Bush's voodoo economics

America's trade deficit is rising and the dollar is falling. So what do George Bush's
economic policies portend for America's future?

By Scott D. O'Reilly

"Deficits don't matter" according to one highly placed administration who spends much of his time in
a secure location. Perhaps if you live in a reinforced bunker that's true, but the for the rest of
us deficits do matter; over the past three years the dollar has fallen 50 percent against the euro
and by 25 against the yen.

This is a direct result of America's twin deficits -- the federal account deficit and the trade
deficit. Simply put, Americans are buying more in goods and services than they produce, and more
than they can afford. The government under Bush has done the same, slashing taxes while dramatically
increasing spending at the same time.

The Bush administration can get away with this, of course, because our credit is still good -- the
Chinese, Japanese, and Europeans are only too happy to lend us money to buy their products. So it
was more than a little curious, last week, when the president of the United States stood outside the
Bureau of Public Debt in Parkersburg, W.Va. and implied that the more than $1.7 trillion in U.S.
Treasury notes that make up the Social Security trust fund aren't really worth the paper they are
printed on.

The president, as usual, was being both truthful and misleading at the same time. It is certainly
correct, as Bush claimed, that the Social Security trust fund does not consist of "real assets" --
like gold or greenbacks. Instead, in a rather neat alchemical trick, real money -- the kind you can
spend -- is withheld in the form of a highly regressive Social Security tax from each wage earners'
paycheck where it is promptly diverted to pay for Federal spending unrelated to Social Security
after being replaced by a Federal I.O.U.

All those I.O.U.'s, in case you were wondering, will be paid for by you -- John or Joan Q. Public --
in the form of higher taxes needed to pay back the interest and the principal on the U.S. Treasury
bonds 'guaranteeing' your Social Security benefits. No, this idea didn't originate with Bush
administration. But if you think about it long enough borrowing money to pay for Bush's tax cut was
the perfect way to turn gold into lead for wage earners.

Of course, if you earned your money the old fashioned way -- you inherited it in the form of a
private trust fund (and you don't have to rely on a risky scheme like Social Security, which might
not be there when you retire anyway) -- having the government borrow money to give you a tax cut
here and now is the equivalent of getting money for nothing.

There's nothing inherently wrong with borrowing money, of course, provided one spends it wisely and
has a reasonable plan for paying it back. But this is why Bush's remark that, "There is no trust
fund. Just i.o.u.'s that I saw firsthand," is so disconcerting. The Chinese and others are likely to
keep lending us money so that the United States can continue its spendthrift was, only so long as
they believe we'll pay them back. The falling dollar is an indication that foreign investors are
losing confidence in America's fiscal responsibility. If America's trade imbalance continues to grow
foreign investors will insist on a risk premium in the form of higher interest rates.

Of course, the U.S. taxpayer will bear the burden of financing the increasing yields of U.S.
treasury notes even as rising interest rates will mean higher monthly mortgage payments, effectively
functioning as a stealth tax on ordinary Americans. Increasingly, wealth will be transferred out of
the United States at an ever-accelerating rate.

If all this wasn't bad enough, an increasing number of Americans will soon be hit with what is known
as the Alternative Minimum Tax. Enacted by Congress years ago the A.M.T. was designed to ensure that
wealth taxpayers could not avoid paying taxes altogether through deductions and loopholes. The
problem, however, is that the A.M.T. was never indexed for inflation and as a result an increasing
segment of middle class Americans will soon find themselves facing a huge tax hike.

The cost of reforming the A.M.T., which nearly everyone agrees will unfairly punish ordinary
taxpayers, is estimated at $1.3 trillion dollars, or about the same cost as the first round of Bush'
s tax cuts. And, as if to heap further irony upon injury, the Bush administration has already
counted the increased revenue expected from the A.M.T. as offsetting the costs of its previous tax
cuts. In other words, without A.M.T. revenue the Bush budget projections would be even direr. It
doesn't more cynical than counting on revenue from a tax that for political reason the
administration will have to find someway to get rid of.

Billionaire John Paul Getty once said, "If you owe the bank a hundred dollars, you've got a problem.
If you owe the bank three trillion dollars, the bank has a problem." The Bush administration is
clearly counting on such logic, assuming our foreign lenders will have so much at stake in the U.S
that they can't possibly let America fail. For now this arrangement has something for everyone:
foreign lenders loan us money to buy their products and they send us I-Pods while we send them I.O.U
's. As long as the I.O.U's go out and the money comes in the Bush administration can afford to cut
taxes and raise spending, just as ordinary Americans can use one credit card to pay off another (ad
infinitum if necessary).

Several years ago a financial crisis in Russia was precipitated when the Russian government
realized, too late as it happens, that they [Russian government] had actually bought back, in a
complex financial transaction, the very same Russian treasury bonds that had been issued on their
behalf to raise investment capital. (Well, if you believe that the Russian government was ever going
to pay itself back, have I got a submarine for you). The lesson there is that the minute someone
realizes they've been had they'll pull the plug and the entire financial house of cards will come
tumbling down. But if Bush's voodoo economics helps precipitate a fiscal meltdown don't say George
didn't give you a heads up. After all, as Bush said about his tax cuts, "It's your money, you paid
for it."

Scott D. O'Reilly is an independent writer with degrees in Philosophy and Psychology who has been
published in The Humanist, Philosophy Now, Think, and The Philosopher's Magazine. You can e-mail
Scott at neuroscott@aol.com.

Posted Friday, April 15, 2005

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