Comments on the News- IAS Group

JOINT AND SEVERAL LIABILITIES

2011-09-03T15:49:00.002-04:00

In an item entitled “American Idiocracy,” the columnist known as Schumpeter wrote in The Economist dated August 13: “American politicians are intent, not on improving their country’s competitiveness, but on gouging each other’s eyes out.” That apt phrase explains the universally low regard in which Americans hold both parties, both houses of Congress and the White House. However well founded, popular disdain seems to have done little to tame the “blame game” in Washington.

Perhaps if elected officials reflected on the law firms and other business partnerships many of them participated in during their time in the real world outside the Capital Beltway, they might see why a relatively lower disapproval rating is quite beside the point. Partnerships are formed to enable two or parties to cooperate pursue mutually beneficial ends. They may be competitors, vying for the same client. They may also be competitors for promotions, prestigious office space, and a bigger share of the profits when that time of year comes. Nonetheless, they are committed to work together to promote their agreed objectives.

Why not consider government as a partnership aimed at the constitutional objectives of forming a more perfect union, establishing justice, insuring domestic tranquility, providing for the common defense, promoting the general welfare, and securing the blessings of liberty to ourselves and our posterity? Those are the purposes for which the people of the United States established this constitutional government. Why not consider all elected officials to serve as general partners in that great and noble partnership? As such, why not hold them jointly and severally liable for the failures of the partnership?

To the extent that our union is less perfect, that injustice prevails, that there is domestic unrest, that the nation has failed to detect and deter threats to its safety, that the welfare of the country as a whole has not been promoted, and the blessings of liberty are unsecured – to the extent we have failed the constitutional purposes of the United States of America – then everyone involved should expect to be held fully accountable. Any partnership – a law or real estate firm, a manufacturing enterprise, a baseball team – performing as poorly as the U.S. government has been would have taken steps to reform its way of doing business, revise its business strategy, and revamp its executive corps.

It is folly to speak of a recession, a budget deficit, or a war as “Obama’s” or “Bush’s.” When the country as a whole is failing, our government as a whole is failing. All elected officials ought to be held accountable for that. No one has done enough to avert the mess our nation finds itself in. No one has even now offered a clear, comprehensive and credible plan to address the structural as well as the cyclical aspects of our economic woes. Government officials ought to be jointly and severally liable and need to find new ways to cooperate to promote the national interest – the general welfare – with diligence, dedication and a decent respect for the opinions of their partners.

The Electric Hedge

2011-06-07T16:13:00.004-04:00

New cars and new technology command hefty price premiums. To the chagrin of green-but-not-gold revolutionaries, the groundbreaking Leaf and Volt are necessarily new on both fronts for the time being. Nissan’s all-electric (EV) Leaf topped the U.S. News & World Report’s “upscale” small car list this year; it carries a $32,780 starting price tag. GM’s extended-range hybrid (PHEV) Chevy Volt was voted North American Car of the Year and is priced at $40,000. Toyota’s latest model of the hybrid Prius costs a bit more than half the latter amount, while comparable conventional vehicles can sell for less than half the price of their EV and PHEV counterparts. The Leaf and Volt may hold great appeal and long waiting lists, but in these economically challenging times, do they make any sense other than to make an ideological statement? Why pay the upfront premium?

Electric and extended-range hybrid vehicles will give you sticker shock, but they will also save you money down the road and protect you from the shock of higher oil prices. First, while their upfront cost is higher, electric vehicles have hugely lower operating costs. Assuming the current national average: you drive 12,000 miles per year, own your car for the average 6 years, and pay $0.11/kWh for electricity and $3.85/gallon for gasoline. The lifetime cost of a Leaf you buy today, including financing costs and federal subsidies, will be $1,841 lower than the cost of a Nissan Altima. And the primary reason for the cost difference is the $7,910 reduction in lifetime fuel costs. If you have range anxiety and/or need a vehicle that can drive for more than 100 miles at a stretch, then the Volt may be a better match. It will cost $8,315 less to operate than the Chevy Impala, but will also take 9 years of ownership to compensate for the difference in upfront costs.

Leaf and Volt Cost Comparisons Under Current Conditions
Costs	Nissan Leaf	Nissan Altima	Chevy Volt	Chevy Impala
Upfront	$ 32,780	$ 20,950	$ 40,000	$ 23,790
Lifetime	$ 31,815	$ 33,656	$ 40,490	$ 37,716
Lifetime Fuel	$ 1,716	$9,626	$ 2,110	$ 10,428

Figures calculated using the Rocky Mountain Institute’s Project Get Ready calculator

The chart above does not include lower maintenance costs. The Electric Power Research Institute estimates that EVs incur half the costs of their conventional counterparts: EVs do not need oil and filter changes, spark plug replacements, and timing chain adjustments; brakes last twice as long due to the regenerative braking mechanism.

Granted, Leaf and Volt purchasers would not come close to breaking even under current cost conditions but for the $7,500 federal tax break. Fleet operators, by contrast, can break even more quickly due to economies of scale, longer ownership, higher and highly predictable utilization rates, and lower (commercial and industrial) electricity rates. If a sizeable fraction of the over 16 million fleet vehicles moved towards electrification, the market would be large enough for battery and other component costs to significantly fall and boost EV and PHEV price competitiveness for individual consumers.

In the meantime, another factor could quickly tip the scale in favor of electric vehicles: higher oil prices. If you believe that within the next decade oil prices are likely to gradually or sharply, then purchasing an EV or PHEV is your personal hedge against oil prices. If oil prices in the US rose to European levels of $8/gallon, the lifetime fuel costs of the Altima and Impala would almost equal the cost of the vehicle itself. The Leaf’s lifetime cost would shrink to $12,217 less than the Altima’s cost, and the Volt, to $7,926 less than the Impala. No subsidies needed.

Leaf and Volt Cost Comparisons Under High Oil Prices
Costs	Nissan Leaf	Nissan Altima	Chevy Volt	Chevy Impala
Lifetime	$ 31,815	$ 44,032	$ 41,030	$ 48,956
Lifetime Fuel	$ 1,716	$20,000	$ 2,649	$ 21,669

Furthermore, electric vehicles empower you to hedge against energy insecurity in general. Oil dependence puts you at the mercy of global supply disruptions you cannot foresee or control, whereas electricity can be domesticated. If you are not satisfied with the grid’s reliability, the price or electricity, or your utility’s carbon footprint, you can always produce your own by installing a geothermal system or solar panels in your home. And in the event of an electric supply shock, you can also use your car’s battery as a back-up generator.

Given that the Leaf and Volt have earned high plaudits, the federal and many state governments are offering alternative fuel vehicle tax credits, auto manufacturers are extending highly favorable financing terms, and oil prices are rising, it makes sense to consider an EV or PHEV if you are in the market for a new car. It’s not too early to start thinking about an electric hedge.

By Carolyn Amon

DOING THE MATH: UNEMPLOYMENT FIGURES

2011-05-06T15:56:00.000-04:00

The initial reaction of the stock market to today’s employment report was quite positive. Certainly, the mood was brightened by yesterday’s sharp correction in petroleum prices, and we all know not to make too much of a single month’s data. So, let’s not gloat over this accomplishment, either.

In fact, I am more disturbed than heartened by the news that the American economy added a higher than expected 244,000 non-farm jobs in April. My caution isn’t based solely on the increase in the unemployment rate to 9.0 percent, up two tenths of a point over March. That’s disturbing enough, but consider the rest of the relevant figures:

· Manufacturing jobs increased by only 29,000. By contrast, retail trade jobs grew by 57,100, almost double the production jobs. What does this say about the progress we’re making as a country to shift away from consumption-led growth?

· Government jobs actually shrank, thanks mostly to the loss of 22,000 positions in state and local government, further shrinking the revenue base for the same governments that let the workers go. As budget nooses tighten all across this country, the loss of public sector jobs could be enough to choke off the fitful recovery.

· The Department of Labor reported separately that the rate of new unemployment claims exceeded 1.7 million in April (the 4-week rolling average of 431,250 times four). That means that, roughly speaking, the economy had to produce a gross increase of upwards of two million jobs in order to achieve the net increase of 244,000. That’s an impressive performance for a single month, yet the unemployment rate actually rose nevertheless. There’s a lot more restructuring going on than real growth.

· Looked at another way, the economy would have to produce 360,00 net new jobs for each of the next 36 months to bring the unemployment rate down to a still high six percent. Every time a month falls short – April did so by 116,000 jobs – the bar is raised for the remaining months till March 2014. We’re falling behind, not progressing.

· Worse yet, our aim can’t simply be to reduce the employment statistics. All jobs are not created equal. Just ask the 8.6 million Americans involuntarily working at part-time positions – with reduced pay and low or no benefits.

As a country, we have our work cut out for us. It’s not enough to reduce budget deficits; in fact in the short run that will only make the employment and revenue problem worse. It’s not enough to aim merely to reduce the “jobs deficit.” That is a symptom, not a cause of what ails us. Instead, we must address the trade deficit itself. That means investing and producing more in the United States, importing less, and exporting more. Nothing less will be enough to address the jobs deficit.

EXCEPTIONAL MUSH

2010-12-03T10:44:00.003-05:00

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

2010-11-11T17:38:00.001-05:00

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

2010-11-11T17:36:00.000-05:00

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

2010-09-19T16:18:00.000-04:00

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!

2010-04-01T15:04:00.002-04:00

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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2010-03-17T23:33:00.001-04:00

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ON-SHORE BREEZES

2010-03-17T23:28:00.000-04:00

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

2010-03-03T10:23:00.001-05:00

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

2010-02-24T17:23:00.000-05:00

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.

DESTABILIZING STABILITY

2009-12-28T15:36:00.000-05:00

Imagine a circus act in which the high-wire artist tried to maintain balance by keeping his body stiff and his knees locked. The rigidity of the effort would be laughable, at least until he lost his balance and fell.

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.

ALL’S FAIR

2009-12-05T17:43:00.002-05:00

My Saturday breakfast was brightened a bit by a news item in the Wall Street Journal (“House Helps to Pick College Football No. 1”). It seems a subcommittee of the House Energy and Commerce Committee found the time and the will this week to vote to force a national college football play-off. A full committee vote might take place as soon as next week. Finally!

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.

SAVING JOBS

2009-11-23T17:44:00.000-05:00

Last week’s finger-pointing session before the Joint Economic Committee of the Congress actually gives me some hope. Not because the criticism of Treasury Secretary Geithner and the administration as a whole was all that fair or balanced. Not because Geithner’s defense was all that convincing. And certainly not because anyone on either side had much to say about how we might exit from the economic crisis that won’t go away.

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.”

A SAUER TASTE

2009-07-31T12:11:00.001-04:00

Older baseball fans will remember Hank Sauer, a slugging outfielder in the 1950s. In 1952 he bashed 37 home runs, batted in 121 runs and hit .270 for the fifth-place Chicago Cubs. For his efforts, he was recognized as the most valuable player in the 8-team National League.

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!

SPEAKING SOFTLY AND ...

2009-06-10T20:50:00.000-04:00

Treasury Secretary Tim Geithner’s speech at Peking University last week seems to have been better received there than in Washington. Some currency hawks are lamenting that he saw the need to go to apologize (again) for stating the obvious fact that China has been manipulating its currency for a long time now.

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.

DEFLATING EXPECTATIONS

2009-05-11T11:03:00.000-04:00

In the view of the latest issue of The Economist, “inflation is bad, but deflation is worse.“ (See The greater of two evils,” May 9-15, 2009.) An editorial reasoned that “inflation is distant and containable, while inflation is at hand and pernicious.”

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.

TAX OVERSIMPLIFICATION

2009-04-19T16:22:00.000-04:00

On Tuesday of last week, President Obama gave a terrific speech at Georgetown University, explaining and defending his approach to the economic crisis better than at any time to date. His message for Americans was that:

“… 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.

WORKING ON THE RAILROADS

2009-04-18T13:42:00.000-04:00

WORKING ON THE RAILROADS

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.

SCARY TACTICS

2009-03-30T10:09:00.000-04:00

Growing up in the 1950s, I learned a lot about scare tactics. In those days, some people imagined a Commie under every bed, as the phrase went. Only in retrospect did I learn
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.

Charles Blum

CONFIDENCE GAMES

2009-03-16T16:46:00.000-04:00

If you thought that monumental greed, unbridled ego, colossally poor judgment, and grossly negligent regulatory “oversight” accounted for most of the financial meltdown, you might be mistaken. At least Steve Forbes wants you to accept a much simpler explanation. “Mark-to-market accounting,” he asserts, “is the principal reason why our financial system is in a meltdown.”

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.

Charles Blum

RR’s 3 R’s

2009-03-16T09:58:00.001-04:00

There are a few preliminary signs that the Obama administration is preparing to take a fresh look at the trade policy that helped get us into the global mess we’re in. Thus far, nothing revolutionary has emerged, just a hopeful emphasis on enforcing our legal rights and a healthy skepticism about new agreements for agreements’ sake.

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.

Charles Blum

LIVING AND DYING BY THE SWORD

2009-03-16T09:56:00.000-04:00

According to a Washington Post dispatch today from Shanghai, Chinese exports plummeted by 25 percent in February. Economists reportedly were “shocked” by the news.

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.

Charles Blum

MUDDLING THROUGH QUICKSAND

2009-02-01T14:16:00.000-05:00

In his February 1 column in the New York Times, Tom Friedman laments that thus far the government response to the economic crisis is akin to pouring water into a hole, waiting for the sound of it splashing against the bottom, but hearing nothing. I have another image that’s been in my head since as a young boy I saw a Tarzan movie my family’s first TV set – quicksand.

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.

Charles Blum