What Would Gorbachev Say? On The US, China, And Saudi Arabia

President Obama is on his way to Saudi Arabia, and Secretary Geithner is done with his major initiative in China.  In part, this is just the US normalizing its relations with the rest of the world and rebuilding some basic diplomatic niceness.  But it’s also about reshaping – or not – the way the world’s economy works after the crisis.

From all appearances, President Obama will ask the Saudis to continue their efforts to stabilize the oil market, including by bringing new production on stream, and the Saudis will offer – to the best of the abilities – to play exactly this role within OPEC.  Of course Secretary Geithner just asked the Chinese to continue their efforts to stabilize the market for long Treasuries, including by investing their current account surplus in US secruties, and the Chinese have agreed – with some pretend grumbling – to play this role.

It looks like adding up to a big mistake – just ask Mikhail Gorbachev.

You don’t have to take a completely pro-Reagan view to agree that the US boxed the Soviet Union into overinvesting in an unproductive rent-seeking sector (the military-industrial complex), which wasted a huge amount of productive resources and undermined the economy’s broader innovative potential – as well as its ability to put basic consumer goods on the table.  Even worse, when Gorbachev did try reform, the system proved so brittle and the capture of policy so complete that the whole empire collapsed in debt, inflation, and catastrophic tunneling (in turn leading to a new wave of oligarchs, etc).

If we continue to depend on “cheap enough” oil, that’s dangerous enough in geopolitical terms.  But if we run our economy so we finance our oil imports by borrowing heavily from the outside world (not all from China; the Middle East and Japan are also big providers of net savings), we are asking for trouble.

The collapse of the dollar is not necessarily imminent, and the temporary use of deficit spending makes senes as a way to get through this deep recession.  But when exactly do we plan to wean ourselves off (a) the oil, and (b) the borrowing from abroad?  This doesn’t have to be done tomorrow, but it has to be done – unless it is somewhere written that the US will stay powerful and solvent forever.

We should be committing ourselves to energy prices (and carbon prices) that rise over time, hence creating an incentive for innovation in fuel efficiency (and lower emissions) throughout the economy.  The Saudi swing-producer role means that, if things go well, they keep pushing oil prices down below the pain point, thus limiting longer-term moves away from oil (and they are quite explicit about this as their goal).  The Chinese swing-investor role means that, at best, long-term interest rates will remain low enough for us to feel like we can keep borrowing (you can draw your own conclusions on their true goals).

Show me the policies-in-place that bring down our external payments deficit, and explain the commitments that will really make this happen. Or even start the conversation in these terms, domestically and with our various kinds of allies overseas.

Just don’t tell me that the financial sector will collapse if we make any moves in the right direction, e.g., cutting back on our current budget-breaking implicit subsidies to that enormous rent-seeking sector; we’re on our way to doubling our debt/GDP ratio, from around 40% to near 80%, directly because of the way this sector has behaved.  Remember the excessive power of particular sectors (and all their policymaking friends) consistently hampers sensible efforts to reform any economy. If that’s too vague for you, look at how and why Gorbachev failed – and all the awful consequences.

There are people who attribute the entire subprime debacle to irresponsible borrowers.  Personally, I would spread the blame more broadly, including lenders, the way the financial system has come to operate, and the way US and European governments looked the other way – or supported the prevailing ideology – as a megabubble developed.

But it is true that someone has to step up and take responsibility any time you see a potential debt bubble developing.  And for our current level of international indebtedness and where this is headed, who will now take responsibility?  Or, if that’s too complicated a question, let’s try a simpler version: who will tell the President?

Originally published at The Baseline Scenario and reproduced here with the author’s permission.

3 Responses to "What Would Gorbachev Say? On The US, China, And Saudi Arabia"

  1. J-Gr   June 3, 2009 at 12:28 am

    Halleluiah! These deficits and imbalances cannot go on forever, and it’s funny how each empire manages to convince itself that IT is the exception. It’s particularly striking that the elites would rather turn to SOCIALISM (banking, car industry, who is next?) than question why the US should pay for military bases in, say, Germany or in some Whateveristan God knows where?Also, their arrogance is endless. To think that THEY could do a good job of picking new technologies (green, whatever?) and managing banks, car companies, and others is just ludicrous. It’s as if they believed that the only problem with the USSR wasn’t the system but that they didn’t have Geithner or Paulson?We live in turbulent times of rapid and fundamental shifts in patterns of production and consumption on the global scale. This is precisely the time to let the market pick successful enterprises. Instead, the way things are going, this country’s elites are doing their best to PREVENT the next Microsoft/Intel/Google/etc. from emerging in this country. What better way to kill entrepreneurship (traditional relative advantage of the US) than to take over the entire economy? Even in an old industry like banking or automobile, how will a competent and well managed institution ever reemerge if the government keeps interfering and changing the rules?But then, I guess, the free market would have been pretty merciless to the financial elites that are in charge. Personally, I would have loved to have seen the breakup of mega-irresponsible mega-banks and fire sales of their assets to small but well-managed regional banks and even credit unions. Haircuts for the shareholders and creditors would have been a great lesson for everyone as well. Sure, there would have been some pain, but then we would have really smartened up and things would have been much, much better in the long run. In fact, I suspect that most people wouldn’t mind pain nearly as much if it were there to enforce good behavior instead of precisely the opposite that we have now.The really scary part, though, is that whereas I can imagine how the free market would have quickly smartened up our financial “elites” and bad managements, I don’t even see a mechanism other than the total collapse of the dollar that will help us deal with the military-industrial complex and the foreign policy elites gone wild. I guess this is a problem in most empires and that’s why they end the way they do.

    • Guest   June 3, 2009 at 4:38 am

      My friend, the politicians are supporting their donors! Why would they bite the hand that feeds them? Moreover, taking them over means expanded power.The US has longed ceased to be a ‘laisser-faire’ economy of ‘creative destruction’. Today it is a corporatist model ruled by an interlocking financial and political elite.

  2. Irini Fountoulaki   June 3, 2009 at 4:34 am

    The US political elite in the Obama administration seem to have other priorities. I do not think that their thinking is very different from the politics in US state governments. Big government spending means expanded political power and patronage. Because taxes are unpopular, politicians prefer to borrow first and then later present the bill in higher taxes down the line. OK we cannot change vices in human nature, albeit I would agree strongly with you that there is massive asset misallocation in Beltway crony politics that justifies Schumpeter’s worst corporatist nightmares.How to finance all this is the issue at hand. Many economists like Bruce Bartlett and Paul Krugman feel that taxes in the US are simply too low and should be raised, which in their mind would balance accounts to service the debt.Personally I think that extracting higher taxes in such a non-productive, rent-seeking situation is simply another expression of your Gorbachev dilemma.What say you to higher taxes as the solution?