Whose Debt Crisis Is It Anyway?
DAVIDSON, PAUL
Perspectives WHOSE DEBT CRISIS IS IT ANYWAY? BY PAUL DAVIDSON Two international debt problems hang over the world economy today. One has to do with the liabilities of certain Less...
...Generally, debt-plagued LDCs fall into two categories...
...In any event, pushing belt-tightening or other deflationary policies on overextended countries would merely unleash global recessionary forces, worsening the plight of debtor and creditor alike...
...imports soared relative to exports, and the balance of trade went from a surplus of $6 billion in 1981 to a deficit of $148 billion in 1986...
...In some instances, though, even if an LDC's economy were operating at peak capacity it would still earn too little to pay for needed imports because the international market value of its output is so low...
...Had his plan been adopted, the debt crisis now threatening the world economy would never have developed...
...In addition, it places a set of onerous commitments on the debtor nations, who have to pay interest and principal— commitments that are unlikely to be met, except on the most optimistic assumptions about the future...
...Thus the problem was not a lack of means on our part—it was the refusal of nations such as Germany and Japan to live up to their means...
...goods, thereby reducing the trade imbalance...
...Paul Davidson is professor of economics at the University of Tennessee, Knoxville, and editor of the Journal of Post Keynesian Economics...
...In both 1985 and 1986 the United States trade deficit was equal to approximately 3 per cent of GNP...
...Instead, they were content to enjoy a burst of export-led economic growth, the correlate to the consumer-led recovery in the United States...
...The escalating trade war will inevitably make all nations worse off...
...What often goes unmentioned is that the policy of engineering a falling dollar—or peso, or cruzado, as the case may be—will, if successful, merely impose the deficit nation's unemployment on foreign workers, whose bosses will find that their companies have suddenly become less competitive...
...That such steps would cause unemployment and general hardship does not seem to unduly worry those who urge them: A decline in economic health is the price deficit nations must pay for their prodigality, we are told...
...The case of the Latin American debtor nations is somewhat more complicated...
...The fundamental fact to be faced is that, on the present course, the greater part of it will wind up in default...
...This will lower the standard of living, it is conceded, but the country's industries will be made more "competitive," both in overseas markets and at home...
...And the essence of Keynes' proposal is still our best strategy...
...To ask industrious families to reduce their living standards simply because the market assigns a paltry value to their labor is uncivilized, to say the least...
...If foreign countries had used their surplus earnings from trade with us to purchase goods " Made in the U.S.A.," we could have more than met the extra demand...
...Fully employed debtor LDCs are analogous to the working poor...
...Nations in this category that run persistent trade deficits are genuinely living beyond their means...
...Considering the obvious danger posed to the banking systems of major lending nations, and to the international monetary order as a whole, there is an urgent need for innovative policies that will (1) remove the threat of default, and (2) prevent future recurrences of the problem...
...In economists'language, itsuffers from "unfavorable terms of trade...
...Thus has the United States moved in four years from being the world's largest creditor to being its largest debtor...
...The solution to their problems is a set of international policies aimed at promoting foreign purchases of these goods and services, enabling them to earn more— not restrictive fiscal and monetary policies forcing them to consume less...
...When surplus nations build up and hoard international reserves and debts of foreign nations, as the Japanese and Germans have been doing in recent years, that depresses global economic activity...
...One response to the impasse is to observe that when conservative economists say a deficit nation is living beyond its means, the implicit "means test" being applied is how much annual income it earns from the sale of goods and services to foreigners...
...With those resources engaged, the GNP would have been at least 5 per cent larger than it was during that period...
...Those nations did not, however, reciprocate by stimulating their economies, an action that would have set up a backflow of orders for U.S...
...These situations developed at different times and for different reasons, but from a forward-looking perspective there is reason to treat them together: Both threaten the viability of the international financial community, and both will require bold, unorthodox measures for their resolution...
...By this criterion, any nation running a trade deficit is living beyond its means...
...The results would be full-employment and continuing prosperity in the latter, as well as an improved standard of living in the former...
...Surplus nations will not, of course, remain passive while their deficit counterparts aggressively pursue exchange rate reduction or tariff protection...
...Conventional conservative approaches have been unable to correct or even ameliorate this state of affairs...
...The Latin American debt, owed by oil-importing and oil-exporting nations alike, stems from the wild fluctuations in petroleum prices over the last decade and a half...
...To meet net import purchase commitments, Americans have needed to borrow funds from and sell assets to foreigners, with the Japanese and Germans only too happy to oblige...
...About 7 per cent of our labor force was unemployed, and 20 per cent of our productive capacity sat idle...
...Itis also imprudent, since it may lead to political unrest among people with little to lose...
...Conventional conservative economic "wisdom" dictates that nations importing more than they export year after year take drastic measures to reduce their spending on foreign goods...
...Yet it does not follow that they should be compelled to undertake restrictive demand management...
...This would allow deficit countries to obtain the liquid funds necessary to increase purchases from surplus nations...
...The United States' foreign debt is chiefly a consequence of the Reagan recovery from the 1979-82 recession, the worst in half a century...
...The surpluses themselves provide the wherewithal for making the necessary steps virtually painless...
...Most of the Latin LDCs will not be able to honor their interest obligations —witness Brazil—much less repay the principal...
...Yet it is worth noting that the effects of tariffs are partly similar to those of a drop in the exchange rate, in that they will reduce imports and make the nation's industries more competitive in the domestic market, while exporting unemployment and idle capacity to trading partners...
...The world economy as a whole will show no improvement...
...One has to do with the liabilities of certain Less Developed Countries (LDCs) in Latin America, the other with the obligations of the world's largest debtor, the United States...
...Most are like the United States, in that there is insufficient world demand for the goods and services they are capable of producing...
...A third option available to a country plagued by a chronic trade imbalance, the introduction of protective tariffs, is condemned by most conservative economists as an unwarranted interference with the free market...
...Some conservatives see this as evidence that we are living beyond our means: Shirking our responsibility to lay aside adequate savings for the future, we are using foreign savings to finance a splurge of wanton consumption...
...The ultimate consequence is a reduction in the standard of living of both the deficit and the surplus nations: The one must pay higher prices for its goods without improving its export situation, the other must put up with reduced demand and increasing unemployment...
...Should the belt-tightening measures prove politically unacceptable, the conventional conservative wisdom continues, the rational alternative is for policymakers to encourage a decline in the exchange rate so that imports will be more expensive to the deficit nation...
...This greatly boosted effective demand, a substantial component of which is for foreign goods and services...
...To create a truly fair international system, it must be realized that nations with consistent balance-ofpayments surpluses have a responsibility to correct trade imbalances by adopting expansionist policies...
...But a nation's means is not its actual export income...
...They must "tighten their belts" by imposing tax increases and reducing the level of government services provided to their citizens...
...From 1982 to 1986, the Federal government gave the economy the largest peacetime dose of Keynesian deficit spending in history, doubling the national debt from $1 trillion to $2 trillion...
...The United States' expansionist fiscal policies fostered increased employment and prosperity in Japan, Germany, South Korea, and elsewhere...
...Surplus nations, by contrast, do not have to make any adjustments on their own initiative...
...And if the exchange rate decline is achieved through means that involve a reduction of domestic demand —such as cutting government outlaysall parties will suffer...
...In 1944, at the Bretton Woods Conference called to set up the postwar international monetary system, John Maynard Keynes proposed an institutional scheme that would have required nations running persistent export surpluses to spend them or give them away...
...Creditor nations should therefore recycle their export surpluses, either by increasing purchases of the debtor nations' output or by giving grants and aid —as the United States did after World War II under the Marshall Plan...
...Would it then be true that the United States and the Latin American LDCs were living beyond their means...
...As the Great Depression demonstrated, they will retaliate with similar policies in an attempt to re-export the additional unemployment they have been saddled with...
...it is the export income it would earn if its labor and capital resources were fully employed...
Vol. 70 • August 1987 • No. 11
