Who's Counting: Double Deficits

Jan. 2, 2005 -- -- Last month there was yet another dreary news story about American students' less than stellar performance on international achievement tests in math and science. Note, though, that this column will not be another dreary commentary on this dreary story.

The recent test, Trends in International Mathematics and Science Study, is probably as good a barometer of relative achievement as any (although, in my opinion, weighing narrow computational skills too heavily). It showed Singapore, Korea, Taiwan and Hong Kong taking away the honors. Having just returned from Hong Kong and Shanghai where business news, market indices, and currency fluctuations dominate TV and newspapers, and where there is an obsession with horse racing, other forms of gambling, and all things numerical, I don't find the results at all surprising.

Also in the news last month (and every month) was a spate of stories about the budget and trade deficits in this country, the historic low of 0.2 percent in Americans' savings rate, and the effect these were having on our trading partners. Again the contrast with China is stark. A feeling of an imminent goldrush strikes even the most superficial observer in Shanghai where businessmen from all over the world have set up shop to negotiate deals.

These two sets of stories may not be as unrelated as they seem, however, and this finally brings me to the meat of this column: the following somewhat parallel arguments.

1. We have a big budget deficit in this country. This is to say that we spend more money than we collect in taxes (approximately $400 billion more this year).

2. So we have to scare up a good deal of money to make up the difference.

3. Since American savings rate are at an-time low, we can't borrow very much from ourselves. There isn't a large pool of domestic savings that can be tapped for purchase of U.S. treasury bonds.

4. As a result we turn to other countries that have a lot of dollars sitting around their central banks (usually because we buy more from them than they buy from us).