America’s Rogue Economy

I know that this sounds boring, but bear with me! The IMF is largely a tool of American foreign policy, or so it is deemed by many a foreign nation whose government has been lectured by some American economist or Treasury official. The lecture usually takes the form of advocating austerity as a solution to budget woes of one form or another. But, as Joe Stiglitz, in this article: The IMF’s American Problem politely points out that the only real “rogue” in the world’s economy at the moment is the US itself. Maybe it is time we took our own advice?

It is historically perverse for the world’s largest economy to be a net debtor: the US sucks in around $2 billion a day of the world’s savings to pay for its consumption habit. This means that the world’s poorer people are forgoing development, infratstucture improvements, and attaining a better standard of living, just so the Americans can remain profligate. No wonder they all get a little peeved when thos lectures begin!

Stiglitz points out that this huge imbalance in the world’s use of its funds cannot be dealt with by changing the policies of foreign countries: beating on the Chinese and making their goods more expensive will not solve anything since Americans will merely switch to importing from non-Chinese sources such as Bangladesh etc. Unfortunately for us the only solution is right here at home: America has to deal with its budget mess. It simply cannot keep importing cash at the rate it is, so it must cut its deficit and start generating its own cash. This means raising taxes or cutting spending. Given the size of the problem the best solution is probably a combination of both. The longer the problem is left the more we run the risk of the world’s money markets “solving” the problem by bidding up interest rates: that would have dire consequences. Just think of the damage rapidly rising long term rates would do to our already inflated housing market. As I have pointed out before there are signs that America is losing control of its own economic policy because of exactly this phenomenon. But this is an election year and the Republicans will want to use their favorite vote getter: let’s cut taxes! Talk about fiscal recklessness. Or worse: talk about unpatriotic!

Food for thought on Memorial Day!