The US needs to clean up its monetary excesses and twin deficits
Price stability is a precious public good — a situation where investment decisions and contractual relationships are made under assumptions of stable prices, because the monetary authorities are trusted to deliver a stable purchasing power of the currency they manage. It’s something like the German Bundesbank before the monetary union, where no German politician would dare talk about the monetary policy, and where it would be unthinkable that a Buba official would ever publicly urge higher inflation rates.
Fiscal policies are a question of national priorities. The U.S. debt and deficit numbers are clear — and they are not good. Budget constraints must be respected. There is a political and market sanction if they are not. The Fed’s independence also means that it should never validate unreasonable fiscal policy choices. Normally, fiscal and monetary policies must be closely coordinated to deliver a noninflationary policy mix for a steady and sustainable growth.
A benign neglect of trade deficits is an equally serious policy blunder. Those deficits are a subtraction from American GDP. They are wealth transfers to trade partners and sources of American foreign debt because deficits have to be covered by U.S. debt instruments in exchange for foreign savings.
For almost two years, Washington has been in a virtual state of siege because the Chinese, the Japanese and the Europeans don’t care about threats and taunts. Those economies are piling on their U.S. trade surpluses with abandon.
It should not take a dinner on Argentinian beef and a big delegation to convince the Chinese president to do “something” about his soaring U.S. trade surpluses. Xi knows he has a $400 billion trade problem with the U.S., and he knows that he needs to get that down. But Xi has been given a wonderful grace period because he has to negotiate Washington’s requests to stop forced technology transfers, illegal intellectual property acquisitions, illegal export subsidies, etc.
The solution here is simple. Washington should ask Beijing for a prompt reduction of its trade deficit. How China does that is its own choice.
Think it can’t actually be done that way? Well, in the first nine months of this year, South Korea slashed its U.S. trade surplus 22.3 percent, after a 17 percent cut for last year as a whole. That is a respectful gesture of a true friend and ally: A 39.3 percent surplus cut since U.S. President Donald Trump took office.
The others can do that too, but the truth is the Chinese, the Japanese and the Europeans don’t want to do it.
And the U.S. should not leave it to the Chinese to change the structural problems. American companies should be prohibited from allowing forced technology transfers, or other forms of intellectual property thefts. Cyber-enabled thefts should be dealt with appropriate technologies that America has. Bilateral market access and investment practices should be matters of strict reciprocity, or as a Scorsese drama character would put it: “Same to you, fellas.”