Monday, January 23, 2006

US Deficits Spell Long Term Decline

Short-sighted US politicians have been telling the American public for years that America's trade imbalances are nothing to worry about. More treaties like NAFTA would spread American products overseas and remedy the situation, they argued. When the trade imbalances only worsened in the aftermath of such arrangements, they suggested that trade imbalances didn't exist at all, and that Americans should pay no attention to Walmart stores stocked to the rafters with items bearing the "made in China" stamp, and thousands of US technology jobs forwarded like email to India. Nor should they worry about all the illegal aliens standing on street corners waiting for work and driving down wages for the lower class. But now America's financial elite are beginning to worry, as are their international counterparts.

Timothy Geithner, president of the New York Federal Reserve, on Monday dismissed the view that the US current account deficit was sustainable, suggesting the risk of a sudden fall in the dollar would grow the longer the trade gap widened.

In a speech at the Royal Institute of International Affairs in London, Mr Geith-ner said the problem could not necessarily be expected to solve itself.

“Time does not necessarily help. The longer these gaps continue to build, the greater the ultimate adjustment required, and the greater the risks that accompany that process,” he said.

“The plausible outcomes range from the gradual and benign to the more precipitous and damaging,” he said. “The size and duration of these [global] imbalances, perhaps the most visible of which is the US current account deficit, present challenges – and risks – for the world economy.”

His warning came as Raghuram Rajan, chief economist at the International Monetary Fund, repeated his concern over the risk of a run on the dollar.

The US account deficit is not the only deficit that should give Americans pause. Under a Republican administration, with a GOP-controlled Congress, the budget deficit has exploded. The president's tax cuts aren't to blame. Runaway GOP-promoted federal spending is.

During the first five years of President Bush's presidency, nondefense discretionary spending (i.e., spending decided on an annual basis) rose 27.9 percent, far more than the 1.9 percent growth during President Clinton's first five years, according to the libertarian Reason Foundation. And according to Citizens Against Government Waste, the number of congressional "pork barrel" projects under Republican leadership during fiscal 2005 was 13,997, more than 10 times that of 1994.

This is fiscal conservatism? The long term consequences of these policies - presided over by Republicans, not Democrats - augur nothing good for the US, or the world, whose stability depends on a prosperous US.

Currently the federal government consumes about 20 percent of the GDP, which is another way of saying that about 20 percent of Americans' income, on average, is paid in taxes to the federal government. According to the Government Accountability Office, that is on course to rise to 30 percent by 2040. Most of that 30 percent would be redistributed as payments to other Americans, rather than spent on standard government services like law enforcement, transportation, defense, national parks, orspace exploration.

While foreign policy has taken a rightward turn since Sept. 11, 2001, it, too, could drift leftward in coming decades. As the government allocates more of its budget to entitlements, there will be less money available to spend on the military, embassies, aid agencies, and other apparatuses that enable us to wield outsized influence in world affairs. We are on track to become more like the welfare states of Europe and Canada, where entitlement spending leaves limited funds available for bold foreign policy initiatives.

The US may not be as far down the garden path of national decay as Europe, but unless present trends are reversed - and there is not sign that the Republican establishment has even the slightest inclination to do so - then America will find itself increasingly forced to follow Europe's slide. Like a rock rolling downhill, that slide will only increase in speed. Not to worry, however. There will be plenty of political sideshows - i.e. "Intelligent Design" in the classroom, anit-porn crusades, gay marriage, perhaps a foreign war or two - to distract the public from the real national threat until it is too late.


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