That Used to Be Us_ How America Fell Behind in thted and How We Can Come Back - Friedman, Thomas L. & Mandelbaum, Michael [93]
As Stockman explained, this “new cadre of ideological tax-cutters” undermined the Republican Party’s commitment to fiscal prudence and conservatism.
Republicans gone wild on tax cuts (which they justified by invoking an imaginary version of Reagan), combined with Democrats determined not to cut spending during the first decade of the twenty-first century, along with two wars and the costs of coping with the meltdown of the financial system and the Great Recession: all this created today’s huge deficits and massive total debt.
But what happened to the discipline of Milton Friedman’s free-currency markets? Why didn’t these lead to a sharp devaluation of the dollar and force the White House and Congress to take the castor oil of tax increases and spending cuts? The reason, argued Stockman, was that a totally unanticipated development got in the way and made us think we were flying: We were able, too easily, to finance our growing budget deficits by borrowing from other countries. The biggest pusher for our debt habit turned out to be China, which proved willing to lend us money on a previously unimaginable scale through the purchase of U.S. Treasury bonds. The Chinese government was eager to do this because of its economic strategy of export-led development. To sustain the country’s growth, which was necessary for the Communist Party to keep its grip on power in the country, China had to sustain and expand its exports in order to create jobs for more and more Chinese. That required keeping those exports affordable for the chief consumer of Chinese-made products, the United States. By buying American dollars, China kept the dollar strong in relation to the yuan, making it possible for American consumers to continue to buy Chinese products in ever larger quantities.
“What Milton Friedman had failed to anticipate,” said Stockman, “was that there would never be a global free market in currencies—that countries such as Japan and China would manipulate their currencies to support their export growth models, and their export growth models turned out to support our consumption growth model.” The result was a system that allowed the United States to overborrow from China and others and to overconsume, and this in turn allowed China and its neighbors to develop much more rapidly than they would have in the pre-1970 world by generating growth through massive exports, high savings, and low consumption.
“China and America entered into the perfect symbiotic relationship,” said Stockman. “China needed somewhere safe to park its massive currency purchases and it put [those purchases] into our sovereign debt. We suddenly had someone who would buy our paper at a scale we never had before in history … We were like two drunks leaning on each other without a lamppost.” America got to live beyond its means as a nation for twenty years and build up a combined shortfall in our trade in goods, services, and income of more than $7 trillion. Stockman describes this as “borrowed prosperity on an epic scale.”
So when Vice President Cheney declared that “Reagan proved deficits don’t matter,” he was speaking economic “nonsense,” said Stockman, “but he was making an empirically accurate observation. It was morally irresponsible, but empirically accurate. Thanks to China, what everyone feared about deficits was no longer true—you could have ‘deficits without tears,’ as a famous French economist said.”
Of course, that is true only as long as China and others are ready to keep lending, which now seems to be coming into question—and not just for Chinese lenders but also for American ones. If, or rather when, that funding slows or stops, the party will end. And that stop could come very suddenly. At that point the United States will have three unhappy options: raise interest rates sharply to attract capital, thereby triggering an economic downturn; print money to cover the deficit, thereby triggering inflation;