Jim Lobe

WASHINGTON, Sep 29 2005 (IPS) — A combination of huge tax cuts, an insatiable appetite for foreign imports, especially oil, and record government spending is steadily eroding U.S. independence and freedom of action, according to a “special report” released Thursday by the influential Council on Foreign Relations (CFR).

The report by Prof. Menzie Chinn, a former senior economist for international financial issues on the White House’s Council of Economic Advisers under both Presidents Bill Clinton and George W. Bush, argues that the federal budget and current account deficits, which have deepened considerably over the last several years, increasingly threaten U.S. sovereignty and influence.

“Failure to take the initiative to reduce the twin deficits will cede to foreign governments increasing influence over the nation’s fate,” according to Chinn’s report. “Perhaps equally alarming, it will lead to slower growth, escalating trade friction, and reduced American influence in political and economic spheres.”

The report, entitled “Getting Serious About the Twin Deficits”, calls for urgent measures to tackle serious challenges faced by the U.S. economy, including reducing the government deficit by, among other steps, increasing taxes; reducing oil imports through the imposition of energy taxes or strict fuel efficiency standards; and managing a coordinated depreciation of the dollar vis-a-vis East Asian currencies.

It called the recent Chinese decision to let the renminbi move in line with a basket of currencies was a “step in the right direction”, but still insufficient to overcome current imbalances.

“The worrying alternative to a modest and coordinated dollar depreciation now,” according to Chinn, “is investor panic and a major dollar collapse down the road.”

The report, the first in a new CFR series on “The Future of American Competitiveness”, is implicitly highly critical of the tax-cutting and free-spending policies pursued by the administration of George W. Bush that have wiped out the budget surpluses built up during the Clinton administration, creating record deficits in their place.

Chinn’s critique is not particularly new – indeed, the International Monetary Fund (IMF) voiced similar concerns at its annual meeting just last weekend, and fiscal conservatives within the Republican Party have displayed growing anxiety about the dollar’s fate, particularly in the aftermath of Katrina.

The CFR stressed that the new study represented Chinn’s personal views only and not those of the organisation. But the fact that the New York-based think tank, which has been seen since its creation shortly after World War II as the foreign policy bastion of U.S.-based multinational corporate interests, commissioned and released the report is likely to be taken as a signal of Wall Street’s growing unhappiness with Republican rule.

Moreover, the fact that the study is framed by the author’s concerns over the future of U.S. sovereignty and its global influence is particularly cutting, since the unilateralist, “bring-it-on” swagger of Bush’s foreign policy has been based on the notion that U.S. power should be unconstrained by traditional alliances, multilateral institutions, or even international law.

While the report does not explicitly address foreign policy, its argument that Washington’s twin deficits are increasing the power of its foreign creditors to influence what the U.S. will and will not be able to do appears designed to suggest to its readers that Bush’s pose and global ambitions are becoming ever more hollow.

The dangers of a dollar collapse and an economic recession, according to the study, have become more acute as a result of Hurricane Katrina, the recovery for which may cost the government as much as 200 billion dollars. Some economists have also predicted that the storm could reduce the rate of economic growth by as much as half a percent for the year. Coupled with the combination of record oil prices and U.S. dependence on imported oil, the pressure on the dollar grows ever stronger.

But even if a sudden collapse is avoided, the country’s descent into ever greater indebtedness threatens an important source of its global influence – the dollar’s role as the world’s most important currency.

“A cautionary note regarding America’s current path is provided by Britain’s loss of military and political primacy in the twentieth century; that development followed a shift from creditor to debtor status,” according to Chinn. “Similarly, a prolonged decline in the dollar’s value and increasing indebtedness will erode America’s dominance in political and security spheres.”

The current account deficit has soared from just under 3.8 percent of gross domestic product (GDP) in 2001 to 5.7 percent last year. While other countries have historically experienced such large deficits, the huge weight of the U.S. economy – which accounts for more than a quarter of global GDP – is unprecedented, according to the study.

What makes matters worse is that the U.S. has accumulated a record amount of foreign debt at the same time, borrowing particularly heavily from Japan and China. In fact, a majority of federal debt is now held by foreign governments and investors, having doubled to two trillion dollars over the five-year life of the Bush administration.

These trends, moreover, show no sign of being reversed, according to Chinn.

According to the study, the current account deficit is being driven mostly by the fiscal deficits that have been run up by Bush and the Congress since 2001 in tax cuts and spending increases. A second factor is the dependence of the U.S. on foreign oil. Indeed, oil imports account for 40 percent of the increase in the trade deficit over the past three years.

A third factor, according to Chinn, is the undervaluation of East Asian currencies, which makes Asian exports more attractive to U.S. consumers, further tilting the trade balance against the U.S.

As a result of these deficits, the U.S. faces several worrying outcomes. The most likely result is that foreign governments and private investors, confronted with a seemingly endless vista of U.S. budget deficits, will stop buying U.S. debt. Borrowing costs for the U.S. Treasury would then rise steeply, spurring a corresponding plunge in the dollar, resulting in a dramatic slowdown of the economy.

To address these threats, the report calls for a number of measures that will be very difficult for the administration to stomach. In particular, it calls for Bush to give up on making permanent the tax cuts of 2001 and 2003 and impose taxes on fossil fuels and/or meaningful fuel-efficiency standards to reduce consumption, steps the administration has so far steadfastly resisted.

The study also called for eliminating the most costly provisions of the recently approved energy and transportation bills, which, according to critics, are laden with “pork” – that is, pet projects or other benefits that Republican lawmakers, in particular, take home to their constituencies or financial backers.