The (not so) almighty dollar: the U.S. economy is by far the world's biggest; add up the Gross Domestic Product of several of its nearest competitors and they still don't equal the American giant.

The U.S. dollar is THE world currency, and almost all nations conduct their economic policies in the context of what is happening to the dollar. Since the end of World War II, half of all exports, most oil transactions, and nearly 70 percent of all foreign central bank reserves have been in U.S. dollars. But, since 2001, the dollar has been in a bit of a funk; its value has dropped by a third against the euro, and 15 percent against the Japanese yen. In July 2001, one euro bought just below 84 cents U.S.; by December 2003, the euro was worth more than $1.20 U.S. Some economists don't think that's such a bad thing: a cheaper dollar makes U.S. exports less expensive for other nations to buy. This has the effect of boosting American exports and reducing the nation's massive trade deficit. Currently, the U.S. is buying (imports) $50 billion per month more than it's selling (exports).

"Barring a crash landing, a weaker dollar is exactly what a dysfunctional global economy needs," says Stephen Roach, chief economist at global investment bank Morgan Stanley, (Globe and Mail, May 2003). "An unbalanced world is in increasingly desperate need of a rebalancing --less domestic demand growth in America and more elsewhere around the world. A weaker dollar may well be the only way to achieve such a result."

But, a weaker dollar also means tougher world markets for other countries, such as those in Europe, and Japan, which depend on exports. The American dollar's drop also hurts Canada, which depends on its exports to the U.S. for about a third of its economic activity.

As The Economist explains, the U.S. dollar's value against the euro could have huge economic consequences, more so than "the prices of oil and computer chips, for example. The strength of the dollar affects trade balances, capital flows, growth rates, profits, share prices, inflation rates, interest rates, and even the relative size of economies. The euro area's GDP was only 60 percent the size of America's in 2001. If current exchange rates are sustained, it swells to around 80 percent."

The fall is the result of massive U.S. government deficits. Coupled with this are rapidly rising levels of personal debt among Americans and their resulting low savings rate. Many economists are working their worry beads overtime about climbing U.S. debt. And, so they should--the long-term gap between the federal government's projected outlays (future spending plus current debt) and its projected revenues is $45.5 trillion. (The entire U.S. economy generated only about $10.4 trillion in 2003, and total household wealth was about $39 trillion in early 2004.) In 2004, the national debt is likely to hit $7.5 trillion, or about $25,600 for every American. Under President George W. Bush, according to the conservative Cato Institute, by 2003 defence spending jumped by 27 percent. In addition, non-military spending rose by 21 percent (much of it on homeland security as well as subsidies to America's farmers). So, with spending going through the roof it might be prudent to increase the government's income. Not in President Bush's world though. He has chosen to bring in massive tax cuts.

The combination of tax cuts, higher spending, and an economic slowdown moved the U.S. budget from a surplus of 2.4% of GDP to a deficit of 3.5% of GDP between 2001 and 2003. The American people are not wild about this shift: according to a poll by ABC News and the Washington Post in November 2003, 53 percent of respondents disapproved of Mr. Bush's tax policy. The Economist quotes the National Association of Business Economists as describing the federal deficit as the biggest problem facing America's economy. Three other economic think-tanks--the Committee for Economic Development, the Concord Coalition, and the Centre on Budget and Policy Priorities--said that unless policy changes, the next decade might be the most fiscally irresponsible in the country's history.

An International Monetary Fund study on the state of U.S. finances confirmed there's no cause to celebrate. Released in January 2004, the study, called U.S. Fiscal Polities and Priorities for Long-Run Sustainability, said the country has dug itself into a deep hole. It's estimated that the 2004 U.S. deficit of between $450 billion and $500 billion brings total U.S. government debt to about 50 percent of Gross Domestic Product. (In 2000, the government had a surplus of 2.4% of GDP.) Even with a lot of serious belt tightening some experts project additional debt of about $2 trillion by 2010. According to the IMF report, the U.S. government's entitlement programs, such as Medicare and Social Security (pensions), which now show a surplus, will be spent within the next 10 years. As Harper's Magazine pointed out recently, the tick-tock of 77 million biological clocks (of the Baby Boomers) winding down toward the golden years is a fearful sound. Now there are 19 elderly for every 100 working-age Americans; by 2050, there will be 35 for every 100. So, in 2015, Medicare taxes will fall short of Medicare expenses for the first time; in 2018, Social Security payments will outstrip payroll-tax revenues.

A 2004 report by the Congressional Budget Office (CBO) agrees that social programs will claim much more of the country's economic output over the coming decades, with pensions alone rising from 4.2% of GDP to 5.9%. According to the CBO, federal spending on healthcare programs will leap from 3.9% of GDP in 2003 to 21 percent in 2050. One analysis in The Economist goes like this: "Unless entitlement (social) programs are cut too (as well as other programs such as defence and transport), or taxes raised to unprecedented levels, or both, the country is on a financially unsustainable path over the next half century."

Even optimistic analysts calculate that to balance the budget by 2013 would entail raising individual and corporate income taxes by 27 percent; cut ring Social Security by 60 percent; cutting defence by 73 percent; or cutting all programs other than defence, homeland security, Social Security, and Medicare by 40 percent.

Then there's the cost of maintaining forces in Afghanistan and Iraq, as well as home security against terrorism; CBO projects these costs will be about $59 billion in 2004 alone.

While many view the deficit numbers as totally irresponsible, White House budget chief Joshua Bolten said in July 2003 that the country was facing more pressing needs.

"A balanced budget is not a higher priority than winning the global war on terror, protecting the American homeland, or restoring economic growth and job creation."

White House staff continue to say that President Bush will turn things around eventually, and hope that Americans will give him another term in office come election day.

Whatever happens at the polls, an article in The Economist predicted in November 2003 that, "Long after Dubya (President George W. Bush) is back on his ranch, Americans will be trying to recover from the mess he created."

SUGGESTED ACTIVITIES:

1. A lot of Americans from business to members of left-leaning think tanks say the current financial situation is the most fiscally irresponsible in U.S. history. Whatever the U.S. government decides to do to improve its economic future, some painful tradeoffs will have to be made. Is it better to increase taxes dramatically and keep their social programs? Or, is it more important to keep taxes lower and cut social programs or other expenditures? Discuss.

2. Paul Krugman, whose provocative New York Times columns are keenly followed by millions, is one of the world's most respected economists. He has been named America's most important columnist by the Washington Monthly and columnist of the year by Editor and Publisher magazine. In his 2003 book, The Great Unraveling: Losing Our Way in the New Century (ISBN:06058-1786), Mr. Krugman records how the boom economy in the U.S. came apart, creating pessimism, cog)orate scandals, and the collapse of fiscal responsibility. He writes about the U.S. administration as one that says tax cuts are for everyone when they are mostly for the affluent; that based the Iraq invasion on false information about weapons of mass destruction and links with al-Qaeda," that professes to be a strong supporter of free trade, but then applies tariffs on domestic goods, and approves vast new subsidies for U.S. farmers," that says it believes in balanced budgets, but runs mind-boggling deficits. Read The Great Unraveling and discuss some of the issues it covers.

3. Canadian economist Jim Stanford said in September 2003 that some Canadians were suffering from "deficit disease" too. He said at the lime that B.C.'s Liberal government was the biggest culprit, piling up $8 billion in debt during its first three budgets, more than all other Canadian provinces combined. 'Those deficits almost perfect reflect the value of corporate and personal-income tax cuts the Liberals handed out after their election. No wonder the reaction from the financial community has been just a tad less aggressive than if an NDP government deficit-financed $8 billion worth of soda/programs." Research the case of the B.C. government, and find other examples of Canadian government overspending.

Websites

Center for Immigration Studies--http://www.cis.org/

Citizens for Tax Justice--http://www.ctj.org/

Congressional Budget Office --http://www.cbo.gov/

National Association of Business Economists--http://www.nabe.com/

THE (ALMOST) ALMIGHTY EURO

Washington correspondent Barrie McKenna says as much as the fall in the U.S. dollar, the rise of the euro could lead to a new world financial order, "The euro's emergence has provided a stable alternative, particularly for central banks." he writes in The Globe and Mail (May 2003). "Several countries have switched a greater share of their reserves into euro-dominated assets since 1999."

He further notes that Iraq was one of the first countries to start switching to the euro. when it converted about $10 billion of its oil revenues in late 2000 into euros.

If me economies of Britain. Sweden, and Denmark are added to the euro area, the European Union had a slightly target economy than that of the United States by the end of 2003.

ILLEGAL WORKERS

Undocumented workers form a large chunk of the U.S. economy. There are about eight million of them: they account for 15 percent of Los Angeles's population of more than 10 million. And they generate $120 billion a year in goods and services, about 10 percent of the entire U.S. economy, according to a 2002 estimate by the International Monetary Fund.

Some companies depend on them so much that one Florida construction firm, for example. signed a contract to pay its illegal workers union wages. In California, Texas. New York, and Utah, the children of illegal immigrants are allowed to enroll in public colleges and qualify for in-state tuition rates. In several states, illegal immigrants can obtain a driver's licence, and, in theory, they're entitled to minimum wage, overtime, and workers' compensation. They're beginning to fight for these rights with the support of some union workers who want to keep wages up. But, not all undocumented workers are se fortunate.

One analyst at the conservative Cato Institute in Washington thinks many large companies in retail, construction manufacturing, and the service industries simply "would not be profitable if they weren't employing large numbers of new immigrants, most of them undocumented."

In other words, many believe the companies profit as a result of tow wages, and lack of benefits to workers

However, because of their numbers, they are starting to influence U.S. politics: a 2003 study by the Washington-based Center for Immigration Studies showed that the makeup of the U.S. Congress has been changed by illegal immigrants. Congressional districts are allocated by population, and the study found that in the 2000 U.S. census, more than 6.6 million undocumented immigrants filled in census returns. As a result of their growing influence, 18 congressional districts were changed, including the creation of six new House of Representatives seats in California.

THE HAVES AND THE HAVE MORES

President Bush's economic strategy has been to cut taxes. He cut the income tax rates. gradually eliminated the estate tax, and raised the child tax credit. Then, he provided firms with tax incentives to invest in order to boost the sluggish economy. That was followed by a tax cut on dividends (paid out of business profits). With the upcoming election. Mr. Bush's strategy isn't expected to change.

Most federal revenues now come from personal and corporate income taxes, and from the payroll taxes that fund Social Security and Medicare in the U.S. However, most government revenues originally came from excise taxes on luxury items such as tobacco, spirits, and sugar, and throughout much of the 19th century the bulk of federal revenues came from tariffs on imported manufactured goods.

Federal income tax is still one of America's most progressive (geared to income) taxes. Half of all the revenue it generates comes from workers earning more than $200,000 a year. But, the tax system is not as progressive as it used to be: the top marginal income-tax rate has declined since the Kennedy Administration (1961-63), from 91 percent in 1960 to 35 percent under President George W. Bush. At the same time, corporate income tax has gone down: it accounted for 50 percent of federal revenues at the beginning of World War II but now provides only 10 percent.

Taxation has become more regressive since the end of World War II, shifting from the rich to the middle class and working poor. The Citizens for Tax Justice made the following calculations in 2003:

* Average tax savings that will go to the richest one percent of Americans during the first four years of the latest round of Bush tax cuts is $103,999;

* Average tax savings that will go to the poorest 20 percent of Americans during the same period is $45;

* Percent of the total tax benefits going to the bottom 60 percent of Americans is 8.5;

* Percent of the total tax benefits going to the top one percent of Americans is 38.9.

Many think the resulting economic inequality should be addressed by more progressive tax reforms that tax people according to their ability to pay. Many also think the tax system should be changed to encourage saving rather than consumption, by providing incentives for people to invest.

Deficits are okay during an economic downturn but they need to be balanced by building surpluses during the boom times. But, tax revenue has continued to decline while spending on government programs has continued going up. The result is the largest federal budget deficit in American history.

At the state level, the combination of tax cuts, higher spending on government programs, higher health-care costs, and a nationwide recession in the 1990s has created a financial mess too. Many have had to reverse their strategy by increasing taxes and cutting expenses. By 2003, Ohio was planning to cut the jail terms of some low-risk inmates to save money. Kentucky was doing the same. Missouri started turning off one of every three light bulbs in government buildings. Alabama got rid of more than 500 state-owned cars, and California was on the brink of bankruptcy and in need of mammoth tax increases and/or spending cuts. Nearly half the country's states planned to raise fees and taxes on everything from cigarettes, alcohol, cars, and gambling, neutralizing federal tax cuts. According to one report dozens of states were looking at increasing class sizes in public schools or shortening the school year, cutting funding to colleges, and freezing the salaries of state workers. More than half the states have decided to restrict access to Medicaid, the state-funded program, and reduce benefits for such things as prescription drugs and dental care, leaving an estimated 1.7 million Americans without state-subsidized medical coverage.

TAKING A STAND

U.S. corporations surround the globe, are hugely innovative and often very aggressive. In the same way, the U.S. government seeks to direct international commerce in support of its business interests. As an article in Harper's Magazine by William Finnegan in May 2003 explained "... there is plenty of evidence that rich countries, starting with the United States (but also including Canada Japan, and the European Union), have no intention of playing by the trade rules and strictures they foist on poorer, weaker countries ... We practice free trade selectively, which is to say not at all, and. when it suits our commercial purposes, we actively prevent poor countries from exploiting their few advantages on the world market."

The lopsided rules show up, according to the article, when the European Union, for example. decided to clump heavily subsidized powdered milk in Jamaica. This forced Jamaican dairy farmers to throw away millions of litres of fresh milk Another case was when the U.S offloaded vast quantities of subsidized rice in Haiti. This put thousands of small rice farmers out of business and caused a regional rise in child malnutrition. The programs and theories of applying open markets and free trade to developing countries have failed to boost their economies. and reduce poverty as promised. And, there are signs of resistance,

A group of developing countries, notably Brazil and South Africa, derailed global trade talks at a World Trade Organization meeting at Cancun, Mexico in 2003.

In February 2004, speaking at an international conference on globalization, Brazil's President Luiz Inacio Lula Da Silva (right) stressed the need for the international community to eradicate hunger and extreme poverty. Here are some of the things ne had to say:

"I view the fight against hunger as a central pillar in the struggle against exclusion and international inequality, as well as a crucial step on the road to greater social justice, sustainable growth, human development, and peace for all countries in the world.

"The threat that terrorism and weapons of mass destruction pose to international security has received growing attention in recent years.

"What has not been sufficiently emphasized is that poverty and exclusion also foster violence; and that peace is the outcome of greaser development and social justice.

"Brazil is well aware, as are countless other developing countries, that hurdles in the globalization race are getting higher all the time. This should not, however, be a qualifying heat to eliminate the weakest runners, but rather a team effort ...

"We need to write a New World Social Contract.

"I have met with the heads of developed and developing countries, with the Secretary General of the United Nations, Kofi Annan, with high level officials of international organizations and with civil society leaders, with a view to finding objective answers to the yearnings of the excluded for justice, fairness, and respect for fundamental human rights.

"The most basic of rights--the right to life--depends on vanquishing hunger. At all the multilateral meetings I have attended -the World Forum in Davos, the G-8 Summit in Evian, the United Nations General Assembly, the Extraordinary Summit of the Americas--I have under-scored the need for our international cooperation to make this challenge a priority.

"We need to muster the political will and increase funding for the eradication of hunger and extreme poverty, by promoting education, improved worker training, and health services in developing countries ..."

FACT FILE

The Washington-based Brookings Institution estimated in January 2004 that, without drastic spending and taxation reform, the annual U.S. deficit will reach nearly $700 billion by 2014.

FACT FILE

In January 2004, it was estimated that President George W. Bush's new legislation to pay for prescription drugs under Medicare, the federal health program for the elderly, will cost $540 billion over the next ten years (30 percent more than expected), in a financial climate that also includes tax cuts.

FACT FILE

A Gallup poll in August 2003 found that 75 percent of respondents rated the financial well-being of "average Americans" as "poor" or "only fair," and that 89 percent considered the employment situation specifically to be either "poor" or "only fair."

FACT FILE

In Canadian dollar terms, President George W. Bush will accumulate more than $3,000 in debt in 2004 for every man, woman, and child in the United States; in Canada, the worst-ever federal deficit was booked in t993, when Ottawa spent $42 billion more than it received, or about $1,450 for every Canadian.

FINDING OUR WAY

Princeton University economist Paul Krugman makes some suggestions on how to improve America's ailing economy in his book The Great Unraveling; Losing Our Way in the New Century (ISBN:0060581785): cancel President Bush's tax cuts, provide financial aid to cash-strapped states and municipalities, and perhaps, start a limited infrastructure investment program as well as create a health care system that will cover the millions of Americans who are without health insurance.