Last Friday the Labor Department reported that the economy lost 308,000 jobs in February. More ominously, the number of long-term unemployed is at its highest level since 1992.
Oil prices are skyrocketing. And a recent report in The Wall Street Journal makes clear that, unlike in the first Gulf War, oil producers are already pumping oil at close to their capacity. If Iraq's supply is seriously damaged, prices could stay high for a while.
The war and its aftermath will also add hundreds of billions to a budget already in deficit by a projected $304 billion, a sum that doesn't count the costs of war, occupation or rebuilding. In the first Gulf War, allies picked up most of the tab. In this war, Bush has few allies. And the reluctant allies he does have, like Turkey, are more likely to be cost centers than sources of cost-sharing.
We would be economically better off, of course, if Bush called off the war or if the war were quick and cheap. But neither of these outcomes is likely.
I wish I could write that war fever is all that ails the economy. But in fact, incipient war is aggravating underlying weaknesses. Some of this damage is the result of long-term trends; some of it is self-inflicted by Bush administration policies.
The economy has still not recovered from the stock collapse of 2000. The stock bubble of the 1990s attracted trillions of dollars into investments that will never pay back a nickel. The airlines, the telecom industry and much of advanced technology are still awash in excess capacity.
Profits have not yet recovered, and the more that industry trims its costs to improve its bottom line, the less equipment it orders and the fewer jobs it creates.
Investors remain traumatized. Once the shooting war is over, Wall Streeters expect a brief relief rally as investors who've hung back return to stocks. But for the long term, as it gradually sinks in that the '90s are really over, investors are putting less money into stocks and more into bonds. That, in turn, reduces the demand for stocks and reduces stock prices.
In the 1990s, the market took several decades of normal gain -- in advance. Now, it's likely to be fairly flat for some time to come. In the 1990s, many stocks stopped paying dividends, but investors took their returns in the form of stock appreciation. Now they have neither. This hurts both retirees and institutions such as universities, foundations, hospitals and philanthropies that depend on endowment income.
The U.S. trade deficit with the rest of the world keeps growing while the dollar is weakening. In principle, a weak dollar should be good for U.S. exports, but because of poor economic conditions overseas, an export boom isn't happening.
The economy is so weak that even large budget deficits are not providing much stimulus. The one thing keeping the economy afloat is very low inflation and low interest rates. But the Federal Reserve has pushed rates down about as far as it can. And if inflationary pressures should break out -- either because of an oil shock, a collapsing dollar or because of skyrocketing federal deficits -- then we would face the real calamity of higher interest rates in a recession.
This brings me back to the part of the downturn inflicted by the Bush administration. Bush may not be able to do much about a stock bubble that burst before he took office. But his policy of endless tax breaks for the wealthy and permanent large deficits does needless damage.
So does his policy of ignoring the fiscal plight of the states, forcing them to cut services or raise taxes in a soft economy. And so does his unilateral war on Iraq, which will saddle Americans with unilateral costs. And so does his gutting of federal regulation, which adds to the chaos in industry after industry and reduces investor confidence.
If the war goes badly and leads to more severe global instability, it will be hard to place the blame. For the world really is a more dangerous place than it was in 2000. And the administration can always take the ensuing chaos as proof of the need for American swagger (rather than the predictable result of the swagger). But the economy is another story. This economy, like the Iraq mess, now bears the stamp of George W. Bush. And it will be far harder for him to evade political responsibility for making a bad economy worse.
Robert Kuttner is co-editor of the Prospect.
