In their campaigns, George W. Bush and John Kerry studiously avoid a certainly crucial issue for the next president: what to do about dual deficits in the federal budget and current account.
Such avoidance is understandable. Neither candidate could respond without belying key parts of his own platform.
The deficits won’t disappear spontaneously. At some point, almost certainly in the next four years, circumstances will force painful adjustments.
The term “dual deficits” gained notoriety in the late 1980s when the United States faced similarly large federal deficits. Discussion waned as deficits shrank in the 1990s. Now, with the federal government again borrowing one of every three dollars it spends — with the exception of Social Security receipts and outlays — the idea is commonplace.
The argument is simple. National saving is the sum of private sector savings and government savings. The U.S. private sector has a low savings rate. When the government runs deficits, it has a negative savings rate. Once that exceeds private saving, the nation as a whole is spending more — on consumption, government purchases, and business plant and equipment — than the value of all it produces.
When that happens, the deficit of spending-minus-production must be filled from abroad. Imports exceed exports. The current account portion of the balance of payments shows a deficit. The import bill must be paid. The money comes from borrowing abroad. Foreign capital inflows offset import payment outflows. The overall balance of payments roughly balances.
Put more simply, we spend more than we produce and buy the shortage from abroad. We pay for these foreign purchases by writing IOUs.
As long as foreigners accept ever-increasing numbers of IOUs, the party continues. When that willingness reaches the breaking point, the adjustment is harsh.
Right now, we can continue to import because Asian central banks are willing to buy huge amounts of dollars to keep the dollar from losing value. That would make their nations’ exports more expensive. They cannot sop up such excess dollars indefinitely.
We faced a similar situation before 1971. The U.S. economy boomed during the Vietnam War era. Dollar outflows greatly exceeded inflows. We made up the difference by giving foreigners an ounce of gold for every $35 they presented. This was a contractual commitment we had made under the Bretton Woods system.
When all the gold was gone, we blithely announced that the deal was off. The value of the dollar plummeted and that of gold soared. The ensuing adjustments contributed to the great stagflation of the 1970s.
Adjustments this time may be equally harsh, but neither candidate will mention the issue. Bush persists in his naive self-delusion that repeated tax cuts eventually will solve all problems. Kerry clings to his equally ludicrous assertion that simply reversing tax cuts for the rich will render everything just fine. If U.S. voters accept such delusions, they are patsies who deserve what they are going to get.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.