Tuesday, April 05, 2005

How the cycle of deficits has kept the right in power in America.

Excerpts from an interesting article about the American Economy (REGANOMICS)


The reality is that all of the deficit problems, the energy deficit, the trade deficit, the budget deficit, and the wages and wealth deficit, are connected, each one reinforcing the others.

They cannot be solved piecemeal: increasing real wages will mean that Americans will burn more oil, and import more, which means a higher trade deficit. In an environment in which other nations have energy deficits of their own, America cannot export its way to material prosperity, and so it votes for budget deficits to keep the economy propped up. This is the centerpiece of why the Republicans hold power: to undo what they have done requires a broad mandate to attack, not one deficit, but all simultaneously.

Because America runs an energy deficit, and must import it, and we cannot export other goods to others to pay for it, we run a trade deficit. Oil is scarce, not because there is not enough energy in the world, but because it is so much cheaper to extract energy from oil than from other sources, and oil can be used to transport goods and people.

But what happens when America buys energy? What does that trade deficit mean? This is the second step of the vicious circle: while many nations sell some energy, a few nations export energy, but import virtually nothing. A nation like Nigeria, with a large population, does not pile up energy wealth because it has many demands on the flow of money coming in. A nation like Saudi Arabia on the other hand, which has a small population and a much greater concentration of the control of oil, piles up profits year after year. Those profits, rather than going into developing Saudi Arabia, are poured back into the US.

This means the trade deficit creates an investment deficit: the US takes in more investment from the rest of the world than it sends out to the rest of the world.

To prevent investors in these countries from gaining control, the developed world, and particularly the US, is forced down a particular path: it must cut taxes on our wealthy, so that they match the taxes on the wealthy of Saudi Arabia. This cutting of revenues is what drives the US budget deficit: without the reduction in revenues from upper-bracket tax rates being lowered, and without the interest on the National debt, there is no financial crisis. This means that the trade deficit, combined with the nature of a few energy exporting states, creates the budget deficit.

The reason Reaganomics was put in place then, and remained in place even after the Democrats took back both the Congress and, by 1992, the Presidency, is that no single point on the circle could be broken: raise real wages, and the trade deficit gets worse, raise tax rates by enough to rapidly wipe out the deficit, and face the prospect of foreign ownership of the "commanding heights" of the American economy.

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