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.
· Joseph Stiglitz, professor of economics at Columbia University,
is a Nobel Prize winner and author of Globalisation and Its
Discontents
© Project Syndicate www.project-syndicate.org
guardian.co.uk |
