Here we go again. After throwing checks at consumers in the vain hope of averting a recession and hundreds upon hundreds of billions at Wall Street in the hope of stemming the financial meltdown, there is constant talk about doing more of the same in the hope of promoting a “recovery.” This makes our economic malady sound like a bad cold. In fact, it’s more like learning to walk again after a crippling accident. We need rehabilitation, not recovery. We need a fundamental restructuring of our economy to address the inescapable central fact of our national economic life: we have lived beyond our means for decades, owe the rest of the world a staggering amount of money (every dollar is an IOU), and lack the means to repay our debt with goods and services.
If we do not solve this problem and make ourselves fit for international competition again, the dollar will lose its value and we’ll have to balance our lopsided accounts through a massive inflation. Americans will “enjoy” a lower standard of living. However richly deserved, this sort of economic purgatory won’t be pleasant.
Yet that is the default setting for a debtor society. If we want to avoid it, we need to get back to basics:
• The central problem in our economy is a chronic lack of investment. Not in stocks, bonds, derivatives or any other paper asset. Not in existing assets. In new productive assets.
• With more such investment, we can expand our domestic production of services and especially goods.
• With expanded production, we can increase our exports. This should always be considered in net terms: that is, it is just as valuable to replace imports with domestically produced goods (think energy) as it is to ship surplus goods abroad. The cheerleaders for the mindless process of “competitive liberalization” -- one faulty “free trade” deal after another – value increased exports but seem to regard any effort to reduce imports as an unattainable or even undesirable goal. They are wrong.
• With increased net exports, we would require less borrowing from abroad. Eventually, increased savings in this country can help reverse the flow of capital and make the United States a creditor nation again.
It’s that simple: more investment leads to more production; more production to an improved trade position; and an improved trade position to reduced dependence on trading partners for financing. Let us hope the incoming administration will adopt a coherent, comprehensive national trade strategy – one that melds trade and domestic policy into a powerful force to transform our economy -- that gets back to basics and frees us, our children, and our grandchildren from the crippling burden of debt.