Editore"s Note
Tilting at Windmills

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October 11, 2003
By: Kevin Drum

AMERICA THE RISKY?....I've mentioned before that although I think George Bush's foreign policy is misguided and ineffective, it's at least an arguable issue. His economic polices, on the other hand, are as stupefyingly wrong and dangerous as it's possible for an economic policy to be. Misguided tax cuts, out of control spending (and bad spending, at that), politically motivated tariff policies, long-term deficits as far as the eye can see all of this and more have combined into a genuine threat to our long-term well-being.

How bad is it? Last week's Economist reported on a computer model from Lehman Brothers called Damocles. Damocles is designed to predict the riskiness of emerging market economies, and a score of 75 or above indicates a one-third chance of a crisis within 12 months. Most of the world has seen their riskiness scores drop over the past few years, but there's an exception:

When Lehman ran America's economic numbers through Damocles, the outcome was striking. With its rapidly climbing current-account deficit and foreign debt, among other worries, America's Damocles index is just shy of 75. There are, points out Russell Jones, the bank's international economist, problems applying Damocles to America, which enjoys the luxury of having the world's reserve currency. Granted. Poorer countries tend to owe dollars, and therefore suffer when their currencies fall. Lucky America, of course, owes its own currency.

America is big enough and rich enough that we are unlikely to face the kind of crisis that a smaller third-world economy would face if they followed our policies. But that's not exactly inspiring news.

Bad policies are bad policies, and Damocles simply tells us what practically every economist already knows: we may not fall off a cliff anytime soon, but we are nonetheless in very serious trouble. And George Bush and his advisors simply don't seem to care. To them, economics is just another effete academic discipline to be shoved aside whenever it disagrees with their favored conservative ideology.

The problem is that this really matters. The 90s were a decade of American economic triumphalism, and it became conventional wisdom that the American brand of capitalism was a juggernaut that couldn't be stopped. The rest of the world just needed to shut up and follow our lead.

But what everyone forgot was that it was only one decade. During the 80s it was Japan that everyone wanted to copy, and in the 70s it was Germany. There is no iron law that says America's growth of the 90s has to last forever, and bad policies really can derail it. That's what's happening now, and the bill is going to come due sometime soon.

The only question left is, how soon?

Kevin Drum 11:15 AM Permalink | Trackbacks

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