A V Rajwade: The state of the US economy

WORLD MONEY

Things may not be right in the US but our current economic interests are likely to be better served by working with the US rather than supporting the Iranian theocracy.

There is every possibility that in the current year Toyota will replace General Motors as the world's largest car producer. It used to be said, what is good for General Motors is good for the United States. As a corollary, does the decline in size and, even more so, in financial strength, of junk-rated GM, signify the US' economic decline? And, if this be so, will it have the will and the resources to sustain the material cost of greatness, of its claim to be the only alternative to "a dramatically more dangerous world", a point I argued last Friday?

I am fully conscious that there would be few takers to the possibility of US economic decline when, for quite some time now, its economic growth and job-creating ability has far outpaced that of Japan and the European Union. And yet, it would be foolish to forget that, at the beginning of the 20th century, few thought that the then sole superpower would barely find a place on the top table less than 50 years later!

Admirable as the US performance in growth and job creation has been in recent decades, this should not blind us to some fundamental macro-economic imbalances.

Economic disparities have significantly worsened over the past quarter century, and the median per capita income has hardly gone up in real terms. The rich have become richer thanks to tax cuts, but, with cuts in social safety nets, the poor are worse off. These trends have continued in the 2007 budget unveiled last week, too.

The world's costliest health care system is in a total mess. And, as Jagdish Gokhale, a US economist has argued, the social security deficit is fast reaching several times the GDP.

Even without considering the present value of future pension liabilities, the fiscal deficit has grown rapidly under Bush. The incompetence in economic management is also manifest in the gross under-estimation of the cost of the Iraq war.

Alan Greenspan, who retired at the end of the last month, has left behind a huge housing bubble.

The deficit on current account keeps growing. One has seen estimates of the need for a 30 per cent drop in the dollar's external value, to bring the deficit down to a sustainable 3 per cent of GDP.

This apart, money seems to have become the sole objective of too many politicians. Zbigniew Brzezinski, the former National Security Advisor, has described Washington as "the most corrupt capital in the world". (Delhi can, of course, contest the claim.) The case of Jack Abramoff, the Republican lobbyist, who looted poor Red Indian tribes of millions of dollars to feed the increasing appetites of Congressmen, is merely the latest in a long list. As Jurek Martin remarked in Financial Times, "The adjective filthy was never more aptly applied to lucre than in the case of American politics". He also reported that an 800-page long budget bill was given to Congressmen at 4 am one morning and passed an hour later: the only people who knew what was in it were the lobbyists who wrote it! Overall, one wonders whether the political economy has the moral strength to take unpopular steps to correct the macro-economic imbalances.

As for military strength, the desire to win wars "on the cheap", without sacrificing too many American lives, is getting ever stronger. In any case, with the wars in Afghanistan and Iraq, the conventional armed forces have been stretched to the limit. Howsoever strong Bush's desire for a regime change in Iran, would he undertake another military adventure there? This time, there may be even less support than at the time of the Iraq war "" if only because every leader who supported it, has suffered electoral reverses. And, the Americans themselves are getting increasingly disenchanted with the developments: Afghanistan is fast sliding into chaos and Iraq remains as far away from normalcy as it ever was during the past three years. Neither Bush nor Blair have ever lost sleep over the hundreds of thousands of innocent Iraqi lives lost as a direct result of their wish to control Iraqi oil. It is unlikely that they would remain equally benign when, as is likely, the now Shia-dominated Iraq joins hands with the other major Shiaite country, namely Iran.

But to come back to where I started the previous article, namely the risks of getting too close to the US, notwithstanding the above points, our current economic interests are likely to be better served by working with the Chinese and the Americans, rather than supporting the Iranian theocracy. Simultaneously, we should not ignore the possibility of a sharp hike in the price of oil should sanctions be imposed on Iran "" or of the fundamental imbalances in the US economy and what they could imply for the world.

Email: avrco@vsnl.com