The Bush Boom Was a Complete Bust

Either we're in a recession or we're about to start one. Either way, the latest expansion is over. While there may be some question about when it happened (the expansion, that is) the reality is it was the least impressive expansion since WWII. Below I will explain why.

Before I move forward, let me address specifically any readers who still think the last expansion was "the Greatest Story Never Told." I am going to use facts to demonstrate why the latest expansion was terrible. If you don't like the facts please feel free to present you own facts. In fact, please do so. But please only use facts from reliable sources. Reliable sources would be the government agencies that collect and present this data. To sit at this table, you must bring data (properly adjusted for inflation) that is from sources used by all economists not from sources whose credibility is non-existent.

That being said (and I can't believe I even have to address this issue).

Let's start with the consumer side of the equation. First , job growth during this expansion is the weakest of any recovery since WWII. (This information comes from the National Bureau of Economic Research and the Bureau of Labor Statistics)

As a result, real median household income (income adjusted for inflation) is now lower than it was at the beginning of this expansion (this is the first time this has happened in 40 years) (This information comes from the Census Bureau).

So -- where did the money for consumer spending come from? Part of it came from savings. Here is a chart from the St. Louis Federal Reserve of U.S. national savings. Notice this number has been decreasing for the last 25 years and is currently hovering around 0%.

Debt is the real source of funds for this expansion (this information comes from the Federal Reserve's Flow of Funds report and the Bureau of Economic Analysis).

As a result of this increased debt load, a larger portion of consumer's income (which has been stagnant for this expansion) is going to debt payments:

So looking at the consumer we see the following picture emerge.

1.) Job growth was the weakest of any post WWII recovery.

2.) Real median income actually dropped for the duration of this expansion.

3.) To sustain consumption, consumers went on a mammoth debt acquisition binge, so that now

4.) Debt payments are as high as they have ever been on a percentage of disposable income basis.

So after 7 years of economic expansion we have lower incomes and more debt.

However, the consumer isn't the only person who ran up a ton of debt.

The Bush White House has again run up the national credit card. Here is a list of total debt outstanding at the end of the government's fiscal year:

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

The current debt outstanding is $9,437,425,175,221.31

Notice that since 2002 the Federal Government has issue over $500 billion of net new debt per year. And yet, we have continually been told the budget deficit is getting better. Let's ask a fundamental question: if you continually spent less than you made, would you have to borrow money?

As the US has become more reliant on debt financing it has also become more reliant on foreign governments for its financing. Here is a chart from the St. Louis Federal Reserve of the total U.S. debt held for foreign investors:

In short, growth at the national level is dependent on the issuance of debt. And we are now reliant on foreigners for an increasing percentage of our growth. A former Federal Reserve Chairman (Paul Volcker) explains why this is a bad development:

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

Finally, the US trade deficit has exploded. Here is a chart of from the St. Louis Federal Reserve:

The St. Louis Reserve published a report in late 2006 that showed how important oil was to this figure. This indicates how important energy independence would really help with the trade deficit.

So let's sum up.

1.) The weakest job growth since WWII led to a declining median family income.

2.) In order to keep spending the U.S. consumer continued to save less and borrow more.

3.) At the national level, the U.S. government has issued over $500 billion dollars of net new debt per year since 2002. This has led to an increased reliance on foreign investors to finance our way of life.

4.) The trade deficit has continued to expand, although oil is responsible for a fair amount of that increase.

5.) In short, the U.S. continues to consume more than it produces.

At some point, we will have to pay the bill.

This is the end result of the "Bush boom" or "the greatest story never told."

If the story was so great, we wouldn't need people to remind us of how good it is.

Comments

[PresidentJoe]

I very much agree with your excellent analysis of the "Bush Boom". The one item that I might expand on is your statement that oil is responsible for a fair amount of that increase in the trade deficit. While true, this might cause some to believe that oil is responsible for most of the deficit itself. The graph and numbers at http://home.att.net/~rdavis2/tbalcat6.html show that "petroleum and products" were about 32 percent of the trade deficit in 2006. Looking at the latest BEA numbers at the source given on that page, it's risen to about 36 percent of the trade deficit in 2007. Hence, while oil is responsible for a fair amount of the increase as you said, it's still just about a third of the trade deficit itself.

[Bluedog12]

How come I didn't see this on Faux Newts?

[RumiSouth]

Because Faux Noise would never stoop so high as to put facts before their viewers. Welcome to the videodome.

[Bluedog12]

My job went to Mexico, my kids in Iraq and the Chinese own the bank that's forclosing on my home. According to Neil Cavuto I'm helping the economy by investing internationally. Who knew!

[midasbob]

Let's take this analysis further and look how it applies to the current recession. So whether we are growing or in a recession depends on the economy on the margin....that little big extra the consumer does or does not spend that means the economy is growing or shrinking. According to Bonddad's post this little bit extra during the last 7 years was provided by the government's and the consumers' deficit spending whether it was borrowing from abroad or from the home equity piggybank. If the consumer's credit card has now been cut off or at least the limit reduced and the government has to stop or at least curtail its deficit spending, where is the growth going to come from to actually get us out of this recession. Wage growth isn't apparently going to do it, neither is wealth from the stock market. Savings are gone. Are we going to rely on foreigners buying out goods with the now devalued (and further devaluing dollar) to bring us out of this. The pundits on CNBC and elsewhere keep pushing that maybe we have hit bottom, but I just don't buy it. This could be a long recession.

[indypete]

You don't seriously expect the news networks to do anything about this information when there are so many pretty white girls going missing, do you? On the serious side.... we're doomed! (My wife sometimes compares me to Eyore!)

[ResidentChimp]

You're basically blaming President Bush for America's behavior. If this is a recession, what was it when Clinton was in office with worse statistics?

[wiseapple]

You weren't paying attention to the graphs. The mostest, worstest statistics have been charted during the Bush years.

[laocoon]

But if that were true it would reflect poorly on Bush so it cant be true.
that is the key to seeing the truth.

[YouThinkAndTalk]

It is the biggest irony of all. The economy DEPENDS on us the consumers (read: regular folks, totally maxed out), but the rich get the tax cuts to stimulate the economy.

This is a 6-inches thick wool in front of our eyes.

One more comment. The late Peter Drucker, the management guru, said that the rich do not contribute to the growth of an economy. And what do we do? We give them more money (tax breaks, loopholes etc etc etc...) to make our economy better.

But should I be surprised? Jesus told us to "love each other." And what do we do? We kill each other.

Got bless America.

[LeftRight]

Maybe Jesus should have told us to kill each other. In fact, if you think about it, maybe he's not god since he would have known that were he omniscient!

But I digress, that means that we need to go back to TAXING THE RICH!!! They use more of the economy, they can pay more for it!

[epotruchyeahright]

I remember back in 1984, working as a cub reporter at the UCLA Daily Bruin, talking to an economist about the budget deficit back then, who said that deficit spending was a good thing for a country. I also remember, being 21 years old and having no knowledge of economics, that his statement made absolutely no sense to me. Today I can see how borrowing money from other countries makes sense by keeping the flow of money moving around the world. But at some point you gotta pay the bill, and not by taking out another freakin' credit card!

Hale, great post as usual.

[cam]

Hale, I am one of your most appreciative readers.

But ...

You are great at analyzing our position but a little short on suggesting how we extricate ourself from the quagmire. I appreciate your Socratic approach, but I would also appreciate the occasional discussion around a solution.

How about it?

[txrotorhead]

I think one example was pointed out in the last chart. We need to get a national energy policy that will reduces our reliance on oil and into more sustainable, renewable sources.

[cam]

Speaking with my engineering hat on, I can tell you that there are currently no viable renewable alternatives to fossile and nuclear fuels. There is a lot we could do about making more efficient use of the energy we do generate. We are an energy prolifigate society, probably because we have never understood the true cost of the energy we use. Our houses are poorly designed, our public transport needs to be radically improved, we need to telecommute more ...

I think the most promising energy source is geothermal energy. If we could only tap into the vast heat reserves beneath us we could escape the constraints that are starting to throttle us.

[cam]

I am thinking more along the lines of raising margin on trades ( http://www.huffingtonpost.com/max-keiser/fixing-the-problems-on-wa_b_95340.html ), increasing fractional holdings, breaking up the Fed so it can regulate markets more effectively ( http://news.yahoo.com/edcartoons/ettahulme;_ylt=AmiSJKss.9dlOtkww6aN7NgDwLAF )

There are a lot of suggestions out there. I would appreciate a critical take on some of them from someone like Hale.

[MajorKong]

In retrospect, selling our houses to each other probably wasn't the best thing to base the economy on.

[YouThinkAndTalk]

A story my father told me. Two peanut sellers on the street were selling very few peanuts. So, to "increase business," they decided to buy from each other. Soon, they were sold out, "boom" in modern terms, but with no money, "bust" in modern terms.

[Mormondude]

We already knew this was likely to happen 8 years ago.

Bush repeatedly spoke about how early intervention to reduce the depth of the recession could lead to a slower recovery.

You say that job growth was slower than any other recovery. You neglect to mention that the unemployment rate at the bottom of the recession was lower than any other recession, so there was less to gain back.

http://upload.wikimedia.org/wikipedia/commons/c/c3/Us_unemployment_rates_1950_2005.png

I think it's self evident that the deflating stock market bubble, 9/11, the extremely overvalued dollar, and corporate scandals all could have led to a cataclysmic recession, but instead we had one of the mildest.

Sure, it's fun to bash Bush over how few jobs were added, but the difference between 6% unemployment in 2000 and almost 10% unemployment in 1980 is ENORMOUS. If you were one of those 4% that were able to keep their job because the recession was blunted, I think you'd have a different opinion of what Bush was trying to do. And that was the argument Bush himself made 8 years ago when he argued that it was worth it to trade a shallow recession for a slow recovery.

[thedirtman]

The difference between 6% unemployment and 10% unemployment is indeed enormous. Too bad the Reagan administration had to reinvent the way the numbers were counted in order to make them look good. The Bush boom wasn't the only "Greatest Story that Never Happened". The Reagan boom is the other.

From the NY Times: How to Create 30 Million Jobs in Eight Years; Poverty's Gains
"The 5.2 percent unemployment rate that you cite masks the true nature of unemployment in our economy: 24 million part-time workers who are counted as fully employed in determining the unemployment rate and 6 million more people who want jobs but don't fulfill the requirements set by the Labor Department to be counted as unemployed."

http://query.nytimes.com/gst/fullpage.html?res=940DE6DB1E3AF936A3575AC0A96E948260

[LeftRight]

Mormondude, you are falling for what bushco(tm) and ronnie raygun want you to fall for. The unemployment rate that you cite doesn't include several classes of people. First, it doesn't count those who are NOT asking for unemployment insurance, including those who WERE requesting it, but have used all their benefits. Second, it doesn't count the part time workers who are searching for full time employment. Third, it doesn't count those who ARE employed, but are receiving FAR less than they deserve, this is called underemployed.

[Mormondude]

It also doesn't include 20 million illegals driving down wages and taking jobs away from Americans. There is no perfect chart out there that explains every facet of the issue. But as far as the "unemployment rate", the chart is accurate.

[utahgirl]

Also not counted, men in prison and in the armed services.

utahgirl

[WIpatriot]

Brought to you by the Ministry of Lying Statistics.

[Mormondude]

I provided objective data to add to the discussion, as requested. Where's yours?

[MajorKong]

The problem hasn't been so much loss of jobs, as you point out the unemployment rate is around 5%, but the loss of income. We've been losing good paying jobs in fields like manufacturing and technology and replacing them with much lower paying jobs in the service sector.

When you lose your $20/hour factory job and replace it with a $7/hour retail or food service position the unemployment rate doesn't change. Your standard of living, however, has changed drastically.

[Mormondude]

"The problem hasn't been so much loss of jobs, as you point out the unemployment rate is around 5%, but the loss of income. "

Then why did Bonddad start his piece by talking about job growth? He's either being deceptive or simply didn't consider the context of the unemployment rate starting so low to begin with.

As far as Real median household income is concerned, that is also obviously impacted by the unemployment rate. In the 90's we went from 8% unemployment to 4%, which I would guess is driving MOST of the gains in RMHI. If you compare my unemployment chart to the RHMI chart, the apexes of unemployment correspond with the troughs of RHMI, temporally.

If he wants to say that wages are underperforming, why didn't he just show that? Instead he opted for RMHI, which is muddied by the unemployment rate. My guess is that wage growth hasn't actually underperformed in this recovery, and since that fact didn't support his hypothesis he left it out.

[BillZBubb]

As usual Morondude grasps at straws. Bush is a failure on every front. He claims the Bush unemployment numbers are good compared to other recessions--that is baloney when you consider participation rates and median wages. The Bush cronies cooked the books by dropping hundreds of thousands from the unemployment roles.

9/11 was a blip on the economic screen, but Morondude clings to that like a life raft in the sea of Republican folly. As for the "stock market bubble" that again is pure Republican poppycock. The real bubble was limited to the dot com area and had played itself out by the time doofus got selected presidunce.

Bush made no such "argument" about recession and recovery eight years ago. Bush wanted tax cuts for the wealthy and he argued a lot of bullshit. The result is we had an extremely poor recovery with median wages falling, a flat stock market, a huge increase in debt, a tanking dollar (which did nothing to help the trade deficits), and a looming economic disaster.

[Mormondude]

"9/11 was a blip on the economic screen"

Some estimate that it cost the world economy up to 1 trillion dollars, which is as much as the entire sub-prime crisis that all the perma-bears are now hocking as the end of the world.

"As for the "stock market bubble" that again is pure Republican poppycock. The real bubble was limited to the dot com area and had played itself out by the time doofus got selected presidunce."

Not exactly.

http://marketswing.com/Historical_Charts/spxlongterm.png

The stock market was nowhere near returning to a historically sustainable level of growth until the bottom in October 2002.

"Bush made no such "argument" about recession and recovery eight years ago."

The entire country was engaged in that argument. Here's an example from Feb. 2001.

http://www.pbs.org/newshour/bb/economy/jan-june01/tax_2-5.html

Some of the guests are saying that they aren't even sure the economy "will go into recession" at that point, and others are making the argument that we need the stimulus now.

[ImmanuelGoldstein]

As I look at Bondad's charts it occurs to me that we may be looking at the source of the 'Yuppy' prosperity of the period from the early 80's till the market crash in '88.
Look at the chart on household debt service payments. In particular begining in 1984 this figure ballooned to what had been a record of over 12% by the late 80's. It could be argued that the Regan 'boom' was bought on credit nearly as much as the present one. The early 90's recession coincided with, and I bet was partly the result of the paydown of that debt.
The thing is we have built up an even worse mountain of debt than in the 80's. If it took the recession of the early 90's to pay that down, what it going to take now....?

[LeftRight]

You don't want to know, but we will ALL know once it's done......

[Ariesjill]

Let us locate the taproot: the Reagan Administration. Did away with vital reglulatins, ultimately, the middle class (foundation of our tacxbase from jump); compromised the labor movement. It was all down hill from there including Clitnon and Gore (U bet, GORE) HOBNAIL BOOTING the NAFTA down the throats of an apathetic electorate, and Congress playing Faust., . SHRUB et.al., were simply the unalloyed distillation of the evil and the coup de gras.

Litte Ross Perot with his pointer and his bar graphs and his ears.....was, OK, not telegenic....but he was dead-on right. The late Molly Ivins, re "You gotta dance with them wut brung ya".....well, getting clear on WHO BRUNG WHOM....IS THE ISSUE; if we don't get clear on that THIS TIME...the slipperly slope will move toward vertical.

[bolobill]

Using your data, there is really only one pertinent statistic, and that is median income. When median incomes drops, there is no recovery; there is no boom. This has been a 7.5 year recession, and it will take a long time to recover from Bush and his bleeding of America.

[LeftRight]

Would the fact that this recession has lasted 7.5 years qualify it as a DEPRESSION??

[Clinton]

If the US were in a depression, how long would it take for the government to admit it? My guess is that it would never be admitted. Moreover it seems likely enough that the US would rather go to war (or Mars) than admit that a lot of effort should go into repairing itself. It seems as though the citizenry gas been divided and conquered for a long time now, reduced to spectators really.

[olephart]

Our conservative friends remind us that we cannot tax our way to prosperity. Likewise, I remind them that we cannot borrow our way there either. The basis of the Kudlow/Laffer economic model is a reduction of tax rates on income spurs growth and increases revenues. Let's examine the growth side by comparisons of changes in GDP expressed in constant 2000 dollars:

http://www.data360.org/dataset.aspx?Data_Set_Id=354

These data indicate that Reagan's eight years produced a net increase of 1.61 trillion (30.3%) after his tax cuts. Clinton's eight years produced a net increase of 2.416 trillion (32.4%) after his tax increases. W. Bush's seven years have produced a net increase of only 1.802 trillion (18.2%) after his tax cuts. Let's examine the debt side to get an idea of how much "growth" was borrowed. The debt in constant 2000 dollars is:

http://www.brillig.com/debt_clock/faq.html

These data indicate that Reagan accumulated 2 trillion in debt, Clinton accumulated 0.4 trillion in debt while W. Bush has accumulated 1.9 trillion of debt in seven years. Factoring the accumulated debt out of the increase in GDP yields Reagan with a negative 0.4 trillion contribution, Clinton with a positive 2 trillion contribution and W. Bush with a negative 0.1 trillion contribution. Extrapolating the data would indicate that W. Bush's final score will be about a negative 0.6 trillion.

This is the "Greatest Story Never Told".

[cam]

In the future the thing that is going to differentiate successful countries from each other is the level of their infrastructure and services. Countries that offer personal security, schooling, rapid transit, clean water, etc as a BASE enjoy both differential and absolute ecomonic advantage over other countries that offer these things to a lesser degree. In the past that has been America's greatest strength.

In other words, as long as taxes are wisely spent they are the single most effective means a society has of raising itself by the bootstraps.

Opinion seems to drain from the catchments of political affiliation more than the watershed of personal wealth, which implies it is ideologically rather than rationally based. Most people seem to believe taxes are an imposition - but then again, most people have very little idea what their taxes are spent on or what they individually gain by constructing and maintaining the society they are immersed in.

It would be nice if our government stopped digging deeper and deeper into debt in order to finance idotic ventures that add not a whit of value to our lives. Hopefully we'll have a better understanding of opportunity cost before we're too destitute to apply the knowledge.

So tell your conservative friends that we CAN indeed tax our way to prosperity.

[Clinton]

The rich say that they pay the most in taxes and hence it is they who should have the most influence on how the money is spent. Why not just eliminate income taxes for anyone making less than $100K per year? It's not as though the people in that income bracket are franchised to any meaningful degree anyway, so why not make it official by ceasing their taxation? While we're at it, how about replacing the military with Blackwater stormtroops funded by the wealthy?

[castlerider]

Bondad, thanks for a great post.

I have never had an answer to my question of why don't we raise Interest rates for investing in America to 10% while separating property loans and keep them down; for instance, allow property rate to remain where they are for 2-3 years, a freeze, if you will, and give buyers until a certain day, like in 6 more months, to purchase property at these rates, or lock in, then let the rates go up? This would move tons of cash to purchase before the increase, and then after they've gone up, it would bring in gobs of cash to invest in our infrastructure. regulations could be implemented so the system couldn't be taken advantage of by investors and scammers.

Doesn't it seem that as we are like a raft getting closer to the edge of a waterfall, someone needs to get a hold of things and steer us clear, using completely unconventional means if necessary?