Trade Imbalances and the Return of Keynes

The US is borrowing about $3 billion a day, just to offset the trade imbalance with China. The Bush Administration blames China for it's under valued currency. But even if China values it's currency at a higher rate, the US would still be borrowing $2 billion a year.
Economics has been undergoing a hidden civil war. Keynes has fallen out of favor by Republicans trying to "starve the beast" of the government institution. So they've run up a huge budget deficit and ignored a trade imbalance. The rich aren't too worried about this problem because they fund their own safety net and think the rest of America could do the same. But of course they feather their nest at the expense of the working person who can barely afford his rising rent or mortgage on his stagnant income.
The Keynes approach? Raise taxes on the rich, cut taxes on the lowest incomes. What an amazing idea!
New York Times

Nothing significant can be done about these global imbalances unless the United States attacks its own problems. No one seriously proposes that businesses save money instead of investing in expanding production simply to correct the problem of the trade deficit; and while there may be sermons aplenty about why Americans should save more — certainly more than the negative amount households saved last year — no one in either political party has devised a fail-proof way of ensuring that they do so. The Bush tax cuts didn’t do it. Expanded incentives for saving didn’t do it.


Indeed, most calculations show that these actually reduce national savings, since the cost to the government in lost revenue is greater than the increased household savings. The common wisdom is that there is but one alternative: reducing the government’s deficit.


Imagine that the Bush administration suddenly got religion (at least, the religion of fiscal responsibility) and cut expenditures. Assume that raising taxes is unlikely for an administration that has been arguing for further tax cuts. The expenditure cuts by themselves would lead to a weakening of the American and global economy. The Federal Reserve might try to offset this by lowering interest rates, and this might protect the American economy — by encouraging debt-ridden American household to try to take even more money out of their home-equity loans to pay for spending. But that would make America’s future even more precarious.


There is one way out of this seeming impasse: expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the “switch” in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit.


Not surprisingly, these recommendations did not emerge from the International Monetary Fund meetings in Singapore. The United States retains a veto there, making it unlikely that the fund will recommend policies that aren’t to the liking of the American administration.


Underlying the current imbalances are fundamental structural problems with the global reserve system. John Maynard Keynes called attention to these problems three-quarters of a century ago. His ideas on how to reform the global monetary system, including creating a new reserve system based on a new international currency, can, with a little work, be adapted to today’s economy. Until we attack the structural problems, the world is likely to continue to be plagued by imbalances that threaten the financial stability and economic well-being of us all. MORE