Economist Jim Devine writes: “The problem (for the American economy), of course, is the Three Bears: 1. Papa Bear: the steep rise of U.S. external indebtedness. 2. Mama Bear: the steep rise of U.S. consumer indebtedness. 3. Baby Bear: the increased indebtedness of non-financial corporations.”

Take Papa Bear: America’s nearly $370 billion trade deficit in 2000, the imbalance between what Americans bought and sold worldwide. Americans have been borrowing to buy foreign goods on the cheap, Devine adds. From where does this money originate? During a two-year period ending in December 1998, America’s financial debt to foreign lenders tripled to $1.5 trillion, according to the Financial Markets Center.

Strikingly, this imbalance in the U.S. economy hasn’t exactly been front page news. What is now on page one is President Bush’s proposed budget plan of reductions in federal taxes and the national debt. His policy sounds spartan. Yet it misdirects the American people’s attention from the financial fragility of the nation’s economic expansion.

According to Robert Blecker of the Economic Policy Institute, “In fact, the U.S. economy’s current prosperity rests on the fragile foundations of a consumer spending boom based on a domestic stock market bubble, combined with foreign bankrolling of the U.S. trade deficit. If present trends continue, the growth in the U.S. international debt will not be sustainable in the long run. No country can continue to borrow so much from abroad without eventually triggering a depreciation of its currency and a contraction of its economy. The rising trade deficit and mushrooming foreign debt are thus warning signals of underlying problems that—if not corrected—could bring the U.S. economic boom crashing to a halt in the not-too-distant future.”

Could there be a lesson from the remarkable growth of the East Asian “tiger economies” before they crashed in summer 1997? The nations of East Asia flourished on foreign debt. In this respect, East Asia’s past prosperity resembles the U.S. economy of the Clinton era. However, there are important differences, Devine cautions. Here’s one: America can repay its international debts with dollars. The East Asian nations couldn’t use their currencies to pay foreign lenders. The consequences have been dreadful for the vast majority of the East Asian population.

Which brings us to Mama Bear. “The household sector’s outstanding debt has nearly doubled since 1990,” Jane D’Arista observes. Workers borrow to make up for falling or stagnant wages, which have just begun to rise. “The recent gain in wages is a welcome reversal of long-term wage decline, but most working families are still playing catch-up,” economist Jared Bernstein notes. The U.S. minimum wage of $5.15 per hour helps drive the wage gap. Workers’ lost ground has led to the wealthiest one percent of Americans now owning more wealth than the bottom 90 percent.

Changing relations between American employers and employees also help fuel wage inequality. Private and public employers cut the wages and benefits of employees, especially entry-level workers. Cases in point are their lower starting benefit packages and salaries.

Public and private employers also cut their employees’ wages with unstable work. A study at UC San Francisco found that in 1999, “only a third of California workers have ‘traditional jobs’—that is, single, permanent, full-time, day-shift work paid for by an employer at the employer’s site.” Part-time, contract, and other non-full-time workers represent 10% of the work force nationwide, the Wall Street Journal reports.

Debt-financed spending has another consequence. Over-borrowing causes under-saving for the working majority. The 1990s was the decade of debt for many working Americans. As a result, many of them have too little savings for emergency situations.

What of additional interest-rate cuts by the Fed? All things being equal, this monetary policy may well encourage more household debt. U.S. consumers are already at debt’s door.

On to Baby Bear. Corporate America is also caught in the debt trap. “American firms, for example, have bought back a net $2.7 trillion-worth [of corporate stock] in the past five years. Many of these purchases are financed not with retained profits but with debt, thus increasing firms’ leverage and reducing their creditworthiness,” the London Economist reports.

“The reason why corporate debt is the Baby Bear is that compared to consumer debt and external debt, it’s relatively minor,” Devine explains. “However, when and if a recession comes it will hurt sales, cash flow, and profits, making the importance of corporate debt soar. A recession makes Baby Bear mature quickly. It encourages corporate bankruptcies (or government bail-outs), much larger lay-offs than even during the last three months, efforts to cut wages and benefits and to speed up work. It also discourages any new accumulation of debt—and thus new investment in factories and equipment. It makes the recession worse.”

The Three Bears are hungry. Plus, they’ve never won a contest for denying themselves food. Will America’s “Goldilocks economy” be their next meal? We shall see.

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