Lessons from America's fiscal recklessness

Jeffrey D. Sachs Professor of Economics Columbia University Project Syndicate

George W. Bush has done more to wreck U.S. economic policy than any other President in American history, exceeding even his mentor, Ronald Reagan. In just three years in office, he has destroyed a fragile political consensus that had taken a decade to construct, and that could take another decade to re-create. In doing so, Bush has risked America's long-term economic health and social stability. Because the long-term budgetary challenges that the U.S. is so badly mismanaging are not unique, America's fiscal blunders provide important lessons for other countries.

The main problem with fiscal policy is that politicians can easily make themselves temporarily popular by cutting taxes and increasing public spending while running up massive public debts, leaving repayment to the future. This trick can last a few years, but sooner rather than later budget deficits and growing public debt force a painful policy reversal. Yet a cynical politician can buy himself re-election and perhaps be in retirement when the crisis arrives.

One would imagine that after hundreds of such episodes of fiscal irresponsibility around the world in recent decades, voters would be allergic to such tricks. Yet Bush is doing it again, buying popularity today by doling out massive tax cuts while simultaneously increasing military spending and even raising expenditure on education and health. The result is a budget deficit equivalent to more than 5 percent of GDP.

What's worse is that America's long-term budgetary prospects were already troubling before Bush began his reckless policies. The U.S. population is aging, so there will be a sharp increase in the costs of publicly funded health care and pension systems. Careful calculations show that future revenues under the tax policies favored by Bush are likely to fall tens of trillions of dollars short of the costs of public pensions, health care, and other fiscal spending expected by the public.

At some point in the future, there will thus need to be steep increases in tax collections, sharp cuts in public spending, or both, to correct Bush's actions. So why does the public support his policies? Because the public has little understanding or concern about these long-term consequences, even though they will eventually hurt most Americans.

The richest taxpayers are, of course, happy because they received the bulk of the tax cuts. Amazingly, the richest 5 percent of U.S. taxpayers received almost half of the tax cuts, and these rich taxpayers clearly expect the other 95 percent -- the middle class and the poor -- to bear most of the future spending cuts and tax increases.

Meanwhile, Bush has convinced many poor and middle-class voters that they should be happy, too, without telling them that they will have to pay for their small tax cuts with much larger cuts in future government services if his administration's policies prevail in the long term.

If Americans had a political memory, they would understand that they already rode this fiscal "roller coaster" once in the past 20 years. Ronald Reagan also came to office promising massive tax cuts and large increases in military spending. The result was a huge budget deficit by the middle of the 1980's.

Tax cuts made Reagan enormously popular and helped win him re- election in 1984. It then took over a decade -- starting in Reagan's second term, and continuing through the terms of George Bush, Sr. and Bill Clinton -- to get the budget back to surplus. Of course, this meant approving fresh tax increases, which cost George Bush, Sr. his re-election and led to the polarized politics of the 1990s.

History will almost certainly repeat. Some right-wing ideologues in the Bush administration believe that today's budget deficits will eventually force government social spending to be cut sharply. They hope to dismantle programs such as Social Security and Medicare.

But the U.S. public strongly supports these social programs. So the right-wing strategy of cutting taxes first in order to force cuts in social programs later will fail, and eventually tax rates will have to rise.

Others in the Bush administration argue that tax cuts are important for pulling the U.S. out of recession. This argument is also mistaken. America's economy could have recovered without the tax cuts, and perhaps even more robustly. In any event, it is a huge mistake to base long-term tax policies on the short-run business cycle.

There are two vital lessons for other countries. The first is that the looming U.S. budget deficits will sooner or later limit America's international power. Americans supported the Iraq war only because they didn't have to pay for it with increased taxes. When Americans are forced to choose between foreign adventures and higher taxes, they will be much less likely to support expensive military operations abroad. Indeed, the U.S. will be deeply divided internally as the public grapples with the fiscal mess left by Bush.

The second lesson is that countries ought to plan their budgets taking into account the rising fiscal costs of an aging population. Long-term budgetary conditions are rarely in clear view of taxpayers or the parliament. Governments should be required to submit long-term budget assessments together with their annual budget proposals, in order to reduce the tendency towards short-run political manipulation of the budget.

The U.S. can serve as an early warning to other countries. The White House ought to provide others with the same caveat that magicians on television give their viewers: "Do not try this at home."