China's future, America's debt

Just curious... when the credit crunch was the new incoming tidal wave, and everyone was talking about the impact, and how it could me depression or recession or whatever...

You doubted the American optimism and rugged individualism. YOu wavered, wanting social gaurantees and safety net becuase you were afraid.

Well, you got that big government nanny and now it looks like it's apocalypse before we get to unseat it and return our nation to sane fiscal and financial policies.

How does endorsing and bucking up some good old fashioned American self reliance and ruggedness sound now? We've see the way of wimps. Now it's obvious where that leads.

Maybe we need a tough, common sense, gun totin' common everyday person with that common every day sense that you so derided and ridiculed. Look what all that "experience" and "education" got us.

Them elites is dumb as stumps, Rod.

Let's pray for takeover of the Palin types. That's the only salvation left.

Just for the record, I meant 1787-89 as the dates for the founding of the U.S. government. The Constitution was drafted in '87, and the government actually opened for business in the spring of '89. Among its first orders of business were redeeming old debt and establishing credit so it could continue to borrow.

Re: The first thought I had after reading this piece was: we will never, ever get our debt situation settled.

We were on the right road in the 90s, until Bush The Lesser decided the champagne and cavier set needed another tax cut.

Re: And China invades the U.S. Maybe sounds strange to everyone else, but I can imagine a scenario like that.

I can't. Because like a good hanging, a phalanx of nuclear tipped missiles concentrates the mind wonderfully. Besides which, China's One's child policy has put it on the road to the sort of demographic reality that precludes throwing away lots of soldiers' lives.

Re: Well, the question is based on a simple fallacy, I think -- the idea that austerity is the only way to pay down debt. I'm surprised that people keep thinking that, since even in their own lives they don't assume this

In one's personal life the alternative to cutting spending is to increase one's income. The US government needs to consider that once this recession is over.

Rod: "Seriously, can you imagine the US paying down its debt? If so, give me the politically and culturally plausible scenario."

Blood. Lots and lots of blood.

Just Google up a graph of US debt. After the end of WWII, debt was over 100% of GDP. We were able to decrease it. We did that during an era of higher taxes and regulation. It all changed in 1980. Since then debt has gone up, except for that period during the late 90's. There is a pattern here if you can spot it.

Getting out of this debt is very plausible. We have done it before. We give up ideology and do what works. We remember that deficits do matter, contra Cheney. Charles is correct that we have usually grown the economy as our remedy, with a few brief years where we actually reduced the actual debt amount. However, we have more competition than in the past, and that competition has embraced much of our market philosophy. We will need to continue investing in education, all types not just college, to compete. We need to make simpler but cruder regulations that will keep our financial system from crashing every 20 years or so. Maybe electing people who will actually enforce those regulations might help also.

As I do not see us having so much bubble growth, we need to reduce entitlement spending and increase revenue. We also need to cut down health care costs. If we can reduce health care costs to a per cent of GDP equivalent to say that of France or Germany, countries with health care about the same as ours, but universal, that alone would solve much of the debt. Social Security should become means tested at some relatively high level. Make capital gains taxes the same as income tax rates. Do away with corporate taxes entirely to eliminate the non productive costs of tax avoidance and attract new business. (Also doing away with some of the business driven political corruption). This is all doable, it just takes the political will.

Steve

We were on the right road in the 90s, until Bush The Lesser decided the champagne and cavier set needed another tax cut.

Enough of this "Bush-tax-cuts-are-the-problem" argument already. It has been shown, time and time again, that President Bush's tax cuts did not harm the economy or cause the federal government to have insufficient revenue. Federal government revenues rose by 44% from 2003 to 2007. The problem during the Bush administration was profligate spending, with percentage increases each and every year that usually doubled the rate of inflation. The last fiscal year the US government actually decreased spending was 1965.

And now Barack has shown up to the fire carrying a container of gasoline.

The prescriptions to fix the debt problem are pills too big and sharp for the majority of Americans to swallow. Fixing the budget involves huge entitlement spending cuts. It would require the federal government to downsize. It would mean delaying qualification for Social Security payments to senior citizens, perhaps by raising the starting age to 70. It would mean military spending cuts. It would mean huge cuts to Medicare - and don't even think about government-paid universal care. It would mean the end of the federal Department of Education.

It would, in short, require agreement from too many Americans. Until the critical mass of Americans stops viewing government as a bottomless well of benefits, goodies, programs and pork, debt reduction is not going to happen.

you can only pay the national debt from the national income. Since that is negative, I don't see the debt being paid. Rather it will be monetized, in one way or the other.

Connie Connie in (socialist) Wisconsin

No newsletter. Let me give you a couple things to get you started on seeing the connection. How many BILLIONS of dollars does our government welfare system spend, at all levels, trying to put a band aid on the consequences of sexual behavior that violates the limits God has placed on it? Because sexual behavior greatly affects the health of the family, and the health of the family unit carries over into critical areas of the stability of a society, especially economics, sexual sin is economically costly. It doesn't take a rocket scientist to figure out that the single mother home is a terrible drag on the economic health of a society, especially in a welfare state like America. And how about venereal disease? How many billions of dollars are spent in many different ways on the burdens something like AIDS puts on society? I live near Cleveland where millions of dollars is being pumped into an educational system that has become a war zone because the sexual behavior of the people in Cleveland's inner city has destroyed families and produced children that are uneducatable and who ruin things for the kids who are. How much of the funding for education problems today can be traced to the sexual behavior of the people who created the children? Plenty!! I think by now you can see where I'm coming from on my America is literally screwing itself to death comment. God is not mocked. There are more than just spiritual consequences for violating His moral law. It's time we realistically recognized where these costs exist.

Obviously, someone who lives in China and speaks Chinese is going to know more about the Chinese than someone who does not. No one is more clueless than an "Asian" pundit who has not lived in Asia for an extended period of time. I have lived in both Japan and China. When I returned to the U.S. I still heard people say many stupid things about the Japanese or Chinese, simply because they have not lived there. All knowledge is empirical and is learned either by direct experience or by the experiences of others. Non-empirical knowledge is an oxymoron.

In this sense, Fallows understand what is going on, Ferguson is clueless.

Having said that, our debt, both personal and governmental, has given the Chinese as long ride. A ride that they realize (or should realize) is coming to an end. The Chinese are slowing adjusting their economy in recognition of this reality. They have maintained a cheap yuan policy in order to keep their exports to the U.S. price competitive. Now that the U.S. market has cratered, they no longer have as much incentive to keep the Yuan cheap and will, therefor, allow it to slowly rise against the dollar, just like the Japanese did during the 80's. This will push Chinese industry into moving up the technology/value added ladder which will help drive technological innovation in China. That China's working population is set to peak by '12 will result in wage inflation which, in turn, provides even more incentive for China to climb the technology/value added ladder. The cheap manufacturing will slowly migrate to India, S.E. Asia, or Latin America; which ever region is fit to ascend the industrialization ladder.

The Chinese will never invade the U.S. They do not have the military to do this and most certainly will not have the amphibious capability to do this. They do not have to. They will come to regard the U.S. much like Europe.

Manxman, you could pay every last penny of the entire medical expenses (including doctor's visits, prescription drugs [that's 3/4 of the costs right there, btw], lab work, hospitalization...everything) for each and every person with HIV in this country and it comes nowhere near to the annual costs of the war in Iraq. The annual cost of providing high quality treatment for all of those people would be less than 10% of the money we're spending each and every year over there.

And of course, many people with HIV don't get high quality treatment. A sizable minority get no treatment at all, either through lack of access to medical care or being unaware of having an HIV infection. And plenty more get treatment without government help (the government's expenses in my case, for instance, are limited to the taxes I save on my FSA—about $150 this year for all of my medical expenses including those not related to HIV).

In short, Manxman, your numbers are bunk.

***

kurt9, I largely agree with your analysis and defer to your expertise. But I do wonder if it's reasonable to say this:

They have maintained a cheap yuan policy in order to keep their exports to the U.S. price competitive. Now that the U.S. market has cratered, they no longer have as much incentive to keep the Yuan cheap and will, therefor, allow it to slowly rise against the dollar, just like the Japanese did during the 80's.

Although I'm sure exports from China to the US have declined over the past year, isn't it true that exports to the US are still a huge part of China's economy? And indeed, while the growth in Chinese exports to the US has declined, exports to Europe have declined even more. Source.

I'm sure that China would love to diversify its trading relationships so that it is less dependent on the US, but it would appear that we are still a critical element in China's economy.

Geoff G.,

It is true that exports to the U.S. make up a large part of China's economy. However, this part declines a little bit each year as China's domestic economy grows. The indebtedness of the U.S. government and economy in general increases in incentive for the Chinese to gradually wean themselves off of U.S. domestic consumption. Timing is the issue here. We're not talking about the next 5 years, more like the next 20 years. Also, since China has lots of foreign reserves and high savings, they can invest in all kinds of technological innovation, everything from nanotechnology to polywell fusion.

The debt will be dealt with in a few ways:

1. Inflation (which will be moderate if fuel commodity prices are not subjected to the levels of speculation they were in 2007-08; that's no guarantee, but OPEC currently is divided over exploitative vs sustainable price management, and killing the geese that lay the eggs of gold is in the long term not sustainable for OPEC).

2.Taxes: During Obama's first term, the Bush tax cuts will expire (though the estate tax will likely simply be frozen in place). Coming next: A VAT, not in Obama's first term, but a second term, but it would only be sellable when conjoined with income tax reform, a la 1986: a reconfiguration of marginal tax rates (will work in two directions - to have more people nominally paying income taxes with the elimination of more loopholes, chief of which would be a long term phase out of the mortgage interest deduction (perhaps over 20 years - the phaseout of consumer loan interest deductions in 1986 occurred over 4 years).

3. Benefits: Some partial means testing of Medicare benefits and possibly even SS benefits, and removal of the cap on FICA taxes.

Watch it, Arrrghhh. Your call to end SS, Medicare, Medicaid and all the pork the democrats just voted in will make the liberals' heads here explode.