The explanation of steps two and three is much quicker: People kept living longer, and they kept saving less. Increased longevity is a tremendous human achievement but a fiscal challenge—as in any household where people outlive their savings. Late in 2003 Congress dramatically escalated the fiscal problem by adding prescription-drug coverage to Medicare, with barely any discussion of its long-term cost. David M. Walker, the government's comptroller general at the time, said that the action was part of "the most reckless fiscal year in the history of the Republic," because that vote and a few other changes added roughly $13 trillion to the government's long-term commitments.

From the archives:



(January 2003)

It's a precarious situation: U.S. consumer spending is sustaining the economy—but we need to save more to prepare for the surge in retirements. Here's how to boost personal saving without undermining the economic recovery. By Michael Calabrese and Maya MacGuineas "Spendthrift Nation" (January 2003)It's a precarious situation: U.S. consumer spending is sustaining the economy—but we need to save more to prepare for the surge in retirements. Here's how to boost personal saving without undermining the economic recovery. By Michael Calabrese and Maya MacGuineas

The evaporation of personal savings was marveled at by all economists but explained by few. Americans saved about eight percent of their disposable income through the 1950s and 1960s, slightly more in the 1970s and 1980s, slightly less and then a lot less in the 1990s. At the beginning of this century they were saving, on average, just about nothing.10

The possible reasons for this failure to save—credit-card debt? a false sense of wealth thanks to the real-estate bubble?11 stagnant real earnings for much of the population?—mattered less than the results. The country needed money to run its government, and Americans themselves weren't about to provide it. This is where the final, secret element of the gun-cocking process came into play: the unspoken deal with China.

The terms of the deal are obvious in retrospect. Even at the time, economists discussed the arrangement endlessly in their journals. The oddity was that so few politicians picked up on what they said. The heart of the matter, as we now know, was this simple equation: each time Congress raised benefits, reduced taxes, or encouraged more borrowing by consumers, it shifted part of the U.S. manufacturing base to China.

Of course this shift had something to do with "unfair" trade, undereducated American workers, dirt-cheap Chinese sweatshops, and all the other things that American politicians chose to yammer about. But the "jobless recovery" of the early 2000s and the "jobless collapse" at the end of the decade could never have occurred without the strange intersection of American and Chinese (plus Japanese and Korean) plans. The Chinese government was determined to keep the value of its yuan as low as possible, thus making Chinese exports as attractive as possible, so that Chinese factories could expand as quickly as possible, to provide work for the tens of millions of people trooping every year to Shanghai or Guangzhou to enter the labor force. To this end, Chinese banks sent their extra dollars right back to the U.S. Treasury, in loans to cover the U.S. budget deficit; if they hadn't, normal market pressures would have driven up the yuan's value.12 This, in turn, would have made it harder for China to keep creating jobs and easier for America to retain them. But Americans would have had to tax themselves to cover the deficit.

From the archives:



(January 2003)

The growing trade deficit threatens U.S. living standards and makes the country dangerously vulnerable to economic extortion. The way out is to make foreigners act more like us. By Sherle R. Schwenninger "America's 'Suez Moment'" (January 2003)The growing trade deficit threatens U.S. living standards and makes the country dangerously vulnerable to economic extortion. The way out is to make foreigners act more like us. By Sherle R. Schwenninger

This arrangement was called "Bretton Woods Two," after the regime that kept the world economy afloat for twenty-five years after World War II. The question economists debated was how long it could last. One group said it could go on indefinitely, because it gave each country's government what it really wanted (for China, booming exports and therefore a less dissatisfied population; for America, the ability to spend more while saving and taxing less). But by Bush's second term the warning signals were getting louder. "This is starting to resemble a pyramid scheme," the Financial Times warned early in 2005.13 The danger was that the system was fundamentally unstable. Almost overnight it could go from working well to collapsing. If any one of the Asian countries piling up dollars (and most were doing so) began to suspect that any other was about to unload them, all the countries would have an incentive to sell dollars as fast as possible, before they got stuck with worthless currency. Economists in the "soft landing" camp said that adjustments would be gradual, and that Chinese self-interest would prevent a panic. The "hard landing" camp—well, we know all too well what they were concerned about.

2. Pulling the Trigger

The 2008 election, like those in 2000 and 2004, could have gone either way. If Fidel Castro had died two years earlier, the second Bay of Pigs tragedy and related "regime change" difficulties might have been dim memories by Election Day. Or if he had died a year later, the Cuban-American bloc of Florida voters would have been as reliably Republican in 2008 as in the previous fifty years. Since the red state-blue state divide was otherwise the same as in 2000 and 2004, if the Republicans had held Florida they would presumably have held the White House as well—despite mounting unease about debt, deficits, job loss, and rising U.S. casualties in Pakistan.