Monday, July 28, 2008


One reason that economics is considered the dismal science was illustrated by today’s announcement by the Department of Transportation that Americans had put 3.7 percent fewer miles on their vehicles in the first half of this year. Good news, right? Proof that Americans respond to market forces – a euphemism for higher prices -- right? Add to that the visible proof that many Americans are trading down from SUVs to more fuel efficient cars, and you get the sense that the good news is unalloyed.

Unfortunately, it’s not so simple. The downside of the good news is that the national highway trust fund is being depleted faster than revenues can replenish it. The trust fund, remember, is funded by the federal gasoline tax. Fewer miles driven means less revenue for the Feds. So, instead of being able to expand and accelerate spending on transportation infrastructure, Americans’ perfectly rational response to higher gas prices may actually put a crimp in plans to rebuild our crumbling highways and collapsing bridges.

This suggests to me a corollary to the rule that there is no free lunch: piecemeal economics can address only one problem at a time and, in so doing, often makes other matters worse.

A weaker dollar is another mixed blessing. Sure, it promotes exports from and foreign investment in the United States, as our commentary on the Ikea plant in Danville acknowledged. Cheerleaders for the current globalization model trumpet our rising exports as if they are, or at least could beocme, the solution to all that ails our eocnomy. But at the same time, a gimpy greenback pushes commodity prices, including importantly petroleum prices, up. That gets us right back to prices at the gas pump and the trust fund problem.

Moreover, a weaker dollar depresses wages and lowers the standard of living of Americans. Again the Danville plant illustrates the point. Or, just ask any tourist unlucky enough to feel the need for breakfast in London, Paris or Toronto with only dollars in his wallet.

Piecemeal economics is like that. Make one thing better; make others worse. America needs a coherent, smart national strategy to address systematically the full set of our fundamental economic weaknesses. A cheap dollar just isn’t the answer.

Charles Blum

Tuesday, July 1, 2008


I'm no extremist, but I do plead guilty to economic fundamentalism. I am firmly convinced that no nation can be a credible, durable world leader if it mismanages its domestic economy, runs up massive debts, and makes promises it can’t keep. America today is such a profligate country, and as a result our leadership in the world is at risk.

As a nation, we owe the rest of the world a net three trillion dollars and more. Our trade deficit pushes that figure higher by several billion dollars each day. Our budget deficit – once again spiraling upward as we go through our “rough patch” – adds to the burden and robs us of the means to pay for the kind of government we need. Consider that in FY 2007, nine percent of the budget went to interest payments while only two percent was spent on homeland security. If nothing is done, we’ll end up paying out more in interest than for national defense or non-defense discretionary spending (both 18 percent of the 2007 spending). By some calculations, the government has made a grand – really grand ! – total in excess of 57 trillion dollars in promises for future benefits. These are pensions, social security, Medicare and Medicaid benefits that folks are counting on. But where in the world are we to borrow that kind of money?

When Henry Paulson calls this economy “fundamentally sound,” I laugh out loud. But others seem to take the treasury secretary at his word. Just this week Chinese prime minister Wen Jiabao gave Condoleezza Rice some grandfatherly advice: “we hope the U.S. will quickly pass through the subprime crisis and stabilize the U.S. dollar; this is of great importance to the world economy.”

Would that it were so simple. When a nation has structural problems, it needs structural solutions. For starters, I propose:

1. urgent realignment of the world’s over- and under-valued currencies, including both the dollar and the renminbi.

2. adoption by the U.S. of a comprehensive national strategy to reduce our` foreign borrowing. That will require us to save and invest more, produce more, and export more. All good things that generate jobs. But jobs shouldn’t be the prime objective; production and saving should be. This is the only sure way to reduce our staggering debt without a big inflation.

3. acceleration of the inevitable tax reform as the key step in implementing such a strategy. Once we get our fiscal structure right, we can tackle health care, infrastructure, domestic energy development and other critical objectives.

When a baseball team starts to play badly, the manager often demands a return to fundamentals. It’s time for America to do the same.

Charles Blum