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Ignoring The Coming Collapse

J. Bradford DeLong

July 12, 2005

J. Bradford DeLong, professor of economics at the University of California at Berkeley, was assistant U.S. treasury secretary during the Clinton administration.

This month, the Bank for International Settlements (BIS) was the latest to worry aloud about the financial risks that the world seems to be building into its future. “[A]ll the countries hit by financial crisis...experience[d] a very sharp slowdown,” the BIS says of Mexico in 1994-5, East Asia in 1997-98, Russia in 1998, as well as Brazil, Turkey, and Argentina subsequently. It then cites “global current account imbalances,” particularly “the U.S. external deficit,” describing it as “unprecedented for a reserve currency country to have a current account deficit of such magnitude.” In short, the world has become “increasingly prone to financial turbulence.”

The BIS hints at the possibility of a financial crisis that, with the United States at its center, would dwarf all crises since 1933. The BIS issues the standard recommendations: “Deficit countries should reduce the rate of growth of domestic spending below that of domestic production. Allowing their currencies to depreciate in real terms would make their products more competitive, and also provide an incentive for production to shift out of non-tradables into tradables.”

This is economists’ code for the message that the United States must gradually cut its budget deficit, while other countries—like China and Japan—must gradually let the value of the dollar fall and that of their own currencies rise.

But America’s government has stuck its head in the sand. As Stan Collender, a noted observer of the U.S. federal budget, has commented, “No one with federal budget responsibilities actually seems to be interested in the budget.” This is not “because the budget committees are too busy....[T]he House and Senate...are not doing much of anything...[because] they don’t want to.” Within the Bush administration, Director of the Office of Management and Budget Josh Bolten “has been virtually invisible,” while “the president and vice president...avoid talking publicly about the budget.”

It is not that politicians wish to take the lead on fiscal consolidation but are failing to gain traction; it is that there are no influential politicians who are even trying to steer the United States toward a more responsible fiscal policy.

Governments that pursue policies—whether America’s fiscal laxity or China’s exchange-rate peg—that create unsustainable imbalances do so for what they regard as important political reasons. Appeals to change their policies, and thus contribute to the common global good of financial stability, are fruitless unless others also are seen to change their policies, act responsibly and so contribute to the common good.

As the world’s largest economy, the United States is best suited to lead by example, but it has so far failed to play its part. Treasury Secretary John Snow has spent almost no public time on the budget, but a lot of public time on China. Republican political operatives care far less about national savings than they do about manufacturing-sector job losses.

“So what else is new?” you may ask. The list of issues on which the Bush administration has failed to lead is a long one, so why harp on its poor financial management?

From a purely practical point of view, one reason is that substantial progress on ensuring global financial stability can be made relatively easily. The Bush administration may not care that deficit reduction is the right policy for America, but it might care far more if the issue were framed as a prerequisite for policy changes abroad that diminish pressure from imports on domestic manufacturing employment.