Fri, 03 Jan 2003

Take from the poor, give to the rich

Jeffrey Sachs, Professor of Economics Director, Earth Institute Columbia University, Project Syndicate

President George W. Bush seems poised to wreck America's budget for years to come. When Bush came into office, the outlook was for budget surpluses as far as the eye could see. Today, through a combination of irresponsible Republican-led tax cuts, a slowing economy, the bursting of the stock market bubble, and a massive increase in defense spending, huge deficits dominate the fiscal horizon.

Worse is coming, because the Bush Administration and the Republican-led Congress are preparing to deepen the fiscal mess. The damage they will do will likely weaken the U.S. and add instability to the world economy.

Traditionally, America's Republican Party stood for balanced budgets. This changed with the Reagan Administration, when conservative Republicans favored tax cuts even at the cost of large budget deficits. President Reagan told the American people that they could enjoy tax cuts, a military build-up, and continuation of their favorite spending programs all at the same time. The result -- no surprise -- was a series of vast budget deficits that took years to clean up.

Both President George Bush Sr. and Bill Clinton had to raise taxes to clean up the Reagan-era mess. Those tax increases probably contributed to President Bush Sr's defeat by Bill Clinton in 1992. Yet Clinton bravely decided to complete the process of restoring fiscal balance, in part to protect the long- term financing of the Social Security retirement program. When Clinton left office in 2000, the budget situation was the best in decades.

Then along came President George Bush Jr. to replay Reagan: Large tax cuts, a big increase in military spending, and continuation or even expansion of popular spending programs. The result was predictable. In January 2001, the cumulative budget outcome for the years 2002-2011 was projected to be US$5.6 trillion dollars in surplus. By mid-2002, those projected surpluses had vanished.

In view of these changed economic conditions, and the shadow of war in Iraq, you might expect the Bush Administration and the Republican-led Congress to be cautious in advocating new tax cuts. But no, their highest priority is to enact more tax cuts that will mainly benefit the rich. At the same time, the Administration is calling for big increases in military spending. With the November 2004 presidential election now coming into view, you can be certain that no meaningful cuts in non-military spending programs will be made.

So massive budget deficits seem here to stay. If domestic spending simply stays constant as a fraction of national income, the cumulative budget outcome for the next 20 years will be a combined deficit of $1.5 trillion. But this figure may be optimistic, because it probably doesn't adequately factor in the costs of a possible war in Iraq, nor another round of tax cuts, nor the risk of higher interest rates in the years ahead.

Why are Republicans so unconcerned about this mess? Some Republicans care more about tax cuts for the rich than they do about almost anything else. Others believe that deficits will force major cuts in domestic government spending, thus shrinking the state, which is their heart's desire. The problem with this latter view is that most taxpayers like domestic programs, and will not readily support major spending cuts.

A more intriguing question is why do Americans vote for such policies, when they should know that trouble will probably result. One answer is that many voters do not see the looming budget troubles. A better answer is that most Americans did not actually vote for these policies. Voter turnout in the 2002 election was only around 40 percent, of which around half went to the Republicans, or around 20 percent of eligible voters.

Of course, the outlook need not be so bleak. War in Iraq may be avoided. Proposed tax cuts may be watered down or abandoned. But I predict large budget deficits for years to come, and a growing sense of unease within the U.S. and abroad about America's macroeconomic situation. Foreign investors may decide to cut back financing America's budget and current account deficits on favorable terms. The dollar may weaken, and fears of inflation may become more pronounced. All of this will make U.S. policymakers less confident and less flexible in their responses to economic shocks.

The poor, both inside the U.S. and abroad, could suffer the most, as President Bush and the Congress tell the American people and the world that, due to the large budget deficits, there is no money available to address problems of poverty, disease, and education. Unless ordinary Americans wake up to these fiscal risks, the rich may walk away with another multi-billion-dollar gift as the country and the world bear the harsh consequences for years to come.