US President George W. Bush's economic policies have been based on an extraordinarily reckless gamble that reflects a political coalition of two major forces: the super-rich and evangelical Christians. As those policies fail, global financial markets are reacting negatively, adding uncertainty to the world economy, and there is little relief in sight, because the US is entering a period of prolonged political infighting and stalemate.
The super-rich had one over-riding objective in joining the Bush coalition: tax cuts that overwhelmingly benefited the wealthiest households. Evangelicals were brought in on the basis of so-called "family values," meaning opposition to abortion and gay marriage, and promises of active government support for religious activities, including direct payments to religious groups for social services that they provide.
The Bush team believed that they would eventually balance the tax cuts for the rich with reductions in government spending, but they never explained this to the public. Instead, for four years they pretended that budget deficits were of little concern. Only after being re-elected did they begin to explain that large budget deficits, caused mainly by lower tax revenues, would require sharp cuts in social security, health care spending and other areas.
But the majority of Americans, having supported the tax cuts in Bush's first term because it gave them a little extra cash, do not support the attack on basic government services that has followed. This opposition extends to Christian evangelicals voters, who tend to live in working-class and middle-class households that depend on many kinds of government social services. Despite the avowedly "free-market" beliefs of many Christian fundamentalists, as voters they support government-financed pensions, health care and other public services.
Bush's tax cutting was irresponsible from the start, but became much more so after Sept. 11, 2001. The Bush administration raised military spending sharply as it went to war in Afghanistan and Iraq, and as it increased spending on national security at home, without ever explaining to the American people how this would be financed.
The military-plus-security budget soared by more than 2 percent of gross national product (GNP), while tax revenues fell by much more. At the same time, Bush supported expenditure increases for popular items like education and prescription drug benefits, but paid for these services by borrowing the money rather than ensuring sufficient tax revenues.
No sooner did this strategy pay off with a narrow re-election victory -- one that strengthened Republican control of Congress -- than the dark realities of Bush's fiscal recklessness started to be recognized. The annual US budget deficit reached 5 percent of GNP, with an enormous part of the gap financed each year by Asian central banks, which now hold about US$2 trillion in claims against the US.
The problem is that Bush's reckless gamble has now built up considerable political momentum. As soon as he was re-elected, Bush started to propose cuts in popular government programs, but his own party is rejecting those cuts. With the Republican-controlled Congress seeking to make the tax cuts for the rich permanent, the world is beginning to realize that US budget deficits are now entrenched, with no end in sight.
Because America's economy is so large, and the dollar so central to global finance, chronic US budget deficits mean huge global repercussions. The dollar is weakening, as financial markets understand that the US will need to borrow huge sums from abroad for years to come.
More ominously, the willingness of foreign central banks to lend to the US also looks likely to end. After all, why should the central banks of China, Japan, South Korea and other Asian countries accumulate vast holdings of US Treasury bills if the dollar is likely to lose value in the years ahead?
In a bizarre, but not unexpected way, the US is lashing out at others for its problems. Huge tax cuts and rising military spending have fueled an enormous rise in imports, and therefore a yawning trade deficit now accompanies America's weak fiscal position. But US politicians are blaming China and other countries for "unfair trade," even threatening them with sanctions.
This response to homegrown problems plays well with voters, but it is ridiculous and ignorant, especially since the US has been depending on China to help finance the fiscal deficits. In essence, the US is lashing out at its own banker, even as it asks the banker for yet more loans.
When Bush asked for spending cuts at the beginning of the year -- including a social security reform that includes cuts in future benefits -- world financiers expected that Bush would get his way, or most of it. Little did they appreciate that US voters, having never actually supported spending cuts, would resist.
As that reality sinks in, economic prospects darken. Foreigners will become less enthusiastic about continued lending to the US, weakening the dollar further, forcing up US interest rates, and threatening to undermine America's stock market and consumer spending.
But as the storm clouds gather in the coming year, the political coalition that put Bush in power will stifle progress in undoing the fiscal mess.
Bush's gamble was a loser from the start, generating costly results -- mainly for the US, but for the rest of the world, too -- for years to come.
Jeffrey Sachs is professor of economics and director of the Earth Institute at Columbia University.
Copyright: Project Syndicate
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