Posted on 08/26/2004 2:40:51 PM PDT by Willie Green
For education and discussion only. Not for commercial use.
When I was teaching college economics, it was common to analyze the United States in terms of four elements. Two of these were in the private sector: households and business firms, which consumed, saved and invested in ways that generated income and growth. There was also the government sector, which provided public goods. And then there was the international trade sector in which exports bolstered domestic production and paid for the import of foreign goods that were not readily available at home. The idyllic equilibrium of these elements would see the government and trade sectors in rough balance, so that those in the private sectors could enjoy an improving standard of living while also putting something away for the future.
Unfortunately, the American economy has veered far from this ideal set of balances. The result has been instability in the economy as a whole and insecurity in the private sector. The problems have reached such a magnitude that the role of the government as a balance wheel in the system is being overwhelmed. To stave off recession, government fiscal policy has been pushed to such an extreme that it is itself becoming a new source of long-term trouble.
Balance cannot be restored in just one sector without risking greater imbalances elsewhere and a collapse of the entire system. In the 1990s, there was a politically popular move towards balance in the government sector. After President Bill Clinton and a Democratic Congress enacted a tax increase in 1994, Federal revenue as a share of the economy increased from 18.1 % in 1994 to 20.8 % in 2000. As a result of higher rates taken from a growing economy, tax receipts jumped from $1.2 trillion in 1994 to $2.0 trillion in 2000. The new Republican majority in Congress elected in 1994 held down government spending during the rest of the decade. Government spending fell from 21.1 % of GDP in 1994 to 18.4 % in 2000, giving the budget a surplus of 2.4 % of GDP, or $236.4 billion.
If the Federal authorities were taking more out of the economy and putting less back in, who was making up the difference? The answer was the American consumer, who was spending like the proverbial drunken sailor and piling up unprecedented amounts of debt in the process. Consumer credit jumped from $960 billion in 1994 to $1,558 billion in 2000. Credit card debt made up 43% of this ($663.2 billion). By the end of the decade, private spending had increased 12 % faster then income, and households were showing a deficit of some 7 % of GDP. This was an unsustainable level of private borrowing for consumption, and not just among the record number of people filing bankruptcy. Households would have to retrench if they were to provide for their future solvency.
The trade sector has been linked to consumer behavior, and has provided a negative feedback that damaged the private sector´s ability to support continued growth. In the “open” U.S. market, a significant portion of the higher consumer spending went to purchase imported products. Goods imports nearly doubled 1994-2000, from $668 billion to $1,224 billion. The largest part of this increase came from 1997 on, as the world economy suffered a crisis and the American market became the dumping ground for surplus output. President Clinton decided to keep the United States open to imports in the hope of reviving foreign economies, but instead the U.S. economy was dragged into recession itself.
Money spent on imports does not stimulate the American economy, while the shift of production (and jobs) overseas undermines U.S. income. The current large trade deficits thus slow the American economy considerably.
To pull the U.S. economy out of recession, President George W. Bush turned to fiscal policy, reversing the pattern of the 1990s. Tax cuts reduced the Federal share of GDP to 16.5% in 2003, a full percentage point lower than the fabled Reagan tax cut of 1982. Government receipts in 2003 were $242.9 billion lower than in 2000. Tax revenues are not predicted to return to their 2000 level until 2005. Federal spending in 2003 increased to 19.9% of GDP and was $368.9 billion higher than 2000, opening a budget deficit of $375.3 billion. But the fiscal impact was blunted by the rise in the trade deficit to $506 billion. Not only were consumers spending too much of their tax cuts on foreign goods, but even the government was outsourcing some of its procurement spending overseas, thus undermining its own fiscal policy. Policymakers have not thought through their policies.
One research group that has integrated its thinking across all sectors of the economy is the Levy Economics Institute at Bard College in New York. A July Levy report written by Wynne Godley, Alex Izurieta, and Gennaro Zezza, with the additional support of the University of Cambridge Endowment for Research in Finance, concluded that a drastic reduction in the trade deficit was the only way to restore balance and sustained growth to the U.S. economy [“Prospects and Policies for the U.S. Economy: Why Net Exports Must Now Be the Motor for U.S. Growth” at www.levy.org].
Consumers are facing insolvency, with personal indebtedness at a record 140% of disposable income in the first quarter of 2004. Households are adding 13 % in borrowed funds to their disposable income in the mad attempt to live beyond their means in an economy suffering from stagnant incomes. And the government cannot continue to run enormous deficits, which would have to accelerate if they were to offset the negative impact of expanding trade deficits.
As Godley, Izurieta and Zezza argue, “a government deficit equal to 9 % of GDP, combined with the interest rates in excess of 5% will send the internal and external debts hurtling towards 100 % of GDP, with more to come after that. If there is anyone who considers a 9% budget deficit to be tolerable, what about 15 % or 30 %? It has to stop somewhere. The longer the deficit goes on rising the larger and more painful the adjustment will be when the tide eventually turns.”
Unfortunately, though they see the problem, their solution is tepid; resting on a devaluation of the dollar to curb imports and (perhaps) increase exports. They do not see this happening automatically because foreign interests are opposed to such a change. The American imbalance is in their favor. “The non-US world during the last few years has become heavily dependent on the US´s growing deficit as a motor for growth.” note Godley and company. There is no reason for these foreign entities to end these policies given their success. “In our view the need for a major realignment of currencies has become so pressing that the US authorities should consider forcing the issue by imposing a temporary import surcharge,” they argue.
Now they are getting somewhere. Washington is going to have to take action in the arena of economic policy it has been ignoring, trade policy. Fiscal policy has been exhausted, indeed, it has been taken to such an extreme as to be untenable. Both President Bush and Senator John Kerry have pledged to reduce the budget deficit by at least half in the next few years. But if the trade deficit is allowed to continue unabated, the recession will return. So imports must be cut and steeply, both to restore financial balance and to shift production and jobs back to the United States. Households need to earn more so they can dig themselves out of debt. Whether the measures are called surcharges, countervailing duties, surge protection or good, old fashioned tariffs, they must be imposed to stop the economic hemorrhaging. Only then can the country return to the ideal set of balances upon which its prosperity and strength was built.
William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
ping
Neither of the major-party candidates seems to give a rotten damn, either.
"Free" trade bump!
All of this is lost to "winning" the election. The kool-aid drinkers on both sides of the aisle will support their candidate regardless.
Report: 1.3 million more Americans in poverty
http://www.msnbc.msn.com/id/5829707/
Check out the picture in the link --- it's of California but it could be any state with a high immigrant population. We're getting to look just like the 3rd world and with poverty matching it.
Americans are going to be in for a big big surprise.
They don't.
"The center's analysis of the census figures found that the number of people living in extreme poverty, with incomes of less than half the poverty threshold, jumped by by 1.2 million to 15.3 million people. And the group said the share of national income going to the bottom 20 percent of the population fell to the lowest level since the government began collecting the data in 1967."
It's not just poverty that's rising --- extreme poverty is skyrocketing. Incomes less than half the poverty threshold --- and these are the people who tend to have 9-10 or more kids starting at age 13 to 14 when they drop out of school.
"...by importing everything we're showing how financially strong we are."
You forgot to put a sarcasm note at the end of this statement.
And when no one wish to take your papers which are worthless...how you buy your oil? For that matter, if you default on debt, then it is your factories that now in China and India are to be confiscated...not only will winter be cold, then also most factories will fall as they loose everything.
US communists are waiting..if you believe that they are not and do not organize, then you live in as much denial as Tsar was.
"So imports must be cut and steeply, both to restore financial balance and to shift production and jobs back to the United States."
Which is precisely what the FairTax would do by removing the tax advantage that imports have over domestically produced goods in our market.
Tax reform bump
We are on a elavator straight down with two crazies fighting over the controls. Little to be done except to prepare for survival after the shakeout.
Your snake-oil tax panacea will only serve to fund the bloated federal agencies whose regulatory mandates place our domestic natural resources at an economic disadvantage.
Harken back to four years ago when Congress was so concerned they couldn't figure out how to spend the HUGE surplus. They were very successful with the help of the conservative President. (Hah)
"But if the trade deficit is allowed to continue unabated, the recession will return. So imports must be cut and steeply, both to restore financial balance and to shift production and jobs back to the United States. Households need to earn more so they can dig themselves out of debt."
This is a good idea. But can it be done? How can households earn more when the costs of fuel and college tuition are rising faster than wages and jobs are being outsourced to third-world countries?
Lelio, you should put your post in your tag line since it is about all you ever seem to post on FR.
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