In today’s FT, from Philip Verleger of the Institute for International Economics, Fred Bergstein’s think tank:
US suffers as Bush’s gamble fails
After his 1964 landslide election, President Lyndon Johnson gambled that the US economy could support a war and his Great Society programme. He lost. The expenditures exceeded economic capacity. Shortages occurred, prices rose, and a 15-year inflationary spiral began. Within two years, the Federal Reserve had to intervene by raising interest rates. Economic growth stopped and harsh economic conditions brought an end to Johnson’s dreams.
Forty years later, another president from Texas made another wager: betting the US could fight a war, reduce taxes and avoid conserving energy. He also lost. Over the next two years, President George W. Bush will see inflation return and the Federal Reserve Board act to offset his profligate energy and fiscal policies.
President Bush (…) and his advisers also gambled, although in a different game. Johnson tried to provide guns and butter without raising taxes. George Bush tried to serve up large tax cuts without reducing spending or addressing the nation’s rapacious thirst for motor fuels, particularly gasoline.
(…)
The loss of natural gas supplies adds to inflationary pressures. Katrina and Rita destroyed perhaps 5 per cent of the nation’s natural gas supply, causing large price increases. Heating bills could double this winter. Furthermore, the cost of goods manufactured using natural gas, such as PVC pipe, will climb sharply even before rebuilding efforts boost demand.
(…)
[gasoline and diesel] price hikes could have been avoided had we pursued a programme to limit increases in motor fuel consumption. Here, too, George Bush made a bet. Efforts to tighten fuel economy standards for new vehicles were rejected when his energy programme was introduced and Congress refused to change it. The president declined to push a gasoline tax following 9/11. He wagered that an already stretched refining industry could meet mounting gasoline demand, which is largely linked to American affinity for large SUVs and trucks. (…) Although the calculations are hard to believe, econometric models suggest retail gasoline prices might need to double by next summer to maintain market balance.
There is only one end to this scenario: higher interest rates. A vigilant Federal Reserve Board will have to boost rates to suppress demand, just as during the Johnson administration. The pressure for higher rates will be even greater given the forthcoming retirement of Alan Greenspan as Fed chairman. His replacement will need to convince financial markets that the Board remains determined to keep inflation in check. The consequences will be a slowdown or worse.
As the rebuilding effort slows, high interest rates and high gasoline prices may pull the economy into recession. Like President Johnson, President Bush took a chance and lost.
I find this article interesting for a number of reasons:
- its publication shows the FT’s continued bearish outlook on the world economy and their strong awareness of the acute energy crisis we are entering. Their front page today is again about oil (this time about the worries expressed at the IMF summit) and they have published a steady drum of stories about energy getting scarcer or more expensive, as my readers know well from my regular quotes. That means that the business community in Europe is becoming increasingly aware that this is a major issue;
- the linkage between the budgetary policy and the energy policy is a vital one. Bush has refused to address the energy issue and has tried instead to drown it instead, with Greenspan’s help, in a massive monetary and budgetary spending binge. We’ll pay “whatever it takes” to get our energy without limits is his (and America’s) motto. Well, that binge may come to an end, and Katrina may have been the wall that stopped Bush’s unsustainable policies, as it shows that there is no spare capacity in the refining sector (to fuel America’s wasteful cars), in the construction sector (to rebuild what was destroyed), and in the global financial world (to finance it all on Uncle Sam’s plastic);
- the insight that price rises will need to be massive to have an effect on America’s insatiable demand. A lot of Americans will change only when in financial pain; big changes will require a lot of pain;
- the important note that natural gas is the biggest short term problem. I have promised to write more about this, and I will, but note again that this will lead to higher heating and higher electricity prices – higher meaning probably double their current levels;
- the conclusion is that the only outcome is higher interest rates. Greenspan leaving is a good thing, but his God-like status does mean that his replacement will need to establish his/her credibility – and that will mean a hawkish attitude on inflation. That’s what’s needed, but it will happen faster than most expect, and it will be painful – in all likelihood popping the housing bubble and increasing debt servicing costs for most.
In a way, it is ironic that Iraq will end the same way that Vietnam did – because the USA could not afford it anymore. But at least Johnson was trying to build the Great Society at the same time. Bush has only been trying to shovel money to his rich cronies. History will not be kind to him.
only that bush started right off in 2001 with his tax cuts and they went from bad to worse to wroser..in a real hurry.
that the Soviet Union collapsed because they couldn’t afford to keep everything propped up. Essentially they ran out of money, the U.S. didn’t.
Now, it’s the United States running out of money and the Chinese who have it. So one could say, with irony, that essentially the Republican neocons have sold out the country to the Communists.
Bedtime for Bonzo.
Description: “It’s nature vs. nurture as Reagan steals a chimp to prove to his would-be father-in-law that love and a proper upbringing can improve on one’s genetic inheritance. Though he provides love and understanding, the chimp unleashes no end of havoc.”
Excellent point – History will record that nobody won the cold war; one side just lost before the other did.
Jerome, thanks for another excellent diary.
“A lot of Americans will change only when in financial pain; big changes will require a lot of pain;”…
I fear the truth in your words. In addition to fuel related increases,consider that the cost of personal debt is about to double in November because of a crony laden Congress. Also, the Republicans are about to push cuts in a myriad of public programs and services. Many of those cuts, if they go through, will result in a spike in state taxes, various co-pays, and fees. The lower you are on the socio-economic scale, the worse the situation will be. It is tragic what is about to befall this country: millions of people will find themselves tumbling towards poverty, with the Bushies giving them a good kick or two along the way.
I think it will be enough to shock this country into the realization that it’s time for a political fire sale: All Republicans Must Go.
I just hope it’s not too late.
Who cares about the poor these days?
I started writing this as a rhetorical question, but realise: who does???
Democrats, show that you care now before it’s all drowned out in the great jingoistic rush to war which will be Bushco’s only way “out” of the energy and economic crisis. We need an alternative to war.
The USA has three self induced crises:
A burgeoning federal and personnel deficits financed by Asia.
An energy shortage that will skyrocket costs.
An ongoing Holy War with Muslims.
For all three, there are no apparent balancing forces. Each will continue to play out unchecked. One or all three could spontaneously crash the economy, bringing the American Empire down with it.
I believe LBJ is a very underrated President. In fact I think he is a “near great” President who will be treated much kinder by history than he has by his contemporaries. I think it’s unfair to say that LBJ “gambled and lost.” The legacy of the Great Society is that during this “15 year inflationary spiral” era that Philip Verleger refers to, there was a corresponding reduction of poverty in the United States that is largely attributable to the goals and policies of the Great Society. Medicare and Medicaid came out of the Great Society. The entire concept of the federal government investing in redeveloping the infrastructure of the inner city came out of the Great Society. Moreover, LBJ initiated the Great Society in 1964 and left office by 1969. Johnson cannot be blamed for the fiscal policies of Nixon, Ford, and Carter over the next ten years which had as much, if not more, to do with the “inflation spiral” as LBJ’s guns and butter policies of the 1960’s.
LBJ was a great man, so his failure has an aspect of tradgedy. What he accomplished was very great, but his accomplishments have been undermined since by the consequences of his mistakes.
Bush was squalid from the get go. He gambled, yes, but he was the sort of gambler who steals his child’s lunch money to bet it on a “sure thing” which in reality is a crap game with loaded dice.
Not all gamblers are equal.