While President Bush has been on the road trying to woo public support for his plan to privatize Social Security, two of the nation's economic gurus have been warning that the country is flirting with financial disaster. It's time for the president to stop focusing on a risky and unpopular scheme for addressing the problems of 2040 and to pay more attention to crises that could unfold during the next few years.
The difficulties with Bush's plan for private investment accounts have become clear: First, it wouldn't address the solvency of the Social Security system, which Bush rightly warns is a serious problem, and it might actually make that problem worse; and, second, it's unpopular with the folks who just reelected Bush. A Washington Post-ABC News poll released Monday showed that only 35 percent of Americans say they approve of Bush's handling of the issue.
What's truly unfortunate about Bush's privatization road show is that it has distracted him and the nation from the financial threats that loom just over the horizon. Those dangers were highlighted in frightening analyses made this month by investor Warren Buffett and Federal Reserve Chairman Alan Greenspan. Though the two differ about precisely what may lie ahead, they agree that unless the United States puts its financial house in order, it faces real trouble.
Buffett's comments came in his annual letter to shareholders of Berkshire Hathaway Inc., released March 5. Every year, Buffett's letter offers blunt economic analysis, and it has become a kind of cult object for his devotees. But this year's version was enough to give you indigestion after devouring the sage's favorite meal of a T-bone steak and double hash browns at Gorat's in Omaha. Indeed, it was downright scary in its comments about the dangers posed by America's trade deficit.
Buffett has argued since 2003 that this huge trade deficit will eventually bring a sharp decline in the dollar, and he has tried to protect his company's shareholders against that dollar crash by speculating in foreign currencies. But this year, with the trade deficit having ballooned to a record $618 billion in 2004, Buffett's tone is almost apocalyptic.
"The evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come," Buffett writes. "The decline in its value has already been substantial, but it is nevertheless likely to continue. Without policy changes, currency markets could even become disorderly and generate spillover effects, both political and financial." That's careful language, but what Buffett is saying is that America is risking a financial crash -- a bursting bubble -- if political leaders don't do something about the trade deficit.
Buffett phrases his analysis in his usual homespun metaphors. By buying more abroad than we produce at home, "We are like a family that consistently overspends its income," he writes; we are financing this self-indulgence only by writing IOUs that are claims on our future income. Rather than an "ownership society," we are creating a "sharecropper's society" that, by Buffett's calculation, will owe the world $11 trillion by 2015 if we continue on the current course. Servicing that debt would cost $550 billion annually, a payment to the rest of the world that "would undoubtedly produce significant political unrest in the U.S.," Buffett fears.
Greenspan focuses on the other looming financial disaster, the federal budget deficit. In a March 10 speech to the Council on Foreign Relations, he warned that the deficit "will rise significantly as the baby boomers start to retire in 2008." And he offered a stark warning that this rising deficit could eventually threaten U.S. financial markets: "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances." In other words, politicians have to solve this problem; the markets can't.
I should note that Greenspan disagrees with Buffett about the trade deficit. The Fed chairman thinks that over time a declining dollar and other adjustments will reduce U.S. demand for expensive imports. There's no sign that this gradual market adjustment is happening, however. Despite a falling dollar, the trade deficit increased in January to $58.3 billion, the second-highest monthly total ever.
Our wisest economic thinkers are sounding the alarm bells, but where are the political leaders? Where, in particular, is President Bush? After Sept. 11, 2001, he showed that he could rally the country to deal with a deadly threat to its security. He faces that challenge again in dealing with the nation's financial imbalances. Bush should put the distraction of his privatization plan behind him and focus on the economic crises that are here and now. Time to step up, Mr. President.