While the Bush Administration has given a road-map for the solution of Palestinian problem, the 9/11 events appear to have produced an unforeseen road-map for the deterioration of the American economy.
The Congressional Budget Office has revealed an interesting fact. It says that the Bush tax cuts enacted since 2001 will cost nearly three times as much as the fighting and occupation in Afghanistan and Iraq, reconstruction and relief after September 11, and the home-land security combined, over the next two years.
Moreover, these tax cuts are going to explode to about $2 trillion over the decade. And that’s assuming the sunset provisions phasing them out are enacted. If, as seems likely, they are not, the 10-year budgetary costs of the tax cuts will rise by another $2 trillion.
President Bush wanted to follow on the footsteps of Ronald Reagan by relying on the theories of the supply-side economists. In his election campaign, he announced about tax cuts to win more votes. But the enactment of these theories after the 9/11 events are producing unforeseen negative effects on the economy, rather than the positive merits which the original economic thinkers had assumed by the implementation of increasing supply in the hope of creating more demand by cutting taxes.
In a scenario changed by the 9/11 events, and after the excessive reaction of the Bush Administration to the so-called terrorism resulting in Afghanistan and Iraq wars, the strain on the American economy has been so tremendous that all these supply-side theories have fallen apart on the ground realities of highly strained economy that ensued after these unforeseen events and the wars.
The federal government enjoyed a projected 10-year budget surplus of $5.6 trillion at the time when President Clinton left office. But the Bush Administration now confronts sizable annual budget deficits within just less than three years. A lot of private economists now forecast a 10-year deficit of around $4 —$6.7 trillion, excluding the social security surplus. As a share of the economy over the next decade, government debt and interest payments are expected to double the share of the economy over the next decade.
In a recent annual survey of the US economy, the International Monetary Fund (IMF) quoted a last mo nth,s White House forecast that the federal budget deficit would explode to a record $455 billion in 2003, and then $475 billion next year.
The IMF further quoted that President George W. Bush Administration said the deficit— 50 per cent bigger than that projected just five months ago — had been exacerbated by a weak economy, the Iraq war and a $350 billion tax cut package.
It means that the Bush Administration had a better scenario 5 months earlier. The deficit has increased more than 50 per cent in just 5 months beyond the expectations of the Administration.
This unforeseen increase is said to have occurred due to Iraq war and the tax cuts. It shows that the Administration did not get the results it was expecting from the tax cuts. The results were just the opposite of the desired expectations.
The IMF has appreciated two improvements in the US economy. First one is that its rate of economic growth was set to rise from 2.25 in 2003 to 3.5 per cent next year. Second one is the high growth in productivity, or output per hour work.
As a matter of fact the expected rise in the rate of economic growth is mainly due to rise in the productivity. If the productivity growth is stifled, the economic growth rate would also be affected negatively. And that is the factor about which the IMF has expressed concern in the following words:
“In particular, they expressed concern that the worsening of the longer-term fiscal position, including as a result of the recent tax cuts, will make it even more difficult to cope with the aging of the baby-boom generation, and will eventually crowd out investment and erode the US productivity growth.”
It means that despite some possible improvements in a short-term scenario, the longer term prospects are doomed to erode the productivity growth and hence the lowering of the economic growth rate leading to eventual eroding out of new investments, while the US has to face the challenge of aging baby-boom generation. This is the final conclusion of the IMF report regarding the long-term prospects of the American economy. It has further added two more worries concerning social security and medicare in the following words:
“The risks to the fiscal outlook appear especially worrisome given the significant actuarial deficit arising from the longer-term demographic pressures on the Social Security and Medicare (health care) systems.”
As a matter of fact, this temporary increase in the economic growth rate and in the productivity is going to occur at the cost of dismissing hundreds and thousands of workers. It is the result of increasing unemployment, which was accelerated as a result of 9/11 events. Number of workers continued to decrease due to increase of unemployment after 9/11 and the overstocked goods had to be cleared without producing more to replace the sold stock due to shortage of workers. This situation resulted in a temporary increase in the productivity or the output per hour work and hence the increase in the rate of economic growth.
As the IMF has pointed out this situation cannot be continued for long as the budget deficits will erode savings and new investments to increase productivity and the growth rate. This temporary phenomenon will fade away with the increase in budget deficits and the increasing unemployment, which will erode the purchasing power and shrink the urge for consumption and hence decrease the demand, which in turn will bring about economic stagnation and stifle growth rate.
It is just not the IMF but even the Republican-controlled joint committee on taxation, using a variety of dynamic scoring assumptions, was forced to admit that these cuts are likely to reduce the economy’s long-term growth. Explaining the reason as to why the committee on taxation, has come to this conclusion, Laura D’Andrea Tyson, dean of London Business School writes:
“ Any positive business-investment incentives from lower taxes will be outweighed by the curtailing of national saving and investment caused by mammoth budget deficits. To the extent that larger deficits diminish domestic saving, they eat into productive investment. To the extent that larger deficits are funded by borrowing from the rest of the world, they raise the nation’s foreign debt and drive future income into servicing this debt. Contrary to the claims of the Administration ideologues, larger deficits mean lower future living standards.”
“The Administration argues that its tax cuts are necessary to stimulate growth in a sluggish economy. But this argument is specious. The economy may have needed a temporary infusion of additional demand during the past three years. But temporary tax cuts or spending hikes for hard-pressed working families, unemployed workers, and state governments would have stimulated demand much more effectively than tax cuts for the rich.”
Tax cuts have been made with the pious wishes to increase demand and employment opportunities, but after the 9/11 events, they have backfired. The average tax cut is said to be about $1000 per person. But half of the tax-payers will get a nominal tax-cut of $120 only and one-third will get no benefit at all.
The average has become much higher just because the benefit to the few rich tax payers is very great. When more than half and the additional one-third do not get any significant benefit of the tax cuts, how is it going to bring about all those blessings, which the theorists of the supply-side economists claim in the form of increase in overall demand or in the purchasing power of the majority, while the number of the unemployed has peaked to a 9-year old high level?
The increase in unemployment is a scourge in itself. A lot of companies like Enron and some airlines bankrupted, and those which survived, dismissed a lot of their workers, as a result of 9/11 events.The Clinton Administration had created millions of new jobs and reduced the unemployment rate to less than 4 per cent.The Bush Administration had to reverse this trend due to 9/11 events and the Afghan and Iraq wars thereafter. It raised the unemployment level 50 per cent higher than the Clinton Administration and brought it to more than a 9-year high level of 6.1 per cent and still maintaining above that level for the last few months despite slight negligible monthly adjustments.
The US had just emerged from recession in the beginning of 2001. But 9/11 events also occurred in the later part of 2001. That made the later growth lacklustre. A growth rate of at least 3 per cent is needed to encourage hiring, say economists, but such growth has not occurred in consecutive quarters since the final six months of 1999.
The economy grew only at a 1.4 per cent annual rate in the first quarter. In an attempt to boost growth, the Federal Reserve cut short-term interest rates to 1 per cent, their lowest level in 45 years.
The US central bank said at the time that the economy was still weak despite previous cuts in interest rates. But the impact of 9/11 events was so strong that all these efforts by the Bush Administration and the central bank failed to spur growth and create new jobs.
On the contrary, under the so-called jobless recovery, more than two million jobs have disappeared since the president, George Bush, took office in January 2001.
In fact, Mr. Bush has revived the memories of 1929 depression, as he could be the first president since Herbert Hoover, who was in the White House from 1929 to 1933, the years of the Great Depression, to oversee a decline in total US jobs during his term. By contrast, 22 million jobs were created during the Clinton years.
With the presidential elections looming next year, Democrats have focused on the economy as Mr. Bush’s weak spot. Nancy Pelosi of California, the House Democratic leader, has described Mr. Bush’s economic record as “$3 trillion deeper in debt, three million fewer jobs.”
As long as the fiscal deficits continue to increase and erode savings and investments, in a long-term scenario, there is no possibility of creating any new jobs to bring about significant reduction in the 9-year high rate of unemployment.
In addition to the increasing large fiscal deficits, unemployment, lowering of productivity, the rate of economic growth and the living standards, America faces risks in some other forms as well. One of them is in the form of the fall in the Federal revenues. Usually, with the yearly growth rate, however small may it be, the revenues also continue to grow every year.
In a healthy economy, however small it may be, but the trend is usually that of increase in revenues and not of any lessening of them to any previous level. It has been the usual historic pattern of revenue growth in the US and in all other developing and the developed countries.
But the war adventures of the Bush Administration have reversed this historic trend. It is a typical phenomenon in the economic history of the United States.
In 2003, federal revenues are expected to fall to as far back as 45-year old level. The forecast is that American economy is going to retrograde to the level of 34th American President Eisenhower (1953-61) era.
Federal revenues include a variety of sources of income and one of them is tax revenue. If only tax revenue is compared, it is going to fall to about 60-year old level of 1943.
The present state of Social Security is such that one-third of the dollars used on this account have to be borrowed from outside, as the internal revenues are not sufficient to cover its costs. This is the largest share of deficit-financed spending in the last 50 years.
This deficit spending is forecast to increase to the level of $400 billion by 2008. If no cut is made in social security, medicare, defence, and interest payments on the debt, government spending on everything else — from education to homeland security — would have to be slashed by more than 80 per cent to restore budgetary balance.
The 9/11 events have brought about such an impact on the American economy that it appears to be the beginning of the end of American economic supremacy in the world.