Debtor Nation
The 5/10 issue of The Nation features “Debtor Nation,” an article by William Greider.
At task are our rising trade deficits and what it really means to us, as Americans, in the ever increasing global economy we live in. It’s no secret that Americans are uber-consumers, putting themselves ever-more in debt for new cars and furniture. Meanwhile, they facilitate the trade deficit by patronizing “intra-trade” multinationals, like Wal-Mart, which use cheap overseas labor in favor of American jobs to sell ever-cheaper goods to Americans. It doesn’t take a genius to see that’s not sustainable. And mixing our declining economy with the world’s most powerful military leads to some terrifying scenarios.
I’m not on the imminent doom bandwagon yet, but it’s got some eye-opening and “putting 2-and-2 together” moments.
Full article is here, but here’s some salient excerpts:
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.
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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.
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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.
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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. (Bold mine.)
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.
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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.
It goes on to propose some solutions. They are radical, but at the same time, there’s a certain amount of undeniable logic. When you have Warren Buffet moving his wealth into overseas markets and currency, it’s probably a good idea to wonder about these things yourself.
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