GOOD NEWS, BETTER NEWS

The Washington Post prominently reported today (http://www.washingtonpost.com/wp-dyn/content/gallery/2008/05/30/GA2008053002534.html?hpid=artslot) on the opening of a furniture factory by the price-conscious retailing giant Ikea. Ikea supplies itself from plants all over the world, so one more wouldn’t be worthy of the page one coverage plus two photos that the Post gave to it. But this one is located in Danville, Virginia, and is the first that Ikea operates in the United States – and that is big news. Bookshelves and coffee tables made in Virginia – bravo!

The article cites a number of factors, including the will power of Virginians, as helping to reverse two decades of job losses. “The weakening dollar,” says the report, “has made the United States more attractive to foreign investors. Companies from England, Canada and India have recently opened operations or expanded in Danville.”

True, Danville has lost tens of thousands of manufacturing, mostly textile, jobs in recent years, and the Ikea plant will eventually employ only 740. True, unemployment in the Danville area still exceeds 7 percent. And true, for many of the new hires, wages are substantially lower than they used to earn.

For several years, I’ve been speechifying that there is only "good" news and better news. The "good" news is that, if we do nothing, market forces will wring the excesses out of the American economy. That will entail a lower dollar, higher inflation, and a lot of belt-tightening by many Americans. That process has now begun in earnest but is far from complete. If allowed to run its course, America will eventually be a highly attractive place for folks with money to invest and produce and a cheap export platform. There will be plenty of jobs, especially for workers with skills. The downside is that our standard of living will be reduced, painfully. What’s happening in Danville illustrates this point very well.

The better news, as I try to argue at every opportunity in this space, is that we can avoid a lot of that pain with smart, globally competitive public policies. Rather than relying on the cheaper dollar (which also contributes to higher energy prices and interest rates), America could achieve a lot of the same gains by making intelligent changes in our tax, energy, infrastructure, and health care policies. Better still, those gains are more likely to endure than market-driven corrections, leaving us better equipped to compete successfully in the global market.

Already there are signs that the US and some of its major trading partners want to reverse the depreciation of the dollar in order to reduce energy costs and ease inflation. That’s understandable, of course. The other side of that coin, however, is that the market incentive for more investments like Ikea’s in Danville will be commensurately lower.

As I tried to argue in “Receding Recession?” relying on market forces to solve structural problems is foolish and subjects us unnecessarily to the whip-sawing discipline of market forces. The Invisible Hand leaves visible scars on individuals, families, communities and nations. We can do better with smart policies.

Charles Blum

RECEDING RECESSION?

In remarkably clear and unnuanced language, Alan Greenspan told the Financial Times a few days ago: “I still believe there is a greater than 50 percent probability of recession” in the United States. The former Fed chairman added: “That probability has receded a little and I think the probability of a severe recession has come down markedly.”

Others disagree. Some say we are already in a recession. Others say that the threat of recession has passed.

Honestly, I don’t care much about this debate for several reasons. First, the pain being felt by so many Americans – higher gas and food prices, tighter credit, disappearing student loans, lost jobs, and more – is just as real whether we are in, still headed for, or successfully avoiding a “recession.”. Second, recessions are generated and cured by market forces. That’s why, by the time we know officially that we’ve been in a recession, it tends to be over. Third, all the fuss about the status of a recession continues to distract us from the structural problems of our economy.

Unlike recessions, we can be reasonably confident that those structural problems are both long-lived and not self-correcting. They have to do with public policy and institutions, not market forces. For example, back in the 1970s the Nixon administration delinked the dollar from gold, implicitly committing US to run trade deficits as a means of providing liquidity to the world (our excess of imported goods is offset by the export of dollars). So long as we were the world’s largest creditor, those deficits mattered little. The biggest challenge was to recycle first the petrodollars and now the sinodollars, too. We have succeeded so well that the US has become – thanks largely to relentless trade deficits, a stupid tax system and overreliance on imported energy – the world’s biggest debtor.

So, my fear is that Dr. Greenspan may be proved right. The threat of recession may recede, the dollar may strengthen, imported petroleum prices may come back down from stratospheric heights, firms may begin hiring again. If all that happens, we will of course breathe a collective sigh of relief. But will we have begun to address our structural problems? Not even close. All we will have done is to postpone the day of reckoning.

If one political party or the other comes up with big ideas to reorient our economy, it may reap rewards for many elections to come. How ironic that neither McCain nor Obama has shown much fluency in such matters. For that matter, a lot of professional economists do no better, and the media are hopeless. But this is why we have elections. Four out of five Americans believe the country is headed in the wrong direction. Let’s hope the diminished threat of a severe recession is not enough to satisfy them.

Charles Blum

A Kernel of Truth about Corn Ethanol

Ethanol has suddenly become the bête noir of renewable energy. First came the arguments that Congress was too heavily subsidizing a crop that, even if entirely converted to ethanol, could only replace 12% of our demand for gasoline. Then Science magazine published a study concluding that over its lifecycle ethanol creates more carbon emissions than gasoline. And now critics claim that ethanol production is causing food prices to rise. So much for the carbon-conscious, farmer-friendly fuel that was going to help make us energy independent. What went wrong?

The problem with corn ethanol is in the kernel. We already force-feed corn to naturally grass-eating cows, and contribute to the country’s obesity epidemic by dousing processed food with high-fructose corn syrup. Dietary alternatives to grass and sugar need not be replicated in the energy sector. Au contraire! The energy balance of corn ethanol is 1.3, compared to 8 for ethanol made from sugar cane, and up to 36 for cellulosic (such as switchgrass) ethanol. On the environmental side of the equation, corn ethanol creates 22% less emissions than gasoline, compared to 56% less for sugar cane, and 91% less for cellulosic. If we must, let’s keep making corn ethanol – with the stalks and leaves.

Advanced batteries and biofuels are the key to propelling our transportation sector out of a virtually complete (97%) dependence on oil. Congress is right to support biofuels, but should do so by setting energy balance and carbon emission goals, offering rewards accordingly, and then letting the market pick the winners.

Carolyn Avery

ONE STEP CLOSER TO REAL DEBATE

According to a New York Times report on May 12: In a "sign of what could be an extremely unusual fall campaign, the two sides said Saturday that they would be open to holding joint forums or unmoderated debates across the country in front of voters through the summer. Mr. Obama, campaigning in Oregon, said that the proposal, floated by Mr. McCain's advisers, was 'a great idea.'" This is a format supposedly considered by John Kennedy in the reelection race he never got to have against another Arizona senator, Barry Goldwater. It's also similar to what I proposed in an earlier comment, "How 2008 Is Different From 1932."

No credit is due to us, I'm sure, and the two campaigns haven't agreed actually to do anything of the sort. But, if it were to happen, the country should surely benefit. Let the two candidates question, challenge and correct the other -- again, again and again, on one subject after another. Then we'd know which of them had the sounder ideas, which could think on his feet in an unscripted exchange, and which had the power of persuasion needed to lead the nation in a new direction.

I for one can't wait to see this happen.

SUBTRACTING BY DIVIDING

America is in deeper trouble than I have thought if Hillary Clinton's case for remaining in the Democratic primary race rests on her assessment of her opponent's shortcomings. The junior senator from New York told USA Today (actually the day before yesterday): "Senator Obama's support among working, hard working Americans, white Americans is weakening again."

Take it from this very hard working, very white American that a lot of us are sick of these tactics. Bush at least pretended to be a "uniter, not a divider." When the Clintons act this way, there's no pretense, but the damage is comparable.

Americans overwhelmingly want the country to change direction. They want to see it strong and prosperous again. The special interests and their failed model of economic and financial globalization stand in the way. How can Democrats possibly expect to pull off major changes in the face of such opposition by dividing the country further?

Charles Blum

OPERATION CHAOS

So, Rush Limbaugh and his thundering herd think they can cause chaos in the Democratic primaries by crossing over and voting for Hillary. Actually, Democrats have a special talent for internal disorder and don't need a lot of help from outsiders.

I don't have a big problem with Republicans participating in Democrat primaries (or vice versa) where that's permitted. The rules are the rules, and overall I think we learn more from open primaries than from closed ones. Remember how Texas Democrats crossed over to vote for Ronald Reagan against Jerry Ford in 1976? There was a message in that, for sure.

If you're offended by Rush's tactics, give him a taste of his own chaos. Call in to his show. If they put you on, denounce him -- that's your right. If they don't put you on -- that's his right -- call again and again.

Or, you can just continue to ignore him. Serious folks have better things to do in this election. Let's do them.

Charles Blum

TAXING TRADE

For all the gnashing of teeth in the Democratic primaries about NAFTA, you’d think that were our number one trade issue. Just “fix” NAFTA, and our record trade imbalance will disappear, right? Wrong!

In fact, the most important impediment to American producers in the global market is our antique tax system. Unlike more than 140 of our trading partners, the United States stubbornly sticks to a system that primarily taxes personal and corporate income. Virtually every major American trading partner large and small (all but the oil exporters) has as a major component if its tax regime some sort of consumption tax. The most common form is a value added tax as in the EU, China and Mexico. Other countries, notably Canada, rely on sales taxes.

Whatever the form, these consumption taxes have one thing in common. Under international trade rules, they are “border adjustable.” That is, they are applied to imports at the same rate as to domestically produced goods, and they may be and usually are rebated on exports. Typically, the border adjustment runs in the range of 15 – 25 percent. Ten percent here, five percent there; pretty soon, you’re talking about real money, as a former senator from Illinois might have put it.

Since the US declines to adjust its tax system, it is by choice a loser in international trade. We have decided not to join ‘em, so they beat us. We seem to insist on doing poorly as a trading nation.

By comparison, most international trade negotiations and most trade disputes involve factors a lot less significant than the disparity in taxes. In fact, our “free trade” agreements are silent on border tax adjustments, leaving our trading partners free to increase their advantage not just while negotiating but even after the agreement is in place.

What’s wrong with Americans? Why is there no sense of outrage at this huge self-inflicted wound? Part of the answer can be found in our “silo” concept of economic policy-making. We have no sense of national purpose or strategy when it comes to economics and trade. Tax people do taxes; trade people do trade. Never the twain shall meet, apparently.

If you think we’ve paid too high a price for too long for silo government, feel free to join in a discussion this Thursday May 8^th with Yale Law Prof. Michael Graetz. He has a plan for a “competitive tax” system that I like a lot. He’ll be addressing the Coalition for a Prosperous America Issues Forum (which I chair) from 10:30 until noon EDT. Contact IAS at iasg@erols.com or 202-393-8600 if you want to be there in person or join or Webinar. You trade people will be glad you did!

Charles Blum

Asian Values Vs. Subprime Values

In today’s New York Times, Tom Friedman asked in a terrific op-ed piece: “Who Will Tell The People?” In it he argued that the American people are hungry to make this country strong again. Isn’t that the essence of patriotism?

He wants a president tough enough not just to withstand the lies of his opponents but also to tell us the truth. Isn't that the essenece of leadership?

He also laments that:

“We are not as powerful as we used to be because over the past three decades, the Asian values of our parents' generation — work hard, study, save, invest, live within your means — have given way to subprime values: "You can have the American dream — a house — with no money down and no payments for two years."

Right on all points. I’d add one more. It’s not enough to have truthful leadership and a personal commitment to traditional values. We need: a) a political system in which money doesn’t dominate; b) a tax system that rewards savings, investment, production and export; and c) a trade policy that puts the interests of domestic producers first. Do any one of these, and the other two will be easier to achieve. Do all three, and watch the resurgence of “Asian values” in this country.

Idealism and moral virtue at the level of individuals are simply not enough to turn our country around. They are undermined by a governmental system that systematically puts special interests before the public interest. If you want this country to be strong again, start demanding more -- a lot more -- of all public servants. If you want better public servants, study the real issues, raise hell whenever necessary to bring attention to them, and vote on that basis, not some PR-fed image.

Charles Blum