deficit and minimal household savings implies the need for a balancing deficit on the current account, if any net investment is to be financed. Without a rapid reversal, sustained high trade deficits will translate into exploding current account deficits, as compound interest works its magic. This implies the need for a further large depreciation of the dollar, and an increase in interest rates or both. For the moment, interest rates have been held down by the willingness of Asian central banks to buy Treasury notes. But this can’t last.
In the absence of a serious attempt to bring the trade and budget deficits under control, a substantial increase in interest rates is inevitable, and that will almost certainly imply a slowdown or recession.
fn1. Except maybe in relation to outsourcing
John Quiggin 
A good one to lose? Maybe, but I’m guessing that the Democrats, having lost 7 of the last 10 presidential elections, and faced with a long term trend against them, don’t see it that way.
One problem that I see with John Q’s thesis is that whatever disasters beset Bush in the next term, neither he nor Cheney will be a candidate in 2008. The Republican nominee will almost certainly come from outside the current administration, and may be able to avoid any taint of association. And you also have to factor in the proven talent of the Democrats for choosing candidates who are tailor-made to alienate the critical swinging voters they need to win over. Looking ahead to 2008, this problem can be summed up in one word. Starts with a H.
I really have to think that if the Democrats couldn’t win this year (and, in fact, actually went backwards) they aren’t going to win any time soon – economic meltdown, World War III, global warming, Mt St Helens notwithstanding.
So John, what’s your advice to Hillary?
What concrete policies should she be advocating now, so that her ascend to the throne in 2008, will be as painless as possible. Plus it will give us a reference points to judge her progress with bated breath.
If the Asian export-driver nations stop buying t-bills, and Americans are unable to buy imported manufactured goods on the credit card, who are the Asian nations going to sell their inventories to?
There is a synergy there that neither wants to unravel. I think it will continue until it is completely unsustainable.
I disagree with the doom and gloom. Economists and businessmen have predicted 10 of the last 2 recessions.
I also can’t see any reason to believe that Dubya will reduce non-defence spending. He has increased non-defence spending and shows no signs of being a closet libertarian.
Hilary Clinton Vs the Terminator in 2008.
There will always be war as long as the republicans are in power.
I agree John with your implicit claim that Bush is a Big government man.
however at some stage in the next four years this willconflict withe the budget deficit. Given he is incapable of cutting expenditure and he won’t raise taxes this means I think a problem for holder of US treasuries does it not?
Will Saletan at Slate (http://slate.msn.com/id/2109128/) makes a strong case for the Democrats presenting a simpler, value-driven message in 2008 – and therefore quickly aligning around John Edwards now. As a policy wonk, oversimplification makes me flinch, but Saletan presents a persuasive argument.
To tim g, the Republican front runner at this stage for 2008 is Jeb Bush. How tainted do you need to be? (!). Hillary Clinton is unelectable, and shouldn’t be seriously considered. The Republicans will mention her at every opportunity. She is good at raising money though, so very useful to the Democratic machine.
To Cameron Riley, you rightly point out that the Chinese (and to a mush lesser extent, the Japanese) will happily buy US T-bills while they need easy access to US domestic markets. That is, until their own domestic market matured enough to absorb their considerable output. At that point, T-bills will lose their attractiveness, the US dollar will decline some more, T-bills will look more unattractive, they’ll start to sell them, the dollar will decline further (and the US domestic market won’t look nearly so lucrative), T-bills will be dumped big time, the US dollar will collapse, and so will living standards in the US. Compounding (as if it’s needed), since the US has run a high and easy dollar policy for so long they have gutted – pretty much destroyed – their import-replacement industries – so there’s not even any domestic industrial capacity to take up the slack from hugely decreased imports. They’re buggered, in other words, from their “print and be damned” dollar policy. It’ll be the final unravelling of Bretton-Woods and the great US-dollar-as-de-facto-world-currency victory that the US won out of WW2.
-pete
Pete:
I think you mistook my meaning; I agree with you. I meant that Hilary would part of the problem that I described, not the cure. If she’s running against Guiliani, never mind Ohio or Florida; she wouldn’t carry New York. As for John Edwards, the Republicans already have their attack ads written for him, and I personally wrote him off when he made his stupid Christopher Reeve claim. I don’t think he’s nearly ready for the top billing.
Recent history suggests that sitting members of Congress just don’t make the grade as presidential candidates. Since the Great Depression, there has been exactly one president who was not either a former vice-president or state governor (and JFK’s win was a mighty near thing, if I recall correctly.) This suggests that you need more than just a Senate voting record, however meritorious; you need a track record in executive government that you can use to define your candidacy, so as to arm yourself against your opponent’s attempt to define it for you.
As for Jeb Bush, I am taking him at his word that he won’t run which, of course, might be a mistake. I certainly hope that he doesn’t, and that Hilary also decides against it – if only for my quaint belief that in what is allegedly the world’s greatest democracy, presidential politics over any given 25 year period should ideally involve more than two families.
Ah, the US needs a constitutional change before Arnie can run. Though personally I find that only a US born citizen can run for President conflicts with the fourteenth amendment where it states something like “all US citizens are entitled to the same rights and privileges”
Given that multilateral institutions are out of favour with the US government and that all ANZUS promises is consultation, is it now time for the Liberal government to return to Menzies policies, withdraw from the Nuclear Non-proliferation Treaty and develop Nuclear weapons?
tim g, I think you’ve forgotten Eisenhower. Brad Delong makes an excellent point that the only people who get elected president are either incumbents or those with no profile in Washington (and for the last 25 years that’s meant Southern Governors)
Sheeple: I didn’t forget Eisenhower – it’s just that I only remembered him a second after I hit the “Post” button. Oops.
Still, Eisenhower did have a significant role in prosecuting the Allied war effort, which would have looked like an imposing track record to American voters at the time; in fact, it probably made him appear much more qualified than if he had been governor of Pennsylvania or wherever. At any rate, he obviously had his own form of defence against his opponent’s attempts to define him. I think my general argument still holds water.
Not so sure about Brad deLong’s version. You couldn’t say that Eisenhower had no profile in Washington, and the same goes for Nixon in 1968. Ronald Reagan was not a southern governor. I still like my argument better (quelle surprise).
Interesting to think of Eisenhower in the current context. Remember “Atoms for Peace”? Grim warnings about the military-industrial complex? Ike must be spinning in his grave at such a speed that he might be at the earth’s core by now.
Which nation gets invaded next?
Iran is convinently surrounded.
alphacoward blog
JQ,
you said in the last post that the USbudget deficit only got to 6.2% of GDP.
I notice briefly glancing at Brad DE Long he was sying it was closer to 7%. I heard it was 6.5%.
Is it possible what % it is so we have a better idea of how it won’t be possible to cut ubless a southern Deomcrat Governor becomes President next Election and quite a few Republican Senators & Congressmen become neo-fiscal conservatives/
pete, the Asian style of capitalism is export driven. It is credit card nations like the US and Au that they sell into. Selling into the trinket hungry US consumer culture is how their economies are sustained.
I often joke that the sign of wealth in suburban America is not the size of your house, or the number of cars you own – but rather the number of boxed up trinkets you have in your basement.
The Christian Right component of the population in the US must be close to the limits of its potential size as a component of the US population.
Note, for example, in the crucial Ohio vote, Bush did not increase the number of counties he carried. In fact, Kerry did better in Ohio than Gore did in 2000. Bush was saved by a strenuous effort in achieving a bigger turnout in the poorer rural and so-called “collar” counties. But Kerry got more urbanites to vote for him.
Moreover, Christian Right communities are not immune to cultural influences. The big question is whether they can hang on to the allegiance of their children, the second generation.
Mightn’t the allure of bright lights, big city pry many of the second generation loose from the attachments of their parents?
I’m thinking of a minor reprise of the “generation gap” that rent Western societies in the 1960s. I assume that any such event would not be as spectacular as the ’60s event. (What could be more spectacular than the 1960s?)
It may be worth noting that from the point of view of the political consequences of American Culture Wars, small changes in places like Ohio can have very big consequences.
John: Your ‘good one to lose’ argument came back to me at my moment of blackest despair yesterday. It’s a good argument, even if it doesn’t help the Iraqis much. And it cheered me up – about thirty percent I’d say, which was a big help.
California never left the Union, but Reagan’s home in Orange County is south of the Mason-Dixon Line. :^)
Read your piece about George Bush in the AFR yesterday John – have you anywhere discussed the possibilities of George Bushs’ planned tort reforms?
The key to the Republicans is always the same: the supremacy of politics amongst the Mayberry Machiavellians.
Policy is in the service of politics, and if the REPs have the power to service their base and silence the DEM base then they will use it.
The USD has already depreciated against the EURO and YEN. Yet the Treasury shows no sign of changing course on taxes and spending.
The DoD is bogged down with an insurgency in Fallujah. Yet the Provisional Government persists in excluding non-approved parties which might aid a political settlement.
The REPs have just got the biggest ,a href=”http://www.nationalreview.com/comment/the_editors200411031225.asp”>VINDICATION in modern political history, since McKinley in 1900. They control all branches of FED government with increased majorities and the Judicial and Gubertanorial branches are also being mopped up.
This counts as a reward for their political conduct: why change?
Only a superior power or unbearable costs can modify the behaviour of the Bush admin. The UN is a military joke and the costs of economic folly are being underwritten by Asian bankers.
So I predict the REPs will stay the course until they come to grief. The grief will probably come from an Arabic martial, or Asiatic financial, source.
I predict that the REPs will try to undo the Rooseveltian domestic welfare state in the US, just as they tried to do undo Roosevelts foreign lawfare state in the UN.
I predict that the REPs will try to undo the Rooseveltian domestic welfare state in the US, just as they tried to do undo Roosevelts foreign lawfare state in the UN.
The irony of the prevailing mood of UN bashing (which is by no means entirely unjustified) is that the UN was created essentially at the behest of the US, and has by and large served the objectives of American foreign policy well over the years.
Just imagine how the Cuban missile crisis might have played out if there had been no international forum like the UN to confront and expose the USSR’s duplicity. The contributors at this blog might consist entirely of cockroaches.
I think the ideologues in the Bush administration might find that the UN is like that first wife that you took for granted; you only really appreciate her after she’s gone.
only if your fourth wife is a bit of a let down and doesn’t like Abba.
The extent of the current account difficulties facing the US are indicated by the publication yesterday of the NBER Rogoff/Obstfeld paper (subscription only) suggesting the US dollar will decline between 20-40%. This would be harmful to the world economy if the US undergoes a financial and infationary crisis.
According to this morning’s Australian newspaper the exchange depreciation will be driven by a decline in the US real estate boom (why?) and declining rates of savings in Asia.
Harry, the real eastate boom might stop/slow with interest rates going up. Just about everyone in the US that could refinance has done so. We have done it once and we only bought this house (in VA) three years ago.
The other issue is that those that are going to spend the equity in their houses have already done so. Banks in the US hand out credit cards that can be used against the houses equity. If you earn $60,000 a year and have a $400,000 house that is appreciating 10% each year, you can spend like you earn $100,000 a year.
If the housing market flattens or interest rates increase, then those increasing their disposable income by refinancing wont be able to anymore, and those spending their house’s equity wont be able to either.
Less money going into the consumer economy, means less goods of Asian manufacture being bought by Americans, which means the Asian nations cant fund the t-bills with the same volume to keep interest rates low so Americans cant continue to shop on their credit cards.
If America stops it spending binge on consumer goods, there is going to be some big time contagion going on IMO. The Asian producers wont be able to send the majority of the goods there, commodity economies like Australia will see a drop in demand from Japan, China, Sth Korea etc.
Could be painful. That being said, the US is still the best country for having investor/businesses bring R&D to market, it is the worlds R&D engine. So the US will weather it ok, without too much pain. But even so.
Cameron
Thanks for helpful remarks.
I thought a collapse in house prices would have wealth effects that reduced the demand for imports helping to sustain the US dollar a bit.
What you are saying is that with lower imports the Asian economies will have less to invest in US capital markets so that interest rates will need to rise. Sounds plausible but will it overwhelm the first class of effects?
Your points on contagion sound right.
Cameron:
“… the US is still the best country for having investor/businesses bring R&D to market, it is the worlds R&D engine. So the US will weather it ok, without too much pain. But even so.”
Historically this is unarguable. But with each technological breakthrough since the end of the nineteenth century: mass-produced steel, mass-produced automobiles, mass-produced electrical products, computer technology, US corporations’ head start over foreign competition has diminished. I wonder what may be the next mass-market technological breakthrough that can act as the locomotive for the rest of the US economy.
Moreover, the US is becoming a more service-based economy whose orientation is increasingly domestic. This must also tend to exacerbate US balance of payment woes.
‘Maybe, but I’m guessing that the Democrats, having lost 7 of the last 10 presidential elections, and faced with a long term trend against them’ actually if you plot the Rep/Dem votes the trend over the last 10 elections is towards the Dems with Rep winning margins getting smaller. Of course if you take the last 12 or the last 5 then there’s no trend. Take the last 4 then there’s a trend towards the Rep. Thats the problem with making statements like that – if you choose the right starting point use the right measurement you can find whatever trend you like.
Harry wrote;
Sounds plausible but will it overwhelm the first class of effects?
Dont know. The housing bubble is creating wealth out of nothing. The stock market in the 90’s did that, but the internet revolution also increased the labour market and salaries. Tech folks in the 90’s could jump jobs each 18 months for substantial increases in salary.
Hopefully the next disruptive technology will pop out of the US (or someone elses) labs and expand the industries and labour markets again.
The amount of t-bills and the level to which the Asian nations are funindg America’s debt fueled consumption is starting to reach the papers in the US. But most of them are “said hanrahan” type pieces and ignore the synergy that comes from the relationship.
There is also the fact that Japan funds Okinawa too, and in trade disputes, Japan has the Pentagon on its side whenever issues over the value of their currency, or opening their markets further arise. China doesnt have the same control over the US, but if it couldnt export into US stores, it would hurt.
Katz wrote;
I wonder what may be the next mass-market technological breakthrough that can act as the locomotive for the rest of the US economy.
Biotech and Nanotech have apparently been getting a lot of funding. Enough that we are thinking of moving to an area with strong ties to Biotech industries. Just near us they put in a big underground biotech science park.
The US also invest heavily into military R&D, which is a direct subsidy to applied scientists and engineers. The last disruptive technology came from DARPA (and European science investment in CERN). I reckon that coupled with American business’ ability to bring R&D to market will remain pretty hard to beat for the foreseeable future.
A big issue may be congress legislating all over a lot of the freedom that many of these startups need. Intellectual Property laws in the US have gone to insane levels, and they have managed to drag the world with them on that count too. The Au-US FTA includes DMCA like clauses as well as extensions on the copyright act. The US patent office is also not being critical and letting courts decide prior art.
Neither are good things as they encourage sitting on IP rather than creating new IP. There are new classes of law businesses that trade on buying submarine patents and suing. They are predatory business and a barrier IMO to R&D being brought to market.
The Dems wont win as long as the Reps have the likes of Karl Roves.
“But Bush’s first term made one thing clear. If there’s a way to stuff things up, these guys will find it.”
One cannot help but be reminded of Churchill’s view of the US, “Americans can be counted upon to do what is right, after exhausting all other possibilities”.
It’s going to be a long, painful four years. How far will we go before the supporters of more of the same realise they’ve gone too far?
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2 much spam in here 😦
Tim says it all
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