What You’re Not Being Told
About America’s Economic Deficits
Part Two

Greg's Corner
by Greg Petty
June 2009

In Part One last month we addressed America’s current fiscal situation, spending needed to bring us out of the recession and the national debt burden made worse by annual budget deficits approved by Congress (you can read the story in full on our Web site). Part Two will discuss the additional deficits that threaten America’s standing as the world’s leading democracy.

Number 2. Trade Deficit
This is a simple one to explain but the problem is difficult to reverse. Americans are importing and paying for more than we produce, export and get paid for. In short, we have switched from producing many commodities and instead are consuming more products produced abroad.

Between 2001 and 2007 the U.S. lost 2.3 million jobs, including 1.5 million manufacturing jobs. ²

The top two U.S. trade deficits from 2007—China $262 billion, Oil Exporters 117 billion. ³

We must reduce our consumption and increase our production of commodities (this means manufacturing) the world desires. America still needs to make products and we have the capacity to produce the very best products in the world. We have high productivity and educated workers. To quote I.O.U.S.A: One Nation, Under Stress, In Debt, "Last year, the U.S. borrowed 65% of all the money that was borrowed in the world — 10 times as much as the next biggest borrower."³

Number 3. Savings Deficit
I’ll give it to you short and straight. The personal savings rate in America in 2007 was 1% and crossed over into a negative figure. We are spending more than we earn. To give you some comparisons, at the end of the 1970s our savings rate was approximately 13%. Personal savings are vital to our economy because they represent real wealth creation from which an economy can prosper and grow. Currently our savings rate accounts for only 2% of our economy, in China it accounts for nearly 40%.

We have been continually told to go out and consume and it appears we really took it to heart. Some people used their homes as if they were ATMs. Now we must stop. We simply must save for our future. Think back to how your parents behaved… they were raised in the Great Depression and had much better financial discipline. If we don’t have the cash, we don’t buy it. This is the personal responsibility that we have to start exhibiting.

Number 4. Action Deficit
Take action. On a personal level assess your situation and make any changes you feel are warranted. Pay down debt and save more of your disposable funds if at all possible. Put more funds away for retirement or make new investments. Discuss sound budget, savings, spending and credit with your children.

Collectively we need to ask our Washington officials what their proposals are to stop and reverse these deficits when our economy rebounds. Tell them you are behind them for tough decisions and that spending cuts will be needed. Now is the time for Congress to assess all programs and their effectiveness… if it is not working then stop the funding. If its effectiveness has not been studied then study it. Inquiring minds want to know right now.

And here is the other hard truth we must face. No politician wants to tell you what they know to be true. They are afraid they won’t get reelected. Tell them you will support them if they vote to raise taxes… but only if they also vote to reinstate pay-go and balanced budgets.

We also have to raise taxes because the deficit we have created for ourselves is so massive that the economy cannot grow its way out. There is no supply-side solution to the massive debt we have incurred. Everyone must pay their fair share.

Revenue from increased taxation must be earmarked for restoring the soundness of both Medicare and Social Security Trust Funds.

America has one of the highest corporate tax rates but because the current tax code is full of holes and exemptions granted by Congress, many companies are able to avoid their tax burden. According to Wikipedia, American corporate taxes amount to only 2.2% of GDP for the years 2000-2005. The average for 30 OECD countries was 3.4%. We must close the corporate tax exemptions. America has, at 35% one of the lowest top personal income tax rates among industrialized nations. I am angry we are in this situation but I am also willing to pay more to restore our economic health. For comparison here are the top personal tax rates in countries: France and Germany 45%, Italy 43%, Spain 42%.⁴

Ask your Congressman and both Senators, Kay Hagan and Richard Burr, to explain their plan for a reformed, fair and simplified tax code. The current tax code is over 70,000 pages long! But remember, there is no free lunch… Our new mantra should be, "Cut spending, raise taxes." It will take both actions to restore our financial health and meet the future challenges America will face. Not a pretty story but the truth is often painful. Never again should Americans let both sides of the economic equation be so totally out of balance. As the words of an Eric Clapton song go, Tell the truth, tell me who’s been fooling who?

Want more information on these topics? My recommendation is to read the book I.O.U.S.A One Nation Under Stress, In Debt referenced below.

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NOTES:

1. Peter Orzag, OMB, PBS Frontline "Ten Trillion and Counting"
2. The Economic Policy Institute
3. I.O.U.S.A. One Nation. Under Stress. In Debt. By Addison Wiggin, Kate Incontrera, ISBN# 978-0-470-22277-5 (Book and DVD- Nominated for the 2008 Sundance Grand Jury Prize)
4. en.wikipedia.org/wiki/Tax_rates_ around_the_world

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