Fiscal Conservatives Fight Spending Surge

0 Comments | Insight on the News, Feb 16, 2004

Byline: Jamie Dettmer, INSIGHT

Fiscal Conservatives Fight Spending Surge

Fiscal conservatives on Capitol Hill and their allies in Washington-based think tanks such as the Heritage Foundation and the Cato Institute say they are frustrated about the free-spending ways of the Bush administration. Although George W. Bush announced just a handful of new, inexpensive, domestic proposals in his State of the Union speech, these conservatives insist the administration should be focusing on ways to cut spending.

Cato estimates that there has been close to a 25 percent surge in spending during the last three years the fastest pace since the Johnson administration. Treasury Secretary John Snow insists the administration will get the deficit down: "You're going to see this administration deeply committed to that objective," he said.

According to Snow and other senior Bush officials their aim is to keep the growth in discretionary spending limited to less than 4 percent in the coming fiscal year. They maintain also that economic growth will help cut the deficit during the next five years.

But critics argue that the discretionary-spending pledge is a gimmick. Many programs and department budgets, such as homeland security, aren't included in the pledge and will grow by far more than 4 percent.

Stephen Moore, president of the Club for Growth, says the president's promise to tackle the deficit, which is approaching $500 billion this fiscal year alone, is "really unpersuasive." Conservative Republicans in the House of Representatives have warned the White House of a potential backlash against Bush's budget proposal unless more is done [see political notebook, p. 12].

The Dollar's Decline

The U.S. budget and trade deficits continue to weigh on the currency-exchange markets. At the annual meeting of the World Economic Forum in Davos, Switzerland, in late January, attendees concluded that, despite strong U.S. economic growth, the coming months may see the dollar fall an additional 10 to 20 percent against the euro on top of the 35 percent drop since early 2002.

As the business has emphasized before, the weak dollar does help U.S. manufacturers sell their exports in Europe, thereby helping to boost economic growth in America. But a prolonged dollar decline holds out considerable risks that could boomerang back on the U.S. economy, especially if Europe's economic recovery is stymied as a result of falling European exports to the United States.

Europe's shaky export-driven recovery likely is too fragile to take the impact of a weak dollar for long. A fall in corporate profits in Europe could lead to an increase in unemployment a spin-off that could affect U.S. export sales. The Europeans aren't the only ones overseas worried about the possibility of a prolonged period of dollar weakness. In the Middle East, the oil-exporting countries are anxious, too.

They price their oil and gas in dollars but need euros for the large quantities of imports they buy from Europe. And the same goes for Russia.

There are fears also for the emerging market economies of Latin America. A weak dollar risks triggering inflation in the United States, which in turn would lead to the Federal Reserve increasing interest rates. For Latin America, higher U.S. interest rates would make it harder to attract overseas investment and loans.

Currently, because of the benefit of stronger U.S. exports, the Bush administration is comfortable with the weak dollar. That could change, however, if foreign investment into the United States falters. There were fears in early fall that this was happening. But Treasury Department data released in January assuaged any immediate worries. In November, net purchases as U.S. investments by foreigners totaled $87.6 billion, compared with $27.8 billion in October, and according to anecdotal evidence December will hold up well on the foreign-investment front.

A high capital flow into the United States is needed to offset the record U.S. trade gap and keep interest rates low.

Is Tough Ruling on Microsoft's Horizon?

Microsoft isn't out of the woods yet with its "unfair-competition" problems. The European Commission has circulated a draft preliminary ruling that finds Microsoft broke European competition law and abused its dominant position in the computer market. The draft decision has been circulated within the European Union (EU) bureaucracy, and the member states also will have to be consulted before the ruling becomes binding.

European sources say the recommended penalty is a large fine. The European case follows Microsoft's 2002 settlement with the U.S. Justice Department. The European Commission wants Microsoft to unbundle its Media Player program from the rest of Windows and share more information with competitors. Any adverse ruling likely would be challenged by Microsoft at the EU's Court of First Instance in Luxembourg.

The European Commission may propose in its final ruling the legally novel imposition of requiring Microsoft to carry rival programs.