When it comes to economic policy, George W. Bush has all the luck. He's like a drunk who wanders across a six-lane highway and somehow never quite gets smushed.
First Bush proposed enormous tax cuts to shore up his conservative credentials in the 2000 primaries. Then, after the first reckless cuts were enacted, along came the perfect after-the-fact justification: terrorism. Suddenly people were terrified about air traffic grinding to a standstill, consumers being too frightened to go shopping and buildings being uninsurable. The economic boost from the tax cuts seemed almost prescient.
Next, the post-Sept. 11 economic trough ended in time for Bush's reelection. Bush Senior lost his 1992 race because the economy rebounded too late to save him. But 12 years later Junior celebrated robust growth for several months before his reelection vote.
But the most remarkable aspect of Bush's good fortune is the way he's repeatedly avoided the retribution of markets.
When Bush passed his tax cuts and followed them up by including prescription drugs in Medicare and increasing the Pentagon's budget, some kind of market reckoning seemed inevitable. After all, extra government borrowing means less available capital and therefore higher interest rates; and if bond rates are attractive, investors will avoid the risk of buying equities and so deflate the stock market. At the same time, extra government borrowing stokes consumption, including consumption of imports. Those imports have to be paid for with capital from foreigners; to entice foreigners to provide it, the dollar may have to fall enough to make U.S. assets a bargain.
But almost none of this has happened. Yes, the trade deficit is at an all-time high, and last year -- conveniently, after the election -- the dollar fell enough to get people nervous. But this year, the trade deficit notwithstanding, the dollar has bounced back again. Meanwhile, long-term interest rates are actually lower now than they were one year ago. The stock market has been amiably docile.
What gives? Certainly not something that Bush could have predicted. Foreigners have decided to shower the United States with savings, so the pain from his guns -- and prescription drugs -- and butter policy has been magically anesthetized. The more Bush pushed up the government's borrowing, the more foreigners eagerly opened their wallets. Hence no shortage of capital, no higher long-term interest rates and no falling dollar.
To appreciate the extraordinary extent of this good fortune, consider what one means by "foreigners." It's not merely that one country, or even one group of countries, has decided to litter the United States with cash. For Bush's winning streak to hold, it's taken one lucky break after another -- three, to be precise.
First came Asia's central banks. In 2003 and 2004 they decided to keep their currencies cheap by selling them and buying dollars. The Japanese, for example, increased their holdings of U.S. Treasurys by an astonishing $312 billion, a sum equivalent to three-quarters of the 2004 Bush deficit, according to Brad Setser of Roubini Global Economics, a consultancy in New York.
There was nothing inevitable or predictable about this. The Bank of Japan could perfectly well have chosen not to buy dollars or amass Treasurys; in fact, in the spring of 2004 it did stop buying dollars, and its accumulation of Treasurys stopped in the fall. But in 2003 and most of 2004, when the Bush budget deficits were exploding, American voters were spared the usual consequences. Indeed, the housing market, one of the most interest-rate-sensitive sectors of the economy, boomed instead of succumbing to the expected tailspin. Low interest rates fueled a refinancing binge, delivering the growth that Bush needed for his reelection drive.
When the Japanese stopped financing the Bush deficit, a combination of China and assorted oil states came to the rescue. Because of its growing trade surplus, China is awash in dollars; because of high energy prices, oil exporters such as Russia are drowning in dollars, too. So the Russians and the Chinese, not exactly the coziest of U.S. allies, are now financing the Bush deficit, including that part of the deficit that's driven by the Pentagon's determination to contain China.
Again, there's nothing inevitable about the Russian or Chinese decisions. They could take their oil earnings and export earnings and park them entirely in euros. But, to complete Bush's lucky sequence, the Europeans have done their best to drive loose savings elsewhere. Their sclerotic economies offer few opportunities for investors, and the Franco-Dutch rejection of the European constitution has shaken business confidence in the euro.
So thanks to Asian central bankers, cash-rich oil states and testy European voters, Bush has escaped the consequences of his profligacy -- and now, because the economy is growing, the budget deficit is coming down. In the long term, to be sure, Bush has put the federal government on an unsustainable financial glide path, and one day the foreigners will refuse to keep us airborne. But there's no justice in politics. The comedown may not happen on Bush's presidential watch.