Bush administration policies threat to the U.S., the world

Joseph E. Stiglitz, Professor of Economics, Columbia University, Project Syndicate

In 2001, President George W. Bush misled the American people. He said that a tax cut that was not designed to stimulate the economy would stimulate it, and the American people believed him. But it did not. He told Americans that the large surpluses that were among President Bill Clinton's legacies meant that the US could afford to cut taxes massively. Wrong again. He did not warn Americans how dubious such estimates can be.

In 2003 President Bush misled the American people about the economy once more. 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 US$230 billion surplus inherited from Bill Clinton had turned into a $450 billion deficit.

Now, after handing billions to rich Americans through tax cuts that almost exclusively benefit them, the Bush administration is passing the hat around, asking for contributions from other countries to help pay for the cost of the Iraq war. Even setting aside the other dubious aspects of Bush's Iraq policy, the conjunction of misguided giveaways to America's richest people with an international U.S. begging bowl is hardly likely to evoke an outpouring of sympathy.

Meanwhile, as all of this happens, the U.S. trade deficit mounts. America, the world's richest country, evidently can't live within its means, borrowing more than a $1 billion a day. As the U.S. thrashes around for someone to blame, it was inevitable that it would focus on China, with its large trade surplus, just as the twin fiscal and trade 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. With Ronald Reagan's irresponsible tax cuts, combined with America's paltry savings, the U.S. had no choice but to borrow abroad. Now, under "Bush II," America is repeating that folly. Matters may get even worse once investment is rekindled, unless private savings increase in a way America has not seen before.

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 non-Americans' Schadenfreude is misguided. Globalization means that mistakes in one country -- especially in 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 recover eventually from its 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 especially costly for developing countries.

Second, America's huge trade deficit may be a major source of global instability. Will the world continue to finance this deficit willingly, to put its money into a country with such a demonstrated lack of competence in macroeconomic management (to say nothing of the corporate, banking, and accounting scandals)? What returns will they demand?

What happens if global investors decide that they should change their portfolio mix, shifting slightly away from American assets? A weak Europe and skittishness about emerging markets has been one of America's great strengths, but how long can the U.S. rely on the weakness of others?

Finally, in searching for others to blame, America may once 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 restrictions at the peak of Reagan protectionism (including so called voluntary export restraints). Expect no less from Bush.

Last year, Bush showed little reluctance in imposing steel tariffs -- in clear violation of the World Trade Organization 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, and in which economic power still counts 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 recognize 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 -- both for America and the world -- is the path on which it has embarked: Deficits as far as the eye can see. The Bush administration's policies bode ill for America in the long run -- and hence for the world.