Stunted Growth
Why Bush's policies make economic recovery unsustainable
By Robert Kuttner
Web Exclusive: 11.6.03
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The economy grew at a sizzling 7.2 percent last quarter, surprising many analysts. If this performance continues, it's good news for the Bush administration -- and the opposition Democrats will stop talking about the economy.
But before Bush and company declare "economic mission accomplished," consider two problems. First, the benefits of the growth are not trickling down. Second, a high growth rate built on Bush's policies is unsustainable.
Even with the highest growth rate since the mid-1980s, the economy shed another 41,000 jobs in the third quarter and has lost 2.7 million jobs since Bush took office. Second, a boom with deficits this huge eventually pushes up interest rates and is thus self-extinguishing.
Curiously, only about one-fifth of the quarter's high growth rate has resulted from the deficits. Most of it reflects low interest rates and consumer borrowing and spending.
It's sensible to run big deficits in the short run to help kick-start a flat economy. This year's deficit will be $250 billion to $300 billion, about 3 percent of GDP. If this were just a one-year stimulus program with a lot of aid to cities, states and the jobless, that would be about good policy.
But Bush's deficit was generated not to stimulate short-run demand or to keep public services flowing during a recession but to cut taxes -- most emphatically for America's wealthiest -- and to slash social spending. The problem is that spending has already been cut to the bone. Discretionary federal spending is at its lowest level in three decades.
There are also new claims on the public purse, such as the mess in Iraq. Even the Bush administration has pledged not to cut Social Security or Medicare and is proposing a new prescription drug benefit.
So further spending cuts are unlikely. Meanwhile, the big multiyear tax cuts legislated in 2001 and 2002 are just beginning to kick in. The higher growth rates will increase government revenues, but not nearly enough to compensate for the losses created by the immense tax cuts on the wealthy that take effect in 2004 and 2005. Thus even bigger deficits loom.
Sooner or later, these deficits will lead to higher interest rates as public borrowing starts competing with private demand for capital. And those higher rates will choke off the consumer borrowing and spending that has been the other engine of recovery.
The Bush tax cuts were also advertised as "supply side" tonics for capital investment. Business investment did improve slightly in the third quarter, but this is not likely to be sustained, because of a large overhang of excess capacity that discourages business from investing new capital.
In addition, the loss of manufacturing jobs is continuing, especially in the swing states of the Midwest. The administration has no strategy to deal with this loss. And the states are still experiencing a major budget crisis, which forces them to raise taxes and slash public services.
Ordinary people may get a small cut in their federal income taxes. But this is often more than offset by school closings, losses of other public services, and hikes in local property taxes or state sales taxes.
And even though the economy is beginning to generate some new jobs, good manufacturing jobs that pay upwards of $20 an hour are migrating overseas, to be replaced by Wal-Mart jobs. Ordinary people also face the squeeze of increased costs and reduced benefits in their health insurance.
Bottom line: The economy is still a risky proposition for the Bush administration. Deficits big enough to keep growth rates at anything like 7.2 percent are deficits that will scare the money markets and choke off the recovery. More normal growth rates of 3 to 4 percent will keep interest rates low but are not sufficient to produce plenty of good jobs.
Back when inflation was a problem, economists used to talk about a "soft landing" -- a reduction in inflation but not so wrenching to produce recession. What Bush needs is a soft takeoff: growth sufficiently robust to produce high-wage jobs but not frightening to the bond market.
In principle, this kind of growth is possible. But it won't result from the unbalanced fiscal policy of the Bush administration -- big, permanent deficits based on tax cuts for the rich coupled with starvation of public services.
In the end, voters base their economic conclusions on their personal situation, not on the statistics. To paraphrase the American Express ad, the economy that matters is yours. The third-quarter statistics may look good, but the economic condition of large number of Americans still feels precarious.
Robert Kuttner is co-editor of the Prospect.
This column originally appeared in yesterday's Boston Globe.
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The Halliburton Of Medicare?
David Sirota, Christy Harvey and Judd Legum are with the Center for American Progress, a nonpartisan research and educational institute.
Just two days after President Bush signed the drug industry-backed Medicare legislation into law, the White House announced the details of the Medicare discount drug card program. In this new program, Medicare will contract with private, pharmaceutical benefit management (PBMs) companies to endorse existing discount cards. The cards have been assailed for not guaranteeing any price discounts, while potentially driving millions to these PBMs. So why, then, is the President so adamant about the cards?
For one thing, he has extremely close financial, professional and political ties to AdvancePCS?-the company that stands to make a windfall off the program. Specifically, Bush is close friends with David Halbert?-CEO of AdvancePCS. As the Fort Worth Star-Telegram reported on 8/18/02 "before starting what would become AdvancePCS, David Halbert helped clean up a deal with Harken Energy that had prompted an SEC investigation of George W. Bush." After the investigation, Halbert then invited Bush to become one of the original investors in AdvancePCS?-a transaction that made the President up to $1 million.
Soon after assuming the Presidency, Bush paid Halbert back in kind?-soliciting his help in writing the 2001 drug discount card proposal that is now part of the new Medicare law. Halbert brags about the complicity, saying the White House specifically asked him to help write parts of the plan. As the Fort Worth Star-Telegram reported on July 18, 2001, "AdvancePCS has been working with the White House to create a nationwide private discount card program... David Halbert, AdvancePCS' chief executive, said the Bush administration contacted his company about two months ago." When Bush announced the original plan, "Halbert stood next to the president in the Rose Garden" and said "it was quite an experience."
How Bush's Friends Will Make A Killing, Part I
The drug discount cards may not be great news for seniors?-but they are terrific news for giant PBMs. AdvancePCS, along with four other companies, controls 80 percent of the PBM market and up to 90 percent of the mail-order pharmacy business. These companies will be hired by drug plans to negotiate with drug makers, issue discount cards and line up networks of pharmacies?-all without a guaranteed price savings for seniors, and with collateral damage to local pharmacists. As Bloomberg News wrote last January, the system is designed to steer "patients away from pharmacies and into mail-order businesses run by pharmacy-benefit managers such as Express Scripts Inc. and AdvancePCS."
AdvancePCS has already faced lawsuits over market manipulation in the past, "by failing to disclose the extent of their financial ties with manufacturers." And the AARP sued them last year, accusing "AdvancePCS in court of not only 'illicitly diverting' seniors from its drug-discount plan, but of actually putting them at risk for potentially dangerous drug interactions."
Making A Killing, Part II?-Refusing To Monitor PBM Prices
Despite these lawsuits, the White House is further rewarding AdvancePCS by refusing to require that they pass along any savings on drug prices to seniors. As The New York Times reports, while HHS "will monitor the prices of prescription drugs bought by Medicare beneficiaries, sponsors of drug discount cards will be allowed to change their prices?-and the list of covered drugs?-on a weekly basis." The administration stated, "we have chosen not to establish minimum threshold levels for price concessions." In August, the Bush administration pushed Congress to "kill a provision of the Senate bill" that forbade drug companies to up prices more than once a month, saying "price stability is not a requirement of the drug benefit." Prescription prices have gone up 17 percent for four straight years in a row. The bottom line: Discount cards will bring profits to PBMs will little real benefit to seniors. Even William Novelli, head of the AARP which supported the bill, admitted the cards would not make a significant difference for seniors: "I don't think that drug card will be the world's most thrilling event."
The Long Relationship Between Bush And Halbert
Halbert was also deeply involved in catapulting George W. Bush into the political spotlight. According to the Center for Public Integrity, "in 1986... Harken's CEO introduced Bush, the company's new director and consultant?-as well as son of then-Vice President George Bush?-to a little startup health-care company. He put in a modest investment, and a few years later walked away with a six-figure windfall." That company was David Halbert's, and eight years later, when Bush was running for Texas governor and scrambling for campaign cash," the company came through. "In 1994, when the company was known as Advance Health Care and Bush was making his first run for Texas governor, those insiders gave him $23,700 for his first gubernatorial run, including $14,500 from Halbert, his brother, Jon, their father and their wives."
Thus began Halbert's investment in the Bush political machine. And 10 years later, he's got to be pretty pleased with his return.
