What do you think of this article?

I found this article on Atlantic Monthly’s website. How likely is it?


How likely is what, exactly?

I don’t think it’s worth debating the details of that article. However, its big message is the US is running several large deficits, including a fiscal deficit (government spending is higher than taxes) and a trade deficit (imports are greater than exports), and that is not sustainable in the long term, even for the country which is the world’s only super power. Something has to give eventually, and it’s the economically responsible countries like China and the European Union which are going to be around to pick up the pieces.

I subscribe to The Atlantic (no longer Monthly) and read it last year. It’s a nice little economics lesson for the supply-siders and tax-reducers. Things hopefully won’t unfold in quite that manner, although I’d love to see a 3rd party president. But Giles said it best: Something’s gotta give.

James Fallows has put together a fictional tale of the next decade or two. America’s trip in a handbasket in his tale depends on a chain of unfortunate events.* Some of them are plausible, such as the death of Castro and its effect on US elections. Some others are off the deep end, such as a third-party president. His cascade of calamity is imaginative, but unlikely. Remember, economists have predicted 11 of the last 3 recessions.

*James Fallows is not Lemony Snicket; that’s Dan Handler.

It’s a cliche (and a true one) that generals are always preparing to fight the previous war. It should be a cliche that economists are always preparing to fight the previous economic crisis. Business leaders, journalists, and economics writers believe what they were taught in school, which is based on events that happened decades ago, in situations that no longer exist.

Everybody says that rising oil prices have to soak the economy. This was true; it obviously happened just like that in the 70’s. It’s not true any more. Oil makes a much lower percentage of the national economy now than it did back then. Hence we can handle a big upward swing in prices with less pain.

Everybody says that huge deficits must lead to skyrocketing inflation and interest rates. Obviously we’ve had the biggest deficits in history during these past few years, yet we’ve seen only modest increases in I&I. People haven’t adjusted to the reality of China buying up all our debt. (Of course China may stop buying our debt if their economy collapses, in which case we’ll have real trouble.)

Everybody says that having a huge trade deficit isn’t sustainable. Actually it is, if you make enough money. If the U.S. Economy generates thirteen trillion dollars per year, then we can afford to send six hundred billion overseas. (If the economy fails to grow at a good clip, then the economy could be in trouble, but again we won’t think about that.)