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.