[A-List] Debtor Nation

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

by William Greider

The Nation (May 10 2004)

The backstory for this election year lacks the urgency of war or of
defeating George W Bush but focuses on a most fateful question: When
will this hemorrhaging debtor nation be compelled to pull back from
profligate consumption and resign its role as "buyer of last resort" for
the global economy?  The smart money assumes such a momentous reckoning
probably won't occur in time to disrupt Bush's re-election campaign, but
it may well become the dominating crisis in the next presidential term,
whoever is elected.  At that point, the United States will lose its aura
of unilateral superiority, and globalization will be forced to undergo
wrenching change.  The American economy, in other words, is in much
deeper trouble than most people realize.

The facts are not secret.  Despite ebbs and surges, the gap between US
exports and imports has been steadily widening across three decades.
The trade deficits of the early 1970s (due mainly to soaring oil prices)
were trivial in size, but Americans were shocked in 1978 when the
deficit hit $30 billion (TV sets and some cars were now made in Japan).
During the 1980s, the trade deficit expanded enormously, as Washington's
strong- dollar policy crippled US manufacturers and companies moved jobs
and production offshore in swelling volume.  After a recession and
dollar devaluation, the gap shrank briefly, but soon began expanding
again.

For several decades, in fact, the federal government has tolerated and
even encouraged the dispersal of American production overseas - first to
secure allies during the cold war, later to advance the fortunes of US
multinationals.  No other major economy in the world accepts perennial
trade deficits; some maintain huge surpluses.  But American leaders and
policy-makers are uniquely dedicated to a faith in "free market"
globalization, and they have regularly promised Americans that despite
the disruptions, this policy guarantees their long-term prosperity.
Present facts make these long-held convictions look like gross illusion.
By 1998, the trade deficit was back to a new high and expanding
ferociously, despite supposed improvements in US competitiveness.  Last
year it set another new record: $489 billion.

Yet no one running for President has found the nerve to discuss these
facts in a straightforward manner.  Nor do the candidates have anything
to say about how the country might avoid a potential calamity.  A few
wise heads in finance, like billionaire investor Warren Buffett, have
sounded the alarm - Buffett refers to the United States as
"Squanderville" and is shifting billions offshore into foreign
currencies for safety.  Meanwhile, political leaders remain silent.

The US economy, in essence, is being kept afloat by enormous foreign
lending so that consumers can keep buying more imports, thus increasing
the bloated trade deficits.  This lopsided arrangement will end when
those foreign creditors - major trading partners like Japan, China and
Europe - decide to stop the lending or simply reduce it substantially.

That reckoning could arrive as a sudden thunderclap of financial crisis
- spiking interest rates, swooning stock market and crashing home prices.
More likely it will be less dramatic but equally painful.  As foreign
capital moves elsewhere and easy credit disappears for consumers, many
Americans will experience a major decline in their living standards - a
gradual grinding-down process that could continue for years.  If the US
government reacts passively and allows "market forces" to make these
adjustments, the consequences will be especially severe for the less
affluent - families already stretched by stagnating wages and too much
borrowing.

Normally, I wouldn't use an economic chart to make my point, but the one
you see on page 11 tells the story of America's predicament more
effectively than words. Prepared by University of Wisconsin economist
Menzie Chinn (and illustrated by Stephen Kling/Avenging Angels), with
dollar values adjusted to remove the distortions of price inflation,
it's a visual display of the US economy's performance in the global
trading system during the past three decades. Year by year, it traces
the line of US imports versus the line of US exports.  The red ink in
between represents America's trade deficits.


Totten: The chart mentioned above apparently appears pn page 11 of the
print version of the May 10 edition of The Nation, but I have not been
able to locate it.  Sorry.


The red ink, as you can see, is exploding.  The thick red blob in the
upper right-hand corner represents our present condition - the record
trade deficits of recent years.  Starting six or seven years ago, these
two lines diverged dramatically: The volume of imports soared, while
export growth leveled off.  Historically, when a mature economy suffers
perennial trade deficits, it is usually understood as a sign of weakness,
especially if the deficits keep getting larger.

The red ink can also be read as a rough approximation of America's
indebtedness to the rest of the world.  Last year the US economy
(business and households as well as the federal government) was
compelled to borrow $540 billion from overseas creditors.  Since the
United States first became a debtor nation fifteen years ago, it has
accumulated nearly $3 trillion in debt obligations abroad. At the
current pace, the foreign debt load will double again in the next six or
seven years.  You can see why we have depicted the debt as a serpent,
rising to strike.  The serpent, I suggest, is biting the debtor nation
that has fed it.  Actually, it ate our lunch.

Leading authorities typically explain what is happening by observing
correctly that Americans are collectively "overconsuming" - that is,
living beyond their means - but experts assume that "market forces" will
eventually correct the situation.  Once the global economy regains
robust growth, it is said, other nations will buy more US exports.  Or,
once the dollar has depreciated in value sufficiently, Americans will
buy fewer imports.  Some even claim the indebtedness is America's good
fortune - a sign of strength that other nations are so eager to finance
US consumption.

I think the authorities are wrong.  When I look at the chart, I see the
United States sinking into financial dependency - dangerously indebted
to rival nations that are holding our debt paper, collecting the
interest on Treasury bonds and private bank loans, or repatriating the
profits from companies that used to be American- owned.  A very wealthy
nation can tolerate this negative toll for many years, but not forever.
Unless the historic meaning of debt has been repealed, no nation can
borrow endlessly from others without sooner or later forfeiting control
of its destiny, and also losing the economic foundations of its general
prosperity.

The world at large will be better off, in my view, when Washington is
compelled to accept a less dominating role and global political power is
dispersed more multilaterally.  But the transition itself could be an
unsettling, even dangerous time, since the declining economic power also
happens to be the pre-eminent military power.  In any case, an American
reckoning would also have economic consequences for the rest of the
world.  If the United States were to tap out, the global system would
lose its best customer.  American consumers have propped up global trade
with their open-ended purchases.  Now the rest of the world is propping
up American consumers, lending them the money to buy still more.


Totten: No, the United States is not the best customer for either the
"the rest of the world" or "the global system", but only for about one
hundred giant multinational corporations.  Their own domestic markets
are, by far, the most important to the great majority of businesses and
workers throughout the world.  See my comments in "Asia's Stockpiles of
Dollars Pose US Economic Risks", posted here on April 21st.


The endgame might be triggered by any number of events - including the
financial exhaustion of America's overextended consumers - but the most
likely venue is the global trade in capital, not the trade in goods and
services.  In theory, wealthy countries are expected to ship investment
capital to poorer countries to build factories and infrastructure.  But
at present, most of the world's capital is flowing in reverse: The net
inflow of foreign capital to the United States represents a staggering
75 percent of the net outflows from the rest of the world, according to
economist Jane D'Arista of the Financial Markets Center.  Even more
abnormal is that nearly one-fourth of this lending comes from
emerging-market nations, led by China, whose trade surplus with America
has surpassed Japan's.

Both China and Japan are prodigious financiers of US consumption - the
two largest foreign holders of US Treasury bonds - despite the weak
returns they get from low US interest rates.  China and Japan are
willing to do this because they calculate that sustaining their own
industrial output and employment is worth more than seeking stronger
financial returns elsewhere.


Totten: Wrong again. The governments of China and Japan are willing to
do this because they are more interested in subsidizing the profits of
their nations' largest multinational corporations than in serving the
interests of the great majority of their nations' businesses, workers,
and consumers.  Again, see my comments in "Asia's Stockpiles of Dollars
Pose US Economic Risks" that I posted on April 21st.


All sides recognize a self-interest in keeping the game going - avoiding
a global meltdown that might ruin everyone.  But the anticipated
benefits from this cooperation are very different: The US consumes in
the present, through indebtedness that it must repay from future
production; the others accumulate financial wealth now and expand their
industrial capabilities to produce in the future.

The Bush Administration must convince its major trading partners,
especially China and Japan, to stay at the table and keep lending huge
sums even as it encourages the dollar's decline in the hope of boosting
US exports, discouraging imports from Asia and Europe and thus shrinking
America's trade gap (with little success so far).

The poker game ends when one major player or another decides it has
gotten the last dollar off the table and it's time to go home.  Creditor
nations naturally have the upper hand, like any banker who can call the
loan when he sees the borrower is hopelessly mired.  But the decision to
exit might be dictated by necessity more than bad faith.  China, for
instance, is booming, with a banking system riddled with bad loans to
its domestic enterprises.  If a banking crisis developed, Beijing might
have no choice but to sell off its US bonds and use the capital at home
to stabilize its financial system or to assuage political unrest among
its unemployed masses.  Tokyo has for some years anticipated an eventual
American reckoning but hoped to keep the United States from doing
anything rash until the Asian sphere was strong enough to prosper on its
own, without depending so heavily on American consumers.

What might be done to avoid the worst?  The necessary first step is for
American politicians to cast aside the propagandistic claims advanced by
multinational business and finance and endorsed by policy elites and
orthodox economists.  For decades, globalization advocates insisted, for
example, that the solution to America's trade deficits was more "free
trade".  Each new trade agreement has been heralded as a market-opening
breakthrough that would boost US exports and thus move toward balanced
trade.

That is not what happened - not after NAFTA (1993) and the WTO (1994),
nor after China normalization (2000).  In each case, the trade deficits
grew dramatically.  (Yes, it's true that since the early 1970s US export
volume has grown by more than five times, but import volume has grown by
eight times.)  Economists have also claimed that ending deficit spending
by the federal government would eliminate the trade gap.  Yet when the
federal government's budget did finally come into balance in 1999, the
trade deficits were exploding.  This discredited explanation is
nonetheless being recycled, now that huge federal deficits have been
spectacularly revived by the Bush Administration.

The humbling reality is this: Across three decades, only one economic
event has been guaranteed to produce balanced US trade: a recession.
When the economy is contracting, people naturally buy less of everything,
including imports.  Look at the chart: On the four occasions when the
line of exports briefly converged with the line of imports, the country
was in recession.  Each time economic growth was restored, the trade
deficits resumed.  A more ominous contradiction occurred during the 2001
recession: The trade gap was so enormous it persisted throughout.  This
suggests that American dependency on foreign producers has advanced to a
dangerous new level.

The failure of conventional explanations for trade deficits leads,
logically, to an unorthodox conclusion: The source of the deficits (and
growing indebtedness) must be embedded in the trading system itself,
independent of shifts in macroeconomic conditions, and so it is there we
must also look for solutions.  The national ambitions and competitive
energies of globalization, at least as currently practiced, persist in
developing new productive capacity - more factories - faster than they
generate rising incomes and adequate demand to absorb the surplus of
goods.  This leads inevitably to falling prices and stiffer pressures
for cost reductions.  The convenient remedy - somebody, somewhere has to
shut down factories - has typically begun by closing America's and
moving its high-wage production offshore for cheaper labor.

American production usually goes first because the US government does
not resist and US multinationals gain from the transaction, even if the
US labor force does not.  Indeed, the multinationals are major actors in
generating America's trade deficits, since they "export" and "import"
within the firms themselves - shipping components and materials back and
forth between their overseas subsidiaries and US-based plants.

Trade is commonly described as between nations, but fully half of US
foreign trade, excluding oil, is composed of these intra-firm
transactions.  This reality explains the interconnection between trade
deficits and job losses: When an American company moves production to
Mexico or China, it still counts the output as its own, but its labor
costs are reduced drastically while its foreign-manufactured products
becomes imports, adding to the trade deficit and accumulating foreign
debt.  For years, advocates have dismissed worries about deficits in
manufactured goods by pointing to the smaller but growing surplus in
services.  As more service jobs are offshored, however, that surplus is
shrinking rapidly too, declining from $90 billion to $60 billion over
the past seven years.

Of course, other advanced economies face the same global pressures and
engage in the same sort of dispersal when required, but their
governments (and societies) do not yield so willingly.  Through
industrial policy and numerous informal barriers, America's European
rivals have managed to avoid both trade deficits and the thirty-year
stagnation of wages that US industrial workers have suffered.  Only in
America do the experts believe these consequences have no meaning for
overall prosperity.

Only in America has the government put the interests of multinationals
ahead of citizens.


Totten: Greider either doesn't include Japan among "other advanced
economies" or doesn't know that Japan's government yields willingly and
cravenly to every pressure the United States exerts.


A decisive President, one who grasped the gravity of the situation,
would start by bringing up a taboo subject - tariffs - and inform the
world that the United States is prepared to impose a temporary general
tariff of 10 or 15 percent on all US imports.  Every multinational would
have to rethink its industrial strategy, because some of its production
might be stranded in the wrong country.  Import-dependent retailers like
Wal-Mart would be seriously disrupted, too.

The idea of tariffs is so alien to conventional wisdom it probably
sounds illegal.  Actually, a nondiscriminatory general tariff is
permitted under the original GATT agreement for a nation to correct
grave financial imbalances - exactly the problem America is facing.
Richard Nixon stunned the world in 1971 when he abruptly announced a 10
percent import surcharge, devalued the dollar and unilaterally discarded
the Bretton Woods monetary system.  America needs a bit of Nixonian
nerve.

With a general tariff, the practice of wage arbitrage - shifting
high-wage jobs to low-wage nations, then selling the goods to the US
market - would no longer be a free ride.  If the US market were less
wide-open, globalization could continue, but countries and companies
would need to disperse production on different assumptions.  They might
finally confront the central dilemma of inadequate global demand versus
the permanent overabundance of supply.

The fundamental solution is to raise wages everywhere in the world, with
perhaps fewer millionaires but a more generalized prosperity, especially
in developing nations.  In short, the global system needs more workers
with the incomes to buy what they make.  Globalization would have to
proceed at a more moderate pace, with less rip-and-run disruption,
financial crisis and social disorder.  It is most unlikely, I have to
add, that America's governing elites will come around to such drastic
measures in time to avert an end-of-era reckoning.

If a full-blown crisis does occur, the macroeconomic challenge would be
unlike anything the United States has faced in more than half a century.
While this would be a time of wrenching, painful change, the new adverse
circumstances might also inspire a great shift toward a new, more
progressive politics.  Given our rapidly deteriorating condition, it is
not too soon to begin considering how the nation might dig out, lest
popular confusion and bitterness generate reactionary politics instead.

The first imperative - an unavoidable necessity - would be to suppress
consumption through credit-restraining measures, fiscal caution or tax
reform, and to stimulate greater domestic savings, yet somehow to keep
the economy growing.  If this great adjustment is left to market forces
alone, the predictable consequences will be to punish the innocent -
struggling households and small businesses - first.

Thus, the second imperative would be to confront inequality aggressively,
through progressive taxation and other measures.  An interlude of mild
austerity will seem more tolerable if people know the sacrifices are
genuinely shared by all.

The principle of equity also matches the economics.  With consumption
suppressed, far greater investment spending will be needed to sustain
the economy - an ambitious agenda of public and private investments.
After decades of obsession with global competition, the country's wealth
and ingenuity will be refocused inward - rebuilding and expanding the
public infrastructure and common assets all citizens need and use
(education, healthcare, transportation, energy, the environment). But
the investment also would be aimed at long-term redevelopment of the
economy, force-feeding new industrial sectors.  Not coincidentally, this
will generate millions of new jobs not subject to export.

The jump-shift strategy I am describing would be the economic equivalent
of wartime, without the bombing and killing.  Indeed, the closest
precedent is World War II, an extraordinary era of economic development
that virtually shut down many forms of domestic consumption (cars and
housing) while the government's spending on war production launched
major new industries (electronics, petrochemicals, modern aircraft and
many others).  Essentially, accelerated investment and forced savings
replaced consumer spending as the leading fuel for economic growth.
After the war, pent-up desires and needs became the economic demand that
drove the long postwar era of prosperity.

War mobilizations encourage national cohesion, but the need for
solidarity can also create a political consensus to enact greater social
and economic guarantees to citizens.  In that sense, World War II was a
seedbed for postwar reform and lasting social change: The GI Bill, which
universalized access to higher education, broadened home ownership and
the initial political agitations for what became the civil rights
movement.  In Britain, wartime solidarity produced bipartisan agreement
to enact national health insurance.  If the United States must accept a
period of shared sacrifice, the experience can similarly create
commitments to enact fundamental measures involving health, education
and other social needs once the financial cloud has lifted.

An important difference from the World War II example, however, is that
the reconstruction could not be financed primarily through deficit
spending, given that the country is already burdened by growing
indebtedness and the objective would be to reverse that trend.
Financing would come, most obviously, from the revival of steeply
progressive taxation.  But private capital can also be pushed to invest
in neglected domestic priorities.  For example:

*  An "invest or else" wealth tax, quite modest in size, would give the
largest wealth-holders and financial institutions this choice: Either
pay the wealth tax or invest an equivalent amount in a priority list of
long-term public improvements, from high-speed rail to renewable energy
systems, these projects to be pursued as both private ventures and
public programs.  Alternatively, one's "wealth tax due" could be
invested in ten-year, low-yield, inflation-proof government bonds that
provide cheaper financing for softer projects like revitalizing
education, from early infancy to midlife job-skills training.

*  Progressive taxation could be restored through a graduated
consumption tax, replacing the deformed federal income tax.  The tax
rate on consumption would rise steeply by income class, but generous
deductions for necessary household living expenses would effectively
exempt most families on the bottom half of the income ladder.  They
might still be taxed on their consumption through value-added taxes
collected at points of sale, much like Europe's.  Either system could
discreetly encourage more responsible choices by favoring less wasteful
and damaging products, while lucrative tax-avoidance schemes and
pointless subsidies would disappear for both corporations and wealthy
individuals.  Suggesting a consumption tax is risky, I concede, because
unless political forces are realigned by crisis, the right wing would
turn it into a regressive flat tax - injuring those who have already
been injured.

*  A Fannie Mae for environmental progress, for small businesses, for
inner-city rehabilitation and for other capital-starved realms of the
economy would insure greater access to capital and credit, just as
Fannie Mae's financing does for home ownership.  Other
quasi-governmental institutions might provide partial tax preferences
for experimental ventures embracing equitable commitments to workers,
like the living wage, or important new priorities, like ecological
sustainability and worker ownership.

*  A less grandiose military posture toward the rest of the world would
save scarce capital.  Why exactly does the United States maintain its
vast forward empire of military outposts?  The $500 billion military
budget, citizens may observe, does not protect America from the $500
billion trade deficit.

*  Trade deficits (or surpluses) could be held to moderate levels for
all nations by a band of tolerances that, when violated, would authorize
nations to take protective measures.  Global leaders would need to focus
on institutional reforms like labor rights and ecological accords and on
inventing a new international financial institution that could end
destructive currency wars and other instabilities.

All these ideas, I know, sound quite improbable at this moment.
Certainly, the establishment would brush them aside.  But do not dismiss
the possibility that dramatic change and epic political reforms lie
ahead.  When self-important people and powerful institutions are
governed by illusion, history has a way of biting back.

http://www.thenation.com/doc.mhtml?i=20040510&s=greider

Please also see:

"Statistics Lie on the True Cost of Living" by Robert Kuttner,
The Boston Globe (March 17 2004)
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2004/03/17/statistics_lie_on_the_true_cost_of_living/

"Wages Don't Figure in Rebound" by Charles Stein,
The Boston Globe (May 05 2004)
http://www.boston.com/news/nation/articles/2004/05/05/wages_dont_figure_in_rebound/