ANALYSIS/OPINION:
You know the world has gone haywire when two of the most sensible statements made lately about America’s economic crisis have come from the Chinese government and Standard & Poor’s.
Granted, neither has earned much credibility. China helped “bubbleize” and destabilize the global economy; its brazenly mercantilist policies have stolen healthy growth and employment from the United States and most of the rest of the world and replaced it with artificially cheap credit and just as artificially cheap products. The ratings agency S&P, as remaining economic optimists now note so gleefully, long insisted that working-class families buying McMansions with free-lunch mortgages were foolproof credit risks. One reason, of course, was the massive conflict of interest created by its business model of evaluating its main clients’ assets.
All the same, both are sending American leaders, in particular, messages they urgently need to hear. The gist is that the United States has made no progress in meeting its overriding economic challenge since at least the last decade’s bubble inflated — fostering adequate levels of growth (and therefore hiring) without racking up ever more, and thus ever more dangerous, debt.
As is so often the case, the Chinese minced no words. “The only way the Americans have come up with to improve economic growth has been to take on new loans to repay the old ones,” observed a commentary in the official Xinhua News Agency. Added the editorial, “The United States has long been maintaining economic growth and excessive consumption by means of debt financing, hence masses of economic bubbles, which eventually triggered the financial crisis.”
That latter statement is especially valuable for spotlighting truths long ignored by America’s economic establishment, perhaps willfully. First, given the U.S. economy’s reliance on massive, borrowed government life support, the word “recovery” can’t legitimately describe U.S. economic performance since the Great Recession began. Second, not only was the previous decade’s expansion yet another government-inflated bubble. The stock-market- and tech-fueled growth of the 1990s was largely fake as well.
Explaining its historic decision to cut America’s credit rating, S&P made the growth-debt point by inference. The downgrade’s purely economic rationale was also partly clouded by the firm’s audacious swipe at “the effectiveness, stability and predictability of American policymaking and political institutions.” But the continuing absence of a strategy for healthy growth unmistakably was S&P’s central concern.
Despite an embarrassing budget math mistake that the Obama administration cynically but understandably jumped on, S&P’s overall outlook isn’t easily challenged. In its best-case scenario, real U.S. annual growth averages 3 percent, and net general government debt rises from 74 percent of gross domestic product at the end of this year to 78 percent by 2021. Its worst-case scenario, assuming real average annual growth of 2.5 percent, expects the debt to top 100 percent of the economy by 2012.
The kicker is that growth nowadays is barely half that worst-case rate — even after the massive Washington-generated stimulus that no thinking person expects to resume on anywhere near its previous scale. Unless the economy, for some mysterious reason, starts exhibiting much more vigor, the resulting lower taxable activity could balloon existing debt even faster.
Not that Beijing or S&P should be considered a policy oracle. China’s recommendation that Washington balance budgets by slashing “gigantic military expenditure” is transparently self-serving, while its attacks on America’s “bloated social welfare costs” ignore how heavily its export-obsessed economy depends on strong U.S. consumption. As S&P made clear, it’s a business, not a think tank, and it “takes no position” on repairing America’s tattered public finances.
But at least the Chinese understand that the foundations of national material power are saving and producing, not borrowing and spending. And S&P has displayed the ability to learn. On both counts, that’s more than can be said for Washington these days.
• Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website, www.American EconomicAlert.org.
Please read our comment policy before commenting.