Category Archives: Economics

The Chiang-Mai Initiative is Freaking Out the IMF

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 imf-logo

For some basic details on the IMF’s relevance in this post-Great Recession world, try here. Or read the IMF’s own publication, Finance & Development, which obsessively navel-gazes over the IMF’s own role.

So last month, I was a selectee for an internal IMF research project on its continuing relevance in Asia. Yikes! That should set off alarm bells. Neither the cover letter nor the interviewer mentioned the Chiang-Mai Initiative (CMI), but it was clear as day if you know about Asian attitudes toward the IMF. In short they loathe it. In fact, they loathe it so much, they want to build their own local version. After the Asian financial crisis (AFC), Japan proposed an “Asian Monetary Fund” (AMF), which the US shot down. At the time, the US was the indispensible nation at the end of history. What all that ‘America-is-awesome’ rhetoric really meant was that we were the uncontested hegemon with our fiscus in order, so we could push the Washington Consensus pretty hard. Today though, the US is a mess, and Asia is feeling its oats. So here we are again.

It was pretty easy to see from the questions that the IMF is really nervous about this. CMI is basically the AMF warmed over, although no one wants to come out and say so. Asians want it, because when the AFC hit, the IMF conditions on the bail-outs were tough. But unsurprisingly they were necessary – really necessary actually. Asian economies are far too export-dependent, mercantilist, corrupt, and oligarchic, and the Fund helped somewhat loosen the death-grip of politically-connected conglomerates on the economies out here. As usual, the Fund was demonized for providing good advice that was necessary. One reason why the AFC was so short, and the region’s economies bounced back so fast, was the IMF’s necessary pain. But no one ever thanks the Fund. It’s far easier to blame it for domestic political point-scoring.

So this time, the Asians are going to create their own currency pool, with their own Asian rules – whatever that means. In a way, one could see as part of the Great Recession-inspired fantasy of ‘de-coupling.’ (Tell me how you decouple from globalization and not fall behind lightning fast?) But they say, Asia should look inward, with its own rules and such. The irony, of course, is that conflict has already erupted between the likely lenders (China and Japan) and the likely borrowers (ASEAN) over what the rules over the loans should be. It’s the clash over conditionality all over again – except far more demur and behind-closed-doors, because of ‘ASEAN Way’ sensitivities that Asian countries should not publically criticize each other (lest that open the door for Western lecturing and preening). Asian leaders love the CMI for the distance it creates from the West and the Fund, but the fight over rules-set will mirror those of the Fund. The other big benefit for Asia, or rather for its elites, is that an neo-AMF/CMI will be far kinder toward ‘state-capitalism’ – all the rage now, as it is supposedly superior to liberal economics. The CMI will provide bail-outs and conditionality which push Southeast ASEAN borrowers to modernize as Northeast Asian donors have – directed state investment, aggressive mercantilism, (semi-)closed politics.

This is unfortunate to my mind for two reasons:

1. Obviously, propping up authoritarians capitalism has an anti-democratic ring to it. The last thing, politically, that Southeast Asia needs is more cheerleading to concentrate political-economic power in a small, almost-closed elite. Insofar as the Fund promotes economic neoliberalism, there has always been an oblique pressure to openly politically therefore as well. This will now be lost, as the CMI is certain to follow the ‘ASEAN Way’ of no political commentary.

2. If you bracket this political concerns, there are clear economic worries. A CMI fractures the global financial system, just as the proliferation of free trade areas in Asia is fracturing the WTO universal trade system, and Chinese pressure increasingly threatens to regionalize the Internet. This year’s ‘multilateralization’ of the CMI means it is now a genuine systemic-institutional threat to the Fund. This is almost certainly the proximate cause of the worried IMF survey on its relevance.

So I felt bad for the Fund (who EVER says that?) All the questions from the interviewer were about the Fund’s continuing relevance, what its role in Asia should be, and perhaps most telling, should it have a role? That inspired real discomfort.  I can only imagine what interviewer heard from Koreans – who feel they were turned upside down by the IMF even though the bail-out probably prevented street rioting – and Indonesians- where the AFC did end in street rioting and government collapse. The prime minister of Malaysia at the time even said the AFC was caused by ‘Jewish speculators.’

I should only add in the Fund’s defense that when I talk with Koreans and other Asians, most have no good sense of what the IMF should do differently, because most have no grasp of what it actually does. All will tell you that it should reform, but like most of the anti-globalization protestors, their ideas are vague or indicate that they don’t understand the, albeit highly technical, IMF. (I even wrote my dissertation on this topic.) Most seem to think that the bailouts should come cost- and change-free, but all that does it move the costs somewhere else – to the OECD taxpayers providing the Fund’s bailout resources – nor does it help clear up the problems that created the crisis in the first place. The great irony is that although Asians loathe the Fund, they actually learned the appropriate lessons from it in 1997 and were much better able to withstand the next crisis in 2008, the Great Recession. Pity the Fund. It does its job pretty well, but everyone hates it anyway…

Revaluation Downside: Low-Cost Chinese Goods Help America’s Poorest

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ts-krugman-190

My big concern is that all the focus is on the negative side of China’s undervalued currency. Krugman (above) and others, correctly, complain that it artificially reduces US competitiveness. If the yuan floated, the price of US goods in China would slide dramatically. Rationalist Chinese consumers would move toward suddenly cheaper US goods, and that gets you the export boom Obama talked up in the State of the Union. (Although Asian buyers are stubbornly nationalistic. The home country bias here is extreme, so don’t get your hopes up for some big US export surge to Asia. You’ve never seen as many Korean cars as you will in Korea…)

The downside of course is that the poorest Americans benefit most from the undervalued yuan, and their unorganized, underprivileged, and non-corporate voice is completely unheard in this debate. The poorer you are, the more it matters to you that Chinese imports at Walmart are super-cheap. By definition, the tighter your family budget constraint, the proportionally more valuable low consumer prices are. The undervalued Chinese currency ensures that all that consumer stuff imported from China and sold at the big box stores like Walmart and Target helps the poor stretch the dollars. The purchasing power of their fewer dollars goes farther when Chinese imports cost so little.

1. So the poorest benefit the most proportionally from the undervaluation. Why doesn’t that make the news? Because the poorest are also the least political organized, and consumer interests are generally far less well-organized than business interests. So US exporters, who would benefit from a weak dollar, scream, and Congress listens. US consumers benefit enormously from a strong, especially overvalued, dollar. But their voice is disaggregated and diffused across the country, compared to the concentrated corporate power of exporters. Consumer gains from a cheaper Chinese-Walmart stuff is far smaller and diffused than the steep and concentrated pain of exporters suffering from a strong dollar. This is a classic protectionist response: gains are diffused, hard to see, and enjoyed by the weakest, while pain is concentrated, easy to indentify, and felt by the politically privileged.

None of this means that the yuan isn’t overvalued. It is, and the world’s largest economies clearly have a systemic responsibility to let their currencies float. The distortions coming from China’s currency are downright bizarre, with China’s foreign exchange reserves at levels never seen in the history of finance before. But if you wonder why DVD players that used to cost $20 at Walmart suddenly cost $30, now you’ll know. And while you, the middle class reader, might not care because that is within your disposable income range, recall that the poorer you are, the more that extra $10 means. The more overvalued the US dollar, the more America’s poorest are helped.

2. The temperature is rising on China’s currency. The US Congress is starting to seriously pressure the US Treasury to formally label China a ‘currency speculator.’ DoT must once again decide in mid-April. Krugman (above) got the ball rolling on the argument that the US should finally come out and openly accuse China of manipulation for its nationalist/mercantilist trade purposes. And just about everybody seems to agree that the yuan is overvalued. Just how undervalued is the yuan? 49% (!!) according to the Economist and 40% according to the Peterson IIE. For what it’s worth, I certainly agree with these estimates. I don’t think anyone really believes the dollar currently reflects its real purchasing power in Asia. US goods are ridiculously expensive in Korea; a fifth of Jack Daniels costs about $40!

3. All these Asian countries want their currencies undervalued because of the nasty lesson they learned in the Asian financial crisis. Most Americans don’t know this at all, it seems. 15 years ago, Asians did not have the dollar reserves to defend their currencies and when capital flight hit, these economies were turned upside down. Indonesia’s government collapsed into anarchy, Thailand lost something like 1/3 of its GDP, and South Korean couples were donating their wedding rings for gold to the government to pay its foreign debts! In short, the region got turned upside down/inside out, and everybody out here remembers this, while Americans just missed it altogether. So afterwards, the Asians did exactly what the DoT and the IMF told them to – they balanced their books and stocked up dollars in case there would be another crisis.

4. Here is good background on the conflict; try this too. To place the China currency evaluation in the global context, read this excellent introduction to the current problems of the global economy, specifically the problem of ‘imbalances.’ In brief, the US and Mediterranean countries are spendthrifts now carrying huge piles of debt, while Germany, China, and other Asians are overthrifty supersavers. So the broke Americans have no more money to spend to prime the global economy, and the supersaver Asians should fill in the gap by buying a lot. The more stuff they buy, the more people will be hired to make all that stuff they are buying. This will reduce unemployment. So the supersavers are the key to getting global unemployment down, because they have the cash to go on a spending spree.

2010 Predictions for Korea on the Radio

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Busan e-FM

 

One of my nice new gigs in 2010 in Busan is a role as a ‘foreign affairs expert’ – please don’t laugh too much 🙂 – on a local English radio station. It is kinda flattering to be asked. The show is “Morning Wave” on Busan’s English language radio station. I speak on Monday mornings for about 8 minutes.

Today was my first contribution. I made a couple of quick predictions about Korea in 2010. The transcript is below. But here is the condensed version:

1. Korea will grow well, having sloughed off the Great Recession with little trouble.

Korea is a fairly small economy globally, even regionally. But it is fairly advanced, and it is a top 15 economy in GDP size. It is quite impressive how well Korea moved through the Great Recession. Unemployment did not spike. There was no capital flight, as there was in 1997. The contrast with the US is striking. There was a little nervousness last year, and the currency slipped for about 8 months as everyone sprinted to the dollar haven, but that’s it. Things never really got un-normal, in contrast to the West. There were not huge banking collapses, etc. So in 2009 things rolled along pretty smoothly, and they should in 2010.

2. The Korea-US free trade deal won’t go through.

What a shame. Just about every business and political official I know in Korea, from both countries, want the FTA to go through. But I don’t see any movement at all from the Democrats in Congress. The Great Recession stirred up all the old protectionist impulses of the Democratic Party. Hillary and Obama even competed to undo NAFTA. Amazing! The Democrats still haven’t made their peace with NAFTA 20 years later, so I see no trade deals at all going through this year. This is too bad, as the conservative Korean president could probably push the FTA through the legislature here if US movement was likely. Ironically that hurts us, the South Korean consumer more, because South Korea is a much more protected, and smaller, economy. Price differentials between foreign and domestic products are marked. The deal actually matters more here, but the US Congress cares more.

3. North Korea won’t change a bit.

NK is odd in so many ways. It is a closed to being a failed state, yet extraordinary stable for a stalinist hole. Everyone is terribly desperate to find change in NK. We look ceaselessly for any shred of movement, especially the doves who thought that putting it on the axis of evil was a mistake and that the sunshine policy was a good idea. But 10 years after sunshine, little has changed. NK is still the same awful repressive place it was, only now it is has nukes. We should stop predicting that NK is going to imminently collapse and strategize on those grounds, and we should start accepting that it has learned from the fall of communism in Europe and is going to hang around for awhile.

4. Japan won’t really come around on Korea.

This is probably the biggest disappointment coming to Koreans in 2009. The new, leftish Democratic Party of Japan government has really raised hopes in Korea for a meaningful apology (finally) over Japanese colonialism in Korea (1910-45) and a pro-Korean (naturally) settlement of a territorial issue (the Liancourt Rocks). The Lee government is even trying to finagle a Japanese Imperial visit. But I am with Jennifer Lind on this: the Japanese are just not there yet. The public doesn’t really care much about Korea, although Koreans care a great deal about Japan. Korean opinion is a nuisance most don’t care about; most voters want good relations with the US and China, which would compel Korea to come around anyway. But for the one group in Japan that really does think about Korea, it is firmly against the apology. Korea is ground zero for all the old rightist pretensions in Japan about WWII – that was defending Asia against the whites, that brought modernity to backward places, etc. To admit that Japanese was simply a rapacious colonialist here would definitively strip the Japanese right of a deep prejudice about Japan’s ‘proper’ place in Asia history. It will take more than the election of Hatoyama to get the Japanese to climb down from that one. But at least he is not visiting the Yasukuni shrine. That’s progress.

 

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TRANSCRIPT:

Petra (the host):

Hello everyone and welcome to …..

Today we have a new foreign affairs contributor at Busan e-FM. Dr. Robert Kelly teaches in the Political Science and Diplomacy Department at Pusan National University. He came to Korea about 18 months ago.

So good morning Professor Kelly. Please, tell us a little about yourself.

REK:

Good morning Petra. Let me first start by thanking you and the producers here at e-FM for inviting me. It’s an honor to speak on Busan’s only English radio station.

As for me, I am a professor of international relations at Pusan National University. I grew up in the US. I am originally from the city Cleveland in the state of Ohio. Cleveland lies about midway between New York City and Chicago, on the south coast of Lake Erie.

One of my areas of study is the foreign policy and political economy of northeast Asia, so I am happy to join the Busan e-FM team in that capacity.

Petra:

Well, we’re happy to have you, and we hope are enjoying living in Korea.

REK:

I am indeed. I enjoy Korea very much. And Busan is wonderful place to live; the city is very vibrant and enjoyable.

Petra:

That’s great to hear.

So let’s turn now a bit to the future. It is the first full week in 2010. Would you like to hazard any big predictions about Korea or East Asia in the coming year? We can always check up on them next year to see how you did.

REK:

Sure. Well, first, I would say, looking ahead, that Korea’s economy will almost certainly be a growth leader in Asia in 2010 – after China of course. Korea has done a remarkable job bouncing back from the nasty recession of the last 18 months. Economists are now calling this the ‘Great Recession.’ Korea’s performance through the Great Recession has in fact been extremely instructive, and it has justified many of the Seoul’s policies since the last big economic crisis in 1997-98, the Asian Financial Crisis.

Petra:

That’s reassuring to hear. What did we do right that helped so much this time around?

REK:

Well, first, Korea’s growth is a lot more balanced now than it was a decade ago. In the 1990s, the large chaebol conglomerates like SK or Samsung represented a larger share of Korea’s economy. So when they had trouble, the whole Korean economy got in trouble too. They were, in the language of today’s Great Recession, ‘too big to fail.’ Today, small and medium enterprises are healthier and more diversified in Korea’s economy. This gives Korea some insurance if chaebol exports fall, as they briefly did last year.

Petra:

What else?

REK:

Korea’s economy is also cleaner and more transparent than it was. Before the elections of the 1990s, Korea’s biggest companies had preferential and politicized access to national budget. This helped spur the reckless borrowing of the 1990s that fed the Asian financial crisis. This time around however, Korea’s biggest companies are more exposed to financial accounting standards, so there are no hidden ‘toxic assets,’ as in the US. In fact, it is ironic, that just as Korea learned and implemented good lessons from its 1990s crisis, the US ignored those same lessons, and we are seeing the fallout today. American unemployment is over 10%; Korea’s is somewhere around 4%. That is quite an achievement.

Petra:

Hmm. It sounds like it. So much for Korea’s economy. I like those reassuring words. What about Korean foreign policy? There are a lot of big issues coming up, right? Like the FTA with the US, North Korean nuclear weapons, a reconciliation with Japan…

REK:

Yes, that’s right. 2010 has the potential to be a big year for the Republic of Korea. But here my predictions are gloomier.

First, on the FTA with the US, I must say that I cannot see it passing. The Korean National Assembly could probably be pushed into ratifying it, if the Blue House really thought the US was going to move on the treaty too. But quite honestly, this is unlikely. The American Democrats control both parts of the US Congress, as well as the White House. For several decades, the Democrats have been skeptical of the economic benefits of globalization, and I see no shift in that attitude. It is unlikely the US Congress will ratify the FTA.

Petra:

But I thought the business communities in both Korea and the US really support the deal?

REK:

That’s right. They do. But that is just not enough. Globalization and trade are met with a lot of skepticism in the US right now, even towards close partners in Europe and Asia, like Korea. So I think the probability is low, and that means higher prices for all of us.

Petra:

How about North Korea? Our previous foreign affairs expert, Brian Myers of Dongseo University, was pretty skeptical.

REK:

I am afraid I am too. Brian is right about most things North Korean. I share his pessimism.

Of course, we all hope for change in North Korea, but the regime has remained remarkably impervious to reform or renewal. Despite 20 years of hardship, including a brutal famine and Kim Jong Il’s stroke, the regime continues to hang on. I see no reason to expect that to change. In fact, the North’s nuclear weapons only serve to strengthen the government in this difficult period. So I see meaningful movement on the nuclear question as almost impossible. To me, the government’s repression and its nuclear weapons go hand-in-hand.

Petra:

How unfortunate. How about Japan? President Lee extended an invitation to the Japanese emperor to come to Korea. That would be quite a breakthrough.

REK:

Your third issue – Korea’s relations with Japan – is the most likely for progress, but again I am pretty pessimistic. What Korea really wants from Japan is a sincere, heartfelt apology for the colonial period of 1910-1945, and an admission that Dodko is, in fact, Korean, territory.

I don’t see either as likely. Just in the last two weeks, another round of Japanese textbook reform missed the chance to narrow the distance. The election of the Democratic Party of Japan is a major event. It has promised better relations with Japan’s neighbors, and above all, that means Korea.  But any apology,  much less an imperial visit, will require a major shift in Japanese popular attitudes toward Korea. An election is simply not enough. And right now, the Japanese persist in old attitudes toward Korea, as a dependent or a little brother. Its apologies continue to be mixed and half-hearted. And they seem unable to formally relinquish claims to Dokdo, even though they already have in substance.

Petra:

How gloomy for your first day on our show! Why did we invite you here? Can you at least close out with something positive?

REK:

Sure, I think the biggest under-appreciated international story in Northeast Asia is enduring peace. For all today’s troubles with China’s growth, Japan’s historical ambivalence, and North Korea’s nukes, East Asia is more peaceful now than it has been in centuries, and wealthier and more contented too. This is a huge achievement – bigger even than Yuna Kim. No one wants to jeopardize that, so one happy prediction for 2010 is the continuation of military peace and of economic growth, both in Korea and the region. This is a good time to live in East Asia. Enjoy it.

Give the IMF a Break Already

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A week ago, I attended a talk by a Hungarian academic on Eastern European countries’ particular problems with the financial crisis. It was sponsored by the PNU EU Center and the Korea-EU Forum – good outfits both.

Ostensibly titled “A Hungarian Perspective on the Future of European Integration,” the talk quickly turned into a list of complaints about IMF conditionality during the current crisis. The audience was receptive; Korea went through an IMF bailout as well that turned the country upside down. The speaker heavily stressed that creditors must share with borrowers the costs of debt crises. She ended with a call for a ‘restructuring of the global financial architecture’ for this purpose. I heard Jeffrey Sachs once at Ohio State say basically the same thing. I am struck by how similar the left’s complaints have been about the global economy since the 70s. A couple of points are in order.

1. I’ve grown tired of the constant use of large-sounding IR jargon to obscure either unlikely leftist proposals (global taxes) or a lack of concrete ideas and notions (rich countries should be nicer). You sound a lot more important if you talk about the need for ‘paradigm shifts’ and ‘new global structures,’ than if you actually say rather mundane things like the IMF should ease up on its inflation targets or Obama should push for global cap-and-trade in carbon.

2. The IMF is world’s financial paramedic. You only call it when the wheels come off your economy, and you’re careening off the bridge. It is bad faith to criticize the Fund when you yourself have caused the crisis – in Hungary’s case by a consumer spending splurge financed by borrowing. Nobody ever calls the Fund when times are good. Nobody ever thanks it for providing resources when no one else will.

3. The IMF does not in fact insist on brutal, one-size-fits-all conditionality, and the Fund has given one program after another to many countries, creating in effect a long-term development relationship rather than a short-term patch. (Read the work of Randall Stone and Ngaire Woods on this generally.) Frequently states welch on the IMF conditions, back-sliding or cheating. The real determinant of the details of conditionality is the conflict between great power interest in the borrower and Fund technocracy.

4. Debt relief has been around for a long-time. and creditors, shareholders, and rich-country taxpayers have carried the costs of LDC profligacy and wasted investment. Institutionalizing or regularizing debt relief would be disastrous, as it would immediate be discounted by private borrowers and likely reduce available development financing and raise its interest rates. More generally, it strikes me as dangerous fantasy to argue against the sanctity of contract, especially in such a high-handed way. This bites the hand that feeds you. If a ‘new international financial architecture’ really means making it easier to get debt relief, than creditors won’t lend to begin with. The moral hazard problems are quite obvious; as much as possible contract must be maintained and borrowers must carry the costs.

5. IMF reforms are usually necessary. Economies don’t just explode overnight. Usually the IMF gets involved because you ran your country off the road yourself. Structural problems pile up and lead to an meltdown. Korea’s economy is dominated by a corporatist oligarchy who sought to unload their costs on taxpayers when the easy money dried up in the Asian crisis. The Fund had nothing to do with this, and the crisis was useful for partially cracking the corporatist-familial lock on the economy that is so common in emerging markets. The Fund’s medicine was good for Korea.

6. You don’t have to borrow from the Fund if you don’t want to. Again, it seems like the height of hubris to bite the hand that feeds you. Some states found dealing with the Fund so disagreeable, they simply won’t do it again. If that is what you want, fine. That’s exactly the right attitude. My own sense is that that is risky, but ultimately that is up to you.

7. Can we stop implying that somehow creditors force borrowers to borrow? If your parents give you a credit card and you buy a car with it inside of paying for your college classes, that is hardly their fault. We are seeing the same logic today about the financial crisis. The Chinese made it so easy to borrow, it was irresistible for Americans to splurge. Gimme a break. Show some basic responsibility. Countries dig their own holes, and lenders only become ‘predatory’ when the mistakes pile up.

And remember the inverse counterfactual. If rich countries and their banks did not lend, then they would be accused of racism, neo-imperialism, coldness to suffering and poverty, and ‘not seeing the people behind the statistics (the credit rating)’. (That last is my all time favorite anti-social science banality.) Recall that this was exactly the logic behind extending credit to the riskiest in the US, which then lead to the financial crisis. Red-lining was racism; cruel bankers saw only credit ratings, not the young under-privileged family struggling for a home. It turns out actually that those credit ratings did have meaning, and ignoring them with implicit government backing has resulted in taxpayers paying the cost of anti-credit rating ‘social justice lending.’ It is a great irony that the World Social Forum wants to eliminate subprime mortgages.

IN short, if you want developing financing, then accept the strings that come with it; if not, then accept international red-ling (as Cuba and NK do). You can’t have both; money isn’t free. And the poor record of official development assistance suggests that free money for LDCs is not a good idea anyway. If you borrow from international finance, expect an IMF stricture if you blow the cash. That is how the game is played. Contracts are contracts, and the IMF is the closest thing we have to insuring their international viability. Try to imagine for a moment how much development finance would disappear without its backstop role. That is a far scarier thought.

The Deficit Matters After All…

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Sometimes the dark or quirky side of me misses the Bush administration. Who can forget those ‘great’ Rumsfeld press conferences where he would attack the media (‘back off,’ ‘freedom is messy’)? Or Bush for his mind-blowing sillinesses (‘heckuva job,’ the ‘moo-lahs’ of Iran) and catastrophic English. Or Cheney (‘no doubt Iraq has nuclear weapons, ‘ deficits don’t matter’)? The political scientist in me can’t help, a little bit, but miss the sheer fun provoked by the endless stream of foolishness from the bad old days. R Gates is vastly superior SecDef, but for sheer entertainment value, you could always count on Rumsfeld to say something ridiculous on TV or Capital Hill and to provoke you. My top three ballonhead moments for W are:

1. When he ran in 2000, he was asked to name his favorite political philosopher and he said Jesus. For a nanosecond, the academic in me thought of Thomas Pangle. The moderate centrist citizen in me gaped in astonishment. To this day I remember that that line sealed my decision to vote for Gore.

2. In 2004 (I think), W was asked in a press conference what mistakes he had made. He said nothing for 15 seconds, before ducking the question. I remember exactly where I was when that happened, it stunned me so much.

3. In one of the State of the Union addresses, Bush said we could balance the budget without raising taxes. I was playing a SotU drinking game with a friend. I think I just about fell off the sofa laughing when I heard that one, and then again when I had to drill my whole cocktail in payment.

So now that reality has returned a little under the great O, another fine Bush era fantasy has just proven to be the illusion serious people always knew it was. It turns out the deficit does matter. How nice to learn once again what my freshmen learn in basic IR when we cover IPE and American power.

When W became POTUS, the deficit was under $6T. When he left, it was over $9T. Even while the economy was growing, we couldn’t balance the budget – which is a basic requirement if you want to borrow during the hard times (Clinton did this in his second term). Now the not-so-great-after-all O will give us trillion dollar plus deficits every year! Gah! I tell my Asian students this (gasp!) and then remind them who we expect to buy all those T-bills (GASP!). If Obama thinks they will just buy, buy, buy, he’s wrong. They may be great savers out here, but they’re not stupid.

Just in case you needed another W-era failure to reinforce your scope of what Obama has to fix, this is probably W’s worst pedestrian, everyday failure. It does not have the media glare and awful human toll of Katrina or Iraq, but this will effect the average American much more than those ‘highlights.’ And it is worse, because so few people understand it. You can see the awfulness of Iraq or Guantanamo on TV or when you travel and meet foreigners who loathe W and you have to tell them you come from Canada. But the deficit and the staggering debt have the kind of micro-effects only someone trained in economics can see in detail. This is not an argument for social science intellectual superiority; I mean only that it takes weeks of classtime for me to explain budgeting to my undergraduates, whereas they could grasp the Iraq mess pretty easily. The budget trainwreck is a complex topic. It is a failure that is easy to hide, dissemble about, or just ignore, as Cheney’s locution makes clear. But in myriad little ways, we must pay for this everyday. It sucks money from the budget to pay for interest on the debt (so we can keep a AAA credit rating in order to borrow MORE); it threatens higher interest rates and inflation should we lose the ability to finance it; it weakens US superpowerdom by placing vast dollar reserves in the hands of foreigners, especially China, who may not share our values. Consider, if China and Taiwan get in a shooting war, how hard it will be for the US to help Taiwan if China threatens to dump all its dollars abruptly.

So at least these people are out of government and some measure of sanity has returned. At least the Republicans can now be the voice of fiscal sanity in opposition they failed to be when in power. The irony is rich – an inverse of the ‘only Nixon can go to China’ notion. Only Clinton would try to balance the budget, because Dems are open and sensitive to the charge they tax and spend. The GOP under W went wild with the fiscus, because the usual voices for spending restraint (the Wall Street Journal, e.g.) were quiet.

Perhaps the larger problem though is we the taxpayers. It increasingly seems like the dominant problem is that Americans want government, but don’t want to pay for it. And ‘deficits don’t matter’ fits perfectly with such an attitude.