WSJ's Wessel: U.S. Borrowing: All Right, Let's Talk Cures

[question everything]

The Wall Street Journal

October 6, 2005

CAPITAL
By DAVID WESSEL

U.S. Borrowing: All Right, Let's Talk Cures
October 6, 2005; Page A2

Several readers chastised me for last week's column warning that the U.S. can't count on borrowing ever-greater sums from abroad. Nice job on the diagnosis, they said. But what's the cure?

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For the U.S., the prescription is: Save more at home so you borrow less from others. American households as a whole save next to nothing these days, and the government "dissaves" by running budget deficits. The surest way to increase U.S. national saving is to reduce the budget deficit, which has been swollen by tax cuts, Iraq and, now, Hurricane Katrina -- and is soon to be further swollen by health and pension benefits for baby boomers.

Tax increases seem almost inevitable, like it or not. Harvard's Kenneth Rogoff, a former chief International Monetary Fund economist, suggests a carbon tax; it would reduce the budget deficit and prod the U.S. toward environmental sustainability. The IMF calls for eliminating tax exemptions, raising energy taxes or imposing a federal sales tax. None of those is imminent. The Bush administration insists tax increases are neither necessary nor wise, though it has been unable to restrain spending today or persuade Congress to shrink expected future gaps between receipts and spending for Social Security and Medicare. Instead, look for the administration to count on Federal Reserve increases in interest rates to discourage consumer borrowing and increase savings, and to talk more loudly about changing the tax code to encourage Americans to save more.

One development that might increase Americans' saving quickly is the often-predicted slowing or decline in house prices. A major reason Americans are saving so little out of their paychecks is that rising housing prices make them wealthier. Still, it's hard to imagine President Bush trying to prick a housing bubble.

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Unfettering the Japanese yen, the Chinese yuan and other Asian currencies so they rise against the dollar is part of the solution, because it will make Asian goods more expensive on global markets and U.S. goods less expensive. "As demand shifts from the U.S. to the rest of the world, prices have to adjust to encourage foreigners to buy more of our goods," says Mr. Eichengreen. "Currencies are part of the mechanism that brings that about." A cheaper dollar is not the entire answer, but it is part of the solution. And then there's Europe, the mention of which produces deep sighs among economists. European households save a lot. Most European governments think their budget deficits already are too big. The European Central Bank, ever nervous about inflation, is reluctant to cut interest rates, though an upward move in the euro would give it room to do so.

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