Rising Tide

A rising tide lifts all ships. This phrase is certainly true, given two important qualifications: all the ships are seaworthy, and rest within the same sea. The statement is rising to the forefront as many have recently argued the globe and its people are getting richer.

New York Times columnist David Brooks points to the number of people who are living in extreme poverty has declined significantly over the past decade. He notes the rapid economic growth of one of the globe’s poorest nations, China, as evidence of declining global poverty. Certainly this economic behemoth is growing, and quite rapidly. But, economic growth rate among one of the world’s poorest and largest nations is no real surprise. A decade ago the average Chinese person earned less than a $1 a day. Even a doubling of those earnings would still be abject poverty. Additionally, one wonders how these statistics are measured. Are people really climbing out of poverty? Or is it more likely that the number of extremely rich people have grown? Is the gap between the rich and the poor even greater now than it was a decade ago? The most likely answer is yes.

Is the tide rising everywhere? Yes. But the current is sweeping many under. Another interesting bit of news is the growing US trade gap and the ballooning federal budget deficit. Many in the Administration point to the numbers and claim alternating theories – either they don’t matter or they are signs of great economic growth and power. But nothing could be further from the truth. The Reagan Administration saddled the United States with the very same problem in the late 80’s. Economic growth started to sputter and interest rates were starting to rise. Fortunately, President George H. Bush did the responsible thing and raised taxes. Over the following decade the deficits shrank, the American economy rebounded, and the growth benefited the entire nation. The recently reelected President Bush with his “mandate” must now show the economic courage of his father and curtail deficit spending.

America is suffering for a drastically low national savings rate. Interest rates are so low that personal borrowing is near record highs. Borrowing by the federal government is also approaching record highs again.

Where does America get the money to satiate its capital hunger? China and Japan are the principal nations running a trade surplus with the US, and lending America the capital needed to finance our economy. Chinese Yuan is tied to the dollar, and therefore unlikely for the US to easily erase its economic deficit with the Chinese.

Fortunately the Chinese are also heavily dependant upon the US consumer market for its exports and therefore are unlikely to stop investing in American dollars or dump the dollars they currently hold. However, Alan Greenspan recently argued that America must do something about its twin deficits before the rest of the world determines other nations hold a greater return on investment.

The United States must reverse its current gluttonous behavior in order to raise all ships. While the poor do benefit from cheap imported goods from across the globe, they will bear the burden in the long run the bill for deficit spending comes due. Without action now the rising tide may also sink all ships.