TREASURY Secretary John W. Snow did his best to sound serious over the weekend about the fault lines in the world economy. He called on China to stop pegging its currency to the dollar, a reform intended to allow the Chinese currency to rise, easing the flood of cheap exports that contributes to the record U.S. trade deficit. At the same time, Mr. Snow promised cuts in the U.S. budget deficit, which would reduce the nation's consumption, including the consumption of imports; Japan and the European Union were urged to promote growth, which would suck in U.S. exports. All of these reforms are intended to bring the nation's trade deficit back toward balance. If they fail, markets may cut the trade deficit in their own blunt way -- via a precipitous collapse of the dollar.
The problem is that nobody believes Mr. Snow's rhetoric. He reiterated the administration's plan to cut the deficit to less than 2 percent of gross domestic product, down from 3.6 percent last year. But this plan leaves out the cost of operations in Iraq and the general war on terrorism, and it assumes no reform of the alternative minimum tax and no rise in federal spending. Using more plausible assumptions, the Center on Budget and Policy Priorities expects the budget deficit to hit a low of 2.5 percent in 2010 and then start rising again.
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Perhaps because Mr. Snow's budget promises are not credible, the United States has done little to force its international partners to play their parts. European leaders are dragging their feet on pro-growth structural reform, and the chief of the European Central Bank refuses to contemplate lower interest rates, baffling most independent observers. Japan's recovery continues to be weak, and the Japanese conspicuously refused to join the Europeans and the United States in calling on China to change its currency policy. In short, the Bush economic team is failing diplomatically as well as failing to present a plausible budget policy.
As with budget deficits, the risks posed by the U.S. trade deficit may not materialize for a long time. High oil prices have created windfall revenue for oil exporters, and the windfalls have to be invested somewhere -- so for the moment the United States can continue borrowing to pay for imports. At the same time, strong economic growth has distracted investors from bad deficit news; last year the world economy grew by more than 5 percent, the fastest in a generation. But the trade deficit, which is already the biggest on record, continues to grow. Americans cannot consume more than they produce forever.
