America’s Future Depends On Learning From Past Mistakes

One fact that holds true is history tends to repeat itself. Americans are traveling down a road previously traversed by Latin Americans; promoting imports over exports, falling deep into debt while losing our central ability to promote and create jobs through manufacturing.

America’s beleaguering facts show: as of July 2008, national debt is $9.4 trillion, while the balance of trade deficit was $708.5 billion in 2007, coupled with the loss of 15,397 U.S. companies since 1978. These facts do not show a strong, independent nation, instead, one dependent on the financing of foreign banks, paralleling Latin America’s past.

Latin America’s demise began after the Bretton Woods conference of July 1944. A group of economists, led by Raul Prebisch, decided to enact a plan of import-substitution industrialization (ISI). ISI was a plan to favor imports over exports to subsidize a weak and uncompetitive industrial sector, leading to competition with and emulation of the rapid growth and industrialization of the East Asian Tigers – Taiwan, South Korea, Hong Kong and Singapore. The plan crippled Latin America’s central work force, by placing harsh tariffs on the exportation of agriculture and timber, while creating a market profitable for the importation of these products. Subsidies created led to a failing industrial sector – maintained only by lending from foreign banks – jobs lost and a massive class divide between the rich and poor. This reflected the middle classes’ inability to promote economic activity and invest into savings; all tell-tale signs of an economy on the verge of failure.

In 1979, Mexico’s foreign debt totaled $28.8 billion while Brazil’s debt was $35 billion – and by 1982 – Mexico defaulted on its U.S. loans, declaring they could not repay them. All banks refused to continue lending to the entire region, sending it into one of the worst debt crises ever witnessed. By 1995 Mexico’s foreign debt soared to $165.7 billion and Brazil’s hit $159.1 billion. Brazil and Argentina experienced hyperinflation – rates of more than 2,000 percent – in the ‘90s and 2000s as their governments scrambled to print money. Many Latin American nations have not rebounded from the crisis. Those that have, did so with direct U.S. loans at high interest rates or under the cruel stipulations of the IMF, requiring strict taxes on citizens, sky-high loan rates and a reorganization of infrastructure.

The modern U.S., like past Latin America, is traveling down a road of insurmountable debt, coupled with taxes that promote foreign exports over imports and the loss of American jobs. Several factors have led to this unsustainable economic state.

First, the VAT devastates American trade by placing a de facto tariff on exported U.S goods, while providing a rebate subsidy to foreign exports entering the U.S. The tax burdens U.S. producers by putting their products at an unfair competitive disadvantage in their profits in a global market. Taxes placed on U.S. exports, in combination with rebates provided to foreign producers were $428 billion in 2006, while costing American producers $218.2 billion. The VAT tax encourages American companies to leave domestic soil in search of alternatives to the tax.

Second, as American companies leave our soil, we lose our ability to maintain and create new jobs. With the loss of more than 15,000 U.S. companies since 1978, America is losing its ability to remain a producer in a global market. What we do not produce – 20 percent of American manufacturing is foreign owned – we import, creating our large trade deficit. Continued foreign acquisitions will lead to stagnation in production, while rising job losses – currently at a 5.5 percent unemployment rate –create a rift between the upper and lower class, representing the inability to spend and save money.

Finally, as exports and production declines, so does the inflow of capital, causing America to print money and sell stocks and bonds to other nations. This practice drives down the value of the dollar, which has been in a steady decline since 2001. This makes all imports more expensive, harming the middle-classes ability to spend and contribute to economic growth. Foreign nations will eventually lose their desire to continue purchasing U.S. treasury in support of our massive foreign debt. We currently owe Japan $517.2 billion and China $405.5 billion.

If our reliance of foreign financing and imports continues, America is destined to repeat Latin America’s history. It is impossible to dig ourselves out of debt without the backbone of strong manufacturing and self-reliant production. When China and Japan decide the dollar has devalued enough and halt their purchase of it, will we default on our insurmountable debt? Could we rely on American industry in its current state to regain our sovereignty?

It should be the goal of all Americans to tackle these economic challenges - if we do not, a bleak future awaits us.

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