The Challenges of Global Integration
Until recently the United States had a relatively closed economy which dominated the rest of the world. Under those conditions Americans enjoyed a great deal of independence. Today, however, our economy has become much more open and is no longer dominant. We consume more than we produce, we depend on continuous inflows of foreign capital, and we are now the world's largest debtor nation. All of this has caused a significant loss of autonomy. Our policy options are much more constrained now than they were a generation ago.
We cannot count on the willingness of foreign savers to finance our twin deficits forever. In the meantime, we are running up huge debts to the rest of the world which we have to service. Annual interest payments on our foreign liabilities already approach 1 percent of the United States' GNP. That sum absorbs nearly half of our average growth capacity each year, thus significantly lowering the income gains we can keep for ourselves. As if this were not worrisome enough, we have used a major portion of that foreign debt for activities that do not make our economy more productive in the long run, predominantly excess consumption and a bloated military apparatus. In order to avoid further erosion we need to lower budget and trade deficits substantially.
The "peace and prosperity" days of the Reagan era are long gone. Bush's first term was marked instead by war and recession. At the end of his presidency the budget deficit amounted to $300 billion, while our trade deficit was still a sizable $70 billion. After the bipartisan Budget Accord of October 1990 the Democratic leadership in Congress and President Bush once again became locked into partisan posturing. Neither side was willing to negotiate a shift in spending priorities from the Pentagon, entitlements, and socialization of private losses (e.g., thrift bailout) to productive investments in our infrastructure and labor force. Thus the new Clinton administration has had to start the necessary adjustment toward lower twin deficits from a worse position. How painful that process of change will be depends on other countries, especially their needs for scarce capital competing with ours and their ability to absorb an eventual U.S. trade surplus.