Health of the State, Sickness of the Economy

Adam Smith famously observed that there is a lot of ruin in a nation. Let’s hope that he was right, because the George W. Bush administration has taken a great many actions during the past seven years that contribute to national ruin. I consider its contributions to moral, legal, and constitutional rot to be its most serious transgressions, but here I allude only to its economic actions.

Much of the administration’s faulty economic policy may be traced to its wars in Afghanistan and Iraq, especially the latter because it has been larger, costlier, and more diverting. I use the word diverting deliberately to emphasize that the government’s military adventures in southwest Asia have served to draw the public’s attention away from economic measures that otherwise would have attracted more notice and hence more resistance.

One reason war is always associated with especially rapid growth of the government’s size, scope, and power is that it focuses people’s attention on what is seen as the most pressing item on the agenda, so they simply don’t notice what the government is doing in other regards. Another reason is that during wartime many people increase their broad support for the government, and hence they are less inclined to challenge its actions even when those actions have little or nothing to do with the war.

Hardly anyone was surprised that real defense spending (as measured in accordance with the government’s own narrow concept) increased by almost 60 percent between 2000 and 2007, while real GDP rose by only 18 percent. Note, however, that the government’s real nondefense outlays increased concurrently by more than 24 percent―an increase one-third greater than that of GDP. When people let down their guard because they “support the troops,” they permit the government to make greater headway in its ceaseless quest to enlarge its spending in a wide range of areas, many of them strictly civilian in nature.

The administration has partially concealed the burden of its spending binge by resorting to deficit finance. The upshot, however, is that federal debt held by the public increased by 49 percent between the end of fiscal 2000 and the end of fiscal 2007―by 24 percent after adjustment for inflation. To facilitate this surge of public borrowing, the Federal Reserve engineered a 40 percent increase in the monetary base, easing credit conditions in the commercial banking sector. The real-estate bubble (now bursting) and the substantial depreciation of the dollar’s international exchange value are but two of the consequences of these reckless, war-spawned fiscal and monetary policies.

In view of the stock market’s plunge since last October, my guess is that the current recession, in which many of the easy-credit-induced malinvestments of the past seven years are being liquidated by means of write-offs, loan defaults, bankruptcies, and other asset forfeitures, has much further to run. If you like the present worsening economic situation, write the president and your congressional representatives a letter and thank them for their war and their related economic spoliation.

Robert Higgs is Senior Fellow in Political Economy at the Independent Institute, author or editor of over fourteen Independent books, and Editor at Large of Independent’s quarterly journal The Independent Review.
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