Monday, January 24, 2005

How irresponsible tax cuts are treasonous

In Bruce Sterling's science fiction novel Distraction, the Chinese government crippled the American economy by offering every American software product free for download from their satellite network. While an intriguing idea, it would actually take a much less illegal step by the Chinese government to cripple the American economy.

In 2003, 83% of the American current account deficit was funded by central banks. While this does have some benefits—institutional investors are less susceptible to a panic than individual investors—there are also some unique risks. Not all central banks are as independent from government interference as the Federal Reserve is. I don't actually know the status of the independence of the Chinese central bank, but I'd be willing to bet my lifetime earnings it isn't entirely independent. Given that the Chinese still have a command economy, the central bank is just another tool of communist economic planners.

And the Chinese central bank is the leading institutional funder of the American current account deficit. In 2004, China funded a third of the current account deficit, increasing their dollar reserves by $207 billion. Now their primary motivation for this dollar-buying is the maintenance of the peg of their currency, ensuring that the renminbi remains cheap compared to the dollar. This also ensures that the dollar maintains its value—if China stopped buying dollars to, say, shift it's currency peg to a mixed peg or to a Euro peg, then the value of the dollar would drop precipitously since demand for the dollar would drop staggeringly. That would crush the buying power of the average American, impoverishing the country. Thus the Chinese have an incredibly powerful economic weapon.

Of course, the question of whether or not they would ever use it is important. I believe it to be a credible threat—one becoming ever more credible as the Chinese deepen trade relationships with Latin America, Europe and South Asia. In 2003, 22.5% of Chinese exports went to the United States. A huge oversimplification of the situation would be to say, "Well if the United States set up an embargo against China in retaliation, it would only kill about 23% of Chinese export revenue, and that's less than 33% of the American current account deficit that China funds." A detailed would analysis would have to be made about the cost-benefit balance for the Chinese in ending their support of the American dollar. But if tensions mounted between the Chinese and American governments, I believe the threat to be credible because the Chinese have other trading partners, because the Chinese are not a democracy and could weather the internal dissent such a move might spark, because the Chinese could do it subtly and slowly and insulate themselves from some of the negative consequences.

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So how do tax cuts fit into this equation? The current account deficit can be written as:

CA = Sp — I — (G — T)

where Sp is private savings, I is investment, G is government spending, and T is government tax revenue. If the government deficit increases (as G — T increases, or as the gap between government spending and tax revenue widens), a nearly identical increase in the current account deficit occurs. Of course, if the government deficit increases but it's offset by increases in private savings and domestic investment, the current account deficit doesn't move.

American private savings have been piteously low for years, and many American consumers suffer dissavings—debt. This has not changed since President Bush instituted his huge tax cuts for the wealthy. What has changed is the government deficit. Our current account deficit is growing at record pace, requiring more and more funding by foreign investors—foreign central banks—and requiring the Chinese to buy more and more dollars to maintain their currency peg.

Hiding in plain sight is treason. Bush's rabid desire to put more money in the pockets of the wealthy has increased this country's vulnerability to a currency shock orchestrated by our chief rival.

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I believe progressives must make "betrayal" the central theme of their fight against the conservative establishment. These are wealthy men who have betrayed our country by their fiscal irresponsibility. They have betrayed our people by threatening Social Security, whose preservation is mandated by Congress and the Constitution, in order to enrich the wealthy. They have betrayed our fundamental values by tarnishing the American flag with torture, imperialism, and brutality.

Some of this language will be too hyperbolic for Democratic Congressmen. But it ought to be made a central part of our argument because it's powerful and true.


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