REDUCE THE DEFICITS
May 20, 2010
Each year, foreign governments and investors increase their holdings of U.S. debt. In effect, they are lending the United States money to finance its excess of imports over exports. However, continued excessive deficits could make U.S. trading partners reluctant to continue the process. Reluctance to buy or efforts to sell dollar holdings by foreign investors would cause U.S. equities to decline, interest rates to spike and the dollar to plunge.
While the United States' status as a debtor nation is unlikely to pose a severe threat in the near future, it would still be wise to reduce the nation's vulnerability sooner rather than later. There are multiple ways to do so, says Robert McTeer, a distinguished fellow with the National Center for Policy Analysis:
- Permanent tax incentives to encourage domestic saving would likely lower both the budget deficit and trade deficit.
- Cuts in marginal tax rates reinforced by slower government spending growth might reduce the budget deficit, increase the domestic capital sock and encourage exports.
- Reducing the budget deficit would reduce the vulnerability of the U.S. economy to foreign creditors.
Entitlement programs should also be reformed to partially prefund health care and retirement spending. This would put the government on a different spending path, increasing job creation and domestic investment. As a result, the U.S. economy would be more productive and competitive with the rest of the world, says McTeer.
Source: Robert McTeer, "What about Those Deficits?" National Center for Policy Analysis, Brief Analysis No. 704, May 20, 2010.
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