What’s next -- austerity measures?
The IMF’s admonition will be familiar to any developing country. As the Fund noted in June in its annual review of U.S. economic policy, unrestrained budget deficits will “eventually crowd out investment and erode U.S. productivity growth.” President George W. Bush and his advisers, however, are far less worried about “eventually” than they are about today -- or perhaps election-year 2004 -- as European Editor Tom Buerkle explains in “Betting the Ranch” (page 74). Buerkle exhaustively examines the administration’s efforts to shake the country out of a job-destroying economic slump -- a downturn intensified by the stock market collapse and plagued by lack of investment -- that has resisted the standard policy prescriptions.
The Bush team’s tax cuts -- three in as many years -- represent a roll of the dice. Yet there are signs that this bold fiscal stimulus plan is working: Business investment is perking up, as are consumer and business confidence; GDP rose by a (restated) 3.1 percent annual rate in the second quarter, twice the rate of the previous quarter.
Of course, the U.S. is hardly alone in straying from IMF orthodoxies. Developing countries have long resented, but only now begun to rebel against, economic policy measures from the IMF and its Bretton Woods twin, the World Bank. Senior Writer Deepak Gopinath explores this phenomenon at length in “Free for All” (page 129).
Disappointed by the so-called Washington consensus -- the 1990s’ development gospel of free markets, privatizations and fiscal responsibility -- a number of countries have begun agitating to go their own way. Their dissent is understandable: Despite heeding the dicta of the multilaterals, many developing regions have suffered a declining standard of living over the past decade. José María Figueres, a former president of Costa Rica, tells Gopinath, “We should be more resourceful and opportunistic in implementing development instead of remaining encased in the dogmas of the past.”
The stakes are high all around. If the Bush administration loses its bet, the U.S. could become the next Japan -- caught in a deflationary spiral of falling prices, rising debt and stagnant growth. But if the gamble pays off, the Bush tax cuts could rev up the U.S. job-generating engine and pull Europe and Japan out of their slumps, while assuring the president of reelection. A rising tide, after all, lifts all voters.
