Skating on thin ice

The word “conservative” comes from a Latin word meaning “to preserve.”
The Bush administration bills itself as conservative, but it’s anything but.

            It’s
unprecedented for a country, under conservative leadership or otherwise, to
propel itself from financial health to possible collapse as fast as the US has
over the past five years. When George W. Bush took office, the Congressional
Budget Office projected a 10-year surplus of $5.6 trillion. Three years, later
the 10-year projection was a deficit of $6.0 trillion: a negative swing of an
astounding $11.6 trillion. And there’s no end in sight.

            Our eyes
tend to glaze over when we’re looking at dry economic statistics, but these
days we do so at our peril. Never before in American history have deficits been
this big and projected for this long.

            We are
entering uncharted territory.

            Others around the world have
noticed, and they’re watching us closely. Foreign countries now have a hand in
our financial future, and they’re capable of taking actions that could have
huge impacts. The dollar is the world’s reserve currency, and thanks to our
growing trade deficits, many foreign governments and financial institutions
hold enormous sums of dollars.

            About 30
percent of our national debt is now owned by foreign governments and
institutions. Japan and China in particular hold approximately 20 percent of
this debt and large amounts of US currency.

            Paralleling
the financial mismanagement in the US, the dollar has declined in recent years
compared to virtually every other currency. And for foreigners who hold dollars
or US government obligations, these declines have been costly. How long will
they continue to hold on to US financial instruments? What are the consequences
if they stop doing it?

But never mind. The
Bush administration, in a delusional state of neocon triumphalism, apparently
believes that permanent American hegemony can be attained by American military
power alone. We continue to be as belligerent as we please with almost anyone
— including China. That’s a curious way to behave toward a major creditor. As
economist William Greider recently noted, the US “is blind to the adverse
balance of power accumulating against us.”

            Larry
Summers, who was treasury secretary in the Clinton administration, said, with a
dry reference to FDR, that “the only thing to fear is the lack of fear itself.”

            We bestride
the world, rejecting international treaties, ignoring the opinion of others,
using our power where and when we want, making appointments to powerful
positions seemingly designed to antagonize others, and generally behaving as an
immature and irresponsible superpower. The international resentment is
building.

            Domestically,
we have the world’s lowest savings rate. In fact, it’s almost non-existent. We
refuse to pay for our worldwide adventures. We make no personal or governmental
sacrifices: Our leaders don’t ask for any, because that may be politically
costly. And we generally ignore the financial consequences.

            And how do
we pay for all this? By putting it off to the next generation and financing it
by selling bonds and currency to foreigners. The wonder is how this scheme has
lasted this long without a collapse. A sage economist once said that if
something is unsustainable it will eventually come to an end. It sounds like a
Yogi Berra witticism, but obviously, it’s true.

How will it end? Foreigners will eventually and reluctantly conclude that the US is not fiscally
responsible. And to protect their own interests, they’ll begin to dump dollars
and bonds. This will usher in a financial crunch for the United States. The
value of the dollar will drop, equity markets will undoubtedly fall, interest
rates will rise sharply, and a more or less severe recession will occur. With
the huge deficits already built into the system, the usual tools for fighting a
recession — tax cuts and spending increases — will be difficult or
impossible to implement.

            The only
way out for us is to quickly take steps to rebalance the national priorities.
That will require both fiscal measures and foreign-policy restructuring. In
foreign policy, we simply cannot continue to act and be viewed as an arrogant
bully. That will only make others savor our national day of reckoning, and
they’ll do little or nothing to help alleviate it.

            The fiscal
measures we need to take will be harder. The American people have not been
asked to make sacrifices for the “war on terror.” We’ve just been asked to go
shopping, which is the opposite of what’s needed. We must enact selected tax
increases, and we must rein in spending. Even though we are in a “war,” defense
spending is the obvious place to cut. We spend more on defense than the rest of
the world combined. Ours is a defense
establishment designed for world hegemony and to fight nation state wars. To
fight a war on terrorism is more akin to a police action. Instead of finding
Osama bin Laden with special forces, we invaded Iraq
in a military operation a hundred times more expensive.

            Increasing
taxes or eliminating those mandated cuts in coming years are anathema to the
Bush administration — as is asking for energy conservation. That would hurt
the oil-industry pals of Bush, Cheney, et al. And making a dent in the
military-industrial complex is even more doubtful. So we are bound to watch
deficits of $600 billion a year grind away at our national strength.
Unfortunately, the political leadership in power shows no indication of
changing course.

Correcting ourselves

In his April 13 column “Our Real Crisis,” Laurence Britt
stated that the US
is the only developed country that allows consumer advertising for prescription
drugs. New Zealand
also permits such advertising. The US
is the only member of the G8 — the world’s major industrial nations — to
allow consumer advertising for prescription drugs.

This article appears in Apr 20-26, 2005.