winners-and-losers.jpgCall this part 2.5 of the “How the Economy Works” Series. A correspondent recently suggested to me that the point needs to be reinforced that a lot of people who voted for Bush aren’t (or rather, weren’t back in 2002 and 2004 (and to a less extent 2006, which was closer than the top-line numbers indicate)) losing from Bush’s policies. Not yet, anyway. So let’s talk about who won, and who lost in this Bush administration.

Winners

Resource Extraction: If you work in a primary extraction industry such as lumber, oil, natural gas or many mining concerns then the Bush administration has been good for you. Commodity prices are on a long term bullish swing that started around 1999 to 2000 and Bush’s policies have generally encouraged high commodity prices. In some cases that was the intention, in others it was accidental, but the end result is the same – for the first time in 25 to 35 years your industry is able to sell its goods for more than the year before.

Military Industrial Complex: either the actual military; the towns that exist around military bases; the mercenary and “security” companies who are being used very heavily; the contractors such as Halliburton or the companies that make the military’s goods (which includes essentially every aviation company in the country) the last few years have been very good for you indeed. Entire rural areas are effectively completely dependent on the military. Their sons and husbands may be getting killed, but the money has been flooding.

Prison Industrial Complex: This is no different than under the Clinton years, but those reliant on this industry feel more comfortable with Republicans in charge, especially Republicans like George Bush. As with the military industrial complex entire rural areas are completely dependent on this industry, which locks up more people than any other nation in the world, recently beating out Russia for top spot. Since the industry is rife with corruption and brutality (including condoned rape and torture) having a President like Bush who approves of such is an extra measure of safety. Likewise politicans who are strongly for maintaining mandatory sentencing laws and harsh drug laws are a necessity for the industry to continue prospering.

The Privileged: Anyone who is in a position to effectively determine his or her own salary, which means most executives; as well as anyone who makes most of his or her money from unearned income has done very well under Bush’s tax cut regime. The cuts on dividend taxes alone have lead to the biggest cash out from corporations in modern times and the continued open window on options has likewise lead to looting of corporations by their own executives and officers not seen since the days of the Robber Barons. It doesn’t matter if you’re an executive in a losing industry – you are still personally a winner, since you can cash out a good chunk of the value of the company even as the company goes into bankruptcy (Delphi execs giving themselves massive bonuses, for example.)

The Medical Industry: Since the medical industry doesn’t face overseas competition, it has consistently been able to raise prices faster than inflation. People have to have it. This includes hospitals, HMO’s, medical insurance of all varieties and the drug companies, who have had their intellectual property vociferously defended at the cost of the lives of those who can’t afford retail medicine prices.

Developers and the Real Estate Industry: People in the building trades, mortgage brokers, developers and real estate speculators all did very well out of the Bush economy until very recently. Certainly they were doing well at election times.

Arbitrageurs: Pretty much anyone in the financial industry with sense. Since the rate you can borrow money at is much less than the rate of inflation in various areas (real estate and commodities, most notably), making money for those who can afford to borrow money has been relatively simple. This also affects, as noted above, anyone who is rich enough to have access to substantial credit on good terms.

The Losers

Anyone except the Executives in any industry that is subject to foreign competition: This means almost any type of manufactured good, from cars to textiles to computers. If it is physically made somewhere and then shipped to consumers then labor arbitrage has meant that the US simply cannot compete with lower wage domiciles. For workers this has meant either losing their jobs or coming under huge pressure to drop wages or benefits.

Hourly Wage Employees: All social programs are under continued pressure and hourly wages are up slightly from the beginning of Bush’s regime (call it a 27 cent raise based on real numbers). However when you consider their increased debt load and factor in inflation in the necessities (medical care, food, energy) their position is substantially worse than it was at the beginning of the Bush regime. There are some exceptions in various specific industries, but as a whole this is true.

Knowledge Workers: Now that the knowledge industry of the last boom is being standardized time pressure is off and the skills have spread. That puts programmers and other such scut workers of the digital world in a position without pricing power. I’m going to take a second to note that in the 90’s I warned this day was coming – owners and executives did everything they could to reduce the pricing power of such workers. In general the telecom revolution means that most knowledge jobs that don’t require face-to-face interaction are under the same labor arbitrage pressure that manufacturing workers have been facing for a long time. Brains are not scarce in the world as a whole.

Debtors: Perhaps the oldest form of social analysis is that of debtor and creditor. While the experience of creditors over the last few years has been mixed (some have done gangbusters, other are going to take it on the chin over the next couple of years), debtors have been clear losers. The new bankruptcy act is extremely harsh, and written by credit card companies. Effective interest rates for the poor and middle class for anything other than house backed loans generally start at 18% and go up to around 60%. For the truly poor, payday loans and other such scams have interest rates of effectively hundreds of percent a year. Again, this did not start under Bush, but he and the Republican Congress have been particulary kind to this sort of usury.

Union Workers: Generally these workers are in older mature manufacturing and transport industries. They have been having their lunch eaten and will continue to do so. They have almost no bargaining power against labor arbitrage. In fact you can calculate their bargaining power by the sunk costs of the capital equipment and training in North America. Then divide that amount by how long it would take to make the money back overseas. The number, when you take into account depreciation and tax breaks, is a lot lower than you’d think. As each facility becomes obsolete and has to be replaced/upgraded anyway, that factor nearly disappears.

Students and young workers: The huge growth in university tuitions, the decline in aid, the increase in reliance on loans, the anemic entry job market and the below inflation growth of wages in many sectors means that the young have never seen good years and have little reason to think that they will. The inflation of housing prices in the bubble means that most will never own a house unless they are willing to take on near catastrophic levels of debt (on top of their student loans). Many have put off having children due to debt.

In Between

Home Owners in most areas: A couple years ago this would have been firmly in the “win” category. Because if you owned a house in most areas, you’d seen its value appreciate substantially. Your net worth had gone up. And odds are, if you had a mortgage, its carrying cost has gone down. This is now a mixed bag. A lot of people are sitting on unrealized (and probably unrealizable) gains. A lot of people are under water, with mortgages worth more than the houses. A lot of people are watching their carrying costs rise, and getting set for them to rise even more (ARM resets start with a vengeance in 2008). Still, a lot of householders did see substantial increases and they still think of themselves as winners from the housing bubble. In a few years they won’t. However, note very carefully that in 2004 and 2006 homeowners as a class would have seen themselves as better off thanks to Bush – not worse off. The bubble’s popping hadn’t happened yet. And Bush ain’t running in 2008. I’d say that bubble worked out okay for him in political terms.

Pensioners: Pensioners are in an odd position. They have mostly been winners, since COLA adjustments have been higher than their actual perceived inflation. Pensioners with houses have done especially well. However they have suffered from health care inflation and as energy and food inflation have hit they have been starting to hurt, and as the United Airlines pension precedent spreads through its more virulent Delphi form they will discover that their pensions can be unilaterally decreased. Pensioners are going to take it on the chin going on for many years to come. But this is just beginning for them.

Suburbanites: The housing boom has been very kind to suburbanites. The value of their houses has increased at a fine clip. However as gas prices increase they have found themselves in a trap – they can’t sell their houses as the bubble bursts, and they must drive to get to work and to go shopping. As a result, while they have mostly been doing ok, with housing asset price rises more than offsetting flat or declining wages they are about to become very unhappy. There will be nothing most can do to escape the trap, however.

Concluding Remarks:

In many respects the Bush economy was and is an awful economy. But there have been a lot of people who have or did, short term at least, win. Many of those are indeed short term winners – such as most house owners. The housing bubble deflation or crack, plus the oncoming inflation, will eat away all of their gains and then some. Others have been real winners – the executives and the privileged who were able to cash out on favourable terms will be rich for the remainder of their lives, provided they aren’t idiots.

In general, those in the protected economy have done reasonably well. In some cases very well, and those in the non-protected economy (anyone who has to compete with anyone outside the US) has not done well. The main exception is that anyone who is in a position to cash out other people’s equity has also done very well.

While there will continue to be ups and downs, in general the Bush economy set up a number of very ugly traps; vicious spirals, which will put a lot of people in economic positions from which there is no escape. Many of these traps will grind exceedingly fine over a number of years, extending the pain for quite some time.

As a brief example, while the health care industry has been doing fine, a collapse of either the real estate or the military sector (or worse, both) will lead to people simply not being able to pay their prices. At which point they will likewise lose pricing power. The only people who retain pricing power throughout all of this, for sure, are those selling energy. Because you have to have it and it will take a long time, and a lot of very fine grinding, before suburbanites and exurbanites give up their houses.

But in general the thing to remember is that a lot of people did just fine out of the Bush economy. They turned on him when they stopped doing fine. That time has started in 2006 and it will continue. The political lesson is clear: hang this not just on Bush, but on the Republicans as a whole. The economic lessons should also be fairly clear, but I doubt they are. More on that in later installments of the series.

Related posts:

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  3. Entrenched Interests Are Safe from the Obama Administration
  4. Sarah Palin: It’s Not My Fault That We Lost
  5. Glenn Beck Has Lost Over 50% of His Ad Dollars