We commit suicide by debt addiction, China rakes in IOUs.
by Victor Davis Hanson
National Review Online
With our national debt at $11 trillion and climbing at a projected rate of $1 to $2 trillion a year, examine the brilliant manner in which Americans justify borrowing much of this money from abroad, particularly from the Chinese.
Precise figures on how much the United States owes China are hard to come by. China is secretive about where it invests its vast surpluses, and even about how gargantuan they have become. Perhaps they are afraid that if such data become widely known, Chinese reformers will start questioning state financial policy — and specifically how, why, and where such national wealth is banked.
But for now, many observers believe the figure may have reached $1.4 trillion. On a per-capita basis, this means that each affluent American has borrowed well over $4,000 from the rather poor Chinese. We have excused our indebtedness in a variety of insidious ways. We say that our annual deficits and aggregate debt stimulate the U.S. consumer demand that is so essential to the Chinese export market. By buying and borrowing from China, we have jumpstarted its transformation from rogue nation to member of the responsible capitalist world — with benefits for the planet at large.
We go on to say that cheap Chinese goods keep consumer costs down in the U.S., increase the purchasing power of a weak currency, and maintain constant pressure on American competitors to maximize efficiency, lower prices, and cut costs. If real earnings have remained stagnant for the middle class, their purchasing power has increased, thanks in part to reduced prices at Wal-Mart and other mass retailers of Chinese goods.
And we’ve thought up even more justifications. Some argue that this debtor/creditor relationship is analogous to the federal government’s tangled no-divorce involvement with AIG or Citibank: The U.S. is simply “too big to fail,” and so we have more leverage over the Chinese than they have over us. They stop lending, we stop buying — and soon their factories shut down. And by the way, we pay low interest at fixed rates on their billions, and plan to pay them back with inflated dollars that will translate in the end into negative-interest loans.
Others point out that China has few options as to where to park its surpluses. Even in the era of Bernie Madoff and Lehman Brothers, what other country is so transparent and committed to protecting capital from arbitrary confiscation or government manipulation? And if China were to tap its vast cash reserves and begin a domestic shopping spree, it might create a consumer revolution at home, in which ever-increasing expectations would fuel ever-rising discretionary spending. If one billion Chinese started investing in three-bedroom homes, SUVs, and power boats, would the Chinese environment support it? Would China’s labor remain competitive? Could the government still control public discourse and expression?
Besides the strange ways in which we addicts justify our borrowing habit vis-à-vis China, such huge sums have also warped politics at home. Republicans have not balanced a budget since the latter days of the Eisenhower presidency. We are supposed to nod and smile when they talk about financial responsibility, like the crowds at the naked emperor’s procession. Nixon, Reagan, and the two Bushes all employed varying exegeses to justify red ink — Keynes, supply side, tapering deficits, a balanced budget by 2010, etc. Clinton, in contrast, was the last president to actually balance a budget — thanks mostly to a Republican Congress.
The recent Republican-Democratic symbiosis about borrowing is bizarre: Democrats in Congress run up debts like teenagers, enabled by the fact that their Republican parents in the White House never call in their credit cards. Republicans, in turn, started calibrating debts and deficits as percentages of GDP, not in real dollars, once hundreds of billions had metamorphosed into tens of trillions.
Liberals privately talked about “gorging the beast,” hoping that their out-of-control spending would force higher taxes, and with them a long-awaited redistribution of income and government-mandated equality of result. Conservatives have talked of “starving the beast,” by voting in tax cuts that would dry up government revenues and therefore force an end to huge federal expenditures. In the end, we got only higher taxes and higher spending and higher deficits and more debt. Republicans now say of Obama’s fantasyland deficits, “He’s gone way beyond Bush.” Democrats reply, “But Bush did it first.”
Both parties privately know that financial physics will take care of the problem in Californian or Icelandic fashion: Lenders abroad and at home will cut off our supply of money; conservatives will have to agree to even more tax increases; liberals will have to agree to some modest spending cuts; and the voters will be told that neither side had any choice. Unless we change our habits, that rendezvous is as inevitable as the sun’s rising. The only mysteries are the approximate date of its arrival, and whether we will call federal pay cuts and layoffs “furloughs,” massive income-tax hikes “surcharges,” and a new blanket federal sales tax an innocuously European-sounding “value-added tax.”
In the meantime, we might begin to look at federal expenditure in terms of where the money is borrowed. Cash-for-clunkers sounds like a great stimulus. But in terms of debt, we are borrowing a few billion from the Japanese and Chinese so that we can rent-to-own new fuel-efficient cars largely from the Japanese and Koreans. At some point, an economist will show us that the savings in fuel efficiency per clunker removed are overmatched by the interest on the money we borrowed for an imported replacement.
I support the conservative argument for a strong next-generation fighter component for national defense. But in acquiring more $177-million F-22 Raptors in our present financial circumstances, we should at least be honest enough to admit that we are renting the planes, not buying them. We are borrowing billions of dollars from the Chinese to protect against future threats from the Chinese. That may sound neat, but at some point the Chinese will not be amused.
When we talk of trillion-dollar health-care initiatives and universal coverage, we fool ourselves again. In essence, we are borrowing hundreds of billions from the Chinese, who do not have adequate health care, in order to give millions of our own citizens what the Chinese lack. Rationed health care is indeed a scary thought, but so is the idea that at age 85, I will have my government Medicare plan borrow $250,000 from the Chinese for my artificial hips and knees while my 50-year-old counterpart from rural China goes without annual check-ups or necessary medications.
Imagine instead an America in which we were obsessed with paying for things rather than borrowing, especially abroad. A senator might pontificate, “I propose purchasing another 100 F-22s, and so advocate cutting the national bike-path program.” Or a congressman would bellow, “I demand universal health care and will force the average rich person to give the government another $25,000 a year to pay for it.” Populists could cry out, “We need interest-free student loans, so I urge that those who make $10 million a year give us another $1 million as a surtax.” Conservatives could counter, “We need a supplemental appropriation for Afghanistan, so we have to cut $200 billion from agricultural subsidies.”
In short order, the entire way we think would be turned upside down, from buying votes with freebies to losing them by demanding payment up front. It all reminds me of the ancient world of my grandfather, who would point to a used tractor he had purchased (and paid for in cash) and sigh, “That cost me 20 tons of raisins”; or would look at the living-room floor and say with a shrug, “It took an acre of Santa Rosa plums to pay for that rug.”
Instead, today we charge it, pay the 19 percent interest on our credit cards, get behind, and then applaud as a Sen. Chris Dodd rails that we were tricked, snookered, and victimized by evil usurers as we justifiably renege on the debt.
It will be interesting when America tries all that with the Chinese.
©2009 Victor Davis Hanson