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Wed, Feb 11, 2004 - Page 12 News List

US rebound expected to fizzle

TROUBLES AHEAD American economists said a recovery funded by defense and deficit spending would not last, with one predicting a threat to the US' prosperity

REUTERS , HAVANA

The US economy is enjoying a growth spurt that will not last beyond this year because it is driven by military spending and tax cuts while the George W. Bush administration turns a blind eye to a looming deficit crisis, American economists said in Havana on Monday.

"Developing countries that still rely on the American market as an engine of growth should be cautious about expecting too much after 2004," said University of Texas professor James Galbraith at an annual economists conference on globalization issues hosted by Cuba.

Economic Nobel laureate Daniel McFadden warned that the US was heading toward a generational demographic crisis in social security and Medicare that will require government funding, and in turn imply unsustainable deficits.

"The current administration in Washington is making no serious effort to deal with the looming failure of its programs," McFadden said in a lecture to 1,300 economists from 43 countries.

"There is a high risk that social and financial turmoil will result, threatening the continued prosperity of the US economy and the stability of the globalized markets in which it is a key player," he said.

Galbraith said the current "spurt of growth" in the US economy was kicked off by the increase in military spending for the Iraq war and sustained over the summer by an infusion of cash into household spending.

"We are going to see another such infusion in the second quarter, so it is not over yet," he said, but added that future tax cuts will not add to household spending and that a slowdown is predictable.

Galbraith, son of Harvard economist John Kenneth Galbraith, said the Bush administration ran policies designed to make the economy stronger in the short run, such as child credits and last year's tax cuts, to enhance its chances in this year's elections.

While the Federal Reserve said it can be patient before it raises very low interest rates, it will come under pressure to defend the dollar through higher rates, he said.

"Whether they yield to that pressure is more a question of when than if. I would not be at all surprised to see interest rates rising next year and that will cause further problems," Galbraith said.

McFadden won the Nobel Prize in 2000 with James Heckman, who also attended the Havana conference, for developing econometric theories and methods widely used in the statistical analysis of individual and household behavior.

McFadden said the unregulated flow of speculative "hot money" had created global financial volatility and burdened developing nations with unpayable debt and attacks on national currencies.

The support provided to nations in difficulties by the International Monetary Fund is often "cold comfort" due to painful austerity demanded in return for bailouts.

"We need to cool down hot money, keeping long term flows while reducing short term volatility, and warm up the cold comfort currently provided by the IMF to countries that are in trouble," he said.

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