On a recent trip, someone asked me the long term consequences of current United States deficits. I probably spoke too long; but my key point was that current deficits make no rational sense unless you expect to abandon the United States in a generation. However they make excellent sense for individuals who plan to cash out within 10 or 20 years and desert the country.
Current United States government deficits crowd out private investment. Moreover, the government deficits are not public investments that lead to a better civilization, such as those for bridges, parks, education, and research. Instead, current government deficits simply enable Americans to spend more on current consumption — more on military spending, which is a public consumption, and more on imported fossil fuel, a partially private consumption. And of course, the deficit enables American to spend more on those who provide these `goods'.
Without long term productive investment, whether by a government in bridges, parks, education, or research, or by private investors in factories, electric generators, warehouses, and stores, a country falls behind.
However, a country can take a long time to fall behind. For example, William Perkin synthesized the first color-fast, non-explosive artificial dye in 1856 in London. That was good for Britain. Moreover, Britain did not lose immediately. It took a generation for Great Britain to fall behind Germany in dye production.
The same may well happen in the United States. Most likely, the losses will not be obvious. Few will notice the loss of industries that might have been, such as the radio stations that were never built because the industry to make use of modern technologies was restricted. For more people (but not for everyone, of course), life will simply get worse.
But some of those who think of their children or their retirement will notice. And those who can leave, and who have no abiding attraction to the place, will abandon the country. This is the only way to understand the help given to US President Bush by some of this supporters. They are not irrational; they simply are not focused on the long term health of the United States as a country.
Suppose, as seems likely as I write this in the beginning of September 2004, George W. Bush wins the next United States presidential election. There is no reason to expect him to change his policies; thus, there is every reason to expect the deficits, the borrowings, to continue.
Current United States borrowing is a transfer of debt from the present to the future. It would not be necessary if the current administration followed traditional Republican party policies and cut spending. But this is a `borrow and spend' administration, not a `scrimp and tax' administration.
The deficit is funded in large part by the central bank of Japan. (It does this by a method that amounts to adding zeros to its electronic bank accounts.) The central bank of Japan hopes, I think, to reduce by a little bit the future cost of pensions to the Japanese by requiring future Americans to pay. Doubtless this is good for Japan. Even if the US devalues, Japan will possess a claim against future Americans that is worth more than the cost of adding zeros to electronic bank accounts.
A country that is growing economically can continue to borrow for generations, because every lender expects to be paid back. In addition, a country that appears secure can borrow money (or sell claims against itself) from people living in less secure places. They will be moving money into the country as a form of what economists call `precautionary savings'.
Difficulties arise when these two advantages fail. Long term economic growth depends on education, research, infrastructure investment, and private investment and development. When those are crowded out, borrowing becomes more difficult. Domestic security depends on a belief that no one will stage the kinds of attack in the United States that the configuration of modern technologies make plausible.
When a country stops being able to borrow, then its people suffer the unemployment, higher prices, and taxes (of which inflation is the easiest for a government) that come from such loss and from the need to shift to a different kind of economy.
Of course, as I said, those former Americans who have left the country will not suffer. For them, the desertion is economically rational.
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