Column

BUSH’S LAST CHANCE

Other major economies must perform, or else the President is toast

DONALD COXE October 20 2003
Column

BUSH’S LAST CHANCE

Other major economies must perform, or else the President is toast

DONALD COXE October 20 2003

BUSH’S LAST CHANCE

Column

DONALD COXE

Other major economies must perform, or else the President is toast

AMERICANS, more than anybody else, are a people who profess the secular faith of free market capitalism. To a degree that amazes (or appalls) Continental Europeans, Americans of all classes have always rejected politicians who described themselves as socialists. However, Americans are also untroubled by ideological inconsistency. Most expect their president to deliver good economic growth without disagreeable inflation or painful unemployment. Voters support lapses from capitalist realism such as farm subsidies and

public funding of sports facilities that are showcases for multi-millionaire male athletes. No winning politicians advocate “big government” or “big bureaucracies,” but voters elect those who promise great gifts from a government that will magically remain on a tight leash.

George W. Bush was elected (barely) on a program of faster economic growth by cutting taxes and red tape. He has delivered on tax cuts, yet the economy still struggles. Yes, it grew rapidly in the second quarter, but most of the growth came from the tax refund cheques Washington mailed after Congress approved Bush’s latest tax cuts, and from the near-universal refinancing of home mortgages during the second quarter when interest rates reached 40-year lows. Those were one-off events.

Federal Reserve chairman Alan Greenspan has promised Bush that the Fed would do whatever necessary to get the economy back on the path to sustained growth. He dropped his base rate to a laughable (or lovable, depending on your viewpoint) one per cent. The debtor class (most voters) rejoiced and spent even more heavily—mostly on imported merchandise, as the nation’s trade deficit kept breaking records. The saver class (mostly the middle-aged and the retired) despaired as it watched its income from money market funds and bank deposits plumb unthinkable depths.

Well, the man from Crawford, Tex., has fired just about all his bullets. The economic consensus is strongly bullish and says he doesn’t need any more. I am inclined to go along, but I worry about a few problems that I fear are beyond any American govern-

ment’s ability. The ghastly technology mania and crash has wiped out trillions of dollars of America’s badly needed savings and left the economy reeling under massive overinvestment in tech gear. Since the economists never warned Americans about the dangers of Nasdaq’s run-up, they won’t talk about the longer-range destructive impact.

The nation’s twin deficits (budgetary and trade) now run at nearly 10 per cent of GDR The trade deficit is the bigger and more dangerous. The Bushies’ only policies on trade include a few protectionist follies and a “flexible exchange rate policy” on the U.S. dollar—a code phrase for devaluing the greenback. Nobody believes those policies will stop the shutdowns of American factories or the migration of white-collar jobs to Asia via the Internet.

The Bushies are right to plead with Japan, Germany and France to get their economies moving, so as to take the pressure off the American economy. The U.S., which has the most open markets in the world, has been propping up flaccid economies abroad since 1995. It can no longer afford such economic unilateralism.

Actually, there is some good news abroad. France is practising its own unilateralism, defying the EU’s wrong-headed deficit rules that it and Germany imposed on their smaller economy “partners” at the time of the Maastricht Treaty. But France is not review-

THE U.S., which has the most open markets in the world, has been propping up flaccid economies abroad since 1995.

It can no longer afford such unilateralism.

ing its absurd 35-hour-a-week labour laws, or any of the rest of its panoply of economic controls. Meanwhile, Germany is finally confronting the economic burden imposed by its overgenerous state pension program.

The big news for the world comes from Japan, where Prime Minister Junichiro Koizumi is finally proving he is the first real reformer Tokyo has seen in decades. The Japanese economy is rousing from its torpor, and this time its national strategy is focusing on China, not on the U.S. consumer. In the long run, that will take pressure off the U.S.

But Bush doesn’t have the luxury of a long-run wait for the Japanese sunrise. His mandate expires in just over a year, and those same voters who talk free enterprise expect him to deliver jobs and growth. Or else they’ll choose those who say they can deliver both—while abolishing the fiscal deficit. Such claims are sheer demagoguery—no American can solve the economic problems of the world. Nor is the poisonous political rhetoric helping voters to make intelligent appraisals. For example, all the wailing about the cost of rebuilding Iraq (US$20.3 billion) ignores the reality that the trade deficit handily exceeds that number in just two weeks. And the trade deficit means disappearing American jobs. In contrast, more than half of the 3.3 per cent U.S. GDP growth in the second quarter came from increased Pentagon spending—which created thousands of American jobs. That doesn’t mean Iraq was good news for Bush or America, but it certainly isn’t a big deal for a US$ll-trillion economy.

Bush never levelled with the voters that what the U.S. economy needs is for the rest of the leading economies to start functioning at least half as effectively as America has since Ronald Reagan was elected.

If they don’t, he’s toast.

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca