Facing other deficits of nature and global competitors

A year that has begun with an unprecedented trade deficit, a major earthquake and growing concerns about the greenhouse effect sees Washington mired in a strange obsession. Reducing the national debt takes precedence over all else. Even President Bush must try to convince Democrats and many Republicans that his tax cut leaves ample room for debt reduction. Sound as this priority may seem, ironically it could deter our nation from public investments needed to assure our physical and economic well-being.

On the day of the Seattle earthquake, President Bush proposed a budget that slashed funding for earthquake-proofing buildings in vulnerable communities. Later that week, experts reported that federally sponsored retrofits in Seattle had saved many lives.

The much-celebrated global economy raises analogous causes for alarm. The concerns that conservatives have long cited regarding our national debt apply in spades to the trade deficit. Much of government debt is owed by our government to U.S. citizens. The trade deficit is more ominous. When U.S. citizens purchase more goods from foreign nations than they buy from us, foreign investors accumulate surplus dollars. As long as they are content to reinvest this surplus in our bonds and stocks, this process can continue indefinitely.

Nonetheless, more of our national prosperity is in effect mortgaged to foreign investors, who collect the interest and profits. In addition, when a trade debt grows in proportion to national assets, the holders of that debt may lose confidence in the ability of the debtor to continue payments.

The late Herbert Stein, the wittiest and smartest conservative economist of his generation, used to say that “unsustainable trends are just that, unsustainable.” The size of the trade debt is no longer trifling. Last year, the United States had a record trade deficit of 3.7 percent of GDP, or $369.7 billion. Our aggregate foreign debt is nearing $2 trillion and is now growing at about $450 billion a year.

This trade deficit is at least as unsustainable as federal budget deficits during the Reagan era. If foreign investors lose confidence in our economy, they will dump U.S. securities and the dollar will decline in value. That decline will in turn lead to inflation, Federal Reserve credit tightening, and a recession. Recession would cure the trade deficit, but at substantial cost. Since such Maine industries as tourism and forest products are especially vulnerable to cyclical downturns, our citizens have a large stake in this seemingly arcane topic.

If the United States could manage both to sell more foreign products and to import fewer ones, the trade deficit would be slowed and the dangers posed by speculative international capital flows lessened. This is unfortunately just where the current fixation on the federal debt exerts so destructive an influence.

Our trade imbalances are driven in part by the high cost of foreign oil. An expensive and inefficient transit system, inadequate conservation practices, and the lack of alternative sources of energy keep oil prices high and also translate into less competitive production costs.

Much of our trade deficit of course antedates the oil price rise, but for reasons that also indict policy priorities. U.S. factories lose market share not merely to cheap labor in the so-called Third World but also to more nimble and innovative firms in Asia and Europe. These nations have emphasized and committed resources to public education and ongoing worker training.

Our public sector continues to decline, with federal spending shrinking from 22 percent of gross domestic product to 18 percent in the last decade. With both parties pushing fiscal restraint, that figure may go as low as 15 percent in the next few years.

The trade deficit is off the political radar screen because, unlike the federal debt, it does not grow out of public intervention in the market. Our political leaders are so taken by the faith that unregulated markets can solve all problems that they assume such imbalances will automatically right themselves. These imbalances will, but how and at cost to whom is the relevant question.

Historically, federal expenditures for rails, rural electrification, interstate highways, the GI Bill, computers, public health, and the Internet made our economy more productive and our citizens healthier and more secure. Paul Loeb, a student of public investment, argued recently in the Los Angeles Times: “Invest in our infrastructure, and it will stay mostly solid, even while the ground shakes, rattles and rolls beneath it. Invest in all our children, and they’ll grow up healthy and strong. Invest in technologies like wind power, compact-fluorescent light bulbs and efficient mass transit, and we won’t have to choose between rationing electricity and despoiling our environment.”

Private corporations have neither the means nor the incentives to make massive, long-term commitments that do not translate into immediate profits. As long as the national debt remains an obsession, our government will leave our citizens and even our businesses unprepared for the challenges posed both by nature and our global competitors.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net.