[Mb-civic] EDITORIAL The Importance of Being Earnest

[Michael Butler]

 The New York Times
February 14, 2005
EDITORIAL
The Importance of Being Earnest

For all its talk of deficit reduction, President Bush's 2006 budget is a map
of reckless economic policies and shows how they have backed the United
States into a precarious position in the global financial markets.

Mr. Bush needs to convince foreign investors that he's serious about cutting
the budget deficit. Here's why: Each day, the United States must borrow
billions of dollars from abroad to finance its enormous budget and trade
deficits. Without a steady stream of huge loans, the country would face
rising interest rates, higher inflation, a dropping dollar and slower
economic growth. The lenders want to see less of a gap between what the
government collects in taxes and what it spends, because a lower budget
deficit always eases a trade deficit. A lower trade deficit also implies a
stronger dollar. And a stronger dollar would reassure foreign investors that
dollar-based assets remain their best choice.

As it is, their belief is being sorely tested: in 2003, the European Central
Bank lost $625 million to the weak dollar and reportedly stands to lose $1.3
billion for 2004. Japan's central bank, which has the world's largest
foreign stash of dollars - some $715 billion - could lose an estimated $40
billion if the dollar weakened to around 95 yen, a level many analysts
expect to see this year. No wonder that a week before Mr. Bush released his
budget, Japan's finance minister said that Japan had to be careful in
managing those dollar-filled foreign currency reserves.

It's not hard to see what brought the United States to this juncture. Mr.
Bush's first-term tax cuts were too expensive and too skewed toward top
earners to work as effective, self-correcting economic stimulus. Instead,
predictably, they've driven the nation deep into the red. Having reduced tax
revenue to a share of the economy not seen since 1959, the cuts are a huge
factor in the swing from a budget surplus to a $412 billion deficit.

The administration also erred big in deciding to deal with the ballooning
trade imbalance by letting the dollar slide. That might have been a winning
gambit if it had been paired with a commitment to cut the deficit.
Theoretically, a weakening dollar would have begun the process of easing the
trade imbalance, while deficit reduction, which takes longer to bring about,
would have addressed the gap in a more lasting way. Instead, Mr. Bush has
unceasingly pursued deficit-financed tax cuts, even as the weak dollar has
failed to fix the trade imbalance. The result is that the country's deficits
- and borrowing needs - remain enormous even as dollar-based investments are
becoming less attractive.

Lately, Mr. Bush has been talking the deficit reduction talk, but there's no
sign that he is willing to walk the walk. In his 2006 budget, he pledges to
slash spending, but largely in areas that would have only a small impact on
the deficit and where cuts would be politically difficult, not to mention
cruel, such as food stamps, veterans' medical care, child care and
low-income housing. Meanwhile, he is pounding the table for more
deficit-bloating measures - making his first-term tax cuts permanent, at a
10-year cost of as much as $2.1 trillion; putting into effect two
high-income tax breaks that were enacted in 2001 but have been on hold, at a
10-year cost of $115 billion; and introducing new tax incentives to allow
high earners to shift even more cash into tax shelters, at a cost that would
ultimately work out to more than $30 billion a year when investors cashed in
their accounts tax-free.

Oh, yes. Mr. Bush also wants to borrow some $4.5 trillion over two decades
to privatize Social Security, which is a bad idea even without the borrowing
and a horrendous one with it.

The global financial community won't be fooled. The dollar may have bouts of
relative strength, as it has recently. But these are due largely to currency
traders' focus on short-term advantages, like Federal Reserve interest-rate
hikes, which are perceived as a positive for the dollar, or the appearance
of profit-taking opportunities. Inevitably, the budget and trade deficits
will reassert their drag on the dollar, and then on Washington's ability to
comfortably borrow money from abroad.

Congress can avert this crisis-in-waiting by forcing Mr. Bush to be serious
about deficit reduction. The first-term tax cuts should be allowed to lapse.
Cuts that are not yet in effect should not be allowed to begin. And no new
programs should be started that require megaborrowing. If the president
doesn't see that he has more important tasks than cutting taxes for the rich
and undermining Social Security, Congress should set him straight.

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