pass the bubble

[Eubulides <paraconsistent@xxxxxxxxxxx>]

Unsustainable debt

Leader
Monday March 1, 2004
The Guardian

The world economic revival seems to be picking up speed practically
everywhere - except, of course, on the continent of Europe, which is still
stagnating. The trouble is that recovery is disconcertingly dependent on
America's pre-electoral boom. Nothing else seems to matter over there.
Forget the unprecedented trade and budget deficits, ignore the free-fall
in the dollar and turn a blind eye to growing protectionism. They can all
be cleared up after the next election, as long as it is President Bush and
not one of those resurgent Democrats that is doing the cleaning up. Unlike
previous US booms, this one is not being oiled by rises in take-home pay.
Wages, after allowing for inflation, are hardly expanding at all. The
long-running spending boom is being sustained by consumers taking on extra
debt (financed by what may turn out to be only a temporary increase in
assets, like shares and houses), plus tax cuts. Consumers, particularly
richer ones, will be drip-fed with more tax refunds in the coming months
in one of the most carefully orchestrated pre-election booms on record.

Even the normally cautious chairman of the Federal Reserve, Alan
Greenspan, is being caught up in this dangerous game of pass the bubble.
He sees hardly any problems in the short-term thanks, he says, to what he
regards as amazing US productivity growth, spare capacity and low
inflation. But he sees mega problems in 10 to 15 years' time when the
rocketing US federal deficit reaches the stratosphere as the baby boom
generation becomes eligible for increased entitlements. If his short-term
solution is complacent, his long-term one is downright irresponsible. He
urges the administration to maintain the tax cuts - which
disproportionately benefit the rich - while cutting benefits; a move that
inevitably will hit the poor. Robin Hood has gone into reverse thrust.

The US administration should act now to bring the deficit down in order to
avoid the danger of a meltdown in later years that would inevitably send
shockwaves across the rest of the world. It could easily do several
things: rescind the worst of the recent regressive tax cuts; allow people
who want to work after their normal retirement date (like the 78-year-old
Alan Greenspan) to do so; rescind the $180bn of extra agricultural
subsidies (mainly credits) that President Bush unexpectedly introduced
soon after gaining office; and start looking at how fiscal policy in the
form of tax increases can be used to reduce America's dependence on Middle
East oil reserves.

An election year is not a good time to be deciding long-term economic
policy. But it is sad to watch how the main political parties find it
difficult to call for tax increases - or even for an end to reductions
that have not yet come into effect - and it is very depressing to see
Democratic candidates lurching towards protectionism, even if only as a
temporary political manoeuvre. On the brighter side, there are encouraging
signs that the US, as well as Europe, wants to re-start the international
trade talks which stalled in Cancun over the demands of developing
countries to end agricultural subsidies. This is probably because the US
negotiators presume nothing of any consequence will happen this side of an
election.

Meanwhile, the rest of the world, including Britain, will profit from the
burgeoning US trade deficit. And for the rest of this year at least,
everything is likely to be all right. But something will have to be done
when the US election is out of the way. This gives European countries a
breathing space to rediscover the lost art of generating economic growth
on their own. Recent forecasts for the eurozone economy suggest growth of
barely 0.5% this year, even with the benefit of a US recovery. Goodness
knows what it would like be without it.