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Bush Administration
America’s Failing Economy: Will Bush Face the Challenge? by Bhuwan Thapaliya The 2004 American election took place in the midst of conflict and widespread global terrorism. George Bush won a crystal clear victory. If the video message to voters from Osama bin Laden had an effect it was in favor of Bush too. He took 51% of the vote, 3.5 million more than John Kerry and in absolute terms, the largest number of votes any presidential candidates has won. Republicans have increased their majorities both in the House of Representatives and in the Senate. Having won the popular vote, he has a mandate for programme, including radical tax-reform and changes to Social Security, with little Democratic Party support. By increasing his party’s control of Congress, he is nearer to the point of being able to use the legislature like a parliament, rubber stamping his proposals without much involvement of the other party. Mr. Bush’s victory is the more remarkable considering the Iraq war has torn the nation and the economic revival is shaky. He won despite all these obstacles. He did everything better than Kerry to get the vote in his favor and yet again confirmed his reputation as a good finisher. Mr. Kerry never managed to persuade the voters of his leadership qualities, where Bush did and won easily. The seed of victory paradoxically explains a performance that was better than in 2000. The jubilant Republicans got right almost everything they had got wrong four years ago. This time they were more pragmatic and less ideological. George Bush’s re-election gives him the chance to do something for the whole world, not for the America only. He should build a bridge to the rest of the world. In the name of aggressive foreign policy he should not pester the dignity of Arab Nations and those Nations regarded by America as the axis of evils. He, however, as a world leader should try to win their heart by practicing the policy of brotherhood and solidarity. He must not forget that hate breeds hate. Aggressive policy is only a temporary solution to a cyclical problem. It pursues America and her allies to pursue reckless policies which in the long run would spill the beans of destruction and terror. Yes, the beginning of a second and last term is the best chance for him to try and bring not only America but the whole world face to face with the facts. Now, however, he has a chance to do something really great for the whole world. In his victory speech, he appealed directly to Mr. Kerry’s supporters: "I will need your support and I will work to earn it." This is indeed a move in the right direction. He needs a strong support to carry on his tenure as a president since there is a wolf lurking at his door. Most economists have been worrying about America's huge current-account deficit and predicting the dollar's sharp decline for years. The dollar has fallen by over 30% against the Euro since 2001, but its trade-weighted index has fallen by much less because of heavy intervention by Asian central banks, aimed at holding down their currencies against the dollar. Asian currencies have been held down against the dollar; America's current-account deficit has continued to swell, reaching almost 6% of GDP in the second quarter. The dollar is already below most estimates of its fair value against the Euro, but it will need to undershoot if the deficit is to be reduced. Nevertheless, despite the dollar’s lackluster performance so far, most economists still expect it to rise. That would be a welcome boost for Mr. Bush and the world economy. A stronger dollar would help to redistribute growth more evenly, by shifting demand from America, where industry is already operating close to full capacity, to exporters in China, India and continental Europe, which have plenty of sack. But even if the dollar does float upwards, there is a strong chance, in the future, that it will drift back down again. Another problem for the dollar is that, central banks, especially those in Asia, are likely to continue to diversify their dollar reserves into other currencies in coming years. As the inflationary costs of maintaining their link to the dollar grow, Asian countries may shift to more flexible regimes. Today there is the Euro, into which Asians could diversify. Let us not forget that countries that run chronic current-account deficits tend to have undervalued currencies. America has a structural current-account deficit because of its high level of consumption and its high propensity to import. As a result, if the dollar is at its PPP, America tends to import proportionally more than other countries. This means that the currency needs to remain cheap to prevent the country’s external deficit from widening. The dollar is therefore unlikely to climb much higher without a big fall in America’s current account deficit and that will not happen until Americans start saving and spending less. Other economists, however, argue that America can sustain its large current-account deficit for at least another decade, without a sharp fall in the dollar, because it will be happily financed by China and other Asian countries. Asian economics, they argue, have chosen to link their currencies to the dollar at undervalued rates, supported by heavy purchases of dollar reserves. Asian countries want to keep their exports clean to support rapid growth and are in consequences happy to keep acquiring dollars indefinitely. In turn, by buying Treasury bonds, they reduce interest rates, which support spending and ensure that American consumers keep buying Asian goods. Currency intervention by Asian central banks helps to explain why America has so far been able to finance its deficit without higher American bond yields or a bigger fall in the dollar. However, the claim that the deficit is sustainable for another decade is highly dubious. In the three years from 1985, the dollar fell by 50% against the other main currencies. Inflation and bond yield rose and, in October 1987, the stock market crashed. America’s current account deficit is now almost twice as big as it was then, so the total fall in dollar and the financial markets could well be larger. Ironically, the big difference is that in the 1960s the United States ran a current –account surplus and was a net creditor to the rest of the world. Today, America is the world’s biggest debtor, which could undermine the dollar’s role as an anchor currency. Will Mr. Bush be able to turn the tides in his favor? This is something America is hoping for, though for some it seems like hoping against the hope. One of the grave charges laid against him by his Democratic critics is that he has presided over the worst Unemployment record since the Depression –era president, Herbert Hoover. American economy is performing well below its potential level and this will hinder Mr. Bush’s political future in the long run. Last but not the least, America is a fiscal nation and it is capable of wiping the current-account deficit because after the election more foreign investors are eager to buy American assets to take advantage of the American economy’s faster productivity growth and its higher returns. But the private inward investment has slumped, leaving America dependent on foreign central banks. We'll see what direction Mr. Bush wants to take going forward. One can only hope for the best. About the Author(s): See under Our Contributors to find out about the Author(s) of this article. |
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