Nov 11, 1988
UNITED STATES: PARTY IS OVER, AND "FACTS" WON'T GO AWAY.GENEVA, NOVEMBER 9 (IFDA/BY CHAKRAVARTHI RAGHAVAN)ó"This is the best "thing that could have happened to the democrats", an American national, a democrat, in one of the international secretariats in Geneva commented Wednesday morning when some of his colleagues commiserated with him an the George Bush victory. The American recalled that Bush, when running against Ronald Reagan eight years ago, had dubbed Reaganís economics as voodoo economics, but later became a part of the administration that put reaganomics into practice. "Bush has benefited from this 8-year binge an which the united states was on for the last eight years ... but now the party is over, and if as is inevitable there is a downturn, the new administration has to pay the price. And it is better the republicans are in White House to pay the price, rather than democrats who would get the blame". In the international diplomatic community in Geneva, the reactions to the election result were muted. Even if the democrats had won, over the medium to long-term, no one had expected major changes in U.S. policy or direction, though over the next few weeks there might have been a hiatus. Such a hiatus is possible even in a changeover from one republican administration to another, but it would seem to be less disruptive. In the immediate term, no one here had expected over the next few weeks, in relation to the "only game in town - the Uruguay round", third world diplomats are bracing themselves against hard-line demands and pressures from the U.S. for "results" at Montreal on issues of interest to it. This is expected to be more so since the U.S. Trade Representative, Clayton Yeutter, would feel the need to show some "results", from his own domestic point of view. U.S. negotiators have already been using the argument that with a democratic Congress coming in, unless trading partners yield to the U.S. on matters of high concern to it, there could be a rise in protectionism. In this view, third world diplomats expect increased pressures on their countries to yield to the U.S. on services, intellectual property rights, and other such issues, where their countries have in fact little leeway and cannot yield very much, and could lead to confrontations. In the medium to long-term, or even 1989-1990, with very little debate during the campaign on the domestic economic agenda with international repercussions (and vice versa), and with neither Bush not having shed much light as to what he would do, diplomats here are waiting to see both the shape of the new administration and the agenda it would set itself. But despite the lack of debate an them during the elections, observers here note that there are some hard facts that will not go away, and there are some hard items on the agenda: the U.S. domestic budget deficit, the trade deficit and connected with it the current account deficit, and the domestic and international debt situation with impacts on the economy and the financial sector. There is the third world debt, now over a trillion dollars, on which there has been much media attention. But there is also the U.S. national debt, now at 2.6 trillion dollars, and the problem of the domestic savings and loans associations - whose troubles are the direct result of the 1986 oil price collapse, and the Reagan policy of deregulation which enabled many of these institutions to indulge in unwise borrowing and lending. All prognostications and forecasts, including by the IMF, are agreed that while the U.S. has been able to bring down its domestic budget deficit and its trade deficit, the downward curve has flattened, and no steady and large reductions on any of them seem possible - without further governmental actions. Most European forecasters and economists expect that the new administration would have no way of avoiding taking actions to cut the government deficits down. But the question still remains how this will be done, since it will have some serious repercussions on the outside world. There is undoubtedly some serious disagreements outside of the U.S. as to how the administration and Congress should act to deal with these hard facts. But even if there is a general consensus (outside) on what needs to be done, it is not certain that Bush and the Congress could act together in easily implementing them. President Reagan it is noted here, with all his failures and faults as an administrator, had come to the White House with an agenda an which he claimed a domestic mandate, and was able to pressure and push Congress on them. Bush has no such mandate. With the democrats controlling the Congress, and sore and angry with Bush over the campaign (as senator Bradley reminded a Washington dc audience on tuesday, when he predicted Congress and administration might have difficulties in working together), it is not even clear whether the Congress would act on an agenda that Bush might now set out. Bush pledged during the campaign that he would not raise taxes, but economists are all agreed that there is no way the U.S. could deal with its deficit except by raising taxes and cutting government expenditures - and an both of which the white house would be at logger heads with the Congress, an the taxes to be levied and on the items to be cut. But it is not so clear whether the priorities of the White House and Congress in cutting government expenditures can mesh. A combative democratic Congress, with less to fear from a popular President (as it did in the case of Reagan) might insist on cutting defence expenditures, rather than social. And some expenditures are unquotable, like the interest on the national debt. The immediate effect of efforts to reduce the deficit would be a reduction in consumer spending - by cutting government expenditures, which would reduce consumer purchasing powers or by raising taxes. Recently the U.S. economy has again been buoyant, partly because of the resurgence of demand from abroad because of the exchange rates. This could peter out in view of the rise in the dollar value over the last few months, and the consumer and business expectations associated with it as to where the dollar would end. But it is clear that if the U.S. has to cut its domestic demand, and prevent the economy from going into a deep recession - with serious consequences not only to itself but to the international economy and that of the third world - the reduction in domestic demand has to be compensated by a rise in demand abroad. Here the picture is somewhat uncertain. Japanese demand, which picked up in 1987 and first half of 1988 appears to have slowed down. The situations in Europe, and the prospects of increased demand, are even more uncertain. Much of the third world, battered by the debt crisis and fall in commodity prices and adverse terms of trade, would like to increase domestic demand and buy abroad, but has no earnings to buy with. The only possible source of external demand that could offset the slack in the U.S. economy could be from the Asian NICS (newly industrialised countries), all of whom are running large surpluses with the U.S. an trade, and might find it in their interest to import more from the U.S. and improve domestic social welfare rather than curb their exports to the U.S. But whether the Bush administration, working with a democratic Congress, would be able to perform the trick of securing a global synchronous adjustment - with U.S. domestic demand being reduced and overseas demand increasing to that extent - is a very difficult question falling in the area of politics and political economy, rather than purely technical economics. But one hard compelling fact that the new administration and Congress cannot buck would be that failure to act on the deficit would soon send the dollar going down. Over the last few weeks and months, in a sense it has been propped up by Europe and Japan (and private industry abroad), which clearly did not want to hurt Bush or his chances. The Dukakis talk on trade and global economics certainly frightened these elements, and persuaded them to act in support of the U.S. But would they continue to act for a longer time in a game of bucking the market, which is a very costly and wasteful way of spending their reserves? But if the dollar goes down, as it would if no tangible efforts are made over the budget and trade deficits, then the administration and federal reserve would be forced to hike up the interest rates, and bring about a domestic recession, as Paul Volcker did in 1979-1980. With the U.S. now a debtor country, an increase in interest rates would increase its budget deficit (by increasing interest payments) as well as its current account deficit on debt-servicing abroad. A hike in interest rates thus seems unlikely in the present situation. This means Willy Nilly both the administration and Congress have to move together on a narrowing range of options for themselves. If these domestic economic questions figured so little in the debate, third world debt and economics figured even less. Here again the solutions and answers lie in the arena of politics. Baker, when he moved from the White House to the U.S. treasury, did succeed in completely reversing, conceptually, two of the pet theologies of the reaganomics. He managed to persuade the OECD to change emphasis from supply side management to demand side management and fine tuning, and it was a remarkable change of direction. Similarly, on the third world debt, baker managed to change the orientation from deflation and domestic adjustment to what he called "growth-oriented adjustment". His Baker plan crash-landed even before takeoff, but again the conceptual change of direction that he signalled, without too much domestic controversies, was remarkable. Baker ha s already been designated as secretary of state in Bush administration, and thus will be in an office more sensitive to U.S. political interests in the third world than when he was in the treasury under Ronald Reagan. But whether in this situation, the Bush administration, and Baker within it, could bring about a change in U.S. thinking and formulate and sell policies to deal with third world debt, and sell it to Congress, Europe and Japan, is a major political question. Could politicians in the U.S. be persuaded to act on debt reduction and other solutions for third world debt without being compelled to act similarly on domestic debt? Also, if 100 billion dollars have to be found to deal with the savings and loans associations crisis, and the budget has to be cut, where would the resources to deal with the third world debt come from? And would the U.S. be able to persuade its other "allies" to undertake the job? No one here expects quick answers, not over the next few months. But these hard agenda issues would not go away, and would need solutions and answers over a maximum of 12-15 months. Otherwise, events could move too fast, and inexorable facts would assert themselves on the market - as happened in 1987 October.