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Economic Signs Aren't Encouraging

by Common Dreams repost
Economic Signs Aren't Encouraging
Unemployment, Inflationary Trends, Trade Deficit all Paint an Unsettling Picture for the Future
by Andrew Zimbalist


As President George W. Bush tries to persuade the nation that he has a plan for Iraq, he might try another tough sell: that he has a plan for the economy. While the U.S. economy continues to limp along with the unemployment rate at 5.6 percent, its vital signs are not encouraging.

The unemployment rate itself is up from 4 percent in 2000. But the official rate only includes those who are actively looking for work, and therefore excludes the nearly half million discouraged workers who have stopped looking. It also leaves out another 4.4 million who are working part time involuntarily. Nor does it tell us that the rate among Latinos is 7 percent or among blacks it is 9.9 percent.

Federal Reserve Chairman Alan Greenspan has done all he could with monetary policy to keep the U.S. economy from falling into a second recession since 2001. The target federal funds rate has been below 1.25 percent for the last 18 months and below 2 percent since the end of 2001 (down from 6 percent at the beginning of 2001). The federal funds rate has not been this low for this long since before World War II.

Look for rates to begin to climb when the Federal Open Market Committee next meets on June 29-30. The real question is not whether interest rates will rise, but rather how rapidly and how far they will go. Rising rates will slow the already sluggish economy.

Together with war spending and oil problems, Greenspan's expansionary monetary policy now has the economy poised for a new bout of inflation. During the first five months of 2004, the consumer price index rose at an annual rate of 5.1 percent - that's after being up 1.9 percent for all of 2003 and 1.3 percent for all of 2002. Also worrisome, falling unit labor costs were helping to retard inflationary pressures, but they have begun to increase in recent quarters.

Vietnam led to deficit spending that contributed to the record inflation in the 1970s. The early record about financing the war in Iraq portends more of the same. Although the media reports total Iraq spending allocations of between $150 billion and $200 billion, the true numbers are higher. This is because many of our expenses in Iraq are picked up in other parts of the general government and Pentagon budgets. When soldiers get transferred from Korea to Iraq, for instance, only the incremental, not the full costs, of those soldiers appear in the Iraqi war ledger. Whatever the true figure is today, it will rise rapidly in the future.

And how is the Bush administration financing these huge expenditures? Not by raising taxes, not by holding taxes constant, but, alas, by cutting taxes. While disproportionately benefiting the rich, the Bush tax cuts have helped to take the federal budget from a surplus of more than $236.4 billion during the last year of the Clinton administration to a projected record deficit this year of close to $500 billion. And that's including more than $150 billion that Bush will take from the "Social Security surplus," instead of investing it to cover part of the nation's coming Social Security crisis.

Large budget deficits contribute to our growing trade imbalance. The United States is currently running a record deficit in its international trade of goods and services - at the current rate it will exceed $550 billion in 2004. When we import more than we export, the dollars we send abroad to buy our imports do not return to buy our goods and services. Instead, they "return" when foreigners either keep the dollars or use them to buy our assets.

Approximately 80 percent of the U.S. budget deficit has been financed by foreign governments, institutions and individuals during the Bush administration. Today, 37 percent of the U.S. government's debt is foreign held, up from 14 percent in 1983 - the peak of the Reagan deficits.

There may come a point where foreign capital does not feel comfortable in the United States. As the U.S. trade deficit builds, there's greater anticipation that the value of the dollar will fall. Foreign investors will be less willing to hold their assets in a depreciating currency. If foreign capital begins to exit, the dollar will plummet and this will accelerate the capital flight.

Remember Argentina? We are not there yet, but there's a tipping point for our economy as well. What is common to each of these indicators of economic performance is that they suggest an economy living on borrowed time. It is likely that there has been enough borrowing and stimulation in the short run to keep us afloat through the November elections.

After that, there will be a heavy price to pay. How high a price will depend on how long the United States continues to follow its present myopic and reckless economic policies.

Andrew Zimbalist is a professor of economics at Smith College.
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