Loquacious commenter Nick has contributed a long but interesting soliloquy on the mentality and concerns of the average American voter. However, what most struck me about his analysis was that his list of “tsunamis on the horizon” didn’t include any economic factors. Nor has the post-election conversation here at Troppo or elsewhere in the blogosphere discussed matters economic to any significant extent.
I suppose that reflects the fact that the Kerry campaign almost totally failed to cut through and get Americans focusing on economic issues, even though the economy was (and remains) one of Bush’s major weak points. The US trade deficit came in at $54 billion in August, the second highest on record, and it’s widely expected that the September figure (due for release tomorrow) will be just as high. More importantly, the US budget deficit for 2003-4 came in at a massive $412.55 billion. However, even though it was released during the election campaign period in early October, this news failed to make a ripple on the public consciousness. The budget announcement was timed for the day after the last televised debate between Bush and Kerry, and the actual deficit figure was slightly lower than the White House’s July deficit forecast of $445 billion. Some suggested that the Bush administration deliberately inflated its forecasts so the actual figure would look like good news by comparison.
I guess these figures are so mind-numbingly huge that they’re mostly meaningless to the average voter. America’s total public debt is more than $7.43 trillion. But what does that mean, apart from a long string of digits? As John Quiggin frequently observes, these deficit levels just aren’t sustainable in the long term. The annual US budget deficit is 3.5% of GDP and total public debt is on track to reach 40% of GDP in the near future, an unprecedented level for such a large industrial country (although the latter figure is around the OECD average, it’s quite another thing for the world’s largest economy to carry that level of debt because there aren’t many others able or willing to lend to America in such huge amounts).
By comparison, Australia’s federal government has been running unbroken budget surpluses for the last decade, and total public debt at both federal and state level is almost non-existent. Although that isn’t necessarily a totally good thing either, at least it gives us a much higher level of assurance of being able to withstand international economic shocks (e.g. oil prices), although the combination of worryingly high private debt and a stubbornly high trade deficit (around $2 billion per month – just as high proportionately as the US trade deficit) mean that our economy also doesn’t present an unreservedly rosy picture.
This article by Daniel Gross in MSN Slate dramatises the US deficit/public debt situation in a way that John Kerry signally failed to achieve:
On Nov. 3, as the bleary-eyed nation returned to work, the Treasury Department announced an impending crisis. If the lame-duck Congress doesn’t raise the statutory $7.384 trillion debt limit, which was intentionally breached in October, by Nov. 18, the world’s greatest power will run out of cash.
Congress, with the White House’s blessing, left town before the election without dealing with the debt limits¢â¬âbut not before passing an appalling, special-interest-written, corporate tax bill that will deprive the government of more than $100 billion in future revenues. That double irresponsibility¢â¬âthe lousy tax bill and the ignored debt limit¢â¬âwas a fitting end to the past four years of essentially one-party rule.
The only solace for sullen Democrats is that now Republicans might have to clean up their own fiscal mess. The fiscal record of the past four years has been one of unmitigated¢â¬âand seemingly intentional¢â¬âirresponsibility. A Republican Congress working with a Republican president created the massive new Medicare prescription-drug entitlement, passed a new, subsidy-crammed farm bill, committed hundreds of billions of dollars to war efforts, and loaded up on pork-barrel spending. Meanwhile, taxes were reduced¢â¬âon wage earners, investors, and companies. The end result: We collected about the same amount of taxes in fiscal 2004 as we did in fiscal 1999. But we spent 34 percent more. The total national debt has risen 30 percent in the past four years. The fiscally conservative Clinton administration had committed government to restraining spending. But now a massive structural gap has opened up between the country’s financial inflows and outflows. It’s only the willingness of the Chinese and Japanese central banks to buy our debt that keeps us afloat.
Gross suggests there’s Buckley’s Chance of a new Bush administration reining in the fiscal excesses:
Freed of the need to run for re-election, will Bush act more fiscally responsible in a second term? Wishful thinking. This crowd literally doesn’t have a clue when it comes to fiscal matters. Bush actually believes he has restrained Congressional spending, Cheney believes deficits don’t matter, and most members of the Bush economic team can’t¢â¬âor won’t¢â¬âspeak truth publicly. …
And so, while the moral-values crowd may have won, the fiscal orgy in Washington is sure to continue. Given Bush’s mandate and his stated desire to fix the Alternative Minimum Tax (a huge tax reduction), make the temporary tax cuts permanent (ditto), and transform Social Security (massive borrowing), his pledge to halve the deficit by 2009 is absurd.
Presumably that’s what Bush means by “spending his electoral capital”. An additional factor Gross fails to mention is Iraq. In order to avoid spiralling chaos there, allow some semblance of democratic elections to occur and facilitate ongoing reconstruction (inter alia to allow the oil to flow and mitigate the current price spike), it’s widely expected that Bush will need to significantly increase the US military commitment to Iraq.
In that situation, the chances of the second Bush administration achieving the promised halving of the budget deficit within 5 years are minimal. The potential consequences for the next Presidential election in 2008 are immense. It’s very unlikely that Bush will be able to suspend the laws of economics for that long. Drastic adverse economic consequences will almost certainly occur before then if the budget deficit isn’t reined in: massive panicked capital outflows, large rises in interest rates, major recession etc. And the deficit is so large that any serious attempt to reduce it will cause a lot of pain to a lot of voters. So, as Scott Wickstein commented yesterday: “Four years is a long time in politics.” Bush is caught between a rock and a hard place. It doesn’t seem to worry him though, either because he’ll never have to face the voters again and answer for the consequences, or because he’s too thick to realise they’re going to happen. But whatever he does, the economy will certainly haunt the next Republican Presidential candidate.
Lastly, Gross’s article made another important point on the Red State/Blue State divide that hasn’t so far figured at least in the Oz blogosphere’s US election post-mortems:
In decades past, increasing Republican dominance of the House and Senate would have meant more fiscal discipline. But Republicans increasingly dominate the states that are net drains on Federal taxes¢â¬âthe Southern and Great Plains states¢â¬âwhile fading in the coastal states that produce a disproportionate share of federal revenue. (It’s Republicans, not Democrats, who are sucking on the federal teat.) What Amity Shlaes quaintly identified in today’s Financial Times as the “southern culture of tax cutting” has been married to the southern culture of failing to generate wealth and the southern culture of depending on federal largesse. The offspring is an unsightly deficit monster.
Maybe all those redneck Bushies aren’t voting against their economic interest after all. And Bush won’t be able to rein in the budget deficit (even if he wants to) without directly attacking his core voter support.
PS – This paper at the IMF website provides a more careful evaluation of US fiscal policy under Bush:
Although U.S. fiscal policy has undoubtedly provided valuable support to the global economy in recent years, large U.S. fiscal deficits also pose significant risks for the rest of the world. Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ½1 percentage point. Higher borrowing costs abroad would mean that the adverse effects of U.S. fiscal deficits would spill over into global investment and output.
Moreover, against the background of a record-high U.S. current account deficit and a ballooning U.S. net foreign liability position, the emergence of twin fiscal and current account deficits has given rise to renewed concern. The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years¢â¬âan unprecedented level of external debt for a large industrial country (IMF, 2003b). This trend is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.
Although the dollar’s adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored. Episodes of rapid dollar adjustments failed to inflict significant damage in the past, but with U.S. net external debt at record levels, an abrupt weakening of investor sentiments vis- -vis the dollar could possibly lead to adverse consequences both domestically and abroad.