New York Times Editorial - America's debt addiction

New York Times Editorial - America's debt addiction
Copyright by The New York Times
Published: October 2, 2006


The U.S. Treasury secretary, Henry Paulson Jr., capped off his recent trip to China with a visit last week to Capitol Hill. His aim was to dissuade Senator Charles Schumer, Democrat of New York, and Senator Lindsey Graham, Republican of South Carolina, from moving forward on their bill to impose punitive tariffs on China. The two senators accuse China of manipulating its currency, the yuan, to gain an unfair trade advantage.

Paulson was right to try to parry the senators' protectionist efforts, and he has succeeded, for now. But the issue will persist so long as he fails to satisfactorily address a root cause of mounting protectionist pressures: the United States' growing indebtedness to the rest of the world.

Instead, Paulson recently told reporters that America's deficit in trade and other international transactions - on track this year to reach $800 billion, or nearly 7 percent of the economy - is actually a sign of strength. America has kept the world prosperous, he said, by buying global goods.

Come again? America's borrow- and-spend ways have indeed juiced the global economy. But the resulting indebtedness makes the United States vulnerable to the protectionism Paulson wants to avoid, as well as to broader economic disarray.

Many American businesses - and politicians - see the mounting trade deficit and immediately cry foul. Demands for tariffs are the predictable, if misguided, reaction. Protectionism conveniently shifts the blame for trade-related hardships to foreigners, which is easier than adapting homegrown business practices to make America more competitive.

There are other dangers. If lenders like China began to doubt the strength of the U.S. economy, they could put their money elsewhere, driving up American interest rates, perhaps sharply.

To reduce excessive foreign borrowing, it is imperative to reduce the federal deficit. To that end, Paulson has pledged to help the Bush administration find ways to curb Social Security, Medicare and Medicaid. That would certainly cut the budget, but at the cost of weakening the already frayed safety net - at precisely the time when increasing globalization is creating economic hardship for many Americans. It would be far better to start a deficit reduction effort by calling for a moratorium on further tax cuts and allowing other Bush-era tax cuts to expire as scheduled.

That, along with continuing efforts to adjust exchange rates in China and other countries, would lower the risks the United States is now courting.