current-account deficit could be trimmed sharply Just when Mr Thurow published his book on hegemonic decline, America would be set to prove him wrong(once again). with the mbalances worked off, its highly productive and flexible economy would be ready to roar Sadly the chances of such a gradual adjustment are not good. the trend remains towards ever bigger American imbalances and continued reliance abroad on American economic growth. European and Japanese leaders seem to take this for granted, much as they rely on America's security umbrella. Reversing that attitude, and with it the trend towards ever bigger American indebtedness, will take political leadership as well as a large dollop of luck Yet to judge by their rhetoric, todays politicians have little sense of the mess that the world economy is in. The Bush administration does not even acknowledge that there is a problem Europe's leaders are too busy squabbling over who has broken the stability and growth Pact's 3% deficit target to see the global economic picture. And Japan's politicians spend too much time bad-mouthing China and too little offering solutions to their own economic troubles This must change. The Europeans and Japanese need to understand that they are not only facing a demographic hiatus of their own, they are also operating in a global economy that could come seriously unstuck unless they act soon. Chinas leaders, too, need to make the connection between their own economic policy and the global picture. Unless they loosen their dollar peg soon, they will find the protectionist backlash against them will get a great deal orse The heaviest responsibility to act differently however, falls on America itself, which is as guilty as anybody else of causing the worlds current lopsidedness. And until Mr Bush s economic team acknowledges the size of the problem others will hide behind American nonchalance In the 1980s, the turning point came when James Baker, Mr Reagan's Treasury secretary, acknowledged the global imbalances and recognised the risks involved He instigated the plaza Accord not out of an idealistic commitment to the global good but because the global imbalances imperilled America' s own prospects Mr Bush's current team need not -and as this survey has argued probably could not -replay the 1980s. But as in the Reagan days, it must force the world to recognise the need to adjust If America does not lead in global economic policy, no one else will. And if nothing is done the imbalances will worsen and the dark scenarios of financial crashes or protectionism become ever more likely. America's biggest contribution to shifting the world away from one-engined growth -and towards improving its own economic prospects -would be some serious medium-term fiscal belt-tightening. The country,s dramatic shift into budget deficits may have underwritten the American, and thus the global, economy in the short term but it risks making the medium- term problem much worse. Bigger American budget deficits mean bigger current-account deficits and an ever greater American reliance on foreign funding Worryingly, Mr Bush's deficits show no sign of being temporary. The president's tax cuts have not yet been fully phased in, and numerous accounting gimmicks have been used to down their apparent cost. The official estimate of the cost of the latest tax cut is 350 billion over ten years, but most budget-watchers put the real figure at twice that level. Nor is the government merely aiming to give the economy a temporary fillip; its declared intention is to reform America's tax code and entirely eliminate the taxation of investment income. Thatcurrent-account deficit could be trimmed sharply. Just when Mr Thurow published his book on hegemonic decline, America would be set to prove him wrong (once again). With the imbalances worked off, its highly productive and flexible economy would be ready to roar. Sadly, the chances of such a gradual adjustment are not good. The trend remains towards ever bigger American imbalances and continued reliance abroad on American economic growth. European and Japanese leaders seem to take this for granted, much as they rely on America's security umbrella. Reversing that attitude, and with it the trend towards ever bigger American indebtedness, will take political leadership as well as a large dollop of luck. Yet to judge by their rhetoric, today's politicians have little sense of the mess that the world economy is in. The Bush administration does not even acknowledge that there is a problem. Europe's leaders are too busy squabbling over who has broken the Stability and Growth Pact's 3% deficit target to see the global economic picture. And Japan's politicians spend too much time bad-mouthing China and too little offering solutions to their own economic troubles. This must change. The Europeans and Japanese need to understand that they are not only facing a demographic hiatus of their own, they are also operating in a global economy that could come seriously unstuck unless they act soon. China's leaders, too, need to make the connection between their own economic policy and the global picture. Unless they loosen their dollar peg soon, they will find the protectionist backlash against them will get a great deal worse. The heaviest responsibility to act differently, however, falls on America itself, which is as guilty as anybody else of causing the world's current lopsidedness. And until Mr Bush's economic team acknowledges the size of the problem, others will hide behind American nonchalance. In the 1980s, the turning point came when James Baker, Mr Reagan's Treasury secretary, acknowledged the global imbalances and recognised the risks involved. He instigated the Plaza Accord not out of an idealistic commitment to the global good, but because the global imbalances imperilled America's own prospects. Mr Bush's current team need not—and, as this survey has argued, probably could not—replay the 1980s. But as in the Reagan days, it must force the world to recognise the need to adjust. If America does not lead in global economic policy, no one else will. And if nothing is done, the imbalances will worsen and the dark scenarios of financial crashes or protectionism become ever more likely. America's biggest contribution to shifting the world away from one-engined growth—and towards improving its own economic prospects—would be some serious medium-term fiscal belt-tightening. The country's dramatic shift into budget deficits may have underwritten the American, and thus the global, economy in the short term, but it risks making the medium￾term problem much worse. Bigger American budget deficits mean bigger current-account deficits and an ever greater American reliance on foreign funding. Worryingly, Mr Bush's deficits show no sign of being temporary. The president's tax cuts have not yet been fully phased in, and numerous accounting gimmicks have been used to massage down their apparent cost. The official estimate of the cost of the latest tax cut is $350 billion over ten years, but most budget-watchers put the real figure at twice that level. Nor is the government merely aiming to give the economy a temporary fillip; its declared intention is to reform America's tax code and entirely eliminate the taxation of investment income. That