September 28, 1985

Big U.S. Deficits Can Help The Economy

There are deficits, and then there are deficits.

Some are good, some bad.

The problem is to recognize the difference so that we can encourage the one and discourage the other.

The two shortfalls now worrying Americans are the federal budget deficit and the U.S. trade deficit.

First, the budget.

Currently we are incurring a budget deficit of $200 billion a year.  This is bad for the U.S. economy.

In contrast, the Japan federal budget is greater per person than that of the U.S.  This is good for Japanese.

The significant difference between the apparent same situations rests on what the borrowed money is used for.

The U.S. deficit was created mostly by arbitrarily transferring money from the productive sector of the economy (popularly referred to as "wealthy fat-cats") to the non-productive consumer sector (read that "poor and disadvantaged").

This act of confiscation worked fine until recently because there was practically no debt 50 years ago when the process began.  Today, the U.S. engine runs on fumes left over from that tank full of credit - and the brakes are locked on a $2 trillion national debt.

For the last half century, we have literally eaten up our national assets with food stamps, rent supplements, unemployment benefits, aid to dependent children, legal services for the poor and farm subsidies.

A case can be made for compassion, but the fact remains that we have little to show for it except a permanent class of welfare recipients.

The Japanese deficit, on the other hand, results from government investment in factories, railroads, industrial research and development and shipping facilities.  In other words, capital investment for production of low-cost high-quality goods.

In America we have come to believe in the hand-out.  In Japan they believe in a hand-up.

Now, the trade deficit.

With much breast beating, the Commerce Department this month announced that the U.S. has become a "net debtor nation" for the first time in 71 years.  Doomsayers point out with a shudder that we not only are in hock to the rest of the world but are the largest debtor as well.

With $100 billion of promissory notes in the hands of foreign investors, America edges out the basket case of Brazil and Mexico.

This negative situation supposedly was triggered by a trade deficit expected to hit $140 billion this year.

There are a number of things about the U.S. economy to worry about, but the "trade" deficit is not one of them.

The Commerce Department reports monthly on how much goods and services we sell and buy abroad.  For some strange reason, a large part of our trade is not counted as such.  It consists of the sale of corporate stocks and bonds to customers abroad.

This real, but ignored, factor of trade deserves more attention.  It affects the value of the American dollar, the world trading currency.

Money (dollars) is nothing more than a convenient substitute for goods and services.  It is simply trade in transit and therefore, as real as  the goods and services themselves.

When we measure our total trade imports - goods, services and securities - we are in near perfect balance with our trade exports.

A zero trade balance neither helps nor hurts.  The U.S. ran a trade deficit for nearly all of its first 100 fastest-growing years.  Conversely, we generated trade surpluses under the super-protectionist Smoot-Hawley Tariff bill which launched the Great Depression of the 1930s.

A growing economy needs much of the world's supply of resources.  Capital is one of these resources.  If capital is invested in private enterprises, the economy continues to grow.

Unfortunately much incoming capital in recent years has gone to buy U.S. Treasury bonds which are government spends on consumer handouts.

There's the rub.

Capital consumed is capital lost.  Capital that is put to work lives to work again.

The high value that foreigners place on the U.S. dollar - for real goods, services, securities and their money substitutes - keeps our total trade in balance.  However, this has unfavorable impacts elsewhere in our economy.

For one thing, it squeezes out enterprises which are not competitive in the world market.  The loss of jobs in labor-intensive high-cost industries is intensely painful.  A Pennsylvania steelworker is not consoled by knowledge that his job has been replaced by two others in California's Silicon Valley.

Foreign investment in America - now about 15 percent of our deficit - channels its earnings to another country.  Also,  it reduces proportionately the decision-making authority of U.S. managers.  He who pays the piper calls the tune.

The transfer of wealth and economic authority to foreigners will continue as long as the U.S. government borrows heavily and thereby runs up interest rates, AND as long as the U.S. gross national product stagnates.

Deficits are good or bad only in how they came about and in how they relate to productivity.

There is a real cause for alarm in the present deficits because they increase at rocket speed while productivity crawls at a snail's pace.

What this country needs is a good capital-generated budget deficit; and a good production-generated trade deficit.

Author: Lindsey Williams