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The current recovery has been characterized by unprecedented, and seemingly contradictory, economic indicators. It has also been accompanied by a fiscal policy that is radically different from that of the 1990's. In order to judge whether our economic recovery can be sustained, it is necessary to examine what has transpired on the economic landscape since President George W. Bush took office.

 

When George Bush assumed the presidency in January of 2001 he inherited a slowing, yet fiscally sound American economy. The federal government, for the fourth consecutive year, was running an annual budget surplus. The publicly held federal debt was being paid down and budget forecasters predicted federal surpluses for nearly as far as the eye could see --10 years into the future.

The country's fiscal situation was so strong, that during the previous year's presidential campaign, Governor Bush called for two trillion dollars worth of tax cuts, most of which would go to the wealthiest Americans because otherwise we in Washington would spend the surplus on needless things like education and health care.

 

As it became clear that the economy was slowing down, however, President Bush continued to call for massive tax cuts but changed his reasoning. Now he argued the tax cuts were necessary to stop the sliding economy and put people back to work.

 

In March 2001, according to the National Bureau of Economic Research, the U.S. economy entered a difficult recession. Millions of jobs --most estimates say nearly three million-- were lost in a short period of time. But the recession was brief and the economy began growing again, albeit slowly, in the fourth quarter of 2001. And it's becoming clear that the expansion we have witnessed is going to continue. Some economists are predicting at least a four percent increase in our Gross Domestic Product this year alone.

 

While a growing economy is always good news, most Americans have not felt its benefits this time. Historically, this is one of the most painful recoveries on record for the middle class. Worse, it is built on a house of cards. And unless the White House recognizes that fact and changes course, our economic house will crumble.

 

This White House is unlikely to enact the necessary change since its policy decisions are driven by an unyielding neo-conservative ideology. Be it the war in Iraq, Medicare reform, environmental protection or the economy, this administration dogmatically ignores the reality of the circumstances we face. Several former administration officials have confirmed this, including John Diulio, Paul O'Neill and, most recently, Richard Clarke. 

 

President Bush is modeling his economic approach on that of his ideological ancestor Ronald Reagan, despite the Reagan model's known failings and in ignorance of the major changes that have taken place over the past two decades. This is why we find ourselves in our current predicament: a jobless, painful recovery accompanied by a debt-laden economic expansion.

Today, according to the Bureau of Labor Statistics' survey of households, 8.2 million Americans are unemployed --2.2 million jobs have been lost since the beginning of the Bush Administration. This is the first time since the Great Depression that jobs have disappeared over the course of one presidential term and the first time in over 70 years that there has not been a net job gain at this point in the business cycle.

 

Only recently have we witnessed any discernable job creation, but our current unemployment rate --5.7 percent-- remains 1.5 percent higher than when President Bush took office.

 

Using the unemployment figure alone is insufficient if we want a true picture of the current state of the labor market under the Bush economy. To understand the severity of the situation, we must also factor in the number of people who want to work but gave up looking for a job and the number of people working part time who want to be working full time. According to BLS, these groups bring the rate up to 9.9 percent.

 

It's important to note that this is long-term unemployment we're discussing. The number of people unemployed for more than 26 weeks has tripled under President Bush. Twenty-six weeks, as you know, is the cut-off point for regular state unemployment benefits. The president and the Republican-controlled Congress, however, refused to renew the Temporary Unemployment Compensation program when it expired in December. As a result, those who have exhausted their regular state benefits will receive no additional federal benefits, despite the still weak labor market.

 

President Bush is on track to have the worst job creation record of any modern president. But if that were the end of the story, most Americans could consider themselves lucky. Unfortunately, this recovery is wrought with more distressing news. According to the most recent Census data, median household income dropped significantly in 2002 for the second year in a row, poverty increased for the second year in a row, the number of people without health insurance continued to climb, health costs skyrocketed, and higher education has become less and less affordable.

 

Median household income in 2002 fell substantially for the first time since the last recession in 1990-91. The average American household lost $934 in 2002, sending household income down to its 1998 level. After adjusting for inflation, the income of a typical household is down over $1400 during the Bush Administration. The average annual decline in real median household income in the Bush years is the greatest drop for any single administration since we began collecting this data almost forty-five years ago.

This reverses some of the gains made in the late 1990s when family income grew in tandem with the economy.

 

While the boom of the late 90s did not fully reverse income inequality, it slowed it down. Low and middle incomes grew more quickly and more evenly than they had in the 1980s or early 1990s. Last year the only real growth in incomes was among the richest five percent of households, while all others stayed essentially even or fell.

 

The Bush economy is today mirroring the divergence we witnessed under the Reagan economy. That is, the disparity between the wealthiest Americans and the poorest Americans is growing rapidly.

 

The poverty level also increased for the first time in six years. Thirty-three million Americans --almost 12 percent of the population, and an increase of 1.3 million in one year-- now live in poverty. The poverty rate among children reached almost 16 percent. After watching these numbers decline for so many years, this is a dramatic and discouraging shift in the living standards of the least advantaged families.

 

To make matters worse, over four million people have lost their health insurance since 2001 and health insurance premiums rose at a rate eight times faster than general inflation, a record pace. In the absence of comprehensive reform, the average annual premium for employer-sponsored family health insurance could reach over $14,000 in the near future.

 

Under President Bush our country went from record budget surpluses to record budget deficits.  In fiscal year 2001, we had a $127 billion budget surplus. Three years later that surplus has been turned instead into a $500 billion deficit. The $5.6 trillion ten-year surplus that was predicted three years ago has been turned into a $2.9 trillion deficit projection. Most of this turn-around is due to the president's nearly $3 trillion in tax cuts, which required the federal government to borrow tremendous sums of money from foreign lenders.

 

This is President Bush's economic record: Failing grades across the board. But it didn't need to be this way.

 

The Center for American Progress has prepared a report that contrasts our economic growth with that of Canada. Although the experiences of our two countries have been different in key ways, the report is illustrative.

 

The economies of these two high-wage nations grew at about the same rate between 2000 and 2003. Canada's nominal GDP growth was 13 percent, while the U.S. growth was 12 percent.  But while we have lost more than 2 million jobs since 2001, Canada has added a million jobs to its economy, a 5.6 percent increase. If one were to apply just half this rate of increase to the United States, it would have given us more than 4 million new jobs.

 

This disparity between our job growth and that of our neighbor to the north is traceable to Mr. Bush's policies. During the period in which our president pushed through his tax cuts, Canada also passed a tax cut package. The Canadian approach was to provide the vast majority of its tax cuts to lower-income and middle-income households, those people who comprise the backbone of our modern-day economy. The Bush tax cuts, in contrast, strongly favored the wealthy and provided incentives for companies to invest in equipment. This allowed wealthy individuals to become more wealthy and encouraged companies to raise production and profit without hiring new workers. In the meantime, while Canada's national health care system removes health coverage as an impediment to hiring, U.S. health insurance premiums have climbed at record rates and remain a major negative factor in hiring decisions. The Bush Administration and the Republican congressional leadership have done nothing to alleviate this serious drag on job creation. This contrast with Canada should remove much of the mystery about the reasons behind the jobless recovery.

 

There is no doubt our economy is expanding. But conditions for continued expansion in the medium- and long-term are far from ideal.

 

Consumer spending and housing have fueled the majority of the growth the country has experienced over the past year. That would be fine except for a point I've already touched on: personal income is barely keeping up with inflation. As wages have remained stagnant, or declined, people have only been able to keep spending by tapping the equity in their homes and running up debt on their credit cards. This phenomenon has been made possible by record low interest rates.

 

President Bush recently touted the increase in homeownership that has taken place. Indeed, the homeownership rate is currently at a record high of 69 percent. But that welcome statistic is accompanied by the troubling news that mortgage debt in the United States is at a record $6.82 trillion. Equally concerning is that almost 30 percent of new mortgages, including refinancing, are adjustable rate mortgages. Meanwhile, outstanding consumer debt --credit cards, auto loans, and other revolving lines of personal credit-- is at an all-time high of more than $2 trillion. This record level of personal debt, when combined with the rapidly rising federal debt is creating what could be called a "debt bubble."

 

The growing annual federal deficit and resulting debt will "crowd out" funds for private investment, as the government is forced to borrow more to cover its operating expenses. The International Monetary Fund reports that the Bush Administration's policies have set the United States on a course to increase its net debt to 40 percent of GDP within the next few years, "an unprecedented level of debt for a large industrial country." This will inevitably lead to a rise in long-term interest rates. Alan Greenspan recently indicated that he has no plans to increase rates at the next Federal Reserve meeting. But as the economy continues to expand and inflationary pressures increase, you can be assured that the Fed will raise short-term interest rates in the near future.

 

As interest rates rise and personal incomes remain stalled, Americans will not be able to keep spending at the same pace.  Mortgage payments, credit card payments and car payments will all increase as rates go up, leaving little disposable income in the household budget. Thus, the foundation of this house of cards --consumer spending-- will crumble.

 

It's very clear how this dangerous debt bubble was created. The Bush tax cuts account for more than three-fourths of the growing deficit. Increased spending --including military, homeland security, and the Iraq war-- accounts for slightly less than a quarter. Of the ten-year projected deficit of $3.6 trillion, the revenue lost due to tax cuts during that time will total $3.7 trillion.

 

Unfortunately, a debt bubble is not the only matter we need to be concerned with. The tax cuts that make up the entirety of President Bush's economic policy have amounted to tax increases --at the local and state levels-- on the majority of Americans.

 

States and localities have just been through some of the most difficult economic times in over 50 years. At the same time, they have been forced to pay for an increasing number of federal mandates. These range from Medicaid services to the changes required in the No Child Left Behind Act. It would be logical to most people that the federal government would provide assistance to the states for these federal obligations. But, as we all know, that didn't happen. Instead the president passed his unaffordable tax cuts. This left states and localities with little choice but to cut programs and services and raise property taxes.  If it were understood that the Bush tax cut represented a choice between a few hundred dollars in federal tax refunds on one hand, and more services and lower state and local taxes on the other, I'm quite certain most people would choose the latter.

 

Interest payments on the national debt are the most obligatory item in the federal budget. As the national debt increases, American taxpayers are required to pay increasing interest payments. This effectively creates a debt tax. If each American family is assumed to pay the same share of debt service, or interest on that national debt, then this year a family of four is paying a $2,109 debt tax. This amounts to 58.7 percent of the income tax liability for a median-income family of four. By 2008, under the same assumptions, the debt tax rises to $3,705 or 71.1 percent of the typical family's tax liability.

 

Of course each family doesn't pay the same share of debt service, but the point remains valid: the debt tax is a significant cost to taxpayers. Worse, it's money that is going solely to pay our debt interest - not to education, health care, medical research or any other vital services.

 

The numbers I've presented do not include a fix for the Alternative Minimum Tax. The AMT was passed many years ago to prevent wealthy individuals from sheltering income and avoiding taxes.  Because the AMT was not adjusted for inflation or to account for the Bush income rate cuts, more families with lower incomes will pay it.  A key component of the AMT calculation disallows the deduction for state and local taxes, an important provision for people in high tax states like New York.

 

In 1999, about 1 million taxpayers were subject to the AMT. But by the end of this decade that figure is expected to reach 33 million and 97 percent of families making between $75,000 and $100,000. It's obvious that this needs to be fixed. But it will be costly. If the Bush tax cuts, which are set to expire in 2010, are made permanent as the president has requested, the cost to fix the AMT would be $780 billion, according to the Urban-Brookings Tax Policy Center. This money would likely be borrowed under the current fiscal conditions and will inevitably increase the debt tax.

In many ways the Bush economy is similar to the Reagan economy: economic expansion, combined with massive federal deficits. But while the consequences of Reagan's irresponsible fiscal policies were remedied, in part by the first President Bush and further when Bill Clinton took office, the same solutions will not work today.

 

When President Clinton and we Democrats in Congress passed an economic recovery package in 1993 and laid the groundwork for the sustained economic expansion of the 1990s, most of the baby boomer generation was still 20 years from retirement. Now, retirement is less than nine years away for most of that generation. Instead of preparing for that eventuality, President Bush and congressional Republicans are digging us deeper and deeper into debt and trying to kill the safety net programs that we promised current and future retirees.

 

Long gone are the days of fiscal responsibility coupled with sound economic growth. President Bush has no plan to deal with the growing deficit. No plan to improve the weak labor market. No plan to increase wages. No plan to address the rise in poverty. No plan to address the loss of health care coverage and rising health care costs. No plan to make higher education more affordable. No plan to fix the AMT. In fact, his budget that is making its way through Congress right now will make many of these conditions even worse. Republicans have set new budget rules that no money can borrowed to pay for non-defense spending increases, but they exempt defense spending and future tax cuts --the primary causes of our deficits-- from that requirement.

Given these realities, I am deeply worried about our economy in both the short and long term. I believe the current economic expansion will continue in its present form, with most of its negative aspects, but only for a short period of time. President Bush's failure to address the myriad problems I have laid before you today will set us up for massive economic distress.