Monday, December 28, 2009
Yet, in all seriousness, the Chinese leadership repeats that its rigid currency policy, which has frozen the yuan (also called the renminbi or RMB) against the dollar for 18 months, is a contribution to stability in the international economy. Listen to Premier Wen Jiabao in a rare sit-down interview with the media on Sunday: “Keeping the yuan’s value basically steady is our contribution to the international community at a time when the world’s major currencies have been devalued.”
De-valued? Against the RMB, virtually every other major currency has risen in value even as they fluctuate against one another in response to market changes. The exception about which Wen is complaining, of course, is the dollar. China has effectively pegged the RMB at 6.8 to the dollar since July 2008. As a result, China’s contribution to a dynamic global exchange rate equilibrium is nil.
The truth is that:
• China, like any IMF member, is obligated to change the value of its pegged currency as needed to reverse imbalances in trade flows and payments. That’s the meaning of IMF Article 4. Exchange rate stability is no virtue; it’s a violation of a country’s international obligations when imbalances need to be corrected.
• The “protectionism” that Wen also complained about in the interview is a direct result of China’s aggressive overreliance on export-led growth. The premier seems to argue that China cannot afford to give up the weak renminbi (the yuan by another name) because its trading partners are exercising their legal rights to commercial self-defense. But what accounts for China’s flood of low-priced exports that prompts trading partners’ antidumping and countervailing duty cases? The massive export subsidy delivered by means of an undervalued RMB. Exchange rate stability is a source of, and not a solution to, trade tensions.
• Wen allowed as how China is concerned that inflation might someday become a problem there. He’s already right. The excessive inflow of dollars and other hard currencies has to be “sterilized” by the Chinese government’s exchanging them for local currency, thereby flooding the market with renminbi. The excessive growth in money supply – China’s money growth is about double its real economic growth – creates constant inflationary pressure. Looked at another way, China is forcing its own people to pay extra renminbi, the only money most of them are allowed to possess, in order to buy anything from abroad. That includes energy and components as well as food and other consumer goods. Here again, stability adds to and does not diminish the problem.
Chinese officials can assert that up is down, black is white, and foul is fair. That won’t change reality. In fact, China’s currency policy is a burden to its own consumers, an affront to its trading partners, and a threat to the international economy. It ought to stop – now – before we all fall off the high wire.
Saturday, December 5, 2009
The Congressional aim is to end the often bewildering, controversial and seemingly unfair system run by the Bowl Championship Series (BCS) by prohibiting it from advertising the January show-down as a “national championship” contest. In the past, President Obama has spoken out against this system which clearly favors the major athletic conferences. So has Sen. Orrin Hatch, whose home-state Utah Utes got passed over recently.
You have to hand it to the Congress. When they see an injustice, our elected representatives can put aside petty differences to act with impressive determination, alacrity, and bipartisanship. Currency manipulators, subsidized foreign producers, product adulturators, Ponzi schemers, and anyone else who dares to take advantage of innocent consumers and fair competitors had better watch out. Once the Congress gets this BCS mess straightened out, they too might themselves in the bull’s eye. It’s just a matter of time – and priorities.
Monday, November 23, 2009
Geithner and the Obama administration have made their share of mistakes, to be sure. So has the Congress. The problems we face are not the work of one branch of government and certainly not of a single administration, past or present.
Our economic problems are structural, inherent in the fundamentally flawed growth model we have pursued – with short-term success – for a number of years. To end the current crisis, we need a new approach to economic growth here and abroad, which Geithner in particular has recognized. Americans need to avoid new debt and to pay down the huge excess of foreign debt, which Obama has now recognized. That will require a new approach to international trade, massive new investment both public and private, and the development and adoption of innovative technologies in this country. No one on either end of Pennsylvania Avenue has yet offered a credible strategy for achieving that.
We also need to refashion our system of government so that it is up to this historic task. We need effective regulation by the executive and effective oversight of the regulators by the legislative branch. We need to find a way to keep our promises and to live within our means. We need smart spending on public investment and an end to pork fests like the 2009 “stimulus” package. Most fundamentally, we need to define a national economic strategy and to implement it intelligently and urgently.
These challenges are the joint work of the Congress and the executive branch. Finger-pointing doesn’t do more than waste precious time. My clear sense of the American public is that they are sick of the bickering, impatient with the inaction on big things, and profoundly skeptical of any political promise. Now is the time for action -- bold, swift and purposeful. My advice to all office holders, regardless of party affiliation or position, is: “Get on with the work of economic and governmental restructuring as a matter of the utmost urgency. The job you save may be your own.”
Friday, July 31, 2009
Two years later, Sauer slugged 41 home runs, drove in 103 runs, and hit .288, arguably a better year. The Cubs finished seventh. During the offseason, Cubs management mailed Sauer a contract calling for a $1,500 reduction, a pretty hefty haircut given the modest salaries in those days. Sauer returned the contract unsigned, suggesting that he had had a “pretty good year.” The general manager replied that yes, indeed, he had had a “pretty good year” but that the Cubs “could have finished seventh without him.” He eventually settled for another year at his old salary.
Thanks to New York Attorney General Andrew Cuomo, I had occasion to ruminate on this bit of baseball lore. Cuomo released a report yesterday to the effect that nine of the banks favored with TARP funds had deemed it wise to shower a total of $32.6 billion in bonuses on its employees. A fortunate few – almost 5,000 in all – got bonuses of one million dollars or more.
The geniuses running the large banks could take a lesson from the lowly Cubs management of the 1950s. Let’s dub this the Sauer Rule:
o If we could have lost all that money, collapsed the world economy and bilked American taxpayers to the extent we did without you, then you should be paid no bonus.
o If we could have avoided some of that without you, you’re fired!
Wednesday, June 10, 2009
In fact, the speech does not include any apology (though private conversations with official Chinese might have). Nor did it represent what some in the media portrayed as a backtracking from the Obama campaign’s tough line on China. On the contrary, it is a thoughtful, reasoned explanation for the need for China and the US to work closely together to “lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established.” The speech should be studied carefully, in my view. The text can be found at http://blogs.wsj.com/chinajournal/2009/06/01/full-text-of-geithners-speech-at-peking-university/.
In fact, I found a lot to admire and agree with in this speech. For example:
§ It rests quite clearly on the expectation that Beijing will start to assume responsibility for the health of the global economy.
§ Geithner made clear that sustainable growth in China “will require a substantial shift from external to domestic demand, from investment and export driven growth, to growth led by consumption.”
§ At the same time, the US will have to increase its savings (i.e. reduce the rate of consumption growth) and should be expected to reduce its current account deficit (the broad measure of borrowing from abroad) as the recovery proceeds.
§ Its global perspective: “China and the United States individually, and together, are so important in the global economy that what we do has a direct impact on the stability and strength of the international economic system. Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.”
With respect to the value of the renminbi – a major nexus between Chinese and American growth strategies – Geithner called for a “more flexible exchange rate regime.” There’s not much new in this. Since the days of John Snow, Treasury has used that phrase as code for a stronger RMB. Indeed, only that meaning makes Geithner’s key sentence other than nonsense. He said: “Greater exchange flexibility will help reinforce the shift in the composition of [Chinese] growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future.” That had to refer to a stronger RMB, not one subject to greater fluctuations.
So, unlike some others. I see in Geithner’s speech most of the elements of a sensible approach to the vexatious currency problem. He has lowered his voice, especially compared to Henry Paulson’s histrionics. He has placed the central issues – sustainable growth strategies for China and the US – on the table for the Strategic and Economic Dialog. He did not back down on the need for a substantial revaluation of the RMB as crucial to a sustainable global recovery.
He’s speaking wisely and more softly. To make the Rooseveltian strategy complete, all he needs is a big stick, some means of compelling Beijing to make politically hard decisions. John Snow at one point told a business delegation in his office that they “should hold our feet to the fire so we can hold the Chinese feet to the fire.” That, I believe, is the most important function of the Currency Reform for Fair Trade Act of 2009 (H.R 2378 and S. 1027). Let’s hope the Secretary will prove willing and able to use it.
Monday, May 11, 2009
It concludes darkly that we might be in for a “malign” form of deflation similar to the 1930s “... because demand is weak and households and firms are burdened by debt. In deflation the nominal value of debts remains fixed even as nominal wages, prices and profits fall. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. That undermines the financial system and deepens the recession.”
“Deflation robs a central bank of its ability to stimulate spending using negative interest rates,” the editorial went on. Moreover, using interest rates to combat deflation can slow the reaction of central banks when inflation once again becomes the issue.
By deflation, The Economist correctly means “persistent price declines” rather than passing ones that reflect temporary imbalances in the market. It focuses on the growing gap between the potential for global economic production and actual output as the source of the problem.
That production gap surely stems from other causes that The Economist overlooks. It’s not just debt-burdened households in the US and Western Europe that are not consuming; it’s also cash-rich households in Asia. Deflation surely stems in part from chronic underconsumption and over-reliance on export-led growth elsewhere. At the heart of this syndrome lies mercantilist price-fixing in the form of undervalued currencies.
So, why not go to the source – one of them anyway? Work out a new Plaza Accord with China, Japan and the others with misaligned currencies. This will help them bring their currencies into line with market forces, reduce their overdependence on exports to unwilling or unable consumers abroad, and stimulate demand at home to sop up some of that unused production capacity. That at least would be a step away from a repetition of the 1930s deflation and toward effective international cooperation to put the world economy on a sustainable growth path.
Sunday, April 19, 2009
“… each action we take and each policy we pursue is driven by a larger vision of America's future - a future where sustained economic growth creates good jobs andrising incomes; a future where prosperity is fueled not by excessive debt, reckless speculation, and fleeting profit, but is instead built by skilled, productive workers; by sound investments that will spread opportunity at home and allow this nation to lead the world in the technologies, innovations, and discoveries that will shape the 21st century. That is the America I see. That is the future I know we can have.”
For a short while I felt much better about the prospects for a new-style American economy. Obama’s ringing statement was at least the beginnings of the sort of national strategy I’ve been seeking for several years now. Some of what has passed for “stimulus” thus far might not serve the President’s “larger vision.” But this strong statement set forth a real test for future policy – it should promote future investment, economic growth, jobs and incomes. Bravo!
Then the following day (not coincidentally, April 15), the President set an objective for change in a major policy area that left me scratching my head. He directed his Economic Recovery Advisory Board headed by Paul Volcker to come up with recommendations for tax reform by the end of this year. In doing so, he left the impression that he sees the big problem as the “monstrous” complexity of the tax code.
The focus on tax and the sense of urgency are commendable. The code does run to over nine million words. Compliance is a nightmare for average citizens and a challenge even for smart CPAs. It’s full of special-interest gifts and replete with essentially failed social policy (think of the many provisions related to health care, savings, and retirement).
Yet you don’t have to be a cynic to be skeptical about the benefits of tax simplification, particularly as they relate to our central problem: as a country we don’t produce enough to satisfy our needs and pay down our debt to the world. Simplification of the tax code, even if it were to materialize as intended, would not by itself address this problem. Our code is not just overly complex; it rewards the wrong behavior. Alongside simplification, let’s hope that Volcker will broaden the agenda to include:
a) lack of any border-adjustable consumption tax. Such a tax – like a value added tax or a national sales tax – can be rebated when goods are exported and imposed when they are imported. Virtually every US trading country does this, and it’s allowed by international law. The unsurprising result is that we have a persistent, massive trade deficit.
b) relatively slow depreciation rates. The US forces businesses to recoup the cost of investment, particularly major ones, over relatively long periods, thereby increasing the cost of capital. The result is to steer investment away from the US to a more generous country, such as Canada.
c) high corporate income tax rates. In 1986 when the US last undertook an overhaul of the tax code, one objective was to reduce the marginal corporate tax rate to match or overmatch the rates in the OECD area. We succeeded in that, but the world did not stand still. Within a short time, the US once again had the highest marginal rates in the developed world.
Simplification is not the be all and end all of tax reform. If we’re serious about regaining international competitiveness and the long-term integrity of the dollar, we need to aim for more than mere simplification of that monstrous tax code. Let’s get a first-class tax system for now and for the future.
Saturday, April 18, 2009
A much ballyhooed element in the Obama stimulus package is the $8 billion dedicated to inter-city rail projects. That’s an impressive sum compared to the paltry investments of the past, and it’s to be complemented by an additional one billion dollars in each of the next five years. It’s an example, say some, of the sort of transformative change that the administration is seeking to bring to this country. Thirteen billion dollars is a big enough pie, reports The Wall Street Journal on April 16, to spark a fierce competition among states from coast to coast to secure a bigger slice for themselves.
Meanwhile, across the Pacific, China has committed to build its own high-speed rail system by 2020. The Shanghai - Beijing link, the longest such line in the world, is almost complete and will cut the trip to five from eleven hours. Even relatively small provincial cities – eleven in Hebei Province alone -- will also be networked together, unleashing a vast potential for development. The cost? A cool five trillion renminbi, or almost $700 billion at current exchange rates, by 2020, most of it planned for the next few years.
Even if construction costs weren’t substantially lower in China, the vast discrepancy in ambition is glaring. My point isn’t that we ought to try to match the Chinese in the scope of our commitment to inter-city rail – though I would love to see that. The payoff of a major commitment to rail transportation is alluring. Lower green-house gas emissions. Less congestion on the highways. An end to a lot of short-haul air travel. Reduced demand for imported oil and gasoline. In short, a big step forward in the greening of America’s transportation system, which is a far greater polluter than our much maligned manufacturing sector.
Instead, what is most striking are the economic benefits that China is already seeing from its commitment to fundamental rather than incremental change in rail transportation. All across China factories are reportedly gearing up to produce steel track, locomotives, rail cars, switches, electronic equipment, and more to satisfy the half-trillion dollar market. The Chinese pie is big enough that investors are eager to produce all that’s needed to supply the burgeoning rail system.
Our incrementally bigger but still woefully inadequate investment, by contrast, is so limited that we will in all likelihood end up importing a good portion of what we eventually do install. That would deliver little of the vision the President laid out earlier this week at Georgetown University of a “future where sustained economic growth creates good jobs and rising incomes.”
In the 19th century, a few thousand Chinese workers were brought to America, to our shame sometimes by duress, to build the transcontinental railroad, using foreign capital and mostly American-made equipment. In the 21st century, more than 100,000 Chinese workers are building their own first-class rail system with their own capital and Chinese-made equipment. We should learn a lesson or two about the multiplier effects of high ambition and get to work on our railroads in earnest.
Monday, March 30, 2009
of the many careers derailed and lives ruined from Hollywood to Foggy Bottom by such irresponsible hysteria. These days, it’s not Commies but protectionists – aka fair traders, trade skeptics, populists, nationalists, etc. – who are thought to be crowded into America’s sleeping quarters.
Almost daily, we get new warnings about the dangers of “protectionism.” The WTO, the World Bank, The Economist, The New York Times, The Washington Post, a host of ivory tower academics, and other apologists for the globalization model that helped bring us to the current ruinous conditions, all denounce protectionism wherever they see it – and they seem to see it everywhere.
The common, usually unstated, assumption in this hysteria is that anything that reduces import levels constitutes protectionism and therefore, especially in these troubled times, is to be shunned. In these tirades, illegal actions are indiscriminately lumped together with legal challenges to illegal measures. But, dumping is a beggar-thy-neighbor action; antidumping is by agreement the corrective measure. Subsidies can be trade distorting and injurious; when they are, countervailing duties are by agreement the corrective measure. Violation of any WTO rules surely is protectionist; seeking a remedy under established dispute settlement procedures just as surely is not. But the press and the experts they choose to cite, including the very guardians of the institutions charged with making the trading system work, use such a broad brush that it takes all of them to lift it.
Let’s slow down and think about this for a moment. Any thing that reduces imports is a danger to the trading system? A recession? A new and better product? Investment in expanded production capacity? Increased domestic savings? Obviously not.
Everyone knows that in the 1930s, when the law of the jungle prevailed in international trade, competitive protectionism deepened the depression. The system of trade laws and contractual obligations established since 1933 have reduced the scope for such ruinous behavior. Some, but only some, recognize that competitive currency devaluations were at least as significant an element in the beggar-thy-neighbor race among nations in the ‘30s. If you are opposed to trade-distorting practices – and I am -- you would work to end mercantilist currency policies, a particularly malicious form of protectionism. Persistently undervalued currencies not only create an artificial two-way trade advantage but leave the protectionist governments with a stash of hard currencies – free money, in effect – to use however they see fit. I don’t hear much talk from the average “free trader” about this practice. Yet, unlike trade protectionism, currency protectionism is beyond the reach of current rules and institutions.
So, as we head into the G-20 summit in London this week, let’s be impeccable with our word, clear in our reasoning, and discerning in our diagnoses. Let’s stop sowing distrust, killing dialog with name-calling, and diverting attention from real issues. This international economic system no longer works very well. It can only be remade by a concerted effort of statesmen of high intellect, uncommon inventiveness and profound good will. The constant drumbeat of fear based on false assumptions and hysterical misreading of events hinders, not enhances, their work.
Monday, March 16, 2009
I’m no CPA, but as I understand it, mark-to-market requires a financial institution to reduce the value of an asset on its books when the market value of that asset – what someone else is willing to pay for it at this moment – falls.
This is, of course, highly inconvenient and might have serious consequences for those high-flying financial institutions that threw caution to the winds in pursuit of competitive profits (and fabulous bonuses for certain personnel), even if they existed only on paper. But the solution to their problem is to allow them to invent a more flattering value based on some phony market situation sometime in the past?
Bernie Madoff made up tens of billions of dollars in phony profits and lived the high life. Ramalinga Raju made up a billion dollars in bank deposits and more than 10,000 employees and lived the high life. Both used phony numbers to make their con games work. The longer they were able to keep their scams going the greater the losses their victims had to suffer.
Now Forbes wants the SEC to enable the banks to do the same thing. Only this time it would not be part of the problem, it’s supposedly a major part of the solution. Is he kidding?
If some banks are “too big to fail,” all of them are too human not to fail in some judgments at some point. Why should the government create moral hazard by insuring their losses and, as AIG and others seem to have managed, their bonuses, too? We need less accounting gimmickry, more transparency, constant and effective oversight, and swift and certain justice – and we need all that now more than ever.
In addition, there are signs of fresh thinking being undertaken at the Office of the US Trade Representative, my old agency. This will take time, and I’d urge them to take the all the time needed to get it right.
For starters, though, it might be instructive to reexamine the rhetoric and record of Ronald Reagan. Though sometimes derided as simplistic, Reagan at his best was a principled pragmatist. Nowhere was that more in evidence than in his trade policy.
Reagan believed and publicly argued that “free trade must be fair.” In other words, free trade and fair trade were complementary, not polar opposites.
He made this clear in his radio address of August 2, 1986. (The transcript can be read at http://www.reagan.utexas.edu/archives/speeches/1986/080286a.htm.) In just a few minutes, Reagan laid out three characteristics of his trade policy that are still on point:
• Reciprocity: “Free and fair trade with free and fair traders” was his motto to get the best treatment in trade, a nation would have to give it to others. In fact, reciprocal market access was the essential feature of Cordell Hull’s reciprocal trade agreements that helped lift the world from the Great Depression and later formed a major foundation for the General Agreement on Tariffs and Trade negotiated in 1947. It’s plain wrong to consider reciprocity as a code word for protectionism. In fact, reciprocal trade undid the 1930 Smoot-Hawley tariffs and opened the way to sustained economic growth in the world.
• Respect for Rules: In another context, Reagan famously said “trust, but verify.” That’s why we must not only have trade rules but also be willing to enforce them. Reagan objected to countries that didn’t “play by the rules” and that got an “unfair advantage” by subsidizing their industries. On the other side of the coin, protectionism – transgression of the agreed rules – invited retaliation by aggrieved trading partners and was to be avoided.
• Results-Oriented: A free and fair trade policy was expected to produce fair and equitable results. A key to good results was “toughness.” Reagan said: “We’ve been tough with those nations who’ve been unfair in their trading practices, and that toughness has produced results.”
Reciprocity. Respect for Rules. Results-oriented. Sounds like the making a pretty good trade policy for the Obama administration, too.
Shocked? Like Captain Renault in Casablanca? No, really shocked. Two Merrill Lynch economists called the $64.9 billion export level an “ugly number” and lamented that “the export slowdown has finally come to China.”
Now, wait a minute! One of my intellectual heroes, Herb Stein, said famously that “if a thing cannot go on forever, it will stop.” A mercantilist trade boom predicated on artificially cheap export prices and the recycling of dollars into consumer debt for buyers of the same goods cannot go on forever. It is stopping now. Not a shock. Not even a surprise. A certainty.
Even the New York Times editorial page got it partly right today I opining that China’s leaders “need to understand that export-led growth no longer works for them or the world.” Of course, the Times went on to urge the Obama administration to back off on China’s undervalued currency, one of the pistons driving the country’s export machine.
The China-based economists don’t see everything as lost, however. They credit Beijing for vigorous – one expert calls them ”drastic” -- measures to help the domestic economy. Aside from a 5 percent tax break on small autos, however, much of the stimulus is aimed at more investment rather than more domestic consumption. More investment in production facilities will only add to the burden of overcapacity, deflating prices and creating surpluses that will seek a market outside of China. If that’s what easy credit results in, China’s “drastic” measures might just be making a bad situation worse.
Live by the sword, die by the sword. The current global economic model is broken. Export-led growth won’t work for large economies. As the Times correctly said, neither China nor the world benefits. At least from this time forward, there is absolutely no basis for anyone, not even professional economists and editorial writers, to be “shocked” by perfectly predictable developments.
Sunday, February 1, 2009
When caught in quicksand, I recall hearing Tarzan urge, you must master your instincts, as struggling only draws you in deeper until you are submerged. Be calm, make a plan, and get the help you need. By all means, stop flailing about.
That seems good advice for the Senate as it considers its stimulus package this week and for the conference committee that will take up the matter soon afterwards. The instinct to do as much as possible may not prove helpful. I cringe when I hear the argument that the biggest danger is doing too little, not too much. Doing too much of costly programs with a dubious stimulative effect and stretching expenditures out over eleven fiscal years simply set up the need for additional, probably quite substantial, new spending measures to help do what this bill is supposed to. The Congressional Budget Office estimates that only $107 billion of the $819 billion approved by the House would actually reach the economy in the fiscal year ending on September 30, 2009. Only $236 billion more would be spent in FY 2010. More than a third of the total would not become available until after October 2010, some of it not until 2019. If the CBO analysis is even remotely correct, we’ll end up sinking deeper into, and being buried beneath, the quicksand of debt as we pile one new stimulus upon another.
A second problem with the stimulus package in its current form is that it aims to do increase in the short run precisely the behavior that we need to cut back on in the longer run. Today, we want to stimulate consumer spending; tomorrow, we want to reduce our over-reliance on consumption as the major engine for GDP growth. Today, we need to borrow from foreign creditors; tomorrow, we have to stop that and start paying our own way again. These and other contradictions between immediate and longer run objectives were neatly summarized last week by Marina Whitman in an op ed piece in the Wall Street Journal.
Those two considerations suggest first that we need to get more public investment into the stimulus package now. In addition to the “shovel ready” highway and transportation projects – a paltry $46 billion of the $819 billion House bill – why not get started on a radical expansion of urban mass transit and high speed inter-city rail links to unclog our streets and air lanes and thereby reduce our fuel consumption and green house gas emissions?
Second, the stimulus ought to provide powerful incentives to private investment, too. It’s clear to all that government spending will not be enough to fund anything like a full recovery of our battered economy. Why not get started right now on a new investment boom by expensing new investment, at least in energy production and transportation, and giving a bonus to those who invest in the next year or two? Why not charter a national infrastructure bank and fund it privately, limiting the government expenditure to a guaranteed annual return? Why not set up a national energy development bank and fund it the same way? Such steps would leverage public expenditures, maximize the role for private capital (foreign as well as domestic), and stimulate real demand for materials, components, finished capital goods, services from engineering to transportation, and labor.
No one expects the Congress to devise a perfect a plan under duress. Time is of the essence. But a little more thought right now might give us a viable exit plan from the fiscal quicksand in which we’re trapped, setting the stage not just for a cyclical recovery but also for a genuine restructuring of the American economy. The whole world is watching and praying that we get it right.
Thursday, January 22, 2009
Take the recent reporting on the decline in international trade over the past year. A number of stories have presented this as an alarming development and frequently included a gratuitous warning about “growing protectionism.” The Wall Street Journal, for example, ran a story under the headline “Global Trade Posts Sharp Decline.” Comparing different periods in each case, the article reported declines in imports and exports of 27 percent for Japan, 18 percent for the US, and 11.9 percent even for China. The reporter asserted that a decline in trade was an “unusual development even in a recession.”
For starters, that’s a dubious assertion. When as normally happens in a recession a society consumes less, it needs fewer goods -- whether produced at home or abroad. As recessions are corrections for periods of excess consumption, such a decline is not necessarily a bad thing. Painful, yes, for employers and employees. Uncomfortable, yes, for elected officials. But reduced demand can be a normal part of a healthy process of adjustment.
Next, consider what constitutes a “sharp” drop. Compared to the swift and brutal collapse of steel, aluminum and auto production worldwide – just to cite a few industries -- what’s so extraordinary about a 12, 18 or 27 percent drop in overall trade?
Moreover, those numbers obscure some good news. One reason why trade measured in dollars has fallen is that petroleum prices have plummeted from their heights. Remember $140 going on $300 per barrel prices? Does the Journal really want us to consider that an alarming development? Personally, I’m thankful with every tank full of gasoline.
But the basic problem runs deeper. The unstated assumption of the self-proclaimed “pro-trade” camp is that trade, any trade, is per se a good thing and that more trade is always better than less. Cheerleaders for the current globalization model have for years taken pride in the fact that the growth in international trade has outpaced global GDP growth for several decades. Trade must lead growth, you see? Without faster trade growth, the global economic pie couldn’t possibly grow fast enough to satisfy rising expectations, right?
What’s wrong with this view? Two points bear emphasizing:
A major function of international trade is to smooth out imbalances in national economies. When a country needs more than it can produce in a given period, it imports. When it produces a surplus, it naturally tries to sell the excess goods into world markets. Thus, it’s perfectly normal, acceptable and even welcome when trade helps to smooth out excesses and deficiencies in national economic performance.
To succeed, export led growth depends on growing consumer markets abroad. When Sweden or Singapore follows that path, the world market can easily absorb their net exports. When a giant economy such as China pursues this path, however, the strategy will encounter natural limits. As the US case shows, chronic massive trade deficits – the other side of the same coin – are unsustainable. When that point is reached, massive export-led growth becomes unsustainable, too. And when export-led growth strategies come acropper, it’s a correction, not a tragedy.
So, let’s acknowledge the recent drop in international trade for what it is. First, a sign of the fundamental ill health of the world economy, both in the real and financial sectors. Second, the beginning of a long-overdue adjustment to excessive reliance on export-led growth, especially by larger Asian economies. Third, a warning that surplus as well as deficit countries need to get their macroeconomic policies right if either is to prosper over the long run.
Open trade on fair terms is a good thing. It spurs competition and efficiency, expands consumer choice, and keeps prices moderate. It can help poorer countries grow and develop. But, as we commented recently on China’s massive stash of foreign exchange, it’s always possible to have “too much of a good thing.” All those who write, read and think about international trade should take care, especially in these perilous times, to understand the fundamental realities of the present trading system and leave the ghost of 1929 on the scrapheap of history.
Tuesday, January 20, 2009
On the pre-Inaugural weekend, two polls appeared that gave Barack Obama about as high a rating as a mere mortal should be permitted. One showed 52 percent with high hopes for Obama, 80 percent as approving his transition, and 72 percent as confident his economic program will help. Another poll had 79 percent as optimistic about the next four years. After today’s inaugural pageantry, those numbers ought to rise farther.
(A cynic might be tempted to question the credibility of any poll such as the first one in which five percent of the 1,079 respondents thought that the national economy was in excellent shape. Are there really 54 individuals in the entire country who could be so out of touch? Who are these people? Where do they live? How do they make their money?)
Also on the weekend, Parade magazine printed the text of Obama’s loving letter to his two daughters, explaining what he hoped for them and for all children. Two phrases struck me as particularly apt:
-- “… America is great not because it is perfect but because it can always be made better --- and … the unfinished work of perfecting our union falls to each of us.”
-- “… it is only when you hitch your wagon to something larger than yourself that you realize your true potential.”
With different words, these themes were woven into the fabric of his fine inaugural address. After frankly admitting “our collective failure to make hard choices,” he called on all citizens to “begin the work of remaking America” and creating a worthy legacy for future generations. Amen.
Saturday, January 17, 2009
--A weak dollar won’t help revive the American economy;
--A weak dollar discourages capital inflows; and
--Exchange rates should be determined by markets. “If you start to manage currencies, it creates more difficulties than it creates benefits,” he argued.
Wait just a minute. First, a weak(er) dollar would help American beleaguered exporters by lowering their prices in terms of other currencies. At a time when Americans are having to adjust their overconsumption, recovery must be based at least in part on increased exports and/or reduced imports. A stronger yen helps open the Japanese market to American-made goods. That can help reduce our trade deficit and foreign borrowing. You’d think the Chamber would like that.
Second, a weaker dollar encourages holders of stronger currencies to invest in the US rather than elsewhere. Their stronger currency buys more value for the buck when the buck is cheaper. When America is a more attractive place to invest and produce, foreign investment will increase. In fact, increased investment is crucial to expand our net exports. You’d think the Chamber would like that, all of it.
By contrast, how right Donohue is about currency manipulation! Too bad he doesn’t see it where it exists. The prolonged misalignment of Asian currencies against the dollar is a prime cause of the current global financial, economic and trade mess. Why didn’t Donohue call a spade a spade and urge, as treasury secretary-designate Tim Geithner has done in the past, all Asian trading partners once and for all to stop managing their currencies? Why didn’t he denounce their mercantilist currencies policies as a protectionist burden on the rest of the world? Why didn’t he inform those export-oriented countries that a global recovery will not be sustainable unless they abandon their managed currency policies?
The Asian currencies have long been maintained at well below their market rates, and most of them still are. There still is time for Donohue to get this right. His next stops are in China and Korea, home of two of the world’s most important undervalued currencies.
Wednesday, January 14, 2009
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
As a company whose ADRs are traded on US stock exchanges, the company is required to meet both Indian and American governance standards. One of the latter, according to the Journal, is to have qualified experts on its audit committee. Satyam’s has not for some time at least.
Worse, this fact was serious enough for GovernanceMetrics International to warn its clients as far back as December 2006 -- more than two years before the scandal broke – that Satyam’s governance wasn’t up to snuff.
So, how could an accounting firm like PriceWaterhouse miss this crucial, tell-tale detail?
All those who placed their faith in the company’s claims and PriceWterhouse’s stamp of approval must now regret not having got a second opinion. But why should that be necessary? Audit committees and outside auditors should must do their jobs and do them right and be held fully accountable when they fail to do so, or the capital markets will operate under a cloud of suspicion for a long time to come.
Ever since, I’ve been pondering what the opposite of a slacktivist might best be called. After all, Eastern philosophies teach that everything has, and is partly defined by, its opposite. I was momentarily triumphant when I thought I had coined the term “activisionary.” An activisionary, I reasoned, was one who had a clear vision of the future and was acting now to realize it.
Unfortunately for my writer’s ego, a brief Web search resulted in a hit on just that made-up term. It’s not someone who works for Activision, Inc., the video game producer. The company recently merged with Vivendi, a French company, so its workers and game addicts might properly be called vivendistes.
No, the word apparently originated with a Filipino group that with the help of Nokia seems to be advocating text messaging as a form of, or at least a means to, joint action. According to the supeme.ph Web site, activisionaries are a “new breed of activists” who have “discovered that change can come from anywhere and everywhere.”
That makes change sound awfully easy. As an American alternative, I’d suggest that activisionaries are those who know the direction they want society to take, believe in Barack Obama’s campaign rhetoric that “change happens from the bottom up,” and are dedicated to working with any and all like-minded allies to effect that change.
So, activisionaries of America, unite!
Sunday, January 11, 2009
Few Americans had ever heard of B. Ramalinga Raju before last week, but most people think they know what to expect of PriceWaterhouse. Raju’s Indian firm, Satyam (from the ancient Sanskrit word for “truth”), built a sterling reputation in providing consulting and outsourcing services to Indians and clients around the world. Ironically, Satyam was no truth-teller. It juiced the value of its shares by inventing assets, including a billion dollars of non-existent cash, and inflating its profits by a factor of nine. As it turns out, Satyam’s fabulous rise was just one more fraud, and Raju, his brother, and the company’s CFO are now under arrest. By contrast, PriceWaterhouse, Satyam’s auditor, insists it’s done nothing wrong.
Thanks to this latest scandal, we can see more clearly than ever that:
--No country has a monopoly on financial fraud. It’s a global problem.
--Even adults need adult supervision, especially when money’s involved. Self-regulation is all too often no regulation at all. When self-regulators fail to adhere to high standards, abuses can go on long enough before being detected that the consequences are dire, widespread and difficult if not impossible to remedy.
--It takes more than one person or a small group of unscrupulous conspirators to perpetrate a fraud such as Raju’s, Madoff’s or the others that keep coming to light. It requires gullible investors in search of the highest possible return, otherwise savvy institutional investors who willingly suspend their disbelief in financial results that sound too good to be true, auditors who don’t audit, and regulators who don’t regulate. These frauds are little more than genteel gangsterism or refined racketeering, not the work of mavericks on the make.
PriceWaterhouse in particular should be ashamed. If it failed to apply the most rigorous accounting standards to Satyam, the culprits within the accounting firm should be prosecuted with the full force of the law. If, as it claims, PriceWaterhouse did it by the book, then the book needs to rewritten – fast.
--In the US and around the world, more than a mere recovery is needed. Our aim must not be to reinflate the bubbles that have been bursting and reward the reckless and irresponsible with an intravenous drip of new capital . Rather, we need simultaneously to restart economic growth, restructure our economies to eliminate the sources of imbalance and excess, and rebuild confidence in our institutions. These goals are interactive and mutually supportive. The bottom line is that a sustainable recovery is probably unattainable unless we get on urgently with the work of restoring confidence in our banks, stock markets, auditors, and governments.
Satyam shows that the truth can hurt. But confronting the truth can set you free, opening up new possibilities for progress and growth with the highest standards of integrity.
Wednesday, January 7, 2009
Hardly earth-shaking, but apparently too strong a dose of reality for The Post. The editorial tries to flip the CBO piece on its head by arguing that the “spur of global competition” had made the remaining American producers stronger, and the country as a whole richer by providing cheap imported goods. The editorial concludes darkly: “We hope that the Obama administration helps U.S. firms adapt. But we hope it also understands that no one can abolish economic reality – and that it would be futile to try.”
Haven’t we heard this all before? Of course. Can we settle the argument, of course not.
But we can set a few ground rules for a more informed and productive debate:
First, The Post and every one else should stop talking about “global competition,” “foreign competition,” “trade” and “free trade” as if they were interchangeable. Global competition is a reality; “free trade” exists only in text books. Much of today’s global trade is rigged by price-fixing in the form of undervalued currencies, the targeted development of hot-house industries propped up by subsidies and other benefits conferred by foreign governments, and excessive corporate power over both the marketplace and regulatory agencies. Competition makes one stronger, as The Post argues. Of course it does, provided the competition is fair. But unfair practices destroy competition, distort the free flow of trade, and undermine confidence in the trading system. No less committed a free trader as Ronald Reagan acknowledged these distinctions and based policy on them.
Second, The Post and others should make it a policy not to comment on our disastrous trade performance without calling for fundamental changes in the U.S. tax, energy, and health care policies. Our outmoded policies are not immutable “economic realities” nor are they the product of some grand march of historical forces, as The Post seems to think. They are choices that we, or more precisely our elected representatives, make. Reverse counterproductive policies, and you can expect a quite different set of results. I think I’d know an immutable economic reality if I saw one, but self-inflicted policy wounds simply don’t make the cut.
Third, The Post and others should stop mixing up the long-run productivity gains and concomitant job losses in manufacturing with the artificial advantages given to imports thanks to our own stupid domestic policies and our trading partners’ unfair practices. Productivity gains have been occurring for a long time, of course, and to our great benefit. Even The Post acknowledges that something changed in the current decade when “the loss of manufacturing jobs was especially sharp and sustained.” However, it shows remarkably little curiosity as to what might have caused this devastating destruction of good jobs and fails to deliver on its promise to tell us how to replace them.
Fourth, The post and others should use only real numbers to make their case. The much trumpeted “productivity” numbers of the US Department of Labor, for example, are based on a simple-minded calculation: divide the dollar value of the economy’s reported shipments by the number of hours worked. A moment’s reflection should enable anyone to realize that our so-called productivity gains are a mixture of real improvements in efficiency and off-shoring. The plant that off-shores all its components and now ships the same amount of shipments into the US market with half its former workforce cannot fairly be credited with a doubling of productivity. But that’s what DOL statistics report, and that’s what The Post and others rely to bolster their shaky arguments.
Finally, The Post and others should stop pontificating on the virtues of more “free trade” without discussing our rapidly mounting external debt. Trade deficits drive the debt problem. In fact, more than 35 years of trade deficits have wiped out our status as the world’s leading creditor, morphing us into the biggest debtor in history. The solution to that still worsening problem simply cannot be more of the same trade policy. And if we don’t begin to solve the problem soon, the Great Inflation that will accompany the widespread abandonment of the dollar will do it for us.
Hard-working Americans now and in the future deserve better public policies than we’ve had for decades of decline. Small wonder that so many have soured on international trade agreements and regard our government and our media as out of touch with reality. The next time The Post is tempted to lament the lack of support for the current trading system, it should point the finger of blame squarely into the mirror.
Monday, January 5, 2009
As I ponder the cloudy prospects for transformative change in America in 2009, this portmanteau (a combination of two words, in this case slacker and activist) haunts me. In my analysis, corporate interests have a vise grip over US trade and tax policy, the government regulatory apparatus, both houses of Congress, and both major political parties. Despite Obama’s astounding success in raising cash from small donors, large donors dominate the money game and thus the political process.
I’ve long believed that the only way to fight such dominance is through grass-roots activism. The keys to effective grass-roots activism seemed to be a) the existence of a crisis atmosphere which opened the door to real change and b) an actionable agenda of solid, well thought-through policy alternatives. Certainly, the present economic conditions qualify as a bona fide crisis and thus a genuine opportunity for fundamental change. Groups like the Coalition for a Prosperous America, the Coalition to Fix America’s Economy, and the China Currency Coalition – all of which I am active in – are getting close to having the necessary sort of action agenda.
What may yet stand in the way of real change is our own slacktivism. Let’s cheer for Obama and watch him deliver “change we can believe in.” Let’s give the Democrats in control of the Congress larger majorities, an ally in the White House, and watch them produce real change. Such slacktivism is delusional and undermines the chances for real progress.
Shalesh Gandhi, a good government crusader in India, was quoted in the Times as saying “Our political class is bad because we do not keep on questioning it.’’ Gandhi added the crucial point that the real work of improving one’s country is not exciting, but dull.
India’s problem is also our own. I’m confident that after the feel-good inaugural ceremony on January 20, the new president and his entourage will parade down Pennsylvania Avenue in front an ebullient crowd. Meanwhile, a horde of lobbyists will descend upon Congressional offices laying the groundwork for killing the Obama program in committee. They know what they want (or don’t want) and back it up with cash, cunning, and ceaseless effort. By contrast, many reformers seem content to feel good about themselves and their beliefs.
Slacktivists of America, unite! You have nothing to lose but your e-mail chains! Now, right now, is the time for all slacktivists to aim higher, to demand and question more of public officials and the media, and especially to do more themselves -- no matter how difficult, daunting or even dull the work may seem.