There's Nothing Macho About Soaring Deficits
By Laura D'Andrea Tyson
At the Republican National Convention, California Governor Arnold Schwarzenegger branded those who question the health of the American economy as "girlie men." According to this characterization, girlie men include Federal Reserve Chairman Alan Greenspan and Blackstone Group Chairman Peter G. Peterson, who warn about the dangers of huge federal budget deficits; hardheaded bear traders in global financial markets; and numerous economists, including those at male-dominated financial firms (MWD ), who worry about the sustainability of the economic expansion.
Alas, there's plenty of evidence to suggest that the concerns of such girlie men are valid. By most conventional measures, the recovery from the 2001 recession has been remarkably weak. Annual growth in real gross domestic product has averaged 3.4%, vs. the 5% average of the previous six business cycles. Job growth has been the slowest of any recovery since the Great Depression. Wage growth, too, has been shabby. Real wage and salary disbursements have been rising less than 1%, on average, vs. the norm of nearly 4% for previous recoveries. During the past year, real hourly and weekly wages for production and nonsupervisory workers actually declined. The real value of the minimum wage is down to a 40-year low.
Perhaps that doesn't matter to macho Republicans, since more than 60% of minimum-wage workers are "girlie girls." But many thinking men are disturbed by the fact that wages are the lowest share of GDP since 1929. Most of the paltry job growth has been in low-wage positions that pay less than average and are less likely to provide health benefits. That's one reason 5.2 million more Americans have lost their health insurance, bringing the total number of uninsured to 45 million, an all-time high. For the typical American family, which depends on income from work rather than capital, the economy's torpor has meant a drop in real income of more than $1,500 from 2000 to 2003.
THE ECONOMY'S POOR JOBS PERFORMANCE is all the more remarkable because it has been fueled by an unprecedented amount of monetary and fiscal stimuli. Using a metaphor that Schwarzenegger might get, the economy has been on steroids during the past three years. Now tax cuts for the middle class are over, and the Fed is raising interest rates. Serious girlie men are asking whether the economy can withdraw from its dependence on policy stimulus without major side effects.
Since 2000, the federal budget has suffered its largest swing from surplus to deficit during a three-year period. Huge structural budget deficits -- 5% to 6% of GDP, if temporary surpluses in the Social Security and Medicare trust funds are excluded -- are projected for the next 10 years, after which they will soar as baby boomers retire. According to the Administration's Mid-Session Review, the 2001 and 2003 tax cuts account for over half of the 2004 budget deficit and have contributed more to increasing the deficit than the costs of homeland security, the war on terrorism, Iraq and Afghanistan, and the growth in domestic spending programs combined.
Vice-President Dick Cheney claims that deficits don't matter, but a growing consensus among economists is that long-term interest rates are likely to rise at least a percentage point as a result of the widening structural budget deficit. Most Americans live in a debt society, not an ownership society. Higher rates will hit them hard.
In his speech, Schwarzenegger derided girlie men for fretting that nations such as Japan and China will overtake us. The real problem is that they will stop lending to us on attractive terms. During the past few years, about 80% of the fiscal deficit has been financed by foreigners, primarily the central banks of Japan and China. Robert E. Rubin, former Treasury Secretary and apparently a girlie man, recently cautioned that large budget deficits could trigger a sudden loss of confidence in America by foreign lenders, causing a sharp decline in the dollar, a spike in U.S. interest rates, and a painful recession.
Haven't we reached a sort of national nadir when the exercise of analytical intelligence is derided as effeminate? Those concerned about trends in the economy during the Bush Presidency aren't wimps or pessimists but thinking men and, yes, women. And many of these thinking persons are optimists who believe that with wise Presidential leadership, the U.S. economy can do much better, as its performance during President Clinton's stewardship demonstrated.
Laura D'Andrea Tyson, dean of London Business School, chaired the Council of Economic Advisers from 1993 to 1995 and is an informal adviser to Democratic Presidential nominee John Kerry.