[A-List] US economy: double jeopardy

["Michael Keaney" <michael.keaney@xxxxxx>]

US economic folly should worry us all

Think before gloating over Bush's spectacular fiscal incompetence

Joseph Stiglitz
Wednesday September 17, 2003
The Guardian

In 2001, President Bush misled the American people. He said that a tax cut
that was not designed to stimulate the economy would stimulate it. But it
did not. He told Americans that the large surpluses that were part of
President Clinton's legacy meant the US could afford to cut taxes massively.
Wrong again. He did not warn Americans how dubious such estimates can be.

This year President Bush again misled the American people about the economy.
Weeks after persuading Congress to pass another tax cut - in some ways even
more inequitable than the first - his administration revealed how bad the
fiscal position had become. The $230bn surplus inherited from Clinton had
turned into a $450bn deficit.

Now, after handing billions to rich Americans through tax cuts, the Bush
administration is passing the hat around, asking for contributions from
other countries to help to pay for the Iraq war. Even setting aside other
dubious aspects of Bush's Iraq policy, the conjunction of misguided
giveaways to America's richest people with an international US begging bowl
is hardly likely to evoke an outpouring of sympathy.

Meanwhile, the US trade deficit is mounting. America, the world's richest
country, evidently can't live within its means, borrowing more than a
billion dollars a day. As the US thrashes around for someone to blame, it is
inevitable that it will focus on China, with its large trade surplus, just
as the deficits of the Reagan era led to a focus on Japan two decades ago.

But this is blame shifting, nothing more. America's fiscal and trade
deficits are intimately linked. If a country saves less than it invests, it
must borrow the difference from abroad, and foreign borrowing and trade
deficits are two sides of the same coin.

National saving has two components - private and public. Reagan's
irresponsible tax cuts, combined with America's paltry savings, meant the US
had no choice but to borrow abroad. Now America is repeating that folly.
Matters may get even worse once investment is rekindled, unless private
savings increase in a way the US has not seen.

Some people abroad now tend to gloat at America's problems. For many, it is
another reason to question America's ability to provide effective
leadership. It took America a dozen years to work its way out of Reagan's
fiscal mess. It may take just as long to clean up the mess Bush has created.

But the schadenfreude of non-Americans is misguided. Globalisation means
that mistakes in one country - especially the world's largest economy - have
powerful repercussions elsewhere.

Three things are worth noting here. First, America's deficits are certain to
sop up vast amounts of the world's pool of savings. But the world will
eventually recover from the current slowdown, and that shortage of savings
will become important. It will mean higher real interest rates, lower
investment and lower growth, all of which will be particularly costly for
developing countries.

Second, America's huge trade deficit may be a source of global instability.
Will the world continue to finance this deficit willingly, to put its money
into a country with a demonstrable lack of competence in macroeconomic
management (to say nothing of the corporate, banking and accounting
scandals)?

What happens if global investors decide to change their portfolio mix,
shifting slightly from US assets? A weak Europe and skittishness about
emerging markets have been American strengths, but how long can the US rely
on the weakness of others?

Third, in searching for others to blame, America may again enter an era of
protectionism, as it did under Reagan. Bush may trumpet free markets, just
as Reagan did, but just as he may exceed Reagan in fiscal irresponsibility,
so he may outflank Reagan in trade hypocrisy.

By one reckoning, close to a quarter of American imports were covered by
some form of trade restriction at the peak of Reagan protectionism. Expect
no less from Bush. Last year he showed little reluctance in imposing steel
tariffs, in clear violation of WTO rules. The good news is that the world is
beginning to see a rule of law in trade - a legal framework that, although
not totally fair to developing countries with economic power still counting
for a great deal, may circumscribe America's ability to revert to the
protectionism of the past.

Europe has committed itself to fiscal responsibility - with almost too much
zeal, failing to recognise that a well-designed deficit in times of
recession may yield high returns. The Bush administration has pushed forward
tax cuts that lead to deficits while providing only a modest amount of
stimulus.

Equally worrying - for America and the world - is the path on which it has
embarked: deficits as far as the eye can see. In the long run, this policy
bodes ill for the US - and hence for the world.