Commentary ~ April 21, 2004: Two international
economic watchdogs have issued stern warnings that President Bush's
uncontrolled budget deficits pose a serious threat to global prosperity.
The 184-nation International Monetary Fund and the
Paris-based Organization for Economic Cooperation and Development
(OECD) have both issued statements condemning the Bush Administration
for mishandling the world's largest economy. Both organizations,
considered the beacons of capitalism amongst the world's industrialized
countries, published reports last week that warn that Bush's uncontrolled
budget deficits pose a serious threat to global prosperity by pushing
interest rates higher, dampening the borrowing that businesses need
to do to expand and modernize.
The IMF economists said the instability would be caused
by increased borrowing demands in the United States to finance the
budget deficit. This would drive up U.S. interest rates and interest
rates in other countries as the global supply of available capital
is reduced, they said.
The report also highlights concerns about the soaring
current account trade deficit in the United States, the broadest
measure of foreign trade, which hit a record $541.8 billion last
year. An article from United Press International describes that
indiciator as representing the amount of money the United States
had to borrow from the rest of the world last year to finance its
appetite for foreign cars, televisions and oil. If other countries
stop lending money to the United States, the value of the American
dollar could plummet – triggering an exit by foreign investors,
and sending stocks plunging and interest rates soaring.
The OECD, an association of the world's rich countries,
suggested in its report that a possible solution could be to broaden
the U.S. personal income-tax base by ending tax breaks for mortgage
interest, charitable donations and employer health-insurance premiums
and closing down corporate tax shelters. It also recommended that
the U.S. encourage savings by implementing a national (federal)
sales tax, or "value-added tax."
The IMF recognizes that Bush has a plan for dealing
with the crisis, but says it does not do nearly enough and is actually
counter-productive. The IMF said the Bush plan, which would cut
the U.S. budget deficit from about $500 billion now to half that
by 2009, rests on "somewhat optimistic assumptions." The
so-called Bush Plan includes a rebound in tax revenue, no change
in the alternative minimum tax -- which each year wipes out the
benefit for more families of the Bush tax cuts -- no costs beyond
this year for the Iraq occupation and unprecedented restraint in
discretionary spending. If those assumptions prove wrong and the
budget deficit continues at current levels, the report reveals that
the loss in output would actually be far larger: 2.7% for the U.S.
and as much as 3.4% for the rest of the world.
Both the IMF and the OECD are known for the economic
advice and assistance they provide to developing countries. The
attention now given to the American economy signals a new low for
Bush's handling of the economy.
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