U.S. Economic/Financial News
Financial Times: Bush Tax Cuts Are 'Lunacy'
"The lunatics are now in charge of the asylum," stated the London Financial Times May 23, in respect to U.S. fiscal policy. In a strongly worded editorial, headlined "Tax LunacyThe U.S. Administration Throws Prudence out of the Window," the FT noted that the short-run economic stimulus from the Bush tax cuts "will be negligible," while the long-run costs "will weigh heavily on future generations." It seems that, "on the management of fiscal policy, the lunatics are now in charge of the asylum." The so-called "sunsetting" provision to cut the nominal 10-year cost of the tax measures is nothing but "an insult to the intelligence of the U.S. people."
However, there may be something else involved, because "more extreme Republicans" often say that "big deficits are in our interests. Proposing to slash Federal spending, particularly on social programs, is a tricky electoral proposition, but a fiscal crisis offers the tantalizing prospect of forcing such cuts through the back door. For them, undermining the multilateral international order is not enough, long-held views on income distribution also require radical revision. In response to this onslaught, there is not much the rational majority can do: Reason cuts no ice; economic theory is dismissed; and contrary evidence is ignored. But watching the world's economic superpower slowly destroy perhaps the world's most enviable fiscal position is something to behold."
GOP Radicals Drive for 'Fiscal Train Wreck'
"Extreme Republicans actually want a fiscal train wreck," states U.S. economist Paul Krugman in a May 27 New York Times op-ed headlined, "Stating the Obvious." "It's no secret that right-wing ideologues want to abolish programs Americans take for granted. But not long ago, to suggest that the Bush Administration's policies might actually be driven by those ideologuesthat the Administration was deliberately setting the country up for a fiscal crisis in which popular social programs could be sharply cutwas to be accused of espousing conspiracy theories."
But, "stating the obvious has now, finally, become respectable" after London's Financial Times has made exactly this point. Krugman quotes the key points from the FT piece and then notes: "Yet by pushing another huge tax cut in the face of record deficits, the administration clearly demonstrates either that it is completely feckless, or that it actually wants a fiscal crisis. (Or maybe both.)"
As tax income is falling and the deficit is rising, it will become ever more difficult to finance social expenditures, Krugman says: "The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balkthey won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control." At that point, there will be calls for "deep cuts where the money is: that is, in Medicaid, Medicare and Social Security."
And, Krugman states he agrees with the Financial Times suggestion that "this is deliberate."
"How can this be happening?" he asks. "Most people," he says, "even most liberals, are complacent. They don't realize how dire the fiscal outlook really is, and they don't read what the ideologues write.... But the people now running America aren't conservatives: They're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what's going on, but when will the public wake up?" he concludes.
Continued Dollar Decline Would Require Action
A further rapid drop in the dollar would require joint action by governments and central banks, warned IMF Managing Director Horst Koehler, according to AFP May 28. Although the dollar's 30% fall in value against the euro in the past year was "no surprise," because the U.S. has a huge current account deficit, "there comes a point when a further rapid decline in the dollar would demand that a number of governments and central banks should come together," Koehler cautioned in an interview with the German business daily Handelsblatt. But, "I don't want to speculate about this point publicly," he added.
In addition, "there is still no determining factor for strong growth momentum in the global economy," he noted.
AEI Fellow Wants 'Controlled' Deflation of Dollar
American Enterprise Institute (AEI) fellow Desmond Lachman penned a piece in the Washington Post May 29, calling on the Group of Eight to take note of U.S. Treasury Secretary John Snow's "foolhardy" approach of "benign neglect" toward the dollar. Lachman proposed the G-8 should instead "temper the dollar's decline" with a "coordinated intervention" to "produce an orderly depreciation." He chides the European Central Bank (ECB) for not "aggressively" cutting interest rates, a policy position he argues has thrown Germany into a "deeper recession." This weakening of Germany, in turn, undermines its ability to reap any advantages from the weaker dollar.
The U.S. financial markets are also at risk, he writes, from a "further rapid fall in the dollar," since foreign investors' return will be reduced. In such a cases, these investors "would begin selling their large holdings of U.S. securities," and with that the "U.S. equity and exchange markets" would "plunge ... into a downward spiral."
White House Celebrates Tax Cut as Millions Face Unemployment, Layoffs
In a New York Times op-ed May 29, Bob Herbert assailed the White House's poor taste in celebrating the signing of the tax cut, as "indifference to the deepening plight of working people" who face either rising lay-offs or falling wages, while essential services and safety net programs are being cut.
Long-term unemployment (six months or more) is increasingexacting the biggest toll on those who have historically felt economically sheltered, according to a joint study by the National Employment Law Project and the Economic Policy Institute. "The reality," asserted the study, "is that the long-term unemployed are better educated, older, and more likely to be professional workers." Of the 1.9 million long-term unemployed, in fact, one in five is a former executive, professional, or manager, according to the study, reports the Wall Street Journal. Most job losses since March 2001 are permanent, according to New York Fed economist Erica Groshen, who estimates 75% of the jobs lost will not come back. Some jobless workers, having seen their unemployment benefits expire, now have depleted their savings, acknowledges the Journal.
U.S. Entering an 'Economic SARS Zone'As Greenspan Ducks
Fed Chairman Alan Greenspan is a "fiscal dinosaur," wrote Howard Karlitz in a Washington Times op-ed May 28, for failing to realize that "our country's financial health is beyond malaise," while "we are quickly entering the economic SARS zone." Headlined, "U.S. Economy in Dire Times; Shaky Pyramic Is on the Verge of Collapse," Karlitz excoriates the Chairman for "hiding his head in the sand," while "corporate downsizings and lay-offs have followed each round of Greenspan's interest rate cuts." Hit by job losses, homeowners have been forced into foreclosure on mortgages, Karlitz warns, characterizing the housing bubble as "an economic time bomb whose fuse is getting precariously short." Moreover, an increasing number of Americans face "growing frustration and fear"like those workers who have been unemployed for a year or more, senior citizens who are using up their savings, and former dot-com hot-shots.
The foundation of the economic "pyramid," is not government-concocted statistics, he insists, but rather, jobsa foundation with "ominous cracks."
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