Source: Financial Times
America's 'Safe Haven' Status Cannot Shelter It InGlenn Hubbard is entirely correct in pointing to the perils of America’s unsustainable fiscal trajectory. As Italy showed just last week, a country’s ability to borrow at moderate interest rates should provide no comfort – confronted with high and rising debt, things are fine until suddenly they are not. Together with the other politically-paralysed economic giant, Japan, the US is alone among the advanced countries not to have taken measures to redress the effects of the financial crisis on its public debt trajectory, even though the crisis originated there.
Whereas other advanced countries have been forced to raise taxes and cut spending by immediate financial market pressure or the fear of it, the US has been sheltered by its safe haven status and, in uncertain times, the world’s continued hunger for dollars – still the global reserve currency. Moreover, in contrast to the UK’s parliamentary system, America’s checks and balances would prevent strong executive action, even if there was stomach for it. Farcical (or tragic) as it may be, the political theatre featuring the debt ceiling is America’s way of confronting the problem before the market forces it to do so.
The rest of the world has a big stake in the outcome. With the eurozone in terrible trouble, and Japan in a quagmire, the risk of losing confidence in the world’s largest economy – still three times the size of China’s – is too dire to contemplate. Deep concerns about America’s fiscal deficits, and the Fed’s attempts to engineer lower long-term interest rates through quantitative easing, contribute massively to international tensions on currency levels (as the dollar comes under pressure), hot money flows and capital controls (as emerging markets overheat), and excessive reserve levels (as China and others amass Treasury Bills).
Finally, if done right, US tax reforms and expenditure cuts can help redress global imbalances. America’s structural current account deficit is not helped by China’s and Germany’s anti-consumption policies. But its deeper roots lie in US fiscal policy, with its comparatively low taxes (especially on corporations and and its top 1 per cent of earners who account for 17.6 per cent of total income), which directly and indirectly promotes consumption. Compared to other advanced countries, America under-taxes gasoline consumption and, indirectly, imported oil. Home building is artificially encouraged by its large mortgage interest rate reduction and many other tax incentives, diverting resources from the traded sectors. The US does not apply value added tax, a consumption tax, and another large potential source of revenues. It spends hugely more on healthcare than all other advanced countries without a pay-off in terms of improved health. And it still accounts for about half of global defence spending.
If the debt ceiling debate helps Americans begin to confront these anomalies, it is to be warmly welcomed.