The Bush plan: A global-scale disappointment
By Henry C K Liu
AsiaTimes Online
January 10, 2003
atimes.com
While Bush aims to think big, his tax plan shows that he is wearing his ideological thinking cap. The US tax system is irrational and unfair. It acts as a structural obstacle to economic growth. Everyone agrees on the need for tax reform; the dispute is only on how the tax system should be reformed.
Yet the US economy is stalled because of overcapacity fueled by debt, a condition also found almost everywhere else around the world. And in the United States, the complex tax regime affects the rules of economic behavior in unique and peculiar ways that encourages debt. On this issue, the Bush plan said little.
Bush's critics are also missing the central issue of fair credit allocation, and instead frame the debate on whether the rich should get more or less tax relief than the poor. The real issue is that the government needs to deliver purchasing power to those who will promptly spend the money consuming the surplus products the world needs to produce to get out of a structural economic crisis. Giving money to those who will only invest it for more productive capacity will only exacerbate the current overcapacity problem. Yet the ideologies of neo-liberal market fundamentalism and sound money prevent any consideration for government intervention on demand management. Market forces as currently constituted by the existing tax and trade regimes tend to depress aggregate demand by treating unemployment and low wages as desirable prescriptions for inflation that threaten profit, even in the face of global deflation and overcapacity. Thus the economies of the world, both advanced and developing, are locked in a downward spiral, causing the global economy as a whole to shrink.
The US dollar is facing a much-delayed exchange-rate correction, but it is misleading to conclude that this is the beginning of a collapse of the dollar. A correction of the dollar up to 20 percent in relations to select foreign currencies would have positive temporary effects on current account balances in trade, but it will not solve the structural problems in world trade. Tokyo and Washington are jointly pushing for a Plaza Accord type move against China to push up the yuan, on the theory that China is exporting deflation, a view China rejects. The low prices of Chinese exports is the direct result of low Chinese wages and land rents. There is logic in the argument that China needs to continue its policy of rising wages to deal with domestic deflation. But the Chinese trade surplus from its export to the United States has a quadrupling effect on added US gross domestic product (GDP). In other words, for every dollar of US trade deficit in favor of China, the US economy registers $4 of additional GDP in value-adding services, such as marketing, distribution and retail markup, trade and consumer financing, etc. It is arguable that global deflation is not caused by any one currency being periodically and temporarily overvalued, or that competitive devaluation or upward valuation could solve the global deflation problem.
But for dollar hegemony, a term describing the undeserved role of the dollar as a preferred reserve currency for international trade and finance, the US trade deficit is not much different that that of most of the Third World. The Washington Consensus, which the United States preaches and which the International Monetary Fund (IMF) implements, prescribes combinations of monetary and fiscal policies to deal with trade deficit that include high interest rates to reflect the real cost of borrowing, and tax hikes and other austerity programs to dampen demand. But the US is exempt from such "stabilization" programs because of dollar hegemony.
Trade is shrinking because the process of transferring wealth from the poor to the rich through trade has run dry both domestically and internationally after a decade. Trade will have to reverse course and begin creating wealth rather than merely transferring it. The easiest place to start creating wealth is where poverty rules. In a poor land, even unsophisticated, simple ideas can create wealth because there is no downside on real poverty. The reason wealth is not created today in the world's poor regions is because of the exploitative structure of the current trade regime. Neo-liberal market fundamentalism never understood that poverty hurts everyone, not just the poor.
The reason world trade has been shrinking in the past few years may be that trade as currently structured transfers wealth from the less developed economies to the advanced economies, and from the poor to the rich within national borders, a double-barreled dwindling game. What is needed is to shift trade from being a game in which every nation competes in predatory exporting to earn dollars by lowering wages, to trade being a game to create wealth in all national economies through economic and human development. This means that trade should be structured to support economic development to raise wages everywhere, not to depress wages to compete for larger export share. This means trade incentives should be focused more on education, health, and social development, rather than exclusively focusing on low-cost manufacturing. The advanced economies should export their wealth-creating technologies to the less developed economies to enable them to create wealth locally through domestic development, not to export low-price goods and commodities to enrich the advanced economies. The advanced economies will have to be prepared to transfer technology and knowledge, forgoing exorbitantly priced intellectual property rights, accept smaller profit margins, leaving more generated wealth in the less developed economies, but because the world economy will then grow faster, even a smaller profit margin will yield higher profit for the advanced economies.
If the United States takes the lead in the progressive restructuring of trade, it will defuse the growing anti-US feelings among the world's exploited poor, defuse tendencies for destructive terrorism and reduce the need for anti-terrorism expenditures. The question is not so much the appropriate exchange value of the dollar or the yen or the yuan, which is merely a temporary technical misalignment issue. A multi-currency world trade regime will allow economies to focus more on domestic development. The exchange value of the dollar is not as important an issue as the dollar's dominant position as a reserve currency for world trade and finance, which tilts trade as a vehicle to forcibly transfer global wealth to the issuer of the dollar, namely the United States. Nor is it a question of the technical aspects of domestic tax polices. The issue is the need for full employment and rising policies world wide that would eliminate global production overcapacity. If government can live with zero interest rates, why is it so difficult to live with zero unemployment?
The world is at a very dangerous moment in its history, caused by violent political fallouts from the destructive economic impacts of neo-liberal trade globalization. The United States needs to shift direction and help the world create wealth that is shared more equitably, both within US borders and internationally. In the end, the US will benefit more as the leading economy of a more prosperous and peaceful world. That would be thinking big. |
