A Tale Of Two Deficits

If we are to fix the problem, we must understand what caused it. Trade deficits are always equal to the difference between national (domestic)savings and investment. Trade deficits are, therefore, the result either of increased investment or reduced savings. If national savings go down as when the government runs a huge fiscal deficit ­ then, unless investment goes down in tandem, the trade deficit must rise. That is why we speak of the twin deficit problem: fiscal deficits normally lead to trade deficits. We had this problem in the Ronald Reagan years, and we are having it again now. What caused the deficit? If the trade deficit is the result of the fiscal deficit, we need to push the analysis back one step further. What caused the fiscal deficit? Four years ago, the George Bush administration could blame the deficit on the economic downturn or problems inherited from the past. This is no longer the case. Economic growth has resumed and unemployment has fallen, and it is clear that America has a very large structural deficit. The turnaround from a surplus of 2% of gross domestic product (or national income) inherited from the Clinton administration to the 4% deficit is dramatic and largely due to the Bush tax cuts for upper-income Americans. Of course, the war in Iraq has contributed, but so too have the enormous increases in corporate welfare and the subsidies for agriculture. The effective tax amnesty ­ inducing American corporations to bring their money back to America in return for paying a tax that is a sixth of their normal tax ­ has made this year’s revenues look better than they otherwise would, and the deficit smaller than it otherwise would. Make no mistake, however: there is an enormous structural deficit in the American economy thanks to increased public spending and tax breaks for business and the wealthy. And structural deficits do not just go away by themselves. (PDF Link) http://www.globalagendamagazine.com/pdfs/2006/articles/Stiglitz.pdf Joseph Stiglitz is University Professor, Columbia University. He served on the Council of Economic Advisers from 1993 to 1997, was the World Bank’s chief economist from 1997 to 2000 and was awarded the Nobel Prize for economics in 2001. [Proofreader's note: this article was edited for spelling and typos on March 1, 2006]

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