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Chronic Deficits and Austerity

"Must America-and the rest of the world-hold its breath while the Bush administration repeats an economic experiment from the Reagan era? Will this be an upswing on loan, with dangerous consequences for American state indebtedness, inflation and interest rates?.. Bush's plans involve a `permanent change of the tax structure, not short-term creation of jobs and growth'. Chronic deficits are the consequence.."
Chronic Deficits and Austerity

The American president drives his country into indebtedness with massive tax cuts and creates a new opposition

By Thomas Fischermann

[This article originally published in: DIE ZEIT, 09/2003 is translated from the German on the World Wide Web,  http://zeus.zeit.de/text/2003/09/WiPo-Bush.]

At last there is help for the unemployed in the US, the bum card. Patrick Kuharic, 27 year old data analyst from Cambridge, Massacusetts, lost his job in December. Since then, he makes an extraordinary offer on the Internet to his suffering compatriots. Under www.bumcard.com, he sells identification cards showing that one is unemployed and can be counted as a bum, an unprofitable pariah in American society. Merchants may give price reductions on presentation of the card. "I have sold thousands of these cards", Kuharic says. "Suddenly everyone wants to be a bum."

For America's president George W. Bush, the flood of involuntarily unprofitable persons could become the greatest risk of his career. Since March 2002, the American unemployment rate has fluctuated between 5.7 and 6 percent although the economic situation is gradually improving. An unknown number of Americans are completely dismissed from the labor market and from statistics. Jared Bernstein from the Economic Policy Institute in Washington doesn't foresee any improvement for the coming months. Jobless growth will occur, a kind of economic growth that scarcely creates jobs.

A week hardly passes in which corporations do not announce new mass dismissals. Some businesses lowered their profit expectations at the beginning of the year. Investments are scaled back in the whole country for a possible war in the Gulf. Dean Baker and Mark Weisbrot from the Washington Center for Economic and Policy Research even calculate that 1.6 million more jobs could disappear in a Gulf war if the conflict is tenacious and drags on for months.

The whole world stares at the economic locomotive America but must adjust to further delays.

Not much time remains for Bush himself. The next presidential election is in November 2004. Most Americans must take the slack period more seriously than the unprofitable Kuharik. "The crisis has started a powerful downward spiral", says Jonathan Rosen from the New York Unemployment Project, a relief organization for the unemployed. "Very normal middle class families break off their old age savings, young unemployed persons return to their parents and wives are sent to work at Starbucks."

The president now receives increasingly poor marks in polls for his economic policy. Loud criticism also resounds from business circles. "The unemployment rate must be near five percent by the election. Otherwise Bush's reelection is in danger", says Roger Kubarych, economist at the Council on Foreign Relations in New York. "For that, he needs four percent economic growth next year. "A truly ambitious goal!"

Bush is certainly ambitious, not only in the battle against evil in the world. Clear contours of Bushonomics are recognizable since his election in 2000 after two stimulus programs for the economy and three budget drafts. The president wants to help the weak economy to its feet with drastic measures and orients himself in prescriptions from the Reagan era. At that time, so-called supply-side economics had economic popularity. Bush follows these prescriptions to the letter. In the coming decade, the state should renounce on three trillion dollars of tax revenue, nearly a third of the annual American gross domestic product. Bush surpasses his party friend Reagan and is applauded by conservative economists. "Repeating Reagan's success and making our tax system more friendly is sensible", declares Robert Barro, economist at Harvard University.

As further evidence for the new old time, Arthur Laffer, Reagan's former advisor, is in vogue again. The conservatives in Washington still use his famous "Laffer curve" as a theoretical support. Tax cuts could boost the economy so strongly that the state would receive more taxes at the end. In economic textbooks, the curve is regarded as a classic, a theory not proven in practice. In the Reagan years, America lived on loan in grand style. In the middle of the nineties, the new economy boom and the frugality of the Clinton era swept aside the enormous deficits that piled up in the past.

Firstly, the Bush administration even expects steep deficits. In 2004, the latest budget proposals of the president will tear a hole of $300 billion in the budget, scarcely three percent of the gross domestic product. European conditions will arise in America where the end of state indebtedness was debated only a few years ago. More favorable projections of the government for the following years are criticized as overly optimistic. The costs of an Iraq war are not even calculated. "Within a decade, the US could have a budgetary situation similar to Brazil a year ago", the economist Paul Krugman warns. However red numbers are no longer seen as a problem in the White House. Even Bush's new Secretary of the Treasury John Snow who earlier was a sharp critic of budget deficits explained in Business Week: "We can run a deficit of two percent (of the gross domestic product) to all eternity. This will not cause any turbulence in the financial markets."

Must America - and the rest of the world - hold its breath while the Bush administration repeats an economic experiment from the Reagan era? Will this be an upswing on loan, with dangerous consequences for American state indebtedness, inflation and interest rates? A group of 400 economists including ten Nobel prizewinners predict dangerous consequences. Last week, the experts turned to the American press with a withering protest letter. Bush's plans involve a "permanent change of the tax structure, not short-term creation of jobs and growth." The consequences are "chronic deficits".

A considerable number of economists agree. Bushonomics is a very inefficient prescription for rescuing the American economy. Crisis times require massive and rapidly effective economic shots in the arm and expenditure programs. Reduction of taxes aiming at the long-term have no prioirity at the moment though this reduction could be reasonable for other reasons. Extra money from the state could benefit poorer Americans and the unemployed from Kuharic's camp for economic reasons, not on account of justice. Poorer people use new money mainly for consumption and fire the economy.

Big earners above all profit from the plans of the president. Those whom Bush calls the "investor class" are especially relieved. Abolition of dividend taxes and generous tax exemptions for private savings are cornerstones of his tax policy. In the medium term, some advisors of the president even go a step further to a tax system that only levies fees on consumption and leaves everything else untaxed.

In the meantime, some of Bush's party friends in the Senate and House of Representative3s have cold feet because citizens murmur or fear uncontrollable deficits. Federal Reserve chief Alan Greenspan still honored as a quasi-god in wide parts of the financial establishment condemned the plans of the president last week. A stimulus program for the economy is "too early". In rare openness, the Federal Reserve head worried about a threatening downward spiral in ever new deficits. Other critics refer to the possible high costs of an Iraq war and that the cohorts of the baby-boomers will retire toward the end of the decade. They must be provided. However Bush gives first to the rich. "The tax cuts in this year's budget are already greater than the pension deficits of the next 75 years", says William Gale from the Brookings Institute in Washington.

In the long run, the situation of the American budget will depend on how far Bush pushes his reform in the coming years. Will he live with deficits in three-digit billions, at least for the time of the slack periods? "This additional stimulus would even please Keynesians", says Willi Semmler, economist at the New School University in New York, "even if they advocate spending the money in a more targeted way." Or will he repeat another trick from Reagan's era? Bush used the growing deficits to justify massive savings in spending particularly in the social budget.

For a long time, Bush did not distinguish himself as an austerity artist. Expenditures for the military and inner security skyrocketed. Observers in Washington expect the distribution of abundant pork, further political favors for elected representatives and interest groups already generously served in last year's budget.

The political game functions in Washington. George W. Bush is known as a hard negotiator who freely makes maximum demands according to the manner of the Arab bazaar. Afterwards he can be beaten down. This time observers expect a very harsh struggle since skepticism grows in his own ranks. The president must rush through the program to demonstrate success before the presidential elections.

Bush's plans include several preventive concessions to the democrats who could otherwise block his package like more money for schools for example, assistance for the unemployed and funds for Aids research. New direct state expenditures will be added. This is what Bush's critics seek for stimulating the economy. Closing budget holes may happen later.


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