IMF REPORT ON U.S. BUDGET DEFICITS & THE WORLD ECONOMY
Jon Kofas writes: "On 14 April 2004, IMF chief economist
Raghuram Rajan issued a report on the impact of U.S. budgetary deficits on the
world economy in the next 15 years. Because of increased U.S. government borrowing,
owing to soaring defcits will reduce America's output by 3.7 percent and global
economic output by 4.2 percent in the next 15 years. The monetarist economists
blame the impending rising interest rates in the U.S. and around the world from
2005 to 2020. Though it inherited a surplus, the Bush administration will leave
a legacy of the largest deficits in U.S. history and global economic contraction.
After the booming "new-internet economy" of the 1990s, and given the
cyclical nature of the world economy, it was inevitable that a contraction would
take place, regardless of who was in the White House. The challenge for any
administration is one of prudent management of the U.S. and the world economy
through the IFIs. I have previously noted that this administration's policy
of containment militarism was costly in every respect, and that I doubted it
would result in a safer world, or that the cost-benefit ratio was worth this
anachronistic road of the early Cold War. Now we have the IMF confirming that
the global economic contraction for the next 15 years fall on the shoulders
of the U.S. Though not the only factor in the budgetary deficits, skyrocketing
defense spending and supplemental spending for Iraq in the next 10-15 years
is something to consider. People throughout the world will suffer lower living
standards because American neo-Conservative ideologues have been pursuing a
diplomacy based on fabrications and a dream of an expanding American empire
that cannot possibly become a reality in this complex multipolar world".
RH: There are many historical examples, among them imperial Spain and the France
of Napoleon, of countries ending up with a financial crisis because of imperialistic
David Westbrook says: "Jon Kofas referred to an IMF Report. In its World Economic Outlook Report, ch. II, released in April 2004, Nicoletta Batini has an "essay" discussing the potential impact of the U.S. deficit. See "How will the U.S. Budget Deficit Affect the Rest of the World" http://www.imf.org/external/pubs/ft/weo/2004/01/index.htm.
Batini's measured account has nothing to say about the neocons and little to say about Iraq, a word that appears exactly twice in the essay, but it may be of interest to WAISers anyway. Batini traces the deficit to the stock market collapse (recall that NASDAQ lost over 60% of its value) and the resulting decline in capital gains and other tax revenues; discretionary tax cuts; weakening of the global economy; September 11th; the accounting crises; and military/security expenditures. (That the U.S. has not entered a Depression -- by which I mean a serious loss of confidence -- is really something of a miracle for which we're insufficiently grateful.) Moreover, Batini concedes that fiscal stimulus has been necessary because the U.S. (and Japan) had little capacity for monetary stimulus (because interest rates were already low). Batini praises U.S. fiscal stimulus over the last few years, noting how much growth has been stimulated in the U.S. and consequently in the rest of the world without raising long term interest rates. The question she is confronting is how the U.S. will wean itself off of such stimulus, without causing currency crises in developing countries. The big point here is that as U.S. interest rates (relatively risk free) rise, relatively riskier investments in developing countries will look less attractive. As a result, capital to relatively riskier countries will dry up, which will slow development.
Batini's piece is nicely done, but it is a very speculative bit of essentially academic analysis, which by its terms sets forth multiple scenarios, each based on multiple hypotheses run through various models. In particular, Batini must rely on linkages among markets, linkages that simply are not well understood in practice (e.g., U.S. exchange rate, government debt, and U.S. consumer spending). More generally, economics is notoriously bad at forecasting, indeed at historical analysis. There is still no consensus on what caused the Depression, and little clue as to what caused the market break of '87. It bears remembering that economists have little idea what a single share of common stock of a publicly traded company will be worth in a year (due in part to the efficiency of markets themselves), much less what the U.S. or the world economy will be doing in fifteen years, much less what causal role current deficits will have played in bringing us to that state of affairs. Such predictions, at least stated as anything more than speculation, are simply silly. Rephrased, our current situation (including the budget surplus we've just spent, and most of the adventures of the '90s (the internet boom? the Asian currency crises? the Russian boom/crash/boom?) could not have been predicted fifteen years ago in '89 (when the Berlin Wall fell!). And, in fairness, Batini states her position as an effort to model certain IMF Staff "concerns." But all the numbers make this look like a presentation of facts.
Importantly, Batini does not suggest that the U.S. should NOT have embarked on its plan of fiscal stimulus. Indeed, she praises the effort. There was no way we were going to get through the crises of 2000-04 without spending a lot of money, and without substantial drops in revenues. Consequently, Batini's arguments about the "cost" of the deficit are somewhat misleading. She does not suggest there was another choice. But it has been expensive, and working the deficit down will cost more, and it is those costs she tries to quantify. Moreover, one of the problems is likely to be currency instability among developing countries, particularly Latin America. Which is a problem for the IMF, of course.
Where does Batini end up? Batini thinks that the U.S. should cure its deficit more quickly than the administration is proposing. In short, this is an argument for reducing spending and raising taxes, both politically problematic. Which is fine and dandy and nothing new from the IMF. It bears mentioning, however, that both progressives and supply side conservatives have other ideas about growth, and the IMF's track record here ("austerity measures") have been criticized, with some justification. Moreover, developed nations exhibiting the sort of fiscal rectitude recommended by the IMF have not been growing (Germany being exhibit A), and Batini concedes that the U.S. economy is fundamentally stronger (certainly in relative terms) than it was in the '80s. My verdict on a fairly quick read of her quite technical essay is rather Scottish, i.e., unproven. My sense is that Batini is playing a bit too true to the economic philosophy of her institution. I'm still enough of a Keynesian to think that she, and the IMF generally, are insufficiently attuned to questions of confidence and so growth, and the difficulty of maintaining those things in a time of military uncertainty. If that's right, under the present circumstances, the U.S. will just have to carry this debt slightly longer than it might otherwise. (Though we do need to revise our tax system.) But that's just my guess. And a budget surplus (even assuming, rather heroically, that the numbers were solid) is too good to be true for long, anyway".
RH: I remember the time when economists were saying that all they had to do
was to fine tune the economy. Clearly that was an arrogant statement, probably
hiding their confusion.
David Westbrook wrote: ·"That the U.S. has not entered a Depression -- by which I mean a serious loss of confidence-- is really something of a miracle for which we're insufficiently grateful." From the UK, John Heelan comments: "The gratitude might be at the expense of American and other lives lost in armed conflict. History over the last century indicates a correlation between the timings US economy being in risk of recession and the dates the US enters armed conflict somewhere in the world, shoots things into space or develops major defense projects. Cynics might think that the US shoots its way out of economic woes". RH: The same was said about Roosevelt and the Depression. The US should not be singled out. Wars have often been started to get the mutinous people to unite behind the flag and to boost industry. However, it would be wrong to reduce the causes of war to that. In the vast literature on the causes of war, there must be something about this.
Randy Black says: "I agree that the Batini piece posted by Davud Westbrook is interesting and provocative. Of the elements discussed that had a negative impact on the US economy (the Nasdaq crash prior to 2001 and 911), one very key element is missing. The Enron/WorldCom collapses, brewing for at least six years (as was 911) were a third key influence on the US economy. It is fact that the Nasdaq lost 60% of its dollar value prior to Dubyas inauguration. We cannot ignore the impacts of those three major events. Those three elements, the Nasdaq crash, the Enron/WorldCom collapses and 911 negatively impacted the US economy is ways that would have caused the demise of a weaker nation".
Jon Kofas writes: "David Westbrook offers great analysis of Nicoletta Batini's essay! And even greater insights regarding the climate of political economy we are currently facing in the advanced capitalist countries. And he is correct about the possible trouble awaiting Latin America which has historically faced cyclical debt crises arising from fiscal and monetary problems. Ultimately, the political question is far more significant than the monetary or fiscal one facing the the G-9 governments, the IMF, World Bank, European Investment Bank, and Paris Club, all of which play a salient role in managing and of course influencing the course of the world economy, thus impacting the lives of people around the world every single day. That the U.S. economy needed some form of stimulation is not at issue, in my view. But what type of stimulation, who pays the price and who benefits in the process. Is the U.S. economy specifically, and the world economy overall, better off because of Bush's fiscal policies now and in the next 15 years as the IMF has speculated? Have Bush's policies improved living standards for working Americans, or at least made their material lives less painful amid the cyclical recession? Have such policies condemned young people to paying for the Bush administration's policy of Keynsian militarism because a few neo-conservatives believe they have a direct line to Divine Providence in shaping institutions here and determining what regimes are worthy of support and which ones must perish? Bush's deficit spending is not FDR's, but much closer to that of Reagan, who left this country a monumental debt. Nor can any one take comfort from Bush's foreign policy that will force countries around the world to add more spending for security and defense. Security and defense costs take away precious resources for the civilian economy, thus impacting living standards. Of course the IMF's crystal ball is as nebulous as that of any economist. In the last analysis the significance of the IMF report is political. To what degree does Bush have the confidence of political leaders, as Kerry and other Democrats have indicated, or of the International Financial Institutions, or of the business elites? To what degree will his policies foster an improved economy and improved living standards for people here and throughout the world?"
RH: Keynesian militarism? Keynes recommended government pump-priming during a depression, but that did not include increased military spending.John Heelan saida: "History over the last century indicates a correlation between the timings US economy being in risk of recession and the dates the US enters armed conflict somewhere in the world, shoots things into space or develops major defense projects".Bert Westbrook replied (I deleted an un.WAIS remark): "John is of course entirely right. Indeed, there was a secret deal cut by Greenspan, bin Laden, and Sharon, done in a black helicopter circling the Dome of the Rock, according to which an anti-recessionary war would be instigated by bin Laden, Sharon would get the West Bank, and bin Laden would become a superstar, realizing heaven on earth and punishing Hussein for dissing him into the bargain. See, it all works out!"
On a more serious note, I would argue -- pace my colleague George Marcus --
that essentially paranoid logics and anxieties increasingly inform political
discourse. See Paranoia Within Reason: A Casebook on Conspiracy As Explanation
(Late Editions, Cultural Studies for the End of the Century) by George E. Marcus
(Editor) (U. Chicago Press, 1999). RH: The question of recourse to war to solve
domestic problems, including economic ones, cannot simply be dismissed as paranoia.
Randy Black writes: "Jon Kofas seems to be saying that the Bush fiscal policies are the principal reason for the difficulties that the US currently faces. I would remind Mr. Kofas that the President spends no money. Congress spends the money, in many cases well beyond the budgets or in direct opposition to the budget proposed by the President. Fiscal policies are the cumulative product of hundreds, if not tens of thousands of persons in the US Congress, their staffs and across the USA.
President Bush did not ask for the collapse of the Nasdaq, nor the 911 attacks, nor the crimes and subsequent collapse of Enron and WorldCom; The record is clear that he inherited those problems, the issues and the fallout. It is clear that those issues were in the making years before Bush even ran for President. Certainly security and defense take from the civilian economy. And?
Are we to simply stand aside while the Arabs finish what Hitler and Stalin could not regarding the Jews? Are we to simply stand aside and allow Islamic leaders and their terrorists to dictate our actions in the world, our actions within our borders, and to allow those terrorists to dictate that our women wear Burkas and refrain from education or a career?
I think not. I will leave you with this thought.
"Without question, we need to disarm Saddam Hussein. He is a brutal, murderous dictator, leading an oppressive regime ... He presents a particularly grievous threat because he is so consistently prone to miscalculation ... And now he is miscalculating America's response to his continued deceit and his consistent grasp for weapons of mass destruction .. So the threat of Saddam Hussein with weapons of mass destruction is real" - Sen. John F. Kerry (D, MA), Jan. 23. 2003
Jon Kofas used the expression "Keynsian militarism". I objected that Keynes recommended government pump priming during a depression, but he was not promoting military expenditures or militarism. John Kofas replies: "Just to clarify "Keynsian militarism" This concept arose after 1950 (from the NSC#68 group) during the Truman administration, and it continued during Eisenhower's. John Meynard Keynes proposed deficit spending and pump priming to stimulate and strengthen capitalist economies amid the Great Depression. During the early Cold War when the U.S. enjoyed enormous economic advantage over all other countries, and it had more than enough gold to support the dollar as a reserve currency, it was deemed desirable for the government to spend on defense to win the race with the Communist world. There was no question that such spending would in fact result in balance of payments deficits and a weaker dollar. By 1958-59 the IMF warned Washington about the situation. "Keynesian militarism" therefore refers to deficit spending for defense, not what Keynes originally intended. That is what Reagan was pursuing and this is exactly what Bush is doing as well, hoping that the growth of the U.S. economy and the luxury of the dollar as a reserve currency would not cause great harm to the U.S. economy in the future. History has shown otherwise".
Ronald Hilton -