The policy myopia that will damage America
Source ListMeister
Date 04/01/13/02:42

By Stephen Cecchetti
Financial Times; Jan 13, 2004

Economic leadership seems to be in short supply these days. On both fiscal
policy and trade policy fronts the current generation of policymakers is
pandering to everyone's worst instincts. Budgetary profligacy and
protectionism threaten to leave the US less secure both at home and abroad.
There is always hope of renewal at this time of year but, as we enter the
quadrennial presidential election season, the temptations of representative
democracy give little reason for optimism.

The Bush administration's narrow focus on the people who will vote in the
next election is the worst in modern memory. In fiscal policy this means
lowering taxes and increasing spending today, as well as promising more of
the same tomorrow. In trade policy it means protecting the jobs of those
perceived to be important in the electoral arithmetic. And in security
policy it means devoting resources to reducing risks that are already low.

Everyone knows the story of the US government's budget. In three years
there has been a staggering shift from a cash flow surplus of 2 per cent of
gross domestic product to a deficit of 5 per cent of GDP. The Bush tax cuts
and increases in defence expenditure, together with the existing Social
Security and Medicare programmes, mean the unfunded liabilities of the US
government are now about seven times GDP. The tendency of today's
politicians to make promises they will not have to honour has put the
government into an unsustainable position.

Solving the fiscal problem requires that officials tie their own hands.
Enforceable legislation setting limits on the extent of budgetary imbalance
seems the only reasonable possibility. Past efforts have focused on current
budget deficits. New rules need to consider long-term sustainability.
Unless the politicians fix this problem themselves, financial markets will
do it for them and drive long-term interest rates up dramatically. No one
wants that.

Trade policy has been doing a bit better. Robert Zoellick, US trade
representative, has indicated that he is determined to revive the stalled
Doha round of trade talks and appears to be adopting a more conciliatory
approach to developing countries' concerns. But this is more a matter of
tone than of substance. The positions that the US maintained to such
disastrous effect in the Cancún meeting remain the same.

The trouble is that, while everyone agrees trade is good in the abstract,
technological progress and shifting consumption patterns make some people
worse off. When jobs shift within a country, we call it labour market
flexibility. When jobs move abroad, it becomes us versus them. While the
winners are diffuse, the losers are concentrated, easily identifiable and
organised - a far more potent electoral force.

But the administration needs to set such short-term concerns aside. The
most insidious consequence of tariffs and quotas is that they keep less
developed countries from developing. It is hard to see how this serves
America's security interests. Making the US safe ultimately means making
everyone else content. President George W. Bush and his fellow leaders need
to tell voters that the US cannot go it alone for long. Growth and
prosperity are based on trade and co-operation.

America's domestic security policy is flawed as well. Rather than tackling
what is truly dangerous, politicians are expending enormous resources
making people feel safe. The focus is on psychology, not reality.

Just consider that the most dangerous thing most Americans do is to travel
by car. Each year in the US, 40,000 people die and 300,000 are dis-abled in
car accidents. By comparison, the chances of being killed in a terrorist
attack seem trivial. Yet we spend tens of billions of dollars on improved
airport security. There is no commensurate move to improve road safety.
Rather than try to educate people about what is safe and what is not, the
government stokes irrational fears.

Ultimately, what we need is leadership. Policymakers have to fight their
natural tendency to pander to voters' short-term wishes. Instead, they
should be willing to make sacrifices today in return for gains that they
will almost certainly not see. Let us hope that Mr Bush's officials have
adopted some simple New Year's resolutions this year: to take the long
view, to work co-operatively - especially with those who are less well off
- and to help people understand what is good for them.

The writer is professor of international economics at Brandeis University.

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