Drunken-sailor Economics

Published April 15, 2005, issue of April 15, 2005.
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It barely caused a ripple on the news pages, but America took another big step this week toward former-superpower status with the announcement by the Commerce Department that our trade deficit had set a new record in February. The deficit, the difference between exports and imports, came to $61 billion, thanks to Americans’ insatiable taste for Middle Eastern oil, Chinese textiles and so much more.

At the current pace, our cumulative trade deficit for 2005 could top $700 billion, dwarfing last year’s jaw-dropping record high of $617 billion. The combination of our trade deficit and government budget deficit — known together as the current-account deficit — now tops 6% of our gross domestic product, a level considered by most international economists to be disastrous. Other countries with that sort of imbalance have been put in receivership by the International Monetary Fund.

Merely keeping our country running at its current level requires an inflow of more than $2 billion a day in foreign capital. Put differently, the rest of the world is lending us $2 billion a day to buy things we can’t afford. The federal government runs up its tab in the form of a federal deficit, spending money without levying enough taxes and borrowing the difference from abroad. Private citizens increasingly do the same thing, running up alarming levels of consumer debt, often at usurious credit-card interest rates.

Most worrisome, the share of our debt held by the central bank of China grows almost monthly. China accounted for one-fourth of our February trade deficit. The Bush administration’s response is to pound China, seek to paint it as a potential enemy and isolate it from allies that want to keep it friendly, such as Europe and Israel. In effect, our government is giving the Chinese a gun to shoot us and daring them to do so.

The crazy, drunken-sailor air of Washington economic policy has allies around the world tearing their hair with worry, but they say they can’t get anyone in Washington to listen. They’d desperately like to see the administration increase tax levels, discourage consumer borrowing, reduce fuel consumption and encourage saving — partly by promoting income policies that leave working families with a few dollars in their pockets at the end of the month.

Bush administration officials counter that there’s nothing wrong. They insist the flood of foreign capital is a sign of strength, a testament to our status as the world’s economic powerhouse.

But warnings of disaster are getting louder, and closer to home.

“I don’t know of any country that has managed to consume and invest 6% more than it produces for long,” former Federal Reserve chairman Paul Volcker said in a speech in California in February, reprinted this week in the Washington Post. “I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.”

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