The overruling of the President
When I visited Washington in the spring of 2001 - the early days of the Bush administration - Professor Colin Campbell, the Canadian political scientist then at Georgetown University, told me that it wasn't really a Bush administration at all, but one run by Vice-President Dick Cheney. George W. Bush was more likely to be in the gymnasium than the Oval Office.
Perceptions changed after 11 September, 2001, and the President proceeded to assume the role of commander-in-chief. But it took him time to get his act together and in the initial stages he was upstaged by Tony Blair.
For all the publicity about the so-called special relationship over Iraq, it has become increasingly obvious that our Prime Minister has gained very little in return for 'hugging Bush close'. There are those who believe that, for all his public bonhomie towards Blair, Bush has never forgiven him for upstaging him in those early days.
Recently it has even been suggested by a leading US commentator that the administration has been deliberately trying to cause a rift between the UK and Europe over defence policy - hardly a help towards Blair's long-term goal of negotiating entry to the Eurozone.
All the suspicions about the Bush-Cheney relationship have been confirmed in the new book written by Ron Suskind but essentially containing the damaging memoirs of sacked US Treasury Secretary Paul O'Neill (The Price of Loyalty). O'Neill used to confide his frustrations with Bush to his old friend Cheney, only to discover rather late in the day that his confessor was also his Control.
O'Neill was against the protectionist tariffs on steel introduced by 'free trader' Bush. He was against the size of the tax cuts, and worried about the fiscal irresponsibility for which he, as Treasury Secretary, would share the blame. Although the constitutional position is different, it is to a certain extent as if Tony Blair had overruled Gordon Brown's fiscal austerity plan during Labour's first term and decided to cut taxes regardless of the budgetary position. Sorry - I should say that it is as if John Prescott had overruled the Chancellor. For O'Neill discovered that it was Cheney who was behind the tax cuts - directed principally at the rich - twice! When even Bush expressed surprise at the second tax cut for the rich - 'Shouldn't we be giving money to the middle?' - the President of the United States was overruled. 'Stick to principle,' he was told. 'Stick to principle.' The last straw was when O'Neill - repeat, the Secretary to the US Treasury - went to confide his concerns about the budget deficit to Cheney, only to be told, in one of the great political economy quotes of recent decades: 'You know, Paul, Reagan proved that deficits don't matter. We won the mid-term elections. This is our due.'
The chairman of the Federal Reserve is famous for his opacity, but not when O'Neill cites private conversations with him. In May 2001 Alan Greenspan told O'Neill that the first Bush (sorry, Cheney) tax cut was 'irresponsible fiscal policy'. As that great critic of the Bush administration, Paul Krugman, has observed: 'This was a time when critics of the tax cut were ridiculed for saying exactly the same thing.' Bush had sworn that 'the vast majority of my tax cuts go to the bottom end of the spectrum', but O'Neill makes clear that he knew this was, in the immortal words of Churchill, a terminological inexactitude.
The point about the Reagan deficits is that deficits don't matter during an economic slowdown or recession; indeed, they are usually necessary to put the economy back on track. But they do matter when normal service has been resumed. As the International Monetary Fund recently pointed out, during the post-Reagan era the US budget was put back in order, but 'within only a few years, hard-won gains of the previous decade have been lost and, instead of budget surpluses, deficits are again projected as far as the eye can see.' ('US Fiscal Policies and Priorities for Long-Run Stability', IMF, 7 January, 2004).
We are not talking about an economy on its knees, but one that expanded (in real terms) at 8.2 per cent per annum in the third quarter. The US economy was boosted by a fiscal swing amounting to 6.5 per cent of gross domestic product between 2000 and 2003. The normal impact of a slowdown (lower tax receipts, higher spending on social security) accounted for half this swing. The other half came equally from tax cuts and higher government spending (mainly on defence and 'security').
Recent growth has been more balanced, with capital spending, exports and inventories adding to the impact of defence and consumer spending. Thus fiscal policy, monetary policy (very low interest rates) and exchange rate policy (toleration, indeed encouragement, of a massive devaluation of the dollar) have all helped.
A visitor from Mars (and one day, if Bush has his way, there will be one on a return trip) might argue that now is the time for the US administration to raise taxes. So might the visitor to the White House from the IMF building around the corner. But it is an election year, and there are also fears that, owing partly to gains in productivity and partly to the transfer of jobs to low-cost producers abroad, this is a 'jobless recovery'. Some commentators in the US are even arguing that, with jobs being transferred abroad, the basic free trade theory (of comparative advantage) no longer applies, and protectionism becomes justified.
I wonder. The movement of jobs abroad isn't an entirely new phenomenon. We used to call it 'structural' unemployment, as opposed to cyclical or frictional. It is difficult to believe that 'the best economic recovery money can buy' is not going to boost US employment and put Bush in a better position than his father was when pipped at the post by Bill Clinton.
The US economist Nariman Behravesh of Global Insight, in London last week, told me he expects 'explicit tax increases or, more probably, stealth taxes' in the US after the election. As he put it: 'Europe has sacrificed short-term stimulus for long-term stability. The US has sacrificed long-term stability for short-term stimulus.'
Meanwhile, the impact on the Eurozone's international competitiveness of the devaluation of the dollar has finally prompted the circumspect Jean-Claude Trichet, president of the European Central Bank, to complain about 'brutal moves' in the currency markets.
Will the US join a concerted effort to stabilise the currency markets? The latest theory from the US is that it might, in return for an interest rate cut by the ECB. The fact of the matter is that the US has been doing too much to stimulate the world economy and the Eurozone too little.
politics.guardian.co.uk
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