Bush to blame for the U.S.-China syndrome

By Sen. JACK REED
KNIGHT RIDDER/TRIBUNE
George W. Bush touts himself as a "CEO President." But it doesn't take someone with a Harvard business degree to realize that China is manipulating its currency and, in doing so, harming the U.S. economy.
By deliberately holding China's currency, the yuan, at 40 percent below its fair market value against the dollar, China keeps its prices artificially low, giving Chinese companies and goods a huge competitive advantage in the international marketplace.
There is overwhelming bipartisan agreement that the Bush administration pulled its punch by not labeling China a "currency manipulator" in its latest report to Congress. Republicans and Democrats alike admonished the administration for turning a blind eye to China's obvious efforts to keep its currency weak.
But few pointed to the White House's contribution to the large payment imbalances that now characterize the international financial system, which begins with our own budget deficit. Call it the U.S.-China syndrome.
Budget deficit
A syndrome is a group of things or events that form a recognizable pattern, especially of something undesirable. It is fair to say that our large and growing budget deficit and China's currency conduct are hardly desirable patterns.
President Bush inherited a $5.6 trillion 10-year budget surplus achieved through sound budget policies and a strong economy in the 1990s. That legacy of fiscal discipline has been squandered and turned into a legacy of deficits and debt. The result has been a sharp decline in our national saving and increased borrowing from the rest of the world to finance our budget shortfall and excess spending.
The consequence of our borrowing binge is that the United States is by far the world's largest international debtor. Last year the U.S. current account deficit was $805 billion, which means that spending by American citizens and the federal government outstripped our income by an amount equal to 6.4 percent of our gross domestic product.
Borrowing such large sums from the rest of the world is neither wise nor a sustainable economic strategy.
Foreign holdings of U.S. Treasury securities have more than doubled since President Bush took office. Almost all of the increase in publicly held debt has been purchases of U.S. Treasury securities by foreigners, including foreign governments.
It is one thing when we owe the debt to ourselves; it's quite another when we owe it to the rest of the world.
The governments of Japan and China are our two largest official creditors. China has increased its holdings of Treasury securities by 423 percent since 2001. Much of that increase has come as a result of purchases by China's central bank to prevent the yuan from appreciating against the dollar.
In the last month, many foreign currencies have appreciated significantly against the U.S. dollar. The British pound is up over 7 percent; the Swiss franc, Japanese yen, and Australian dollar are up over 6 percent; the Euro is up over 5 percent; yet the Chinese yuan has only appreciated a miniscule 0.1 percent against the dollar.
Trade deficit
Meanwhile, the U.S. trade deficit with China rose to a record $201.6 billion last year. As China continues to encourage export growth by not allowing its currency to appreciate, American workers in competing industries suffer.
China's role in threatening the stability of the international financial system cannot be ignored, but our own role in creating large payment imbalances must also be recognized.
The cure for the U.S.-China syndrome begins at home by getting our fiscal house in order.
The first test of the president's new Treasury Secretary nominee, Henry M. Paulson, is to become a strong voice for restoring sound budget policies. He must provide a realistic viewpoint of the serious issues facing the American economy, even when that may not be what the administration wants to hear.
President Bush is fond of slogans like "stay the course." But if we don't change course, our children and grandchildren will have to repay these irresponsible debts and future generations will suffer.
Sen. Jack Reed, D-R.I., is the ranking member of the Joint Economic Committee and a member of the Senate Banking Committee. Distributed by Knight Ridder/Tribune Information Service