George W. Bush has done more to wreck US economic policy than any other President in American history, exceeding even his mentor, Ronald Reagan. In just three years in office, he has destroyed a fragile political consensus that had taken a decade to construct, and that could take another decade to re-create. In doing so, Bush has risked America's long-term economic health and social stability. Because the long-term budgetary challenges that the US is so badly mismanaging are not unique, America's fiscal blunders provide important lessons for other countries.
The main problem with fiscal policy is that politicians can easily make themselves temporarily popular by cutting taxes and increasing public spending while running up massive public debts, leaving repayment to the future. This trick can last a few years, but sooner rather than later budget deficits and growing public debt force a painful policy reversal. Yet a cynical politician can buy himself re-election and perhaps be in retirement when the crisis arrives.
One would imagine that after hundreds of such episodes of fiscal irresponsibility around the world in recent decades, voters would be allergic to such tricks. Yet Bush is doing it again, buying popularity today by doling out massive tax cuts while simultaneously increasing military spending and even raising expenditure on education and health. The result is a budget deficit equivalent to more than 5% of GDP.
What's worse is that America's long-term budgetary prospects were already troubling before Bush began his reckless policies. The US population is aging, so there will be a sharp increase in the costs of publicly funded health care and pension systems. Careful calculations show that future revenues under the tax policies favored by Bush are likely to fall tens of trillions of dollars short of the costs of public pensions, health care, and other fiscal spending expected by the public.