WASHINGTON - A combination of huge tax
cuts, an insatiable appetite for foreign imports,
especially oil, and record government spending is
steadily eroding US independence and freedom of
action, according to a "special report" released
Thursday by the influential Council on Foreign
Relations (CFR).
The report by Prof Menzie
Chinn, a former senior economist for international
financial issues on the White House's Council of
Economic Advisers under both Presidents Bill
Clinton and George W Bush, argues that the federal
budget and current account deficits, which have
deepened considerably over the last several
years, increasingly threaten
US sovereignty and influence. "Failure to take the
initiative to reduce the twin deficits will cede
to foreign governments increasing influence over
the nation's fate," according to Chinn's report.
"Perhaps equally alarming, it will lead to slower
growth, escalating trade friction, and reduced
American influence in political and economic
spheres."
The report, entitled "Getting
Serious About the Twin Deficits" calls for urgent
measures to tackle serious challenges faced by the
US economy, including reducing the government
deficit by, among other steps, increasing taxes;
reducing oil imports through the imposition of
energy taxes or strict fuel efficiency standards;
and managing a coordinated depreciation of the
dollar vis-a-vis East Asian currencies.
It
called the recent Chinese decision to let the yuan
fluctuate in line with a basket of currencies was
a "step in the right direction", but still
insufficient to overcome current imbalances. "The
worrying alternative to a modest and coordinated
dollar depreciation now," according to Chinn, "is
investor panic and a major dollar collapse down
the road."
The report, the first in a new
CFR series on "The Future of American
Competitiveness", is implicitly highly critical of
the tax-cutting and free-spending policies pursued
by the Bush administration that have, along with
increased post-September 11 military spending,
wiped out the budget surpluses built up during the
Clinton era, creating record deficits in their
place.
Chinn's critique is not
particularly new. The International Monetary Fund
(IMF) voiced similar concerns at its annual
meeting just last weekend, and fiscal
conservatives within the Republican Party have
displayed growing anxiety about the dollar's fate,
particularly in the aftermath of Katrina. The CFR
stressed that the new study represented Chinn's
personal views only and not those of the
organization. But the fact that the New York-based
think tank, which has been seen since its creation
shortly after World War II as the foreign policy
bastion of US-based multinational corporate
interests, commissioned and released the report is
likely to be taken as a signal of Wall Street's
growing unhappiness with Republican rule.
Moreover, the fact that the study is
framed by the author's concerns over the future of
US sovereignty and its global influence is
particularly cutting, since the "bring-it-on"
swagger of Bush's foreign policy has been based on
the notion that US power should be unconstrained
by traditional alliances, multilateral
institutions, or even international law. While the
report does not explicitly address foreign policy,
its argument that Washington's twin deficits are
increasing the power of its foreign creditors to
influence what the US will and will not be able to
do appears designed to suggest to its readers that
Bush's pose and global ambitions are becoming ever
more hollow.
The dangers of a dollar
collapse and an economic recession, according to
the study, have become more acute as a result of
Hurricane Katrina, the recovery from which may
cost the government as much as US$200 billion.
Some economists have also predicted that the storm
could reduce the rate of economic growth by as
much as 0.5% for the year. Coupled with the
combination of record oil prices and US dependence
on imported oil, the pressure on the dollar grows
ever stronger.
But even if a sudden
collapse is avoided, the country's descent into
ever greater indebtedness threatens an important
source of its global influence - the dollar's role
as the world's most important currency. "A
cautionary note regarding America's current path
is provided by Britain's loss of military and
political primacy in the 20th century; that
development followed a shift from creditor to
debtor status," according to Chinn. "Similarly, a
prolonged decline in the dollar's value and
increasing indebtedness will erode America's
dominance in political and security spheres."
The current account deficit has soared
from just under 3.8% of gross domestic product
(GDP) in 2001 to 5.7% last year. While other
countries have historically experienced such large
deficits, the huge weight of the US economy -
which accounts for more than a quarter of global
GDP - is unprecedented, according to the study.
What makes matters worse is that the US has
accumulated a record amount of foreign debt at the
same time, borrowing particularly heavily from
Japan and China. In fact, a majority of federal
debt is now held by foreign governments and
investors, having doubled to $2 trillion over the
five-year life of the Bush administration.
These trends, moreover, show no sign of
being reversed, according to Chinn. According to
the study, the current account deficit is being
driven mostly by the fiscal deficits that have
been run up by Bush and the Congress since 2001 in
tax cuts and spending increases. A second factor
is the dependence of the US on foreign oil.
Indeed, oil imports account for 40% of the
increase in the trade deficit over the past three
years.
A third factor, according to Chinn,
is the undervaluation of East Asian currencies,
which makes Asian exports more attractive to US
consumers, further tilting the trade balance
against the US. As a result of these deficits, the
US faces several worrying outcomes. The most
likely result is that foreign governments and
private investors, confronted with a seemingly
endless vista of US budget deficits, will stop
buying US debt. Borrowing costs for the US
Treasury would then rise steeply, spurring a
corresponding plunge in the dollar, resulting in a
dramatic slowdown of the economy.
To
address these threats, the report calls for a
number of measures that will be very difficult for
the administration to stomach. In particular, it
calls for Bush to give up on making permanent the
tax cuts of 2001 and 2003 and impose taxes on
fossil fuels and/or meaningful fuel-efficiency
standards to reduce consumption - steps the
administration has so far steadfastly resisted.
The study also called for eliminating the most
costly provisions of the recently approved energy
and transportation bills, which, according to
critics, are laden with "pork" - that is, pet
projects or other benefits that lawmakers take
home to their constituencies or financial backers.
