IndyStar.com Opinion

April 10, 2006

lee hamilton
Deficit keeps America living on borrowed time


Even among those who are aware of it, the current account deficit ranks low on the list of America's top concerns. Yet our growing debt to the rest of the world is a serious problem, and threatens the long-term prosperity of the U.S. economy and the ordinary American.
America is saving too little and spending too much, just as we produce far less than we consume. The U.S. current account deficit -- the difference between what we export and what we import -- stands at $805 billion, well over 6 percent of our gross domestic product (GDP). In 2005, our trade deficit, which accounts for most of our current account deficit, rose to $723 billion, nearly double what it was in 2001, and a 19 percent increase from 2004. To use one bilateral example, the Chinese now export nearly six times as much to the U.S. as we export to China.

These imbalances are worrisome. To begin with, the U.S. economy could become less competitive. Already, good jobs that support a high standard of living have been lost to other countries in sectors ranging from manufacturing to high-technology services, and the trade deficit has pushed down wages across the manufacturing sector. Meanwhile, individual Americans and the U.S. government are borrowing more and more money to purchase goods and services that keep our country running and economy growing.

Another result is a dangerous dependence on foreign investors, principally from China, Japan and oil-rich Persian Gulf states. Together, foreign investors own more than half of U.S. government bonds. These foreign investors buy U.S. dollars (and bonds) to keep the value of their own currencies down and their exports to U.S. markets up. As a result, our government can run an annual budget deficit of nearly $400 billion, while enabling low interest rates and home mortgage costs for Americans. Warren Buffet, the influential American investor, recently summed up these concerns by warning that the U.S. is moving away from an "ownership society" and is instead becoming a "sharecropper's society."

This shift was an overlooked aspect of the recent controversy over a Dubai company receiving contracts to operate in American ports, just as it was a subplot to a 2005 controversy over whether a Chinese oil company would purchase Unocal, an American oil company. If we spend more than we take in, we outsource the means of ownership in the American economy. If we don't close the imbalances in our accounts, there will be more instances of Arab, Chinese or other foreign entities purchasing assets in the U.S., and more arguments about whether we should insist that certain assets be American-owned because of national security.

Just as an individual cannot spend indefinitely on credit, the U.S. cannot sustain its deficits without eventually facing consequences. Without a change of course, our dependence on foreign capital will continue to rise, as will payments on the national debt. Foreign investors could lose confidence in the U.S. The value of the dollar could plunge. Interest rates could soar. A debilitating recession could take hold here and around much of the world.

The U.S. economy has many strengths: robust markets, an openness to trade and immigration, an ability to adapt to change, a solid record of growth and stability, deep capital markets, and global confidence in U.S. bonds. Foreign countries have incentives to continue funding American deficits to support their own prosperity and global stability. For these and other reasons, many dismiss concerns about foreign indebtedness as inconsequential.

Yet we have been spared the gravest consequences of debt thus far only because foreigners have been willing to take our IOU's; that means the fate of our own economy is out of our own hands at a time when we face rising competitors like China and India, and volatility in international energy markets. We must significantly reduce our budget deficits, so government revenues are more in line with spending. We need to save more and spend less. And we should bolster American competitiveness through investments in education, science and technology and the development of American productivity, particularly in 21st-century industries.

No sensible American family would risk their finances on persistent and increasing borrowing. As a nation, we must apply that common sense to our balance of accounts, and make tough and bold choices to remove a dangerous vulnerability.

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Hamilton is the director of the Woodrow Wilson International Center for Scholars in Washington, D.C., and director of the Center on Congress at Indiana University. He served as a U.S. representative from Indiana from 1965 to 1999.