Following is Russia Today interviewing Economist Max Fraad Wolff, from The New School in New York, supporting an IMF report saying China’s economy will overtake that of the United States in five years on a purchasing-power parity (PPP) basis. This report has stirred up a new wave of discussions around the globe. I liked Wolff’s overall take on this issue, and I would like to chime in with some thoughts of my own. Please watch the footage below before continuing with this post.
Wolff didn’t elaborate on why the U.S. has been consistently making “bad policy decisions” in favor of short-term politically expedient ones. I watched a panel discussion on CCTV yesterday about this same topic. On the program, the host used the term “cowardice” as are some circles in criticizing the U.S. policy makers.
Regarding deficit, both the American public and government are in trouble. First, let’s look at the consumer side (see chart below of U.S. consumer borrowing in the last few decades):
On the government side, this year’s federal budget is $3.82 trillion, and with taxes amounting to $2.17 trillion, a short-fall of $1.65 trillion will be added to the overall national debt, which mounts to $15.1 trillion by year-end.
It is not rocket science for one to see both are problems of over spending. The above chart shows that in the last decade alone, the U.S. consumer borrowing has roughly DOUBLED.
One may argue, there could be a miracle breakthrough to American productivity and in turn economic output dramatically increases. Tax revenue will then be sufficiently large to pay down the debt. Well, miracles may occur from time to time, but they certainly do not occur frequently.
Wolff also said, U.S. by exporting manufacturing to China exports ‘growth’ as well. That is true. But, American corporations also enjoy incredible global competitiveness partly due to them leveraging China’s cheap labor pool. As in the case with the iPad, China is compensated very little in fact in the overall value chain. See “Fighting for Jobs in a Globalized World” by Allen. China could import more from the U.S., and that comes gradually as China’s population crawls out of poverty. China needs an opportunity to grow too.
I would characterize the trade relationship as the U.S. enjoying spectacular standards of living by exporting some ‘growth’ to China. Who is getting a better deal? That was arbitrated by the smartest people on both sides, when China agreed to U.S. terms in order to gain entry into the WTO long time ago. In exchange, China was recognized primarily as a developing country. Fairness therefore must be viewed through that relationship.
And, the truth is, across America, there is broad recognition the country needs to cut back spending. China is not holding a gun requiring the U.S. to spend beyond her means. Nobody else is doing that.
With the Fed constantly printing USD (and by the way, this act is now ‘sophisticatedly’ termed “quantitative easing”), the U.S. is doing just that on her own.
The latest quantitative easing, or QE2, was sold to the American public on this idea that with unemployment high, the government must pump money into the system and relax credit to spur investments and job creation. With unemployment too high, there could be social unrest in America. (I know, “social unrest” sounds strange to describe what might happen in America, but that’s the truth, isn’t it?) To stay on the job, the Obama administration must embark on this short term decision to temporarily prop up the economy.
But also remember that too much quantitative easing causes inflation, so the unrest would come from everyone, not just from the unemployed.
That then means the U.S. government must borrow at the same time. With Dagong dropping U.S. sovereign ratings and S&P threatening to do the same, U.S. borrowing could become more expensive. U.S. interest payments is already a significant portion of the U.S. spending.
The situation in America is like a house of cards on a table. A group of people is lifting this table and moving it. No one person can fall. Each time the U.S. borrows more or prints more USD, more cards are added to the table.
There is also this psychological “problem.” They are determined to move this table to a “number one” position, which by the way, they seem to believe is a God given imperative.
Wolff also makes the good point that China has 1 billion more people, so it is inevitable this many people will have a bigger combined economic output. If anything, I think it is China who should feel behind and dissatisfied on the economics front.
In this day in age where everyone can get access to cell phones, computers, and relatively good education, it is preposterous to hold unto this view that 3 people could out-produced 13 people.
Is it possible for the narrative in America to accept China having a much bigger economy given her size?
Back to the point about making politically expedient policy decisions vs. smarter and longer term ones. There is no productive debate within America between the two parties on how to solve this problem from a long term perspective.
Do we hear any sort of 5, 10, or 20-year plans from both the Republicans and the Democrats on tackling the $15.1 trillion? Nope. All we hear is bickering.
American-style politics like to shift blame to someone else. They want a “morning after” pill. Force the Chinese to suddenly valuate the RMB, so overnight, Chinese manufactured goods become more expensive for the Americans. They’d prefer the Chinese to be blamed for making too expensive stuff in case the American public gets upset for not able to buy enough.
See this New York Times article, “Inflation in China Poses Big Threat to Global Trade.” You see how this works? Yesterday, it was “cheap” Chinese goods wrecking havoc on world trade. Now that there is inflation in China and goods from there are more expensive, the global trade is again threatened. The editors at the New York Times are idiots or they believe Americans are. One must be true.
How the New York Times treat the issues of deficits in America is emblematic of what is wrong with the country. Everyone likes to blame. Nobody seems to truly care about solving problems. In fact, the question of who is the idiot above is irrelevant to the likes of the NYT. As long as they blame and Americans are upset, they generate more revenue.
American politicians and the American media seem to have an incestuous relationship, don’t they? Wolff puts it more nicely – the country cannot make smart and longer term decisions. I would have to agree with the CCTV panel’s more blunt characterization – that’s because American politicians and media are cowards. Will they ever have the courage to offer up a narrative of reducing consumption, lowering expectations on entitlements, and cut back on that out-sized military?