Economics, war and peace, and the US vision

R K Roy

Year one of the 21st century has started with a challenge to policy orthodoxy in the capitalist haven, the United States. President George W Bush has opted for lower taxes and, hold your breath, deficit spending in support of public expenditure. Fiscal (expansionary) policy has been accorded priority, playing down the exclusive reliance on monetary policy and budget surplus.

He has justified his stand thus: only under the following circumstances should governments deficit-spend: 1) if there is a national emergency, 2) if there is a recession or 3) if there is war. The conditions for the shift in US economic policy are all there. Note that the recession was very much on before September 11, though job cuts became virulent after that date.

It is perhaps no coincidence that, almost simultaneously, the foremost opponent of the IMF orthodoxy, Professor Joseph E Stiglitz, is among the three winners of the Nobel for economics announced this year. He is best known outside the academia for his outspoken criticism of fiscal and monetary contraction forced on the East Asian economies at the time of the meltdown of 1998.

Winds of change? Not quite. The European Union faces the prospect of rising budget deficits in the wake of the economic slowdown but is loth to go in for tax cuts and public spending. Europe still relies on interest rate cuts (but has held its horses in the face of US interest rate cuts).

May be, if the American initiative to go in for deficit financing (after years of budget surplus) works, that is, reverses the US recession, Europe will benefit: via a rise in exports to the US. The intra-first world trade and investment flows are very large.

But it is by no means clear what works. The US has cut interest rates to a real low; and has followed this up with deficit-spend. But this combined prescription has flopped in Japan. The belief is that consumption in Japan has reached saturation point. What if this is true of the US and the richer among the countries of the European Union?

Will this then mean a policy thrust on war expenditure (President Bush’s third condition)? This is not to discount the beneficial psychological impact of the President’s economic measures on US consumer demand. But once the WTC is rebuilt, and the high cost of insurance levels down, and grounded passenger planes take to the air, and the hotels get back to business as usual, what will be the new source of demand?

Japanese-style, the US might discover that neither low interest rates nor fiscal spending works. The short point is: what if the high annual consumption-led growth of the past decade turn out to be unsustainable in the foreseeable future?

Foreign TV channels report that Nato combat aircraft are being rushed to guard American skies; the moral for the US is it needs more armed aircraft in its role as super power; and more armament. All that will raise US aggregate demand, but its secondary impact on the rest of the world will be to choke development and accelerate the arms race (suppliers being the First World).

It is time for the US and the rich countries to re-think their economic policy goals: focus on boosting aggregate world demand, not just first world demand.s