Is This Any Way to Treat Your Banker?
China recoils in horror at America's fiscal dysfunction.
SHANGHAI — At the last possible instant, the White House and Congress reached a compromise that prevented the United States from falling off the "fiscal cliff" — or, as we in China have been calling it, caizheng xuanya.
By raising taxes on households that make more than $450,000 a year, the negotiations will save middle-class families from tax increases and also will likely prevent the United States from going into another recession. China can relax — for now. Given how deeply the Chinese and U.S. economies are intertwined — in 2012, the United States imported more than $350 billion of goods from China while exporting just under $90 billion — a U.S. recession would hurt China’s labor force. China’s exports to the United States grew at 9.4 percent from 2010 to 2011 and at a similar speed in 2012; if that number slows significantly or becomes negative, it would undercut China’s economic prospects and even impair China’s social stability.
Why hasn’t the United States been able to keep its financial house in order? The United States is the richest country in the world, but since 2009, the U.S. government has spent at least $1 trillion more than it took in. In its first term, the Obama administration aspired to solve all of its country’s problems at once: addressing the financial crisis by bailing out businesses and stimulating the markets, wrapping up the wars in Iraq and Afghanistan, and reforming social security and health care. But the weak economy sent the U.S. federal debt soaring from roughly $10 trillion to $16.4 trillion in just four years. Real reform of the U.S. entitlement system has yet to happen. And the fiscal cliff deal merely locked in George W. Bush’s unsustainable tax cuts for most Americans. All this has Chinese elites worried.
Frankly, China is fed up with the performance of U.S. democracy. People’s Daily, the mouthpiece of the Communist Party, warned the United States in a recent article not to scare the world so frequently. In Beijing’s eyes, the financial crisis instigated by the fall of the U.S. firm Lehman Brothers in 2008, followed by years of slow growth, 2011’s debt-ceiling fight, and 2012’s fiscal cliff showdown have weakened America considerably. Xinhua, China’s national news wire, weighed in on the matter Wednesday: "So the politicians have chosen to kick the can down the road again and again. But as we all know, the can will never disappear. Sometime and somewhere, you might trip over it and fall hard on the ground, or in the U.S. case, into an abyss you can never come out of." By focusing on their own constituents and not making hard decisions for the benefit of the country, America’s lawmakers are making things worse; another People’s Daily article, published Dec. 31, called the fiscal cliff crisis "auto-sadism" arising from the U.S. political system.
One hopes that the United States can work out a sensible solution. The total 2012 federal budget of $3.8 trillion accounted for roughly a quarter of U.S. GDP. To be sure, the United States can keep sustaining its unbalanced federal account by printing money and selling Treasury bonds. By printing more dollars, the U.S. government stimulates its markets, as well as exports and employment, by increasing its liquidity. But much of this liquidity will actually go abroad, pushing inflation overseas.
Is that any way to treat your banker?
China helps the U.S. economy by lending money to the United States by buying Treasury bonds – it now holds $1.16 trillion of U.S. debt. U.S.-China cooperation has helped save the United States from financial insolvency — and China has benefited from this system by keeping its currency competitive — but this enablement has come with risks, including weakening the credibility of the U.S. dollar. To fundamentally improve its economy, the United States needs to stop the financial gimmicks and boost its exports the old-fashioned way, through innovation, while encouraging its citizens to increase their incomes and decrease their spending. China wants to partner with a healthy, balanced United States, not a profligate, irresponsible one.
And even if America’s day of reckoning has been postponed, China still faces the risk that the United States could fall off one fiscal cliff or another in the future. Without a fundamental restructuring of the U.S. budget that significantly raises income while cutting expenses, the United States looks like a disaster waiting to happen.
No wonder many Chinese see an America in decline, even if many Americans don’t believe it yet. We see few signs that the United States is ready to reinvent its national narrative and mission. But here in Shanghai, we understand basic math pretty well. The United States needs to balance its consumption and savings; weigh its pursuit of al Qaeda in Afghanistan with other foreign-policy goals; and cut its spending on defense and social welfare. How can Washington be responsible for the rest of the world if it can’t even take care of itself?