Deficit spending makes this country less secure. With it, we are more vulnerable to economic attack from other countries. The deficit spending and Bush tax cuts are creating an untenable economic position for the United States.
Deficit spending occurs when governmental expenditures exceed revenues. The tax cuts enacted in 2001 (the ones the Republicans would like to make permanent before they expire in 2010) meant that the government had less money to work with than under the last eight presidents before G.W. Bush. From Lyndon Johnson to Ronald Reagan, tax revenue remained fairly consistent.
Under Bill Clinton's administration, revenue rose to a 20.8% share of GDP. This allowed Congress to enact "pay as you go" rules to government expenditures and to begin paying down the debt. Not only that, there were projected surpluses of $5.6 trillion over ten years by 2000. In that time, the U.S. could have paid off $2 trillion of its $3.6 trillion accumulated debt (treasury bills that would mature during this time).
To be fair, the original intent of the Bush tax cuts was to give back only half of the "unusable" $3.6 trillion in surplus (a foolish idea, but never mind) on the ideological grounds that it was the "people's money." Now, I will give the benefit of the doubt to the Bush Administration and agree, for the sake of argument, that 9/11 was unforeseeable. However, in 2002, deficit spending rose to $158 billion and then $378 billion after that in 2003. The foreseen surplus (while half of what it would have been originally had deficit spending not occurred) evaporated.
At the same time, Congress voted to add $13 trillion in long-term federal obligations (via Medicare prescription drug "benefits" and so on).
Had the Bush Administration yielded to pragmatics instead of ideology and rescinded the tax cuts, we would not be in a vulnerable state today.
But, Jim, aside from mounting debt and deficit spending, where's the danger? I hear you ask. Well, I'm glad you did. I'll show you.
Whenever Congress cuts taxes, raises certain benefits (such as Medicare), or encourages more taxpayer borrowing, U.S. corporations send manufacturing jobs overseas, to places like China. Ladies and gentlemen, I give you the "jobless recovery" of the last few years: profits up (and I mean WAY up) but jobs stagnant. China is a very, very important actor in the economic drama here. We know that China has military and political ambitions to be the dominant player in Asia and possibly the specific. Astute political scientists (and even myself in my undergrad International Relations studies) predict that China will be the key rival to the U.S. in the 21st century.
Economically, this trade relationship with China is important because, for a rival, they are in a unique position to screw our economy royally. You see, China wants to keep their currency, the yuan, low to make its exports more attractive and its market attractive for manufacturing employers. To do this, they send the U.S. dollars they earn from U.S. corporations back to this country in the form of loans so the government can cover its debt (due to deficits). This keeps their currency value low, their items cheap, and their economy expanding.
If the Bush Administration had the cajones to tax Americans to cover the deficits and jobs would stay in America. Would this to happen, China would see its currency value rise relative to the dollar and its economic growth would slow. The current relationship keeps China growing and its exports cheap and America gets to keep spending without taxing or saving (the U.S. populations' savings rate is between one and two percent, the lowest of any nation, ever, in the modern era).
Now, if the U.S. government were an indiviudal, a family, or a corporation, they would be forced to declare bankruptcy. For a country ,this means its currency falls in value. For the U.S., this means that for every 100 dollars spent, only $95 are generated in-country. The other $5 comes from abroad, which is a pretty severe trade deficit. Normally this would mean that China's yuan would rise in value against the dollar (as have European currencies and oil values for the Middle East and South America). China, in covering the U.S. debt with its dollars, keeps the yuan low (Japan and South Korea behave similarly, but not to the same extent). It used to be that foreign companies performed this activity, buying up American real estate and corporate holdings. Now, it is foreign governments behaving in this fashion. This is baaaad. Essentially, the U.S. is using foreign, state-controlled banks for loans.
As the Financial Times said in 2005, this is "beginning to resemble a pyramid scheme." This is a fundamentally unstable system. When China reaches a point where its economy becomes internally stable and viable (they are on a controlled plan to move from Communism to totalitarian capitalism), they will no longer need their main military and political rival: the United States. If one Asian country (say China) were to sell off its dollar and securities holdings, all the others would do so: essentially, instead of a run on a bank, it's a run on a whole country, and just as destabilizing.
We would not be in this position were it not for deficit spending. The government would have enough revenue to cover its needs (even factoring in unplanned spending such as for Iraq, Afghanistan, and homeland security) if it rescinded the tax cuts. The Bush Administration's reckless spending and ideologically grounded but economically unsound "supply side" economics put our country at risk to a major political rival.
Why does George W. Bush hate America?
-Jim
Cross-posted at Los Punditos.