Business Page – December 7, 2003

The Virtues Of Burrowing (deep into debt)

Introduction

While the (Dubya) Bush Administration gained early notoriety for the dubious manner in which it was installed in the White House and more recently for lying to the world about weapons of mass destruction in Iraq his management of the world’s largest economy has raised equally disturbing questions about the integrity and competence of his administration. Even before he was awarded the elections in 2000 he and his band of conservatives including Wolfowitz, Rumsfeld, Cheney and Rice had already constructed his electioneering for the 2004 presidential elections now less than one year away. The achievements which even his most ardent supporters would point out reflect some of the worst characteristics of man including short term thinking, greed , belief that people are stupid and can easily be fooled and that some lives are more precious than others. Just look at Iraq and Palestine.

Let us be clear – this article does not underrate Mr. Bush. He is a man of conviction and other than his readiness to tell a lie here and a lie there he appears to possess an enviable package of personal virtues particularly when compared with his predecessor nicknamed Slick Willie Clinton who is more like us and whose achievements Bush seemed committed from day one to undo. This he has done with the sense of reason and passion of the jihad warrior, the finesse of the bulldozer and the empathy of the lion for his prey. What is even more remarkable is the incredible short time frame within which he has brought about such dramatic sea change. Yes 9/11 provided him with as much a challenge by the terrorists as an opportunity to reshape not only the political, economic and social landscape of the USA but of the entire world.

The Bush doctrine whether of politics or religion has been imposed on the world and everyone including the jelly-bellied leaders in the Caribbean must fall in line – or else, just look at the World Court. But it also provided him with the political opportunities as well and even his harshest critics concede that he has used it to such great political advantage that for a while to criticize him was seen as unpatriotic – he became synonymous with his country as only few leaders have ever been. Even the more unpleasant shocks recognized by Americans are hidden behind smoke and mirrors confusing them about whether they are in a dream or confronting a nightmare.

Prosperous Decade

This column is however about business and economic and tax issues and it is to those that we will now turn. Bush inherited an economy that was strong, some say too strong when he assumed office. He was riding into town on the back of what Joseph Stiglitz, winner of the 2001 Nobel Prize for Economics called the ‘most prosperous decade’ despite its rather undistinguished beginning and the initial disenchantment which led to a political tyro Ross Perot capturing close to twenty percent of the popular vote in the 1992 elections.

Indeed in the 1996 elections leading economists from the right were criticizing the Clinton administration for the sluggish economy. Yet the decade saw some 32 million new jobs and productivity was at an unprecedented levels no doubt fuelled by the remarkable advances in technology. These translated into substantial benefits at the national level and into budget surpluses which were then attacked for taking too much money from the taxpayers rather than allowing them to invest it, enjoy it or just simply count it.   

The Mission

By 2001 the surplus for the next ten years was estimated at $5.6 T.(trillion), Americans had shed their pessimism, the stables of corporate filth had been cleaned and it was time for Americans to enjoy the fruits of the previous decade. They did not however fully understand the man or the party who was now leading their country. Naturally they did not expect the attack on September 11 of that year or the response by the administration. The Republicans were mad at Clinton for raising taxes to close the deficit and must surely have been privately unhappy with senior Bush for his own tax increases. Bush junior therefore had both a mission and a mandate. In truth he did say even before his selection that he would use ¼ of the projected budget surplus to cut taxes. The rest he had said would be used to secure the country’s Social Security system and the balance for undefined special projects presumably in the mould of the Stealth Bomber, Star Wars, wars on everyone, countries and institutions which do not toe the line and heaven forbid, even converting all those infidels in Asia, Africa and China.

Surplus To Deficit

In his crusade, he has managed to convert, much to the cost of all Americans the venerable Alan Greenspan, Chairman of the Federal Reserve Board and apostle of fiscal responsibility and good financial management, and even worse for them the largest budget surplus into the highest deficit ever estimated at close to $600Bn. In twenty-nine months the Administration has managed to turn the projected ten year projected surplus of $5.6T.into a deficit of $4T. which as the Democratic Senator from South Carolina pointed out perhaps a little cleverly amounts to a downswing of ten trillion in two years. How did this come about? True the war in and on Iraq and Afghanistan has cost money, lots of it, but did Mr. Bush not say that his budget reserved $1T.for unforeseen circumstances? How was this spent and who is keeping the books? Let us not forget that George Bush and Ken Lay of Enron, the surviving workers of which are observing the second anniversary of its demise just around this time, are colleagues from Texas.

Real Money

Despite the dire warnings which have come from within the ranks of the Republicans and the administration, those in control and that really boils down to one see their mandate as simply to cut taxes and damn the rest. If there is a choice between tax cuts and social expenditure, the administration almost instinctively chooses tax cuts. And if there is a choice between tax cuts and the war on terror, again it chooses tax cuts. As the records show if there is a choice between reducing the deficit and tax cuts, you know the answer.

A budget deficit is not alas an accounting entry but real money which either has to be printed or borrowed from someone else. I am discounting the option of stealing as immoral and illegal and which therefore has no place in this newspaper. So far despite all the evidence that the US’s dominance in the world economy is being challenged by the incredible growth rate in the world’s newest powerhouse China, the resurgence of the Japanese economy and the increasing confidence in Europe, foreigners remain willing to put their spare cash in US government paper even in the face of the falling value of the United States dollar, its mounting debt and growing loss of admiration in the world. They assume rightly that the US economy is too big to fail.

Implications

Borrowing has several implications few of which are positive for the borrower unless it is to invest in expenditure which would generate commensurate economic returns. Not only is it true that the more you borrow the more interest you will have to pay but that as demand for borrowing increases so does the interest rate. The citizen now has to pay increased interest on the mortgage for the home, the car loan, and those symbols of consumption in America, the credit cards. What Mr. Bush’s advisors may not have told him is that the extra interest which the citizen now has to pay as a result of reckless borrowing is a form of taxation.

History

The Republicans appear to have learnt nothing from the experiences of the 12 years of the Reagan/Bush administrations when the United States went from being the world's largest creditor nation to the world's largest debtor. If they do not remember this it is understandable that they are unaware of their earlier Quaker history and their revulsion to debt. Our nation's founders were against debt. At the writing of the Constitution they were concerned about debt incurred to finance the Revolutionary War, and it was their intention to promptly pay it off. Alexander Hamilton (federalist paper #7) called for the "extinguishment of all debt." Thomas Jefferson later wrote, "I place economy among the first and most important of Republican virtues, and public debt as the greatest of dangers to be feared."

Service Economy

Having shipped many of its jobs to the ‘lower cost’ countries in the interest of the cost cutting and having lost in the race for manufacturing excellence to Japan and the Asian Tigers, the trade surplus of earlier years has disappeared. Having moved from a manufacturing to a service economy there are fewer products to export and take advantage of the depreciating US dollar and to strengthen its balance of payments. Perhaps charitably, many of those nations which enjoy trade surpluses with the USA have almost instinctively retained those surpluses in America in the form of investments. One of the great ironies of the globalisation wave so zealously promoted by business in America is that their economy will suffer an Icarian fall if foreigners were to show loss of confidence in the US economy and indeed it is a bit surprising that they have not begun to do so. Like all investors they must reckon and pray against the self-fulfilling prophesy.

Conclusion

Perhaps it is a doomsday scenario but can Americans count on the indefinite patience of those nations and banks owed by the US? Of course they realize that their own economies are tightly entwined with that of America and that what hurts America will hurt them. But is it out of the realm of probability that sooner or later, possibly after a market crash, someone, in order to pay their own debts, will demand their loans to the United States be paid. In that case, rather than get caught with "bad paper", there will be a run on the United States government.

In addition to the government debt of $14 trillion, businesses are home to trillions more in foreign investment, kept in the US by the promise that the American taxpayer will be made to cover all losses. But with manufacturing in decline and schools producing far more lawyers than anything else, it should be obvious to the prudent observer that the American taxpayer, even if so inclined, may not be able to cover the losses of their own government, let alone a foreign investor. That has to be making them nervous as well.

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