George W. Bush has been back in the news lately, flogging his memoirs, reminding us of his disastrous presidency.
Mr. Bush was a Republican and, like most of them since 1980, had fallen under a spell. Cut taxes, believers proclaimed, and economic growth would rise and the budget would be balanced. As John Maynard Keynes once said - and it certainly applied to Mr. Bush - "the difficulty lies not so much in developing new ideas as in escaping from old ones."
The old ideas that cast a spell over Mr. Bush still inspire Republicans, but they haunt the rest of the world - because the repeated evidentiary failure of these ideas has contributed to America's decline, the serious imbalances in the world's economy and the turbulence of currencies.
As in so many other areas, Mr. Bush made his country's fiscal position appreciably worse, and the recession that accompanied his departure from office turned it from worse to disastrous.
David Walker, the former U.S. comptroller-general (the equivalent of Canada's auditor-general), puts it this way in his book Comeback America: "Bush 43's serial tax cuts, on top of his greatly increased spending, destroyed the balanced budget that Clinton had turned over to him. While we faced large and growing budget surpluses when Bush 43 entered office, we faced huge and growing deficits when he left office."
Today's Republicans, like Bourbon kings, have learned and forgotten nothing. For 20 years, their party controlled the White House and often Congress, but, despite rhetoric about limited government, lower taxes and balanced budgets, they never once balanced the books.
Mr. Bush didn't start the doleful trends - Ronald Reagan did that - but he wasn't smart enough to free himself from the captivity of the old ideas. The U.S., with everything worsened by recession and its aftermath, is now so far in hock that it's hard to imagine any early escape.
With political polarization gripping Washington, fiscal policy so loose (a $1-trillion-plus deficit this year), and President Barack Obama's stimulus money just about spent, the Federal Reserve rode to the rescue by announcing the forthcoming purchase of $600-billion in bonds.
This risky move is designed to drive down the value of the U.S. dollar, make exports more competitive, create jobs and, in effect, beggar the country's trading partners. It's also surely directed at China, in the sense that, if China won't allow its yuan to appreciate (as it should for a country with a huge trade surplus), the Americans will reply with a devaluation to change the currency alignment.
The Fed's move essentially will force U.S. lenders, notably the Chinese, to accept devalued U.S. dollars - in other words, to pay the price for American profligacy of the kind Mr. Bush sanctioned. Among the great uncertainties of our time is whether lenders to the U.S. will be willing to accept this kind of haircut. Those uncertainties plague all international discussions of economic matters, as we saw before and during the G20 summit in South Korea.
Until the U.S. gets a grip on its fiscal woes, the world economy will remain unsettled. The answers aren't easy, but Mr. Walker, a political independent, is surely right in saying they must come from an increase in taxes (he favours a national VAT) and a reduction in spending.
This observation is so commonsensical that it will dismissed by the left's ideological warriors who dominate the Democratic House contingent and those of the right who form the new Republican majority. This latter group now proposes to try something Mr. Bush never attempted: to slash government spending in order to balance the budget, or at least reduce it to 3 per cent of GDP, while cutting taxes. The simple math, of course, doesn't add up, quite apart from the difficult politics of cutting programs such as farm subsidies, student aid, defence and health care for the elderly.
Very soon, a bipartisan presidential commission will recommend ways of dealing with the deficit and debt buildup. It probably will offer some variation on the Walker idea - tax increases and spending cuts - and thus will be ignored by those who can't escape from old ideas.Report Typo/Error
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