Wednesday 17 September 2003

US economic folly should worry us all

Think before gloating over Bush's spectacular fiscal incompetence

by Joseph Stiglitz

BUY THIS BOOK TODAY 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.

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