Econ 101 revisited, or, an elementary look at Uncle Sam's credit card
DO your eyes glaze over when you see the words ``federal budget deficit''? Do you sometimes feel that politicians, journalists, businessmen, labor leaders -- and most of all, economists -- are speaking in a foreign tongue?Skip to next paragraph
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Thomas Carlyle was perhaps being too kind when he called economics the ``dismal science.'' But take heart, you are in good company -- company that includes, for instance, a prominent former actor who lives in the District of Columbia.
What we all need is an Econ 101 refresher.
Let's start simply: Uncle Sam's bank statement is in the red. His income continually falls short of his outgo. Keep this in mind. From this imbalance stem many other current economic problems.
Sam was already in the red when Ronald Reagan came to office in 1980. But then the government embarked on an record peacetime military buildup -- and, at the same time, it cut taxes, meaning it had less income to pay for expensive weapons and for the many social programs the government also funds.
The gap between spending and revenue is called the federal budget deficit. It was running at around $200 billion in the fiscal year that ended Sept. 30; within days we will know just what the exact fiscal-year-end figure was.
Budget deficits year after year add to the national debt. The national debt is now nearing $2 trillion. Interest payments alone on the debt amounted to $200 billion in fiscal 1985.
So, as the saying goes, we're borrowing from Peter (credit markets) to pay Paul (government-bond holders).
Think of a Visa card: When it is new you can go out and buy meals, clothes, vacations in Canc'un, and feel pretty swell.
But inevitably, your debt mounts.
Then one day you notice that you owe Visa a couple of thousand dollars and $80 or $100 a month comes right off the top of your paycheck to service that debt. At some point, you'll probably cut the credit card in half and try to work your way out of debt.
The federal government has not yet reached that point. In fact, each year as borrowing threatens to exceed the statutory debt limit, the government wrings its hands and raises the limit.
It now stands at $1.824 trillion, and the White House wants Congress to boost it to $2.078 trillion. As it happens, the government was scheduled to run out of money on this very day if the debt limit was not raised.
``Blessed are the young,'' said Herbert Hoover, ``for they shall inherit the national debt.''
Ah, but that is years away. There are more immediate concerns.
To bridge the annual federal budget deficit, the government has to borrow big bucks. It does this by selling savings bonds and Treasury bills and notes. And the government, being the premier credit risk on the planet, always gets its money.
Heavy federal borrowing, however, sops up the pool of credit available in the US and sucks in money from abroad. Less credit means interest rates rise. Also driving up interest rates has been the underlying fiscal strategy of the 1980s: Battle inflation by tightening the US money supply.
Those relatively high interest rates -- plus good corporate earnings and a sound investment climate in the United States -- have attracted money from overseas. The rush to purchase dollars to acquire US assets has led to the strong dollar.
The strong dollar, in turn, has helped keep inflation down, by making imports cheap and forcing American producers to rein in their prices.
But the strong dollar has also made many US products uncompetitive internationally. This has helped cause a trade deficit, a gap between the amount the US earns from exports and what it spends for imports.
The trade deficit must be financed with money borrowed from abroad, creating external debt.
Today, the US owes more abroad than it is owed, largely because of chronic trade deficits. Hence the US is now considered a debtor nation.
In fact, by next year it will be the biggest debtor nation in the world, owing more even than Mexico and Brazil.
In this climate of tougher international competition and a strong dollar, American industry has been hurt and jobs lost. This has prompted calls for trade protection.
Proposals for tariffs and other protectionist measures are perking through Congress. A toughly worded textile-industry bill, which is heading for a vote in the Senate possibly as early as this week, is evidence of the seriousness of protectionism.
Protectionism is putting pressure on the White House.
And that brings us up to the recent move by the US, Japan, Britain, France, and Germany to try to improve the American trade balance by bringing about a weaker dollar in relation to other currencies.
This, in turn, the Group of Five hopes, would trim the US trade deficit and eventually help American industry and save jobs.
But the world is a complex place and financial markets are skittish.
Fear of a weaker dollar will make it more difficult to attract foreign money to finance the budget deficit. There are worries, too, that a weaker dollar could cause inflation to reignite. And if inflation heats up, interest rates could increase also, although it is too early in the process to tell whether this will be the case.
By the way, Uncle Sam's monthly bank statement is still in the red. If you want to know how to get it balanced, you'll have to take Political Science 101.