The other night I had two old friends over for dinner. They’re twins, and they’re very well known in political and economic circles. You might know them, too. Their last name is Deficit. The older twin’s name is Budget, and his younger sister’s name is Trade. They’re a couple of fire-starters, these two, and over the years they’ve often rattled the feathers of politicians, economists, and various folks in the media. But recently I’ve noticed they’ve been in a funk.
My friends accepted the invitation to dinner on the condition they could respond to the media outlets and politicians who are once again calling for their heads. Their mood was especially dour, since they were recently special guests of Congress for the testimony of new Federal Reserve chairman, Ben Bernanke. During his testimony to both House and Senate subcommittees, the Fed chairman appeared to agree with politicians’ statements that my friends the twins are big problems, and that something should be done about them.
After the wine was poured and the food was on the table, Budget Deficit was the first to open up.
“Tom, I really don’t get it. Every time the U.S. economy gets into trouble, I am summoned to pitch in to help solve the problem. Each time there is a recession or economic slowdown, I’m there — like a doctor tending to a patient. The worse the economic circumstances, the more I’m expected to accomplish. But once the economy is back on its feet, many of the friends I gained become my enemies and want to do away with me by raising taxes or cutting spending. The most hurtful criticism I hear is that I will damage America’s future generations. Why would I do that? My whole purpose is to bolster the economy today to increase economic growth and contribute to higher output tomorrow — which is real wealth. My existence does the opposite of what my critics complain about. I help keep the economy afloat and, in the process, provide the conditions for higher levels of output tomorrow, increasing the wealth of future generations, not decreasing it.”
I could see why Budget was down in the mouth. Detractors look upon him as an economic liability, yet he really is an indispensable asset who shows up when the economy needs him the most. Between bites, Budget also said that he has no relatives at the state and local levels, so when financial problems arise for those entities, the states have to either raise taxes or cut expenditures — two options that aren’t too palatable. In fact, if history is any guide, Budget Deficit’s attractive but arrogant cousin, Budget Surplus, has mysteriously appeared just around the time the economy begins to weaken. Budget Deficit recounted how many politicians have embraced his cousin even though his cousin has actually damaged the economy.
I wanted to console my guest, so I began telling Budget Deficit that I think he’s getting a raw deal. But Trade Deficit quickly cut me off, telling me that her story was even worse than her brother’s.
“Darn it, Tom—I’m getting the same treatment,” she said. “People just don’t see me for who I am. While my brother Budget Deficit is dealing with domestic disturbances, I get called in to facilitate growth in world trade. All these politicians are complaining about a low U.S. savings rate. Yet I am the vehicle for huge international savings derived from American purchases of goods abroad. Tom, when Americans buy those goods, they enter into an agreement to exchange their real output for U.S. financial assets. In other words, I facilitate the progress of trade when foreigners prefer to save and not spend. What is wonderful about my existence is that I allow the U.S. to consume not only what it produces, but lots of what other countries produce as well. My brother complains about accusations that he’s injuring future generations, and while I can relate to that, I’m the enemy today. People accuse me of putting Americans out of work by sending their jobs overseas. But, like, when do I ever get credit for keeping inflation and interest rates low?”
“Trade Deficit,” I said, “you make excellent points. Politicians are so far removed from understanding the important role that you play in world trade that they denigrate your good work and, in the process, precipitate economic downturns. For example, imposing a 27 percent tariff on Chinese imports, as a few too many politicians want to do, would clearly penalize American consumers, not the Chinese government. Picking on the Chinese because they fix their currency to the dollar to keep inflation low makes absolutely no sense. Politicians are singling out China while ignoring Hong Kong, which fixed to the dollar back in the 1980s, and countries south of the border that dollarized their economies during the late 1990s.”
It said all this as a way of empathizing with Trade Deficit, but the mention of higher tariffs only got her that much more riled up. “Few historians have ever come to my aid in the midst of growing protectionist sentiment,” she said. “Politicians thought they could kill me back in the 1930s by imposing a tariff to protect U.S. farmers from European imports. After my cousins in Europe took a beating through retaliatory trade barriers, world trade collapsed. The world plunged into a global depression only to be rescued by my father, Budget Deficit Sr., who was 28 percent of GDP in 1943. Few politicians complained about how he bailed the country out of a prolonged period of economic malaise that was triggered by bad economic policies. More, future generations didn’t suffer from his size; they benefited.”
“I couldn’t agree with you more, Trade,” I said. “Why politicians love domestic savings and hate foreign savings is beyond me. Washington encourages U.S. workers to save as if it were a good thing, but berate foreign savers who work hard producing competitive goods for us. And then we turn around and say to those same foreigners, don’t save that money, spend it now. I just don’t get it.”
“Look at our cousin Trade Surplus,” said Budget, taking his sister’s side. “He has existed in Japan for many, many years, yet he has done very little to bolster that economy. Up until recently, Japan was in a quasi-recession for almost ten years even though Japanese politicians continued to worship at Trade Surplus’s feet. American politicians seem to have been ensnared by our cousin in that same conversation.”
I had expected a lively meal with my friends, and it certainly was, but even our agreement couldn’t sweeten the taste of discouragement in our mouths. My friends the twins, whose very presence has done so much to make the U.S. economy great, have been spit at one too many times. Even the knowledgeable and experienced Ben Bernanke turned on them at his first chance as Fed chair.
Budget and Trade Deficit can feel the groundswell of animosity toward them growing, particularly in Congress. As I bid goodnight to my two friends I shuddered to think about our economic future without them.
– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc., and principal of Victoria Capital Management, Inc.