Thursday, March 09, 2006

What We Learn From the Ports Fiasco

We still do not know if there really is a security risk from the Dubai Ports World fiasco.  We do know that there is a big political showdown brewing, and it reflects badly on the Bush Administration.  Brad DeLong points us to another post (on Nouriel Roubini's Blog) that explains one aspect of this that seems to be overlooked by the media.  That is, regardless of whether there is a security issue, the port fiasco illustrates the fact that foreign companies are buying America.  Not content to settle for the relatively low returns on Treasury bonds, foreign governments and companies are increasingly turning to equity investments in America.  This is an inevitable consequence of the USA running a deficit.  Mathematically, there is no way around that.  As DeLong puts it:
"Economic growth produces about $1.3 trillion of new net wealth in America every year, and at a current account deficit of $1 trillion only $300 billion of that is an addition to the wealth of Americans--the $1 trillion that matches the current-account deficit is an addition to the wealth of foreigners."
At first, that seems to be inexplicable.  Why would our government pursue policies that lead to greater foreign ownership of American assets?  The usual explanation is that certain fiscal conservatives -- the "Norquistas" -- want to "starve the beast."  That is, by running deficits, they force cutting of social programs.  

Now, personally, I think that is a sociopathic thing to do, but I acknowledge the fact that there are smart people who think that it is a good idea to cut spending on social programs.   Not being an economist, perhaps there is something about this that I do not understand.  But in trying to figure it out, I came across this at the Economic Policy Institute:

I had to shrink the graphic a bit to get it to fit in my template, which causes distortion.  But of course everyone will click on the graphic to go to the full article, and see the graphic in its original, undistorted glory.  The graph shows the consequences of the current budget projections.  The flat line for social spending reflects an actual, gradual decrease, due to the effects of inflation and increasing population.  The increase in debt service payments indicates a real increase.  Soon we will be paying more to foreign lenders and investors than we will be paying for our own social programs.

So that is how you starve the beast: you feed the dragon instead!  How does that make sense?  

I have no particular quarrel with China, or any of the other foreign investors.  I mean, I wish they would hurry up and improve their human rights policies; but frankly, I am more concerned about human rights here in the USA.  What concerns me is the shift in relative power.  The trends illustrated in the graph can only make our country weaker, and other countries stronger.  That makes no sense to me, and I am practically a pacifist!  How does it makes sense to the hawks?  Is it really so important to starve the beast, that it makes it a good idea to weaken ourselves in relation to the rest of the world?  Forget about the ports.  We are selling our entire country.

Am I missing something here, or are the people who made this policy just plain idiots?