EXCEPTIONAL MUSH

These are discouraging days for anyone seriously concerned about the future of our country. In the aftermath of last month’s electoral upheaval, both parties seem hell-bent on misinterpreting the message from the people – those that voted and the many that didn’t. The fact is that most Americans failed to support either party – and with good reason.

On the one side, we hear the mind-numbing mantra of “American exceptionalism.” We are so special a people, this view seems to presume, that we can continue to mismanage our economy, neglect our needs, and ignore our foreign competitors without suffering the consequences. All we must do is ensure no tax increases -- especially on those most able to pay -- and to starve the federal beast. Exceptionalism is the ideology of the privileged, but its appeal traps many more citizens in the 51^st state, the State of Denial, far from the realities of a global economy and the rise of state capitalism.

On the other, we are offered, according to Eliot Spitzer, “mush.” Democrats have no coherent message and thus fall back on “mushy” calls for more economic stimulus and patching the gaping holes in the social safety net. But where are the good jobs to come from? Green technology? Well, come with me to visit China sometime and I’ll show you what a commitment to green technology looks like and what kind of resources it entails. The only competitions in which mush is useful are Iditarod and the race to the bottom. It’s no way to win elections nor to motivate a nation.

Don’t get me wrong. I love this country and thank God every day that when they left Germany my father and my grandfather decided to come here, not South America. I believe in the greatness of our country and was privileged to represent it for 17 years as a diplomat and a trade negotiator. I believe, as one of my Korean friends told me in the middle of an all-night haggling session in Geneva that “America is great because America is good.”

Just for those reasons, I sympathize with the objectives of living within our means, ensuring a sound dollar, and maintaining an open and fair trading system. At the same time, I recognize the need for any civilized society to educate the young, retrain the older, provide decent housing and health care for all, care for the needy, and ensure an investment climate that generates good paying jobs for all those willing to work.

But as a country we have to escape this debate over “exceptional mush.” Our problems are greater than this petty partisan debate presumes. They are more difficult and more urgent, but we hardly speak of them.

Perhaps we can learn a lesson or two while watching this weekend’s football action. We already know that the better team does not always win. It’s possible for a less talented team to beat a more talented one, for an injury-riddled line up to best a healthy one, for a team on a losing streak to whip the hottest team in the league. That’s why we bother to watch.

It might be good to contemplate how the unexpected can happen. Sometimes it’s a lucky bounce of the ball, a mental blunder, or a bad call from the ref. Most times, however, it’s preparation. Football coaching staffs work almost 24/7 to devise elaborate game plans to capitalize on their team’s strengths, exploit the other team’s weaknesses, and produce victories even when not blessed by the odds makers.

On a national level, the steps to a winning game plan are pretty clear:

• Establish a winning vision of a productive, wealth creating, financially self-reliant country.
• Agree on overarching strategic objectives to save, invest, and produce in this country and balance our trade and current accounts.
• Stop foreign currency subsidies.
• Reform our tax system to rely more on consumption taxes that reward savings, domestic production, and exports and less on income taxation.
• Expense investment in new plant and equipment to unlock the trillions of dollars of cash that large corporations are sitting on and to promote the expansion of domestic energy production without undue political interference with market forces.
• Support innovation and its application in this country.
• Establish a national bank for infrastructure and energy conversion to provide reliable, long-term financing to meet our needs in transportation, communication and energy distribution.
• Revise our trade policy to reflect the Reagan formula of reciprocity: “free and fair trade with free and fair traders.”

There are many details to be hammered out legislatively and by regulation, of course. But the starting point is a vision. My friend Pat Mulloy likes to quote the book of Proverbs: “Where there is no vision, the people will perish.” Without a vision, the American people are losing. It’s time to work as diligently, as creatively and as urgently as an NFL staff to get a new game plan for America. The whole word is watching.

APPLES AND ORANGES

November 11, 2010

How can we hope for any meaningful agreement to rebalance the lop-sided international trade system when heads of state and talking heads, finance ministers and financial gurus condemn deficit countries (i.e. the USA) in terms that ought to be reserved for surplus countries (China in particular)? One key to success at this week’s G-20 summit – and any future endeavor of this sort – is to recognize the fundamental difference in the significance and legal status of weak or weaker currencies.

On the one hand, some countries – China and others today, Japan for a long time in the past –systematically intervene in foreign exchange markets in a way that produces and perpetuates massive imbalances. The evidence of such policies lies in the huge excess foreign currency reserves and persistent trade surpluses. (China acknowledged a monthly surplus with the world of $27.1 billion in October, the second highest level this year. The result is yet another record level for China’s official reserves.)

Such behavior is inconsistent with IMF Article IV, which obligates members not to manipulate exchange rates in ways that prevent the adjustment of unbalanced trade flows and international payments or produce a competitive advantage. The logic is clear: when countries run big surpluses, the exchange rate should be allowed to strengthen so as to reduce the imbalances. Not to do so is a violation of Article IV and a shortsighted assault on the very international trading system that enabled export-oriented countries to grow so successfully. China has not done so.

On the other hand, the United States at long last is changing macroeconomic policies in ways that will, if market forces are allowed to work, produce a weaker dollar for a period of time. At the same time, Americans – individuals and businesses – are deleveraging and substantially increasing their savings. Banks have greatly strengthened their balance sheets and tightened the undisciplined credit expansion of the last decade. Interest rates have been held close to zero. Together, those steps should work to reduce the imbalances that burden the international system. The logic of Article IV also applies: when a country runs persistent trade and current account deficits, its exchange rate should weaken. American policy — which consists of much more than just a weaker dollar -- upholds Article IV and reinforces the flexibility of the international system in the face of massive imbalances.

The contrast between China’s perpetual surplus machine and the United States' self-corrective medicine is as plain as apples and oranges, illegal and legal, destructive and constructive. Those who cry out in horror that the industrial countries shouldn’t attempt to increase their exports fail to understand how markets work and make a mockery of the system from which export-oriented countries have hugely benefitted.

There is no perfect level for exchange rates, interest rates, money supplies, trade balances or current account balances. They must be allowed to rise and fall as necessary to maintain the overall stability of the system. To paraphrase Lord Keynes: “When circumstances change, our policies change. What do you do?” That’s the essence of Article IV. Those who insist on their right to run perpetual surpluses or who want to condemn the US to run perpetual deficits need a remedial course in economics. Without a better understanding of this fundamental economic truth, there is little hope for any lasting positive result from the G-20, now or ever.

Charles Blum

LOOKING FORWARD

November 5, 2010

This week’s election results – especially the sweeping Republican gains in the House of Representatives and governorships across the country – will be analyzed for years to come. Many observers attribute the Republican tsunami to widespread anger with the Obama/Pelosi agenda. In particular, health care and cap and trade legislation are often singled out. Yet health care divides the American public pretty evenly between those who want to repeal Obamacare and those who like it and even want it to go farther. Cap and trade, of course, died in the Senate and may not revived soon, if ever. It has not adversely affected anyone’s household or corporate budget.

Others single out the stimulus measures as the cause of the Democrats’ debacle. Exit polls confirm that voters divided evenly between those who thought the stimulus measures – some of which are still to materialize -- had helped the economy, those who believed it had hurt the economy, and those who felt that it had made no difference.

Voting decisions are complex, of course, and I’m sure there is some validity to all these factors and many more. My own take is a bit different, however. Consider the following answers to three questions reported by the Wall Street Journal on November 3:

• When asked which issue was the most important in determining their vote, 62 percent responded the economy. Health care was a distant second at 18 percent health care, followed by immigration at 8 percent.
• When asked who was to blame for the poor economy, 35 percent answered Wall Street, 30 percent George W. Bush, and only 23 percent Barack Obama.
• Those voters living in a household that had experienced unemployment voted Democrat by a relatively slim 51-48 percent margin.

These answers are not surprising. They suggest that voters, while not holding the Obama administration principally responsible for the economic mess we’re in, do hold it mainly accountable for failing to provide a strategy for getting out of it. Throwing more stimulus money around the economy helter-skelter is not seen as the answer. The perceived added cost of health care and energy is similarly rejected as a response to our economic woes, as some Democrats tried to portray their health and environmental reforms.

Rather than angry, voters seem to me anxious. Rather than “frustrated with the pace of our economic recovery,” as Obama put it the morning after, they are fearful that government hasn’t got a clue about how to change the structure and functioning of our economy so that we can resume the growth of investment, jobs and income on a sound basis without endless borrowing from foreign creditors.

This election was, sadly enough, too much about the past. Democrats lost in part because they failed to produce a viable economic strategy; Republicans won despite their failure to produce one of their own. Together, the parties demonstrated that it is difficult and dangerous to move forward while gazing intently into the rear-view mirror. Both parties need to do better – and soon – so that America can do better.

Charles Blum

MULTI-TASKING

Multitasking in individuals is controversial. Some people glory in their professed ability to juggle multiple chores simultaneously. Others deny that anyone can do full justice to two things at once, much less three or four. Whatever the truth, a more mindful approach to life’s problems can be more fulfilling and less stressful for individuals. As Peter Drucker advised: Do one thing at a time, and do first things first.

In political life, though, multitasking is the only approach to solving complex problems. There are few, if any, silver bullets. Simple measures hardly ever suffice to resolve multidimensional problems. Instead, the challenge for strategists is to organize different approaches into a coherent, effective solution – even if they appear on the surface to be contradictory or even incompatible.

The raging debate over currency misalignment is a case in point. Some advise that the problem is multilateral and must be dealt with by and through multilateral institutions. Others stress the bilateral dimension of the problem and focus on how the United States can gin up enough pressure to persuade recalcitrants such as China to conform with the multilaterally agreed rules they violate. Still others insist that the US must rely on steps within its own power. Of those, some are ready to take any measure – say an across-the-board import tariff – regardless of its legal defensibility or the economic and political consequences. Another faction, to which I have always belonged, insists that the US must stick to the legal high ground, enforcing its legitimate rights under the WTO as the most effective way to resolve the problem without setting off a trade war. My experience as a trade negotiator tells me that the application of countervailing duties to counteract currency subsidies when they cause injury to a particular industry is the starting point for an effective strategy.

These three dimensions of action are not as contradictory as some would have it. Rather, they are complementary – three sides to a stable triangle of policy. In the end, what’s needed is reform of multilateral institutions and enforcement mechanisms that clearly have failed over the past decade. A step in that direction would be one or more bilateral understandings that ease the immediate imbalances imperiling the US and the global economy. Legal action under our WTO-consistent trade laws is the only way to bring some of the key countries to the negotiating table.

Unilateral action is the only way to get the process started. Bilateral agreements are the only way to make substantial progress over the medium term. Multilateral reform is the only solution over the longer run. One element without the other two is unlikely to succeed; all three together constitute an intelligent multitasking strategy.

Secretary Geithner opened the door this week to collaboration between the administration and the Congress on the vexatious currency problem. If they will conceive their strategy in these terms, there is a good chance of success. It’s a truly global issue, so the whole world will be watching.

Charles Blum

NO FOOLING!

Jim O’Neill, chief economist at Goldman Sachs, put in his two cents’ worth to the currency debate in a April 1 Financial Times op ed entitled “Tough talk on China ignores economic reality.” His argument seems to be:

• At 14-15 percent, China’s annual domestic demand growth is “too strong,” adding to inflationary pressures in China.
• China’s “strong imports” are a positive force in the world economy.
• The RMB is not undervalued but rather “ very close to the price it should be.”
• “[G]iven the past weakness of the dollar and the strength of domestic demand in many big emerging countries, China included, the US has a chance of reaching its goal [of doubling exports over the next five years].”
• So, it’s counterproductive to press China to change its exchange rate regime.

Huh? Is this some sort of April Fool’s piece? Let’s try to think straight about each piece of O’Neill’s argument:

• As O”Neill himself recognizes, revaluation of the renminbi is deflationary, not inflationary. Inflation arises when the total supply is restricted. A revaluation helps remedy that problem immediately and over time. First, domestic prices would fall as the price of imports (energy, raw materials, components, luxury goods) fell and the supply of imports rose. Over the longer term, China’s domestic supply would be expanded, too, as some producers found the economics of producing goods for the domestic market more appealing than exporting. So, the inflation argument helps to justify a revaluation.
• If China’s expected trade deficit for March were to turn out to be more than a one-month wonder, the argument for China’s growth being good for the global economy would be more credible. However, a revaluation would help to open the Chinese economy to global competition on an on-going basis. Here again, O’Neill’s argument seems to work in favor of a revaluation.
• How can O’Neill argue that the RMB is not undervalued? China’s official reserves have reached stratospheric levels and are still rising. IMF rules require a rebalancing when trade flows or the balance of payments are imbalanced. That means a reversal of rising trends, not a slowing or a stabilization of them.
• How will past weakness of the dollar help future US exports when it was associated with the world’s largest trade deficit? How will continued strength of the dollar against the renminbi help increase US exports?
• O’Neill seems implicitly to endorse the old chestnut that “China doesn’t respond to foreign pressure.” The other side of that coin is “no pressure, no problem.” Silence is just a form of assent.

The facts and the law are on the side of an immediate, substantial revaluation. Economic logic indicates that a revaluation is in the overall interests of the not just the US, but China and the rest of the world as well. That much should be apparent to all independent analysts by now. It’s time to stop fooling around and act.

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ON-SHORE BREEZES

The Wall Street Journal reported last weekend that Caterpillar is the latest American producer to shift production from abroad back to the United States. Cat’s new US plant -- at a location still to be decided --.will manufacture excavators formally produced in Japan and an older plant in Aurora, Illinois. The result could be a tripling of domestic production, while the Japan plant would have extra capacity to ship to Asian markets.

Cat is not alone. The Journal reminded us that General Electric had announced last year it was moving production of water heaters from China to Louisville, Kentucky and that U.S. Block Windows had decided to move all its China production to Pensacola, Florida.

From our own experience, we know of other cases of precision parts work coming back home for quality reasons. Even some woolen apparel production is being “on-shored.” Surely there are scores of other examples that have received less attention.

The Journal drew the following conclusion: “After a decade of rapid globalization, economists say companies are seeing disadvantages of offshore production, including shipping costs, complicated logistics, and quality issues. Political unrest and theft of intellectual property pose additional risks.”

These encouraging signs for American manufacturing are driven essentially by market forces and the shortcomings of regulatory systems abroad. Certainly, they are far too limited to constitute a reversal of the disastrous exodus of manufacturing output that has helped to drive the trade deficit and the accompanying foreign debt. Moreover, there’s no reason to believe that these trends will continue long enough to achieve that result without a disastrous fall in the dollar against floating currencies with the attendant inflation and destruction of wealth.

Imagine what could be done if the United States of America could get its collective act together and define a national economic policy that favored domestic production and a radical increase in net exports. The key elements would include: decisive action to counteract the protracted undervaluation of foreign currencies against the dollar; a tax system that rewarded investors for building new plant and equipment in the US; an ambitious program to build a national infrastructure – roads, bridges, waterways, broadband, and power distribution – worthy of a global leader; and the vigorous enforcement of our rights under international agreements and domestic statutes to achieve “free and fair trade with free and fair traders” as Ronald Reagan once defined his trade policy of reciprocity.

The growing list of on-shoring operations underscores the basic truth that American industry is fundamentally competitive. We have few obsolete or high-cost producers; they have long since been driven out by competition both international and domestic. What ails us is our public policy. That can and should be fixed without further delay.

Charles Blum

Electrifying our National Strategy

Warren Buffett predicts that we’ll all be driving electric vehicles (EVs) in 20 years. The Oracle of Omaha knows a thing or two about sound investments and he’s placing his bets on EVs. It makes economic, environmental and energetic sense. What doesn’t make sense is the dismal record of Buffett’s native land to capitalize on this insight.

Electric vehicles exceed the energy efficiency, environmental, and economic virtues of their conventional counterparts. Internal combustion engines have less than half the 95% efficiency rate of EV motors. The latter are also less carbon intensive: even if the electric grid that charged EVs were entirely coal-powered, EVs would still emit less carbon emissions than petroleum-burning cars. EVs are consumer friendly, requiring less maintenance and sporting a significantly lower cost of ownership for budget conscious Americans. Beyond the cost benefits of electricity over gasoline, EVs, like solid-state computer drives, have fewer moving parts and hence less need for service and repair. At a more macro level, EVs do not require the same massive infrastructural support as liquid fuels. More public EV plugs will be needed, but a home garage plug will suffice for the charging needs of most commuters. Moreover, when combined with a smart grid EVs might serve as energy reservoirs that could be tapped during peak electricity demand. Finally, EVs can empower America to make significant headway in weaning itself off its oil addiction. Indeed, transportation accounts for over two thirds of total U.S. oil consumption.

In 2008, Berkshire Hathaway made its foray into the EV market by investing $232 million in 2008 for a 10% share of BYD, China’s number one battery and electric car company. That share is now worth almost $2 billion. Berkshire’s record gains from this investment flow from BYD’s innovations in the EV industry, including a breakthrough in lithium ion ferrous phosphate technology and a plan to produce the world’s first mass-produced plug-in hybrid.

BYD’s (and Buffet’s) good fortunes are also a sign that China is doing something right: it is thinking big about bold investments in EVs. The Chinese government has made “independent innovation” in the EV industry a national goal. By 2011, Beijing plans to invest $1.5 billion dollars in EV R&D, to convert entire government and taxi fleets into EVs, and to incentivize local government and individual EV purchases through rebates and tax credits of more than $7,000 per passenger vehicle and up to $86,000 for trucks and buses. The Chinese government wants its domestic manufacturers to produce half a million EVs by the end of next year to secure China’s place as a leading EV producer and exporter.

The U.S. goal is strikingly less ambitious. President Obama has committed $2.4 billion in stimulus funding for EV and battery R&D to help pave the way for domestic production of 1 million EVs by 2015 (0.5% of our vehicle fleet). In the 1990s, when Chevy produced its S-10EV, GM its EV1, and Ford its Ranger EV, the U.S. seemed poised to dominate the EV market for years to come. Fifteen years and an $80 billion bailout later, the Chinese have picked up where America left off and are happily eating GM’s lunch.

There is hope for American producers and the Obama administration though. It’s not too late to develop and implement a comprehensive energy strategy that places 21st Century technologies like smart energy grids and EVs where they rightfully belong. Washington has to recognize that the electric stakes are high. Fortunately, there are rays of hope coming from the Department of Energy, which has granted Tesla almost half a billion dollars in loans to develop a mass-market version of its pricey high-tech all-electric Roadster sports car. Let’s hope this is a first step for the U.S. auto industry towards regaining a competitive edge in the EV market. After all, the U.S. shouldn’t trade its dependence on foreign oil for one on foreign green technology.

Carolyn Avery

THE PARABLE OF THE LOST MOTORIST

Late one foggy, drizzly evening, an alpha male motorist became hopelessly lost in the crisscross maze of streets in the nation’s capital. Perilously low on gas, he pulled into a filling station. Bemoaning the inflated cost of fuel, he filled the tank with the cheapest grade. He decided to buy a new set of windshield wipers to help him see a few feet in front of the car, added a little air to one tire that seemed low, and ran the vehicle through the car wash to remove some unsightly splatter. Then, on impulse, he added some snack food and a diet soft drink to his credit card tab before driving off. He neglected to buy a road map or even ask directions.

The result of this pitiful pit stop is predictable. After many more hours of aimless driving, the same motorist will return to this or another gas station to refill the tank and his empty stomach. He is wasting time and money, going nowhere.

Like that hapless motorist, official Washington seems lost, spending precious time and money to go nowhere fast. The nation looks a little better and may even feel a little better, but no one has a clear sense of direction or purpose. This is the predictable result of an administration, a Congress and an opposition that seem united on just one thing: There shall be no agreed way out of the mess we’ve made of our economy and, increasingly, of our society.

The President has an agenda, a list of things to do, rather than a strategy. As Fareed Zakaria wrote recently, “Prime Minister” Obama seems content to manage the government when he should be leading the country. The House and Senate are working at odds with one another, helping to account for their shared de minimis approval rating. The Republican opposition seems content to just say no.

What we all lack is a clear sense of strategy: a few big steps that will set us off in a new direction. It could be as simple as: let’s change public policy in every way necessary to ensure that Americans can invest more, produce more, import less, and export more. That would pay big dividends: reduced debt; lower interest rates; and more jobs. Over time, the even larger pay-off would be renewed confidence that the American Dream will survive for future generations, restoration of the value of the dollar, and renewed credibility and influence for the United States in the world.

Focus on fundamentals. Aim high. Stay focused. That’s the kind of leadership we need, and we need it now.