Never mind, his gradual conversion is more eloquent than some of those who've been constantly attacking Bush. A column like this from Stelzer is a strong intimation that some very serious worries are now building up in the normally pro-Bush camp.
Just one more point. If Bush gets in again then I'm sure he'll renege on his Medicaid policy. This is just for electioneering purposes, I'm sure. The budgetary situation will be much too serious for it to be sustained.
KH
<<<< SHORT TERM GAIN IS STORING UP LONG TERM PAIN
Irwin Stelzer
As readers of this column can't help but notice, I have been reasonably optimistic about the outlook for the American economy, so optimistic that I may have deprived our readers of the economist's ever-present "other hand".Here it is.
The economy may well be on the road to the 4.75% annual growth rate that John Snow, Treasury secretary, sees in his crystal ball, and that might well achieve the aim of all economic policy these days -- getting George W Bush a four-year extension on his White House lease. But we may be buying short-term gain at the expense of long- term pain.
Let's start with Bush's all-time favourite -- tax cuts. Recent upward revisions of the estimated budget deficit put it at more than 4% of GDP. If experience teaches anything, further upward revisions are in our near-term future. But not all the swing from surplus to deficit can be blamed on the reductions in taxes. Part is due to higher spending on domestic programmes and the war on terror, and a portion is due to the decline in revenues as high-earners saw their bonuses and capital gains shrivel. Only about a quarter can be laid at the door of the tax cuts.
But in that explanation lurks a problem for the economy: these sources of red ink will be there long after the economy has recovered. The tax cuts are too politically popular, and too much a part of the president's conservative philosophy, to be reversed in the foreseeable future.Spending on the implementation of the administration's muscular foreign policy is more likely to rise than fall, as the stay in Iraq become prolonged, nation-building in Afghanistan proves more costly than originally thought and pressures mount for interventions in Liberia and other places in which America has no strategic interest.
Add to that Bush's big-spending proclivities. The president's advisers insist that he must go to the electorate, especially the many pensioners living in the key state of Florida, with a prescription-drug programme. So he has signed on to the largest expansion in the welfare state since Medicare. Nobody can predict the precise cost of this expensive new entitlement, which will have the government paying for the drugs of all Americans, from Bill Gates and Warren Buffett to the poorest pensioner. But it is "damn the cost and full speed ahead" towards the November 2004 elections.
That adds up to deficits as far ahead as the eye can see. Administration spokesmen argue that when the economy starts to grow, the revenues flowing into the Treasury will wipe out the deficit. At best, that represents the triumph of hope over experience; at worst, the triumph of dissimulation over truth. More rapid growth will, of course, generate more tax revenues, but not enough to offset the combined effects of rising defence and welfare costs and reduced tax rates.
Enter the staff of the Federal Reserve Board -- on tiptoe, so as not to antagonise the president's men or upset the markets too much. In an important but not loudly trumpeted study, the Fed found that every one percentage point increase in the deficit will drive up long-term interest rates by 0.25 of a point. I have good reason to believe that Alan Greenspan, Fed chairman, has reviewed the study in detail and is satisfied with its soundness.
Since we will have moved from a 1% surplus to something like a 5% deficit, a six-point shift, we will be seeing interest rates some 1.5 points higher than they would otherwise be. That will surely slow the economy in the long run.
Worse still is the fact that this recovery is taking place in unusual circumstances. Most recessions correct the imbalances that caused them: excess capacity is sweated out, asset prices decline to more realistic levels, and balance sheets are restored to some semblance of health.
Not so the recession that the National Bureau of Economic Research now tells us ended almost a year ago. Worldwide excess capacity still exists. Balance sheets are not as solid as they might be, as lower interest rates have encouraged consumers to borrow against the equity in their homes and businessmen to tap the credit markets. Share prices, especially in the high-tech sector, remain at levels that many stock-market observers still consider alarmingly inflated. The trade deficit, which in ordinary recessions would decline as consumers rein in purchases of cars and other imports, has instead soared to 5% of GDP.
All this is sustainable as long as interest rates remain low. But should foreigners decide to unload the hoard of dollars that they are accumulating as we ship them bits of green paper in return for cars, trainers, T-shirts and, increasingly, software, interest rates will have to rise.
That would end refinancing of homes, a trend already discernible as interest rates climb. Gone, too, would be zero-interest incentives to buy cars. Higher rates would increase the claim of interest payments on corporate cashflows, and make new investments by businesses more expensive. And they would increase the cost of servicing the mounting pile of government IOUs.
This is not a pretty picture but, fortunately, it is not certain to be the case. Consumer-led growth may well be replaced by the investment-led variety as businessmen recover their nerve. That would allow the economy to grow while consumers take a holiday from the shops and start to pay down their debts. Meanwhile, the lower dollar might just encourage exports and discourage imports, lowering the trade" deficit to a sustainable level.
In short, all may come right in the end. My own guess is that it will -- America's risk-taking, entrepreneurial, free-market economy has too much flexibility and too much energy not to be assured a brilliant future.
Sunday Times 27 July 2003 >>>>
Keith Hudson, 6 Upper Camden Place, Bath, England
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