Prof. Niall Ferguson of the Harvard University compares the US economy to a dinosaur whose bulk once shook the ground. Yet, it disappeared from the face because of its inner problems. Like it, â€œthe US economy is mind-bogglingly enormousâ€”two and a half times as big as the next largest economy in the world and almost as large as that of the six other members of the Group of Seven combined. The catch is that it has to consume almost incessantly to sustain its great heft.â€ This reveals its great weakness and the inherent seed of its likely collapse at some future date.
The American economy is the most parasitical in the world. It sucks the rest of the world to prosper. Even though it is the richest, it is the most indebted country. This is reflected in two deficits, namely, fiscal deficit and trade deficit.
In 1989, when the country started worrying about the national debt, it stood at $2.7 trillion. Eleven years later, in September 2000, it crossed $5.6 trillion. Belying all the hopes that the national debt would decline and completely disappear, leading to a balanced budget, it now exceeds $8.3 trillion. Thus George Bush has created a record so far as the extent of the national debt is concerned. Bushâ€™s contribution to pushing up the level of the national debt is quite significant. He cannot blame the reduced revenue receipts on the 2001 recession due to the bust of dot.com boom or problems inherited from the Clinton administration for the increasing volume of the national debt. Recession is long over and economic growth has been looking up and the rate of unemployment has declined even though off shoring has shifted abroad quite a sizable volume of job opportunities. It must not be forgotten that the Clinton administration had left a fiscal surplus of 2 per cent of the GDP that the Bush administration has converted into the deficit and pushed up to 4 per cent. This has been mainly as a result of the generous tax cuts for the higher income groups and military adventurism abroad. It is needless to add that the Bush administration has been responsible for them. If the policies pursued by the Bush administration are not reversed, by 2016, the national debt is likely to reach $12.8 trillion. Mind you, this is the estimate given by the Congressional Budget Office.
The Nobel laureate Joseph Stiglitz blames for the growing fiscal deficit the domestic economic policies more than military adventurism abroad. To quote: â€œOf course, the war in Iraq has contributed, but so too have the enormous increases in corporate welfare and the subsidies for agriculture. The effective tax amnestyâ€”inducing American corporations to bring their money back to America in return for paying a tax that is a sixth of their normal tax â€“ has made this yearâ€™s revenues look better than they otherwise would, and the deficit smaller than it otherwise would. Make no mistake, however, there is an enormous structural deficit in the American economy thanks to increased public spending and tax breaks for business and the wealthy. And structural deficits do not just go away by themselves.â€
The military adventurism in Iraq is going to cost somewhere between $1 trillion and $2 trillion. This is far more than the initial estimate by the Bush administration, which was put at $50 billion. Soon after the invasion of Iraq it was realized that the war was going to be much more difficult than initially expected. To quote Prof. Joseph Stiglitzâ€™s interview to Germanyâ€™s Der Spiegel, â€œThey thought they were going to walk in, everybody would say thank you, and they would set up a democratic government and leave. Now that this war is lasting so much longer, they constantly have to adapt their budget. It rose from $50 billion to $250 billion. Today, the Congressional Budget Office talks about $500 billion or more for this adventure.â€ Even if the American intervention in Iraq comes to an end in a few months or years, the US government will have to spend to meet the costs of the lifetime disability of and health care expenses of those returning from Iraq. In addition, the government will have to incur expenses on fresh recruitment to fill up the vacancies due to the casualties in Iraq war. All these will add up to billions of dollars.
It is feared that rising national debt will lead to larger interest payments, which will eat up the revenues that could have been spent on other programmes. As every student of economics knows that larger borrowings from the public may push up the long-term interest rates that may, in turn, crowd out private investment. Besides, it has implications for the distribution of national income in the sense that bondholders may get a larger share of the national cake. Some economists (such as Jagadeesh Gokhale and Kent Smetters) hold that the actual fiscal deficit of the US federal government is much larger than what the official sources indicate. According to their computation, it may be around $66 trillion.
There is a huge trade deficit because America imports much more than what it exports. It is estimated that America has been borrowing abroad $2 billion daily to meet its foreign trade deficit. Thus the richest country in the world is a net debtor because it has been living beyond its means. Since dollar is a widely accepted international currency, America prints as much as is required and sends abroad to meet its liabilities. From all over the world, governments, corporate entities and individuals buy American government bonds and bring in huge sums of money that helps the United States and it never faces any liquidity crunch. Suppose, however, that tomorrow, the universal acceptability of the dollar disappears or declines and the foreigners refuse to invest in American government bonds, the US economy will be in great difficulties. For almost one and a half decades the USA has been running trade deficit, i.e., it has been importing much more than what it has been exporting. This year the current account deficit or trade deficit is likely to reach 7 per cent of the GDP, which will be almost double the record level reached around mid-1980s. Consequently, the burden of foreign debt on America has been continuously increasing. In the mid-1980s the Americans owned more assets abroad than the foreigners owned in the USA. Now, it is the other way round. At present, the difference between the overseas assets owned by Americans and the American assets possessed by foreigners is (â€“) 20 per cent while in the mid-1980s it was (+5) per cent.
There is an intimate connection between the two deficits, namely, fiscal deficit and trade deficit. Since there is fiscal deficit, it means the savings are not adequate to the task of financing the imports. The imports, however, are not to meet the needs of investment activities. In fact they are to meet consumption needs of the people. Personal savings are almost nil. Similarly, the reduction in the incidence of taxation on the rich is not aimed at inducing them to invest but it goes to promote more consumption by them. The term â€˜consumption bingeâ€™ has been used to describe this. Both the deficits are the consequence of this consumption binge. The twin deficits are potentially dangerous for the health of the economy in the future and they have no current benefits to contribute.
It is strange that, instead of looking inwards to find the real reason for this state of affairs, the administration has been searching for the scapegoat. It has been blaming China for keeping its currency undervalued or Europe for slow rate of economic growth resulting in fewer imports from America.