Pitfalls and Pratfalls: America as No. 1 Debtor
America’s economic place under the global sun is beginning to get chilly. Never before has a major power’s balance of imports versus exports collapsed like ours over the last several years. Take July’s record $18-billion monthly trade deficit, which probably signals a record 1986 deficit of $160 billion to $170 billion--a hitherto almost inconceivable flood of Japanese cars, Canadian lumber, Korean electronics and East Asian textiles.
More and more experts are starting to fear that the U.S. trade deficit will remain above $100 billion a year for the rest of the decade. Unless, of course, we slide into a slump that shrinks domestic demand the hard way. Sen. Lloyd Bentsen (D-Tex.), former chairman of the Joint Economic Committee, estimates that by the early 1990s we could owe foreigners $1 trillion; the last, best hope of mankind as an oversized, overdrawn banana republic.
For Americans, the trade issue can no longer be some abstract statistic of international commerce. Not just an Achilles heel of prosperity, it’s also a symptom of two important Washington policy weaknesses. First, the inadequacy of the “Ponce de Leon” aspect of Reaganomics, with its belief that the U.S. economy is drinking from a fountain of youth through massively reduced tax rates, neo-laissez faire government and large-scale deregulation. And second, the pratfalls of a U.S. Treasury Department captained by politicians apparently more knowledgeable about Michigan primary elections than the dynamics and pitfalls of competitive currency devaluations. In tandem, the two constitute an unnerving combination.
This Administration’s under-concern with trade goes way back. In 1981, America’s new GOP Sun Belt leadership took office articulating a frontier-spirited view of the world. Just unleash us, cut taxes, remove the stultifying hand of government and we’ll get the economy moving again. After the heavy-handed Carter years, this unleashing had some plausibility, too. But it lacked a necessary international dimension. If the Reaganite Sun Belt elites were turning away from the old European-focused internationalism of New York and Boston, their own emerging East Asian and Latin American orientation was still colored by convictions of Yankee supremacy. Commercial apprehensions were few and far between.
So the trade problem snuck up on the Administration. By 1983-84, even as much of the economy recovered from the 1981-82 recession, the trade imbalance worsened. Yet the White House was enthusiastic over the general direction of the economy, calling it a sign of “morning again in America.” Was there trouble in agriculture, steel, mining and textiles? That’s just an unfortunate corollary of the transition toward a post-industrial high-tech and services economy. Were budget deficits smashing records? No matter; the strong dollar, bolstered by the high real interest rates needed to finance the deficit, was practically hailed as a new stanza to the Star-Spangled Banner, another sign of the world’s reviving respect.
The trade deficit, meanwhile, more or less ratcheted up with the budget deficit, hitting $123 billion in 1984 and then reaching a record $148 billion in 1985. This year’s new record trade deficit will further rebut any arguments that the crisis has been brought under control. Because of this economic hemorrhage, moreover, the United States has become a net debtor for the first time since 1917--and in just one year, we have become the world’s biggest. The economic achievements of generations are being dissipated. If Jimmy Carter had done this, he would have been damned from Boston to San Diego.
Unfortunately, much of the U.S. unresponse to the trade disaster is rooted in several larger myopias. White House policy-makers can’t grapple with the historical context of what’s happening--that the United States is a late middle-aged economic power, its global and trade hegemony fading, in part because of its obvious conflict with themes of “morning again in America” and rediscovery of economic youthfulness. In addition, the 1981-85 naivetes of neo-laissez faire go far beyond trade and currency lassitude. In recent months, for example, questions have begun to mushroom about the wisdom of deregulation in a number of areas: airline troubles, public doubts about breaking up AT&T; and the speculative trend in finance. Administration hostility to federal government activism is also a perceived problem in energy policy (or lack of policy), transportation infrastructure and education. Finally, the President’s much-trumpeted second-term commitment to tax reform--wiping out specific credits and deductions in exchange for lower rates and marketplace decisions--seems to be laying an egg with public opinion.
Nothing better encapsulates the Administration’s chancy second-term economic policy calculus, in fact, than its fundamental decisions to go all out for tax reform while opposing Congress’ various attempts to do something about the trade deficits. White House trade initiatives, in turn, have generally been too little, too late. Aside from a few recent actions to help specific industries like semiconductors and machine tools, the Administration’s response to the huge trade deficit has been one-dimensional--reliance on currency realignment.
This couldn’t be more ironic. Only in 1985, after former White House Chief of Staff James A. Baker III changed jobs with Donald T. Regan and became Treasury secretary, did the Reaganites finally wake up to the fact that the strong dollar, far from being a world tribute to renewed American prowess, had been pricing U.S. goods out of global markets. So after ignoring trade and currency problems, the Administration decided to restore trade by devaluing the dollar. It was ideologically acceptable. After all, if that’s the only reason trade is in trouble, then “morning again” merely requires the dollar to drop enough. Meanwhile--and this, remember, is mid-1985--tax reform had to stay at the top of Reagan’s agenda for political reasons. Trade was only a transient problem and diversion; redoing the tax code and unleashing the economy with marginal rate reduction would make the GOP the new majority party.
Which brings us to the second problem: politicizing the Treasury Department. For the last year and a half, U.S. economic policy has been largely orchestrated by two 1981-84 White House political strategists who moved to Treasury in 1985: Baker and Deputy Secretary Richard G. Darman (major theorist of tax reform as a key to political realignment). Yet our current political T-men are just the latest in a two-decade succession of inauspicious Treasury leaderships.
Consider: For almost 18 months, the dollar has been plummeting toward what’s now almost Carter-like weakness against the Japanese yen, the German mark and the Swiss franc, but the U.S. trade deficit just happens to be bigger than ever. In retrospect, the White House politicians-turned-amateur-economists ignored the extent to which nearly half of U.S. trade is with Canada, Korean, Taiwan, Hong Kong, Mexico, Brazil and other countries with currencies beyond the scope of “Group of Five” major power machinations. They also ignored the extent to which foreign manufacturers would absorb the negative impact of currency changes to maintain U.S. markets. Currency devaluation alone can’t restore American competitiveness any more than it could restore Britain’s international economic erosion in the first half of this century. More substantial competitiveness and reorientations of U.S. policy--tougher trade laws, budget deficit reduction and a different tax rewrite (like a consumption tax)--have gotten short shrift from a Treasury preoccupied with political realignment through tax bracket reduction.
It’s not a great record. If Baker were a Japanese trade minister, he’d be a candidate for hara-kiri. And if the chief financial officer of a major corporation had fumbled that much, he’d probably lose his job. Baker, however, is managing politics as well as economics, so he’s not in jeopardy. Maybe that’s the problem. Today’s international circumstances demand a Treasury secretary who’s not also a part-time political strategist and a crypto-1988 presidential campaign manager. Most of all, they demand putting aside election-minded global pretense in order to recognize a real and growing threat to domestic prosperity and economic independence.
