United States History

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The Faltering Economy

After nearly a decade of unprecedented expansion during the 1990s, the American economy began to show signs of a slump at the beginning of the 21st century. In 2000 the so-called dot-com bubble—the explosion of companies that sprouted up to take advantage of the Internet—burst. Analysts cited many reasons for the failure of these companies. Among them was that investors overestimated the extent to which consumers were willing to buy goods and services online. When venture capitalists—the people and companies that provide money to start-up businesses—became reluctant to invest new funds, the collapse began.

As many Internet companies went out of business, the stock prices of once high-flying companies such as Cisco Systems, Inc., and Lucent Technologies began to plummet. Other large companies, such as Microsoft Corporation and AOL Time Warner, Inc. (present-day Time Warner Inc.), announced that they would not meet projected profits. And just as high-technology stocks fueled the market’s rise, they dragged the market down. Both the Dow Jones Industrial Average and The Nasdaq Stock Market ended 2000 with a loss.

Soon the rest of the economy started to weaken. The National Bureau of Economic Research, a respected group of economists, estimated that the U.S. economy actually stopped growing in March 2001. Manufacturing and employment began to decline. The big automobile companies shut down plants and laid off thousands of workers. As businesspeople traveled less, airlines began cutting back. By the end of 2001, corporate profits had suffered one of their steepest drops in decades.

Many economists believe that the terrorist attacks of September 11, 2001, made the country’s slumping economy even worse. After remaining closed for several days after the terrorist attacks, the stock market suffered a record plunge when it reopened, with anxious investors selling off their holdings. Companies continued to trim workers, accelerating a downsizing that would total more than 1 million jobs by the end of 2001. Unemployment reached 8.3 million in December 2001, the highest in seven years.

Presidential Election Year

The year 2004 began with the Democratic Party’s Iowa caucus in January, the kickoff for the party’s presidential nomination campaign in a presidential election year. By March Senator John F. Kerry of Massachusetts had won enough delegates in the caucuses and primaries to secure the nomination at the party’s convention in June. President Bush ran unopposed in the Republican primaries and was nominated at his party’s convention in New York City in August.

In the November elections, Bush defeated Kerry, sweeping the South and the key swing state of Ohio to win both the electoral college tally and the popular vote. Kerry won the Northeast, the West Coast, and a number of Midwestern states.

Claiming a popular mandate from the election, Bush began his second term by calling for a sweeping overhaul of Social Security. His plan to replace guaranteed Social Security benefits with private accounts invested in the stock market for younger workers met with resistance, however.

Bush’s Second Term

The failure of Bush’s Social Security proposal seemed to set the stage for a series of mishaps for the Bush administration that resulted in some of the lowest approval ratings for the president since his election in 2000. Chief among these was the federal government’s delayed response to Hurricane Katrina, an August 2005 disaster that left tens of thousands of New Orleans residents, mostly poor and African American, stranded in the flooded city. It was the costliest natural disaster in U.S. history. A lobbying scandal involving Republican members of Congress, a decision to lease some U.S. port operations to a company based in the United Arab Emirates, and continued disorder in Iraq also contributed to popular disapproval.

Nevertheless, Bush’s second term gave him an historic opportunity to realign the Supreme Court in a more conservative direction. With the death of Chief Justice William Rehnquist and the retirement of Justice Sandra Day O’Connor, Bush succeeded in winning the Senate confirmation of two conservative jurists, John Glover Roberts, Jr., who succeeded Rehnquist as chief justice, and Samuel A. Alito, Jr., who succeeded O’Connor. With Justice Anthony Kennedy often filling the role of a swing voter and with some uncertainty about the judicial philosophies of the new appointees, however, it was unclear if Bush’s new appointments would lead to the overturning of significant precedents, such as Roe v. Wade.

The extent of presidential power in relation to the U.S. system of checks and balances spurred controversy during Bush’s second term. Throughout his prosecution of the wars in Afghanistan and Iraq, Bush claimed that he had wide latitude as commander in chief to protect national security. Those claims were the basis for denying Geneva Convention protections to prisoners held at Guantánamo Bay, Cuba. In 2006 Bush claimed that he had the authority as commander in chief and under the congressional resolution that authorized military force in Afghanistan to order the National Security Agency to eavesdrop on the overseas communications of U.S. citizens and nationals. The secret program, begun after the September 2001 terrorist attacks, was disclosed by a 2006 report in the New York Times. Some congressional critics said the 1978 Foreign Intelligence Surveillance Act required judicial review of electronic eavesdropping in such cases, making the program illegal. See also Surveillance, Electronic.

Bush’s assertions of sweeping presidential power were rejected by several Supreme Court decisions, particularly Hamdan v. Rumsfeld (2006), which upheld the Geneva Convention’s protections and struck down the administration’s plans to try prisoners held at Guantánamo before special military tribunals. The Republican-controlled U.S. Congress, however, addressed the Hamdan decision by passing the Military Commissions Act of 2006, which gave Bush administration officials immunity from prosecution for torture or inhuman treatment of detainees and suspended habeas corpus for anyone declared an illegal enemy combatant. Bush also frequently issued signing statements in which he asserted a presidential prerogative to ignore provisions in legislation passed by Congress if he deemed the provisions infringes on his alleged powers as commander-in-chief. See also Civil Rights and Civil Liberties.

As the midterm elections approached, Republicans were fearful that the president’s low popularity ratings could lead to a Democratic takeover of one or both houses of Congress. But the Democratic Party appeared to be disunited, particularly over the Iraq war, and uncertain as to how to take advantage of the president’s unexpected setbacks. In the meantime the U.S. economy showed considerable resilience, having recovered all the jobs lost during the recession of 2000. Despite economic growth, however, the United States continued to lose jobs in the manufacturing sector, and the two major automakers, General Motors Corporation and Ford Motor Company, announced plans for massive layoffs as their market shares dwindled.

Republican fears were validated by the results of the 2006 midterm elections, which saw Democrats gain control of both houses of Congress. The Democrats also took six state houses from the Republicans, giving them a majority of the country’s governorships. President Bush called the election results a “thumping,” and the day after the election he asked for and received the resignation of Secretary of Defense Donald Rumsfeld, the architect of the Iraq war planning. Polls showed that voters overwhelmingly disapproved of Bush’s handling of the war. The congressional leadership of the Democratic Party resisted calls from the left wing of the party for Bush’s impeachment but pledged to hold hearings and investigations into the prewar intelligence that led to the war, the administration’s handling of the war, including allegations of torture and prisoner abuse, and the way in which Iraq war funds had been spent.

As 2007 progressed Bush’s handling of the Iraq war continued to come under intense criticism, particularly after Bush largely ignored the recommendations of the bipartisan Iraq Study Group. The conviction of Vice President Dick Cheney’s chief of staff in the Valerie Plame Wilson affair, and the controversial firing of eight U.S. attorneys also distracted the Bush administration from pursuing its second-term agenda.

The highly regarded Iraq Study Group, made up of leading foreign policy experts from both parties, had issued its final report in December 2006 and made 79 recommendations for how to wind down the war and bring home American troops by 2008. Included among the recommendations was a call for U.S. negotiations with Iran and Syria and a renewal of the Israeli-Palestinian peace process with the aim of achieving a region-wide peace settlement in the Middle East. In a January 2007 nationally televised address, however, President Bush instead called for an additional 20,000 troops to be sent to Iraq. The Democratic-controlled Congress characterized the proposed “troop surge” as an escalation and for the first time passed legislation that called for a definite timetable for a U.S. troop withdrawal. A number of Republican members of Congress began to take up the troop withdrawal position, which President Bush characterized as “tying the hands” of U.S. military commanders in Iraq. Bush vowed to veto any legislation with a troop withdrawal deadline.

Meanwhile, the Bush administration was distracted by the conviction in March of I. Lewis “Scooter” Libby, Cheney’s former chief of staff, for perjury and obstruction of justice in the investigation of who leaked the identity of covert Central Intelligence Agency (CIA) agent Valerie Plame Wilson. In his concluding remarks to the jury, the U.S. prosecutor said that Cheney himself was “under a cloud” for his role in the affair, and many political observers believed that Cheney’s once-prominent role in the administration was being sidelined. The same month congressional investigations into the firing of eight federal prosecutors cast a cloud over Attorney General Alberto Gonzales, who later resigned.

The Beginning of the 2008 Presidential Campaign

President Bush’s lame-duck status and the Democrats’ narrow control of Congress made it increasingly apparent that little would be accomplished domestically during Bush’s last years in office. The Democrats lacked enough votes to override presidential vetoes of their legislation, and Bush lacked enough Republican votes in Congress to enact his own program. As a result the race for the presidency in 2008 got off to an early start, and it promised to be the most expensive election in U.S. history. By April 2007 six declared Democratic candidates had raised $78 million, and five Republican candidates had raised $53 million, for a combined total of $131 million, with many more months of fundraising to go. Among the leading Democratic contenders were senators Hillary Rodham Clinton and Barack Obama and former vice-presidential candidate John Edwards. Among the leading Republicans were former governor of Massachusetts Mitt Romney, former New York City mayor Rudy Giuliani, and Senator John McCain.

They were vying for leadership of a country that reached a population of 300 million in 2006. They were contending over a number of issues, ranging from the ongoing wars in Afghanistan and Iraq to global warming, health insurance, immigration, nuclear weapons proliferation, and the health of the U.S. economy.

By March 2008 the field of candidates had narrowed to Clinton and Obama among the Democrats and McCain, who became the presumptive Republican nominee after winning enough delegates in the Republican primaries and caucuses to secure the nomination at the Republican convention in September. The range of issues appeared to narrow as well as polls showed voters increasingly focused on two issues: the state of the economy and the U.S.-Iraq War.

As 2008 began the new chairman of the Federal Reserve, Ben S. Bernanke, warned that the U.S. economy appeared to be headed for a recession. A number of factors contributed to the economy’s growing malaise, including a decline in housing prices, a sharp increase in oil prices, a growing number of housing foreclosures and personal bankruptcies, a diminishing savings rate, rising budget deficits, the growth of income inequality, and a crisis in financial markets that led the Federal Reserve to offer a $200-billion loan program to investment banks to offset their losses in the mortgage market.

For several years Americans had, on average, stopped saving money. Some economists became alarmed when the personal savings rate in the United States reached negative territory—that is, Americans on the whole were spending more money than they were saving. Many observers attributed the negative savings rate to the steady increases in housing prices. Americans appeared to be banking on the value of their home for their retirement, rather than setting aside money in savings accounts. Meanwhile, other observers were warning that the housing market was a bubble that would eventually burst, and in 2007 it did, as home prices declined nationwide by 8.9 percent, one of the sharpest drops in U.S. history.

A rise in housing foreclosures added to the gloomy picture. Defaults on home mortgages reached an all-time high in September 2007. Particularly hard-hit were people who had taken out adjustable rate mortgages, arrangements that enabled them to pay monthly mortgages at a relatively low interest rate. After the rates rose, many of these people could no longer afford to make their monthly payments. Many of the foreclosures affected people who received so-called subprime mortgages—that is, loans made to people whose credit ratings or income usually disqualify them for a home purchase loan. A report by the U.S. Congress estimated that as many as 2 million families with subprime mortgages would lose their homes due to their inability to meet rising mortgage payments.

Further complicating the growing housing crisis was the discovery that due to banking deregulation no one really knew who held the mortgages that Americans were defaulting on. In March 2008 the Federal Reserve announced a $200-billion loan program for about 20 large investment banks to reassure investors worried about losses in the mortgage market. The Fed also extended an additional $30 billion for J. P. Morgan Chase & Co. to acquire a leading investment bank known as Bear Stearns, which was threatened with bankruptcy due to losses in the mortgage market.

The first part of this article was contributed by Paul E. Johnson. The second part, from Reconstruction to the Early 21st Century, was contributed by Nancy Woloch.

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