Who Caused the Recession?

Discussing Mike Ditka's empty bromides on the American job market, I ascribed this week's layoffs at Gehl (46, not 45) to the "Bush Recession." As expected, a couple commenters raged back (I paraphrase), "Well, what about your Democrats? They're in charge of Congress; it's their fault!"

Quick intellectual honesty check: If you believe that the Democrats who have controlled Congress for the past 22 months are responsible for the current recession*, do you also believe that the Republicans who had controlled Congress from 1995 to 2001 were responsible for the 2001 recession?

Ah, now we have to start thinking. Let's float some alternative theories on the cause of the current economic mess:

Neocons Did It: The War in Iraq

THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy, according to Nobel Prize-winning economist Joseph Stiglitz.

The former World Bank vice-president yesterday said the war had, so far, cost the US something like $US3trillion ($3.3 trillion) compared with the $US50-$US60-billion predicted in 2003.

...The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.

That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said [Peter Wilson, "Iraq War 'Caused Slowdown in the US," The Australian, 2008.02.28].

Bush Did It: Tax Cuts and Funding War with Foreign Credit

With China and other foreign countries absorbing Treasury securities directly, and U.S. corporations still coming off of their late-90's investment binge, the beneficiaries of the tax cuts absorbed newly issued securities primarily in the form of mortgage obligations and the bulk of the real investment was spent to build residential homes to excess. We are now seeing the results of that overinvestment.

So the policies of recent years have indeed been stimulative. But stimulative to what? Primarily to unproductive investment and poor credit. There is nothing wrong with debt that is incurred to obtain productive assets, legitimate national security, or the relief of suffering. In this instance, there is little to show but liabilities. The U.S. is now saddled with a burdensome federal debt, a deep current account deficit, reduced competitiveness, a weakened financial system, a tragic and needless loss of life on both sides of the war, and a growing indebtedness that allows major U.S. companies to be picked away by foreign hands like apples from a tree [John P. Hussman, "How the War, Tax Cuts, and the Swaps Market Debased the U.S. Financial System," HussmanFunds.com, 2008.07.21].

We Did It: Consumer Debt

There's no magic bullet, says Steven Fazzari, economics professor at Washington University in St. Louis. The root cause of the current economic slowdown in the U.S. goes back several decades. There has been a concurrent wave of increasing consumer spending and rising consumer indebtedness. In the past, consumer spending actually helped the economy as it raised firms' sales and encouraged more hiring. But the associated rise in household debt, most obviously in the recent housing bubble, has come back to haunt the U.S. [Shula Neuman, "Recession's Root Cause Is Consumer Debt, Expert Says," Washington University in St. Louis News & Information, 2008.03.31]

Commenters, feel free to join the link war. Post your favorite articles, fix the blame... and let us know who can fix the problem.

By the way, if you think Presidents have anything to do with the economy (and both McCain and Obama argue that they do), it's worth noting that during the last 50 years, the best economic growth has happened under Kennedy, Johnson, and Clinton. Next come Reagan and Carter in a tie, then Nixon and Ford. Both Bushes are at the bottom of the list. As I've said, if nothing else, vote your pocketbook... and vote Dem!

Recession: Last week's GDP numbers showed the economy shrank 0.3% during the third quarter. Some economists will say it's not a recession until we get two consecutive quarters of GDP contraction. The National Bureau of Economic Research defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Take your pick.