The Other Side of US Economic Policy

The Bush Administration keeps touting the strength of the US economy, which in 2005 saw annual GDP growth of 3.5% and a 15% hike in federal revenues over 2004 to a record $2.15 trillion. In today’s Washington Post, Paul Blustein’s “Trade Gap Hits Record For 4th Year In a Row” tells only a part of the other side of this story – at what cost has this “economic success” been achieved?

The US trade deficit almost doubled from $370 billion in 2000 to $725 billion in 2005, while the national debt increased 44% from $5.7 trillion to $8.2 trillion during the same period. The US personal savings rate was -0.5% in 2005, which means that Americans spent more than they earned after taxes – this is the first time that this has happened since the Great Depression. According to the Chicago Tribune, “The savings rate has been negative for an entire year only twice before, in 1932 and 1933.” So not only is our government living beyond its means, now “we the people” are doing so too!

Meanwhile China continues to eat our lunch on the economic front. Recently the Canadian Broadcasting Corporation reported, “China's economy grew by a red-hot 9.9 per cent in 2005, the Chinese government announced Wednesday – enough to overtake Britain as the fourth biggest economy in the world, after the U.S., Japan, and Germany.” However, as the CBC noted, “Exports surged 28.4 per cent to $878 billion and helped to lead China to record a trade surplus of almost $118 billion.” To make matters worse, Mr. Blustein points out in today’s Post article, “the mounting U.S. deficit with China, which rose 24.5 percent to $201.6 billion last year, the biggest gap the United States has ever posted with a single country.”

If only that were all we had to worry about – Peter S. Goodman of The Washington Post had warned last month that China’s “foreign currency reserves swelled by more than one-third last year to a record $819 billion”. Mr. Goodman also notes that “Traditionally, China has sunk three-fourths of its reserves into U.S.-dollar-denominated investments, such as U.S. Treasury bills.” Is there any doubt as to how easy it has become for China to adversely impact US monetary policy? Never mind, how increasingly difficult it has become for the US to convince China to allow its currency to float!

Finally, we have all heard of the saying, “Like father, like son”. In the geopolitical context, this can be interpreted to mean, “Like nation, like people”. The day after Mr. Goodman’s story appeared in the Post, the Chinese Embassy in the US put out a news release stating “The country had a record 14 trillion yuan (US$1.7 trillion) in personal savings by the end of 2005”.

Candidate Bush had campaigned in 2000 that he would treat China as a “strategic competitor” and not as a “strategic partner” – which is the way he claimed then that President Clinton had dealt with China throughout his presidency. Ironically, President Bush’s own economic policy has now pretty much tied up his hands and severely limited his options in effecting any dramatic change in the overall nature of our relationship with China. It’s the other side of US economic policy that the Bush Administration never talks about!