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World needs US taxpayer bailout - but Atlas is about to Shrug
Howard Richman, 6/15/2010

Fred Bergsten of the Peterson Institute for International Economics, a thinktank with close ties to the Obama administration, wrote a commentary for the Financial Times (New imbalances will threaten global recovery) which foresaw continuing world economic stagnation unless the US taxpayer bails out the world with increased deficit spending. Here is his reasoning:

Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further....

Other emerging markets [not just China] are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. Switzerland has intervened substantially to hold its currency down. The eurozone has joined this “new mercantilism” and the result will be a sharp rise in global imbalances.

The counterpart increases in deficits will again accumulate mainly in the US as no other country could attract the requisite financing.... The US could then maintain its recovery only by continuing to run large budget deficits and again tolerating debt-financed consumer demand....

In other words, the world is relying upon our Congress to sacrifice our children's economic future in order to bail them out. And President Obama is moving quickly to accomodate them. His top economic advisor Lawrence Summers has proposed $200 billion in new stimulus spending with the first $150 billion being advertised as a measure to extend unemployment insurance and popular business tax breaks and the second $50 billion billed as a measure to help the states. Summers urges Congress to "grit its teeth" and pass it. But many current members of Congress already know that they are likely to get thrown out on their ear in November because of their spend-thrift ways.

Moreover, there is a much better alternative. The United States could get out of our economic stagnation simply by balancing trade, as through Warren Buffett's Import Certificates (IC) plan. There is even a version of that plan (in which the U.S. Treasury auctions the ICs) that would be consistent with WTO rules.

Balancing trade would stimulate our aggregate demand, increase our incomes, and increase our business investment. But the internationalist free traders of the American political establishment, including Fred Bergsten, would prefer that Congress destroy our children's future. In fact, Bergsten writes that one of the chief dangers of the current scenario is that the United States could choose "protectionism," specifically:

Third, a renewed explosion of the US trade deficit could well trigger the outbreak of protectionist trade policies that has been largely avoided to date. With unemployment remaining very high, job losses to the “new mercantilism” abroad are likely to incite strong political reactions. The virtual absence of a positive trade policy under President Barack Obama has created a dangerous vacuum in which new import restrictions, especially aimed against “unfair exchange rates,” could readily prevail.

The world is expecting the U.S. Congress to bail them out through ever more massive government deficits. But the American people are not going to stand for it. Atlas is about to shrug.

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