Xenophobia at the New York Times

The New York Times editorial page went a bit overboard in its anti-Bush tirade on the budget deficit. The basic point, that the Bush administration deficits are too large, is on the mark. (By the way, they could better make this point using the gross deficit [4.0 percent of GDP], which includes the money borrowed from Social Security, or better yet, just report the change in the ratio of gross debt to GDP.)

If the Times had left the issue there, all of us econ types could happily applaud this push for fiscal responsibility. But our intrepid Times editorial writers felt the need to push further. They tell us that the debt is especially troublesome because 43 percent is in foreign hands and "debt owed to bankers in Beijing, Tokyo and elsewhere could destabilize the dollar and from there, drive up interest rates and prices." Huh?

Okay, let's check the bases here. Most foreigners hold government debt for the same reason that investors in the U.S. hold debt, they value its safety, and also expect a decent return. Is there a set of events that will cause bankers in Beijing, Tokyo, and elsewhere to dump their U.S. government debt, which will not also cause bankers in New York, San Francisco and Chicago to dump their debt? Is the Times promoting the image of the patriot banker who holds onto their U.S. government bonds, even as their price falls through the floor? In the interest of the environment, the NYT should save a few trees and not print such nonsense.

Of course not all foreigners hold bonds for their safety and return. Foreign central banks (most importantly the Chinese and Japanese central banks) have bought up vast amounts of U.S. government debt in order to keep the dollar high. Their reason is that a high dollar makes their exports cheap to people in the United States, and export growth was helping to drive their economies.

These central banks will stop buying, and possibly start selling, U.S. debt when it fits their economic strategy. This can be destabilizing for the U.S. economy, leading to higher interest rates and higher prices, as the NYT editorial suggests, but this has nothing to with Bush's budget deficits. The problem here is simply that the U.S. allowed the dollar to get overvalued.

The main villain here is Robert "strong dollar" Rubin. He was the one who initiated the high dollar policy back in the mid-nineties. Politically, this is great policy. It allows for substantial short-term gains (low inflation and higher living standards for those protected from import competition), at a cost of substantial long-term pain. Bush of course is complicit in this high dollar policy, since he did not move aggressively to bring the dollar down to a sustainable level.

Anyhow, we will pay a large price, possibly in the near future, for this short-sighted high dollar policy. But, the fault here lies primarily with Rubin and Clinton, not the current occupant of the White House.

--Dean Baker

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