The US needs more debate about reducing its deficit

The approach of Christmas is a good time to talk about whether there really is a Santa Claus. The US government is acting like a true believer. And well it might. Only largess from Santa can bail it out of manifold difficulties. There are record deficits in foreign trade and the federal budget. There are a number of expensive things that need to be done at the same time, notably paying for the war in Iraq and rebuilding New Orleans. And there is the problem of how to adjust to a changing world in which the United States may no longer be No. 1.

As 2005 draws to a close, foreigners hold about $3 trillion (yes, that's trillion) in US dollars, Treasury bonds, and other government securities such as Fannie Mae mortgages. Two-thirds of this is held by four Asian countries - Japan, China, Taiwan, and Korea. It is a mark of confidence that foreigners are willing to put so much of their money into our money, but the cumulative result is that foreigners are acquiring huge claims on American assets. This is the stuff of nightmares for US economic policymakers worrying about what would happen if the Asians should decide to cash in their dollars all at once. Worse, what if the Asians decided, as the US has sometimes done, to use their economic clout for political purposes?

The foreign trade deficit is accompanied by the US budget deficit, which is the result of skyrocketing demands on federal spending and the refusal to raise taxes. Besides Iraq and New Orleans, we urgently need to deal with healthcare, education, Social Security, and the environment, among many other issues.

It used to be said that budget deficits didn't matter because we owed the money to ourselves. But that is no longer true. Both as a government and a people, we are living beyond our means. Individual spending has outrun incomes. Saving rates are negative. Consumers are drawing down savings from earlier years. They are cashing in on home equities and are maxing out credit cards. And they have an insatiable appetite for foreign-made goods, driving up imports and the trade deficit.

We need to have a national debate about the federal budget. This should not be a repetition of the silly argument in which Republicans accuse Democrats of taxing and spending and Democrats accuse Republicans of neglecting the poor in favor of the rich. The budget is our main tool for allocating resources and setting national priorities and values. When we can't do everything, making the budget is how we decide what to do first. If the budgetmaking process is taken seriously, it will make a lot of people unhappy - the last thing a politician wants to do.

We talk about budgets in terms of dollars, because dollars are a convenient measure of the value of the resources which the budget shifts from one purpose to another. It is the resources that are important and that tell us a lot about the national values expressed in the budget. They involve people (soldiers, sailors, doctors, nurses, teachers, engineers, among others) and goods (airplanes, guns, ships, hospitals, schools, roadbuilding equipment, and more). The more resources a budget transfers to public purposes, the fewer are available for private use, and vice versa.

The other part of budgetmaking is taxes. Tax policy is deciding who pays how much for the costs of the budget. Tax policy can also be used for social purposes, that is, the redistribution of wealth. President Bush's tax program would make the rich richer while the poor paid for it - an approach that makes Robin Hood look like a soft-headed liberal. Mr. Bush argues that this would produce more economic growth. Democrats argue, as one did recently in the House of Representatives on a deficit reduction bill, that it "gives a new meaning to women and children first."

At the same time, we have to adjust to a changing world. We don't know how to deal with globalization. The Chinese, on their way to becoming a world power, don't know how to deal with the clash between a liberalizing economy and an authoritarian political system. General Motors, long the world's biggest automaker, is threatened in that position not by Ford, not by Volkswagen, but by Japanese Toyota. And this comes on the eve of the 64th anniversary of Pearl Harbor. Better an economic than a military threat, but the irony remains.

Will Santa Claus be there when we need him?

• Pat M. Holt is former chief of staff of the Senate Foreign Relations Committee.