|
BUSH’S SECOND TERM
From Foreign Affairs, Vol. 84 NO 1,
January - February, 2005
Jeffery
E. Garten, Dean of the Yale School of
Management.
Formerly
a Managing Director of the Blackstone Group, he also served in the Nixon, Ford,
Carter, and Clinton administrations.
This situation could easily change in Bush's second
term. The president came into office facing a projected $5 trillion budget
surplus over the next decade. Today,
the ten-year projection is for a more than $2 trillion deficit that is before
spending on any of the new initiatives planned for the second term is taken into
account. President Bush has said he will make his tax cuts permanent, adding
another $2 trillion to the deficit over the next decade. He also wants to
privatize part of Social Security in a way that would add trillions in
transition costs. He has said his upcoming tax reforms will be revenue neutral,
but if the administration's past performance is any guide, they could easily end
up leading to even more tax breaks. Moreover, the administration has been weak
in controlling spending and resisted imposing strict spending guidelines. With a
smaller Democratic resistance in Congress, there is now likely to be even less
resistance to these trends. All the
while, the United States is relying heavily on foreign investors, particularly
Asian central
banks
that are now buying about a third of all U.S. treasury obligations, to fund its
deficits as well as a good part of new investment in the United States.
Under
these circumstances, the possibility of a financial crisis that forces the Bush
administration quickly to reassess its policies cannot be discounted, to say the
least. Such a crisis would ensue if foreign leaders were to change their
investment patterns, spending more on their own economies or shifting funds to
the euro or other assets. Were this to happen, a currency crisis could force the
United States to jack up interest rates to make lending and investing more
attractive. That, in turn, could cause a recession. If and when a crisis occurs,
the administration will be forced to work with Congress on an emergency fiscal
package to show international investors it is taking remedial action, as
happened in the Reagan years. Simultaneously,
it would be seeking help from foreign governments to support a dollar rescue
operation.
The implications for what could ensue would affect much
more than fiscal and monetary policy, and it could scuttle more than Bush's
plans for tax and Social Security reform. Budget
pressure dictated from abroad could affect the size and composition of the U.S.
armed forces and put excruciating pressure on the
United
States to solicit military help from other countries.
It could reduce funds available for everything from homeland security to
education. In sum,
the refusal of international investors to support out-of-control U.S. fiscal
policies could become the defining event of Bush's second term.
MOVING
QUICKLY
The
Bush administration has very little time if it is to change the pattern of its
first term and devote adequate attention to international economic policy.
Certain dynamics characterize the second term of any administration.
There is significant turnover of the best people, fatigue among those who stay,
and, after the midterm election, a whole exodus of more talent. In addition,
global economic issues could soon be crowded out by both a pressing foreign
policy agenda (Iraq, Iran, North Korea, the Israeli-Palestinian conflict) and a
set of high-profile domestic initiatives (Social security reform, tax reform,
supreme Court nomination).
At
the same time, the currents of globalization are moving fast, and the longer the
administration subordinates international economic policy, the more difficult
the subsequent challenges will become. For
example, global financial markets are growing at exponential rates, and the
risks inherent in them are becoming infinitely more difficult for policy makers
to understand. Between April 2001 and April 2004, daily global turnover in
traditional foreign exchange markets increased 57 percent to $1.9 trillion,
while daily turnover of complex derivatives grew by 77 percent to $1.2 trillion.
The rise of China and India, the problem of Europe's
competitiveness, the unrest in Islamic society around the world, the imminence
of aging as a major global issue, the growth of complex corporate supply chains
that straddle the globe, the spread of infectious across borders - these are
just some of the trends that accelerated during the first Bush administration.
At some point, the absence of an involvement commensurate with U.S. power and
U.S. interests will take its toll on the United States and the world.
If the Bush administration recognizes what the global economy is about,
if it understands the links to foreign and domestic policy, if it cares enough
about the United States’ long-term foreign policy and economic interests, then
it will move quickly to change its pattern of neglect.
|
|
