8-29-06, 9:08 am

Professor Niall Ferguson of Harvard University compares the US economy to a dinosaur, whose bulk once shook the ground. Yet it disappeared from the face of the earth. Like the dinosaur, 'the US economy is mind-bogglingly enormous, 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.' 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 feeds upon the rest of the world to prosper. Even though it is the richest, it is also the most indebted country. This is reflected in two deficits, the fiscal deficit and the trade deficit.

In 1989, when the country started worrying about the national debt, it stood at 2.7 trillion dollars. Eleven years later, in September 2000, it exceeded 5.6 trillion dollars.  It now stands at more than 8.3 trillion dollars, belying all hopes that the national debt would decline and completely disappear, leading to a balanced budget.  Thus, George W. Bush has established a new national debt record. Bush's own contribution to pushing up the level of the national debt is quite significant. He cannot blame reduced federal revenue receipts on the 2001 recession (due to the dot.com bust) or the increasing volume of the national debt on problems inherited from the Clinton administration.

That recession is long over, economic growth has been looking up, and the unemployment rate has declined, even though outsourcing overseas has shifted abroad quite a sizable number of jobs. It must not be forgotten that the Clinton administration left a fiscal surplus of 2 percent of the GDP and that the Bush administration has converted it into a deficit. This has happened mainly as a result of the generous tax cuts for higher income groups and military adventurism abroad. Needless to say, it is the Bush administration that has been responsible. If the policies pursued by the Bush administration are not reversed, by 2016 the national debt is likely to reach 12.8 trillion dollars. Mind you, this is the estimate given by the Congressional Budget Office.

The Nobel laureate Joseph Stiglitz blames the growing fiscal deficit on domestic economic policies more than military adventurism abroad. To quote: 'Of 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 amnesty, inducing American corporations to bring their money back to America in return for paying a tax that is a sixth of their normal tax, has made this year'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.'

The military adventurism in Iraq is going to cost somewhere between 1 trillion and 2 trillion dollars. This is far more than the initial estimate by the Bush administration, which was put at 50 billion dollars. Soon after the invasion of Iraq, it was realized that the war was going to be much more difficult than initially expected. To quote Professor Stiglitz's interview in Germany's Der Spiegel, 'They 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 dollars. Today, the Congressional Budget Office talks about 500 billion dollars or more for this adventure.'

Even if the American intervention in Iraq comes to an end in a few months or years, the US government will have to continue to spend to meet the costs of the lifetime disabilities and health care expenses of those returning from Iraq. In addition the government will incur war-related expenses on new recruitment to fill up the vacancies due to the casualties in the Iraq war. All these costs will add up to billions of dollars. It is feared that raising the national debt ceiling will lead to larger interest payments, which will eat up the revenues that could have been spent on other programs. As every student of economics knows, larger public debt may push up long-term interest rates that may, in turn, crowd out private investment. Besides, increased debt has implications for the distribution of national income, in that bondholders may get a larger slice 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.

There is a huge trade deficit because America imports much more than it exports. It is estimated that America has been borrowing 2 billion dollars abroad daily to cover its foreign trade deficit. Thus, the richest country in the world is a net debtor because it has been living beyond its means. Since the dollar is a widely accepted international currency, America prints as much as is required and sends it 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 so that the US 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.  Then the US economy will be in great difficulties.

From New Age Weekly, a publication of the Communist Party of India