Trade-Wars

We have Moved our Blog

2010-01-04T15:29:00.001-08:00

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Trade and the Election

2008-08-22T06:41:00.000-07:00

Check out new postings on our new blog. www.tradeandtaxes.blogspot.com.

We've moved our blog!

2008-08-02T20:07:00.000-07:00

Go to: http://TradeAndTaxes.blogspot.com

Joseph Calhoun had an excellent commentary on the credit problem in yesterday's American Thinker

2008-08-01T09:26:00.000-07:00

Joseph Y. Calhoun, III, had an excellent commentary on the credit problem in yesterday's American Thinker. I especially appreciated his wisdom when he pointed out that the real problem is a capital accumulation problem, not a credit problem. He began:

A long wave of credit stimulation has been allowed to obscure the underlying problem of capital accumulation in the United States. We are paying a price, but not solving the problem.

The political class simply cannot be trusted to provide solutions. They are too interested in retaining power for the sake of power. They do not have the guts to say what needs to be said for fear of alienating some group of supporters. They do not have the integrity to stand on principle and advocate unpopular but necessary policies. They are too beholden to special interest groups to do what is right for the country rather than what is right for their campaign contributors. It is high time that politicians were held responsible for the damage done by policies intended to benefit the few at the expense of the many....

In a recent market commentary, Bill Gross called credit the mother's milk of capitalism. That sentiment, echoed by our politicians and policy makers, is the source of our problems. It is not credit but capital that is the lifeblood of capitalism and the US doesn't accumulate enough capital to support the growth to which we've become accustomed. The savings rate has ticked somewhat higher over the last few months, but for years we've saved too little and spent too much. The difference to date has been provided by foreigners such as the Chinese who now own over $1 trillion of US debt and Middle Easterners who own even more.

The U.S. problem is not a lack of credit. Our extremely low interest rates are testament that there is plenty of money available to be borrowed if Americans were credit worthy. The basic problem is a failure to accumulate capital (i.e., a lack of savings). No amount of borrowing from abroad will solve the underlying problem.

Follow the following link to read his commentary: http://www.americanthinker.com/2008/07/the_credit_problem_1.html.

Howard

Good news! Doha Round of WTO negotiations collapses!

2008-07-31T15:35:00.001-07:00

An article by Stephen Castle and Mark Landler in yesterday's The New York Times reported that the Doha Round of the WTO negotiations just collapsed. The story doesn't mention that the Doha Round does not address mercantilist government currency manipulations, a glaring oversight that makes the whole agreement worthless.

According to the New York Times article, the chances of this incompetent agreement passing in the future are minimal given changing political opinion in the countries that are being victimized by mercantilism. Specifically:

Deep skepticism about the advantages of free trade was on vivid display during the Democratic primaries and it is growing in Europe, particularly as France, Italy and other countries have fallen into an American-style economic malaise.

Howard

Growing Trade Deficit with China Cost 2.3 Million Jobs

2008-07-29T18:38:00.000-07:00

The Economic Policy Institute just released a report that estimates the jobs lost by each U.S. state due to trade with China.

The top line of the press release emphasizes the main findings.

WASHINGTON – As the nation’s economic woes mount, a new study details the devastating impact that the growing U.S. trade deficit with China is having on American jobs, wages and key industries. Between 2001 and 2007, 2.3 million American jobs were lost due to the China trade gap, including 366,000 last year, according to the report released today by the Economic Policy Institute (EPI).

Those displaced workers lost an average of $8,146 in wages last year, a total of $19.4 billion, as they took lower-paying jobs. China is also the predominant source of downward pressure on wages of other production workers, about 100 million Americans. Competition from low-wage workers in less developed countries and less bargaining power here at home pushed the median wage for full-time workers without a college degree – about 70 percent of the U.S. workforce – down about $1,400 in 2006.

The EPI used an input-output sector specific model of the U.S. economy to estimate these impacts. The full report contains some revealing arguments and text.

The authors note that the trade deficit with China is supported by a range of anticompetitive tactics.

A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. China has tightly pegged its currency to the dollar at a rate that encourages a large bilateral surplus with the United States. Maintaining this peg required the purchase of about $460 billion in U.S. treasury bills and other securities in 2007 alone.² This intervention makes the yuan artificially cheap and provides an effective subsidy on Chinese exports. The best estimates place this effective subsidy at roughly 30%, even after recent appreciation in the yuan(Cline and Williamson 2008).

In addition, the report summarizes China's subsidy of key industries, and its suppression of workers rights.

One of the more intriguing results from this study is the balance between the wages of workers gaining from trade with China and the wages of workers in sectors loosing from trade with China. Typically, workers in exporting industries earn higher wages. In the case of our manipulated and distorted trade with China that isn't the case.

The growth of trade deficits with China shifts jobs from better-paid traded goods industries into jobs in non-traded sectors where wages are significantly lower on average. Moreover, average wages in import-competing industries were higher than those in export industries. Thus, the growth in the overall volume of trade (imports plus exports) with China substituted lower-paying export jobs for higher-paying jobs in import-competing industries. This somewhat surprising finding stands economic logic on its head. Economic theory would suggest that the United States should specialize in producing goods that intensively use high-skilled, highly educated (and highly paid) workers and import labor-intensive goods that use more low-skilled labor. In fact, low-wage commodity sectors were some of the largest exporters of goods from the United States to China.

How to Bring Down Oil Prices Now

2008-07-27T18:15:00.000-07:00

How to Bring Down Oil Prices Now

Raymond L. Richman

Economists have ignored in the name of free trade the unfortunate consequences of the trade deficits which are rapidly converting us into a second-rate power and turning our enemies and potential enemies into industrial powers. Imports of oil are responsible for nearly half of the trade deficit so far this year. Market forces will bring down the price of crude oil a little if you count as market forces the subsidized substitution of ethanol for gasoline, subsidized wind power for coal, oil, and natural gas, subsidized hybrid vehicles, etc. Much more likely to bring down the price of crude oil in the short-run is ending the prohibitions on offshore drilling in the Atlantic and Pacific, in the Alaskan Wild Life Refuge, and on public lands. The price of crude oil would fall substantially if the world believed U.S. actions to increase the domestic supply of oil and oil substitutes were to be effective even though such efforts would not reduce the importation of oil for several years.

The key is credibility. Prof. Martin Feldstein in his op-ed, "We can Lower Oil Prices Now," (WSJ, 7-1-08) has rendered an important service by arguing that credible steps by the U.S. to reduce future consumption and increase the future supply of oil will lead to lower prices of oil immediately by changing the expectations of oil-exporting nations with respect to the expected rate of growth of demand and supply of oil. Unfortunately, history since the oil shocks of the 1970s, demonstrates that this country's decision-makers simply have not considered our dependency on imported oil a problem. Any benefit-cost analysis would have to weigh the supposed benefits and costs of fewer carbon emissions against the real impact of the trade deficits on the dollar, on jobs, and on the economy, which have been very serious as we show in our book, Trading Away Our Future.

Sen. Obama and Congressional Democrats support the current prohibitions against drilling off-shore and in the ANWR. Unfortunately, the Democrats, at this moment of time (July, 2008), appear likely to win the 2008 presidential and congressional elections, Sen. McCain, who likewise supported these prohibitions, recently changed his position and is calling for permitting off-shore drilling. President Bush has called for legislation eliminating the prohibitions against drilling off-shore and in the ANWR. Republican legislators have introduced such legislation. Pressure is building on Sen. McCain to endorse such legislation. This would lend credibility that the U.S. will adopt measures to reduce the importation of oil substantially especially if it becomes an important issue in the current election campaign.

We are currently in the second-stage of a mercantilist produced collapse

2008-07-26T05:40:00.001-07:00

During the first stage (from 1995 to 2005) the mercantilist government loans lowered our interest rates causing our asset values to go up. We felt rich and were able to borrow for consumption and for house and mall construction. The foreign money pouring in enriched our financial industries. We closed our eyes to the fact that we were losing about 20% of the our manufacturing jobs while investment was stagnating in our trade-competitive sectors.

During the second stage, which we are now in, our lack of past investment in our trade-competitive sectors, such as manufacturing, is causing the dollar to decline. Foreign governments, and it’s not just China, have been increasing their dollar purchases to keep their currencies undervalued relative to the dollar while at the same time they maintain other barriers to our imports including tariffs as well as artificial barriers, such as the Chinese prohibiting the riding of Harley Davidson-size motorcycles on many of their roads.

The mercantilist countries, especially China, will continue to finance our trade deficits while they steal our remaining industries. China is currently working on getting US market share from the following industries:

Currently the Chinese government is financing the purchase of GE Appliance to get GE’s market share. After that purchase, they will close many US factories.
Currently tariffs and other barriers in the growing markets of the world have put our vehicle parts and vehicle production industries on the ropes. If nothing is done, it is quite likely that GM and Ford will go bankrupt.
Airbus is moving its production to China which should allow China to steal our aircraft production industry.
China is building 3 factories to compete with our heavy mining equipment companies, including Bucyrus, while protecting their new industry behind both a currency-manipulation barrier and a tariff barier.

More and more governments are voluntarily participating in these dollar purchases. (After all, it is not often that a country voluntarily gives away its productive resources!)

This stage will not end until China has finished stealing our remaining industries. The US trade deficit will continue to increase even while the dollar gradually falls.

The third stage will commence at the time that China chooses to start selling their dollars. My guess is that it will occur approximately one year before China challenges the United States over Taiwan.

The third stage will leave the United States in poverty with a collapsed currency, high interest rates, and high inflation. It will leave China as the dominant economic and political power in the world.

As we note in our book, Trading Away the Future, it is not too late for the United States to avoid the impending collapse. The United States still has enough industry left to build upon, should we take action now. If we wait ten years, then it will be too late.

All we would need to do now is to insist upon balanced trade with our mercantilist trading partners. The result would be a huge increase in investment in our remaining industries. America would resume the path toward prosperity.

Howard

Shouting Match in Tax Evasion Hearings

2008-07-25T22:16:00.000-07:00

The Senate Homeland Security and Governmental Affairs Permanent Investigations Subcommittee continues to investigate tax evasion by U.S. residents who hid millions from U.S. tax officials using the services of the Swiss bank UBS and the Liechtenstein bank LGT. The most recent hearings ended in a shouting match between Senator Levin and Washington lawyer Robert Bennett. National Journal's Congress Daily writes that the two tried to shout each other down. Apparently the dispute involved a Bennett client who had earlier taken the fifth amendment to avoid testimony before the committee. Hopefully these hearings will be the beginning of the end of the global tax frauds perpetuated by banks around the world to hide income from legally owed taxes. As noted before, U.S. banks are clearly implicated along with the rest.

Gerald P. O'Driscoll Jr.: "Socialism is alive and well in America - thanks to a Republican Treasury secretary"

2008-07-23T17:26:00.000-07:00

Secretary Treasury Paulson comes in for some well-deserved scathing criticisms in a commentary by Gerald P. O'Driscoll Jr. in today's New York Post. Here is a selection:

TREASURY Secretary Henry Paulson's bailout plan for mortgage giants Fannie Mae and Freddie Mac should be titled "The Bondholder Relief Act of 2008": The taxpayers will be providing the relief to holders of Fannie/Freddie debt, many of whom are foreigners.

Paulson has asked Congress for a blank check from the taxpayer to pay off investors for losses already incurred and likely to be incurred in the next few years. He told Congress that, if it promises unlimited funds to backstop the lenders, Fannie and Freddie are unlikely to draw on the credit line. But the nonpartisan Congressional Budget Office estimates the most likely outcome to be a cost of $25 billion over the next two years - and more if housing deteriorates further.

He also wants authorization for Treasury to buy senior preferred shares in Fannie and Freddie. That prompted Sen. Jim Bunning (R-Ky.) to remark that he thought he'd woken up in France. Yes, socialism is alive and well in America - thanks to a Republican Treasury secretary.

Absent from Paulson's plan is any protection for taxpayers. They'll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it "casino capitalism" - taxpayers bankrolling management high rollers....

Republicans, especially in the House, have found their political spine and are pushing back against Paulson's largesse for Wall Street. House GOP Leader John Boehner demands more time to review the proposal - and opposes attaching it to the Housing bill....

The article briefly mentions that many of Freddie and Fannie's bond holders are foreigners. Brad Setser is more specific in his July 12 blog entry, "Too Chinese (and Russian) to fail?" in which he pointed out that the Chinese and Russian governments likely hold huge stakes in Fannie Mae and Freddie Mac.

Thus what Paulson is doing is making sure it is doubly profitable for mercantilist governments to steal market share from American industry. They not only benefit by getting American jobs, but when the bonds they buy as a byproduct of their currency manipulations lose money as the American economy goes south, the US taxpayer will bail the foreign governments out. Macro Man made a similar point in his blog. He wrote:

The more interesting question is what becomes of Fannie and Freddie's bonds? The rapscallion in Macro Man would like to see substantial losses for the bondholders as well. After all, people like Voldemort and the Russkies have been buying a helluva lot of Agency bonds with the proceeds of their FX piss-taking. If globalization has brought about of economic realpolitik, it would be refreshing to see SAFE, CBR, et al hit with hundreds of billions of losses as a "reward" for their currency manipulation.

Howard

The Road to Tax Shelter Perdition

2008-07-22T21:25:00.001-07:00

I wrote previously about Senators Levin and Coleman's bill aimed at cracking down on tax shelters abroad. Today I want to fill in some of the background. How did we arrive at the point where 50 to 100 billion dollars of tax revenue is lost every year due to the wealthy and not so wealthy sheltering their income from taxation through offshore banks?

The European Union has taken more aggressive steps than the United States to combat tax fraud. The "European Union Withholding Tax" aims to prevent citizens of E.U. member countries from hiding income by depositing it in other E.U. countries (and in a substantial number of non-EU countries). All deposits, even those in accounts protected by bank secrecy laws, are subject to a withholding tax (initially 15 percent, but 35 percent by 2011). The withheld revenue is transfered to the depositor's country of residence. For a summary of the policy see the relevant Wikipedia page.

The United States abolished all withholding of tax from foreign deposts in the U.S. in 1984. The U.S. also stopped collecting information on the deposits and interest earned by foreigners. With the exception of Canada, with which the U.S. has an agreement to share tax information, the U.S. does not inform any foreign governments about income earned in the U.S.

The beneficiaries of these policies have been U.S. banks, which are able to attract money from foreigners interested in hiding it from taxation. The policy is further protected by a curious mutant of free market conservative ideology that equates tax fraud with economic freedom. The case in point is the fight over IRS proposed regulation (REG-133254-02).

The regulation began in the waning days of the Clinton administration. In brief the regulation proposed to require that U.S. banks would report interest income earned to the IRS, which might then report this information to foreign governments.

The proposed regulation generated a firestorm of protest from conservative think tanks (e.g. the Heritage Foundation), small business organizations, and U.S. banks. In part opponents argued that the measures were unnecessary and thence illegal because the U.S. did not and does not tax interest earned by foreigners in this country. Be that as it may, some of the arguments made against reporting the interest income are worth reflection.

Argument 1. We abolished the withholding tax and protect foreigners from any realistic chance of being caught underpaying their taxes because the U.S. needs to attract foreign capital.

For instance, a quote from Andrew F. Quinlan's testimony:

House Way and Means Vice Chairman Phil Crane:"The Internal Revenue Service is supposed to enforce the tax laws approved by Congress. It is with some dismay, therefore, that I see that the Service has issued a regulation designed to overturn existing Congressional intent. On many occasions, Congress has visited this issue, and in every instance has chosen not to tax this income and not to require its reporting. The goal, clearly seen in legislative discussion, is to attract capital to the American economy where it will be used to create jobs and boost growth."

The problem with this argument is that much of the capital attracted to the U.S. economy by giving foreigners preferential tax treatment compared to American savers was used to finance consumption, including consumption of imported foreign goods. This exacerbated the trade deficit and encouraged the endebtedness that now threatens the U.S. economy. In addition, the unrealistic exchanges rates these subsized capital inflows created helped make U.S. producers less competitive internationally, which discouraged investment.

Argument 2. Reporting income would hurt the competitiveness of U.S. financial institutions.

The cheap loans financed by foreign capital did help U.S. financial institutions grow for a long time. At present it looks as if those gains were not so solid as they seemed. Ultimately, a bank is only as sound as its borrowers are credit worthy. The long era of cheap money has encouraged Americans to borrow without saving. Some banks are now reaping the whirlwind they helped create.

Argument 3. Imposing reporting requiremets would result in "double taxation" of income.

This is bogus. Because the U.S. did not and does not tax any income earned by foreigners in U.S. banks, there is no way on earth that the income could be double taxed. What reporting would do is allow the income to be taxed by someone.

Some advocate allowing individuals to avoid paying tax anywhere on interest income earned. I'm all for a shift to more emphasis on consumption taxes, but I don't think we should begin such a shift with foreigners. It should begin with U.S. citizens. Reversing the equation, and allowing foreigners to invest unlimitted amounts tax free has been a disaster. It has encouraged Americans to borrow and live beyond their means, and it his exacerbated trade deficits that have helped undermine the competitive position of the U.S. economy.

I support the effort by Senators Levin, Coleman and others to restrict the ability of American citizens to hide income earned abroad. It is worth remembering, however, that when the United States complains that data on income earned by U.S. residents in foreign banks is not forthcoming or accurate, we are the pot calling the foreign kettle black. U.S. banks play the same tax shelter game only bigger than anyone else. The game has been bad for the broader U.S. economy. It is time the game ended.

Bush administration promising agricultural concessions in attempt to pass the worthless Doha round of WTO negotiations

2008-07-22T10:01:00.000-07:00

A Reuters article reports that the current US and European leadership is working hard to pass the Doha round of the WTO negotiations. The story doesn't mention that the Doha Round does not address mercantilist government currency manipulations, a glaring oversight that makes the whole agreement worthless.

The article reports that the Bush administration wants to pass the agreement as a way to help the flagging world economy. But the real reason that the world economy is flagging is because the WTO rules, with or without the Doha Round, do not prohibit mercantilism, the practice of deliberately maximizing exports and minimizing imports in order to steal market share in the world economy.

As Richard Duncan pointed out in The Dollar Crisis: Causes Consequences and Cures, the (mercantilist) countries pursuing export-oriented growth are producing more and more goods without a corresponding increase in income among worldwide consumers.

Back in 2003, Duncan predicted exactly what is happening today: US consumers will not be able to borrow more for consumption. Like other debtors they will be forced to pull back.

Europe is picking up the slack in American demand at the moment, but unless the mercantilist countries change their policies, an eventual world depression or severe recession is in the offing.

In our book, Trading Away Our Future we advocate that the United States insist upon relatively balanced trade with the mercantilist countries. This would move the world system toward a sustainable system based upon balanced trade, instead of the current regulatory-based system that permits mercantilism.

We advocate that the United States require that our mercantilist trading partners move their trade with us toward balance over 5 years or we would force that movement toward balance using Import Certificates to balance trade, adapting a recommendation originally made by Warren Buffett in 2003.

The Bush administration is in a hurry to pass the agreement thinking that it would enhance the world economy. But any newly negotiated agreement that doesn't combat mercantilism is just another step toward the upcoming worldwide depression or recession.

The Bush administration should leave the negotiations to an Obama or McCain administration. Neither could be as incompetent as the Bush administration in these negotiations. Here is a selection from the story:

GENEVA (Reuters) - The United States sought to kickstart efforts to rescue a global trade deal on Tuesday by offering to cut a ceiling on its contested farm subsidies, but leading developing countries said it was not enough.

U.S. Trade Representative Susan Schwab announced Washington was ready to cap its trade-distorting farm subsidies at $15 billion (7.5 billion pounds) a year, on condition countries like Brazil and India also make concessions to save the World Trade Organisation talks.

"This is a major move, taken in good faith with the expectation that others will reciprocate and step forward with improved offers in market access," Schwab told reporters.

The long-awaited U.S. move came on the second day of a week-long push by ministers for a breakthrough on farming and manufacturing -- core trade issues that have dogged the WTO's nearly seven-year-old Doha round of world trade talks....

Supporters of a WTO deal say it could send a morale-boosting signal to the slowing global economy.

Howard

Change in China's policy could cause dollar to fall and US interest rates to rise (at least temporarily)

2008-07-21T07:49:00.000-07:00

I am convinced that Brad Setser discovered a new trend in his July 14 blog posting "The mystery deepens. China’s June reserve growth is surprisingly low". According to Setser, Chinese reports indicated that the Chinese government purchased much less foreign currency in June than in previous months.

There were two possibilities: Either the June data was a fluke or the June data represents a new Chinese policy. My first inclination was to suppose it was a fluke, but I just read a Financial Times article which reports that the Chinese consumer price inflation fell the same month to 7.1% from 7.7% in May.

Combine that with Dr. Yu's overview of the Chinese economy where he advocates strong measures by the Chinese government to counteract inflation, and I think that Brad Setser was the first to spot a real change in Chinese policy! So long as China sees a need to fight inflation, they may plan to greatly slow their foreign exchange purchases.

China had a choice if it wanted to fight inflation. It could either reduce the amount that it was lending to foreign countries (which would cause its currency to strengthen, thus reducing its exports and increasing its imports) or it could reduce the amount it was lending to its own citizens. In June, they apparently decided to reduce the amount they were lending to foreign countries.

There has been some grumbling about the decision to tighten credit. The Financial Times article reports: "(T)he central bank is under growing pressure from different parts of the government and industry to relax some of the tightening measures, which could increase with the latest signs of slowing growth."

Some in China want the government to resume buying ever more foreign currency. The same article reports: "In particular, the Commerce Ministry called last week for slower appreciation of the currency."

It appears that Chinese inflation is causing the Chinese government to pause its mercantilist attacks upon foreign countries. I would expect a rise in the yuan, a fall in the dollar, and a rise in US interest rates as a result of this new (possibly temporary) Chinese policy.

Howard

WTO rules against China on autopart tariffs

2008-07-20T08:44:00.000-07:00

On Friday, the WTO ruled against China's tariffs (typically 25%) on foreign made autoparts. These tariffs are one of the reasons why Michigan auto parts companies have been laying off workers. China also has a 25% tariff on foreign vehicles. These tariffs are all part of China's mercantilist strategy of exporting as much as possible while importing as little as possible.

Instead of reducing its autoparts tariffs right away, China will appeal the decision. Here is a summary of some major facts about the the Chinese auto market that accompanied the Financial Times story about the WTO ruling:

China’s $19bn (€12bn, £9.5bn) vehicle market is the world’s third largest after the US and Japan
China’s exports of vehicles and parts jumped 45 per cent last year to $41bn
China’s imports of vehicles and parts rose 25 per cent in 2007 to $26bn
China’s export sales of car parts reached $2bn in 2007

The story also includes this snippet about Chinese motivation:

(T)he US, EU and Canada argued [that the Chinese tariff] was a protectionist device which was designed to discourage imports, build up China’s domestic motor manufacturing industry and force foreign part-makers to relocate manufacturing to China.

The $19bn (€12bn, £9.5bn) Chinese vehicle market is the world’s third largest after the US and Japan. Chinese manufacturers such as Chery have seen rises in both domestic and export sales above those of joint ventures between big US and European companies, such as General Motors and Volkswagen, though these still dominate the market.

Nothing in this decision would challenge the 25% Chinese tariffs on foreign vehicles of all sorts, including American and Japanese automobiles and motorcycles. Nor would anything challenge the Chinese currency manipulations which produce an additional 40% hidden duty on all foreign imports and a hidden 40% government subsidy on all Chinese exports.

The world is currently moving toward a global recession because the mercantilist countries have growing economies but are not buying and the United States, the chief victim of the mercantilist countries, has a stagnant economy and can no longer afford to buy as much.

While it is encouraging when WTO rules reduce tariffs between countries, such rulings do not do anything to fix what is clearly a broken international system.

Howard

Combining wind power with hydrogen: A science fiction idea

2008-07-19T22:52:00.000-07:00

I had a fun idea of a possible energy future. If I find out that someone else has already thought of it, I'll give them credit. The basic idea is to convert wind power into electricity, turn the electricity into hydogen at a water source, ship the hydrogen to market in huge robot controlled hydrogen filled balloons, and then compress the hydrogen and use it to power motor vehicles.

T. Boone Pickens is currently advocating building windmills all through the Western great plains of the United States. He notes that that region of the United States, from West Texas north to Canada, is the Saudi Arabia of wind power.

He advocates getting the electricity to market by building power lines from the Great Plains to the population centers that are currently using natural-gas fired power plants, and then using the freed up natural gas to run motor vehicles, decreasing the need for gasoline produced by foreign oil.

It's an excellent plan, but as Senator Obama points out wind power has the problem that the wind does not always blow. Electricity produced by wind power needs to be stored when it is coming in strongly so that stored electricity will be available at other times. In other words, windmills would need batteries.

Perhaps power lines could be built to transport the electricity produced by wind mills to a water source, such as, perhaps, the Missouri River where factories could use electrolysis to turn the electricity into hydrogen and oxygen, releasing the oxygen into the air but collecting the hydrogen for use in powering cars.

I realize this is a fanciful idea with many likely drawbacks. Still, in my minds eye I see a future in which robot-controlled zepellins fly hydrogen produced by windmills to the markets where it would be compressed and used to fuel vehicles.

Howard

What is Obama's real stance on nuclear energy?

2008-07-18T20:44:00.000-07:00

On June 24, Senator Obama opposed McCain’s plan to build 45 nuclear power plants by 2030, giving the lame excuse that nuclear plants should not be built until the nuclear waste disposal problem is solved. Meanwhile his Democratic colleagues in the Senate, led by Harry Reid of Nevada, have prevented the building of a needed nuclear waste dump at Yucca Mountain in Reid’s home state. As a result, nuclear waste storage has become a huge problem for any who would consider building new nuclear power plants.

But at a July 11 town meeting in Dayton Ohio, Obama began to nuance his position. He is now sympathetic to all forms of energy investment, but critical of them all at the same time. He told a questioner that problems with nuclear waste disposal could be overcome.

Until he actually enunciates some action steps, we will not know where Obama stands. He might propose a solution to the nuclear waste disposal problem, but he might not. He may just continue to talk about the positives and negatives of all kinds of energy in order to sound sympathetic both to those who favor investment in energy production and those who prefer conservation.

We now know that a President McCain would be elected with a mandate to build nuclear power plants and free up offshore areas for oil drilling. He would put America back to work creating substitutes for the oil that we now import. While preparing for the inexpensive nuclear electricity to come online, a President McCain would provide incentives for the development of improved electric car batteries. We do not yet know whether a President Obama would spur investment in US production of energy.

Howard

UBS Tax Shelter Folds its Tent

2008-07-17T22:31:00.001-07:00

The Senate hearings involving UBS had a surprising conclusion. The bank all but admitted to fraud, and promised to reform. Whether the reform is real remains to be seen. From Friday's NY Times story:

Mark Branson, chief financial officer of the UBS global wealth management group, told a Senate subcommittee that the company would provide banking or securities services to United States residents only through companies licensed in this country and that it would help the federal government identify American citizens engaging in tax fraud.

On Wednesday, a Senate permanent subcommittee on investigations released a report saying that UBS’s offshore practices helped American citizens hide an estimated $18 billion in 19,000 accounts from the Internal Revenue Service.

Bravo for Levin and the committee for this progress. Hopefully this move by UBS will not prevent the enactment of legislation that reduces the opportunity for fraud.

Other banks remain recalcitrant.

Mr. Kieber told the subcommittee that LGT had used sophisticated methods to avoid detection by American tax authorities. LGT customers were advised to use only public phones to contact the bank, and the company mailed correspondence from nearby Austria or Switzerland, he said.

Michael Robinson, a spokesman for LGT, said in an e-mail statement to a reporter that the documents Mr. Kieber supplied dated “back to a time when the regulatory environment was completely different.”

Ironically, the Google-placed ads associated with the Times story may be pitching just the kinds of accounts that the Senators are investigating. Here they are.

Ads by Google
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It appears that there is more work to be done.

Senator Levin (D-MI) with cosponsors including Senator Coleman (R-MN) and three other Senators including Senator Obama introduced legislation last year aimed at restricting the use of off shore shelters. The text of the legislation in Thomas is available here: Bill Summary & Status file.

A shortcoming of the legislation is that it is one sided. It focusses on Americans hiding assets abroad. This is a problem, clearly. It would also be worth while to go after foreigners hiding assets here.

Because there is no withholding tax foreigners pay no U.S. taxes on income earned from investments here. And a substantial amount of money goes unreported abroad. Hopefully the next president will cooperate with countries around the world to prevent this sort of tax avoidance fraud.

As we document in Trading Away Our Future, the abolition of the withholding tax is one of the culprits in encouraging Americans to borrow rather than save. It helped smooth the way for our dangerous habit of borrowing to pay for imports rather than trading to pay for imports.

The Number One Solution to U.S. Economic Problems

2008-07-16T12:38:00.001-07:00

Raymond Richman has argued on this blog that the trade deficit is the root of our economic problems. The public in two critical swing states agrees. An NPR, Kaiser Foundation, Harvard School of Public Health poll released today emphasizes fixing the loss of jobs overseas as the best solution to America's economic problems. The poll question:

(SCRAMBLE ITEMS) 8. People have suggested various ways that the government could act to try to fix the U.S. economy. How much do you think each of the following would help fix the country's economic problems? (First,) what about (INSERT)? would this help fix the country’s economic problems a great deal, some, only a little, or would it be no help at all?

A ranking of the "great deal" answers in Florida and Ohio:

Florida Ohio
56% 64% Stopping American jobs from going overseas
49% 40% Pulling out of Iraq
42% 42% Lowering the cost of health care and health insurance
40% 39% Making sure all Americans have health insurance coverage
35% 34% Putting more money into the hands of people
32% 33% Cutting taxes
34% 29% Increasing spending on domestic programs like health care, education, and housing
30% 28% Investing in public works projects like roads, bridges, and new schools

There is quite a contrast between what the American people see as the most effective solution to U.S. economic problems and what the presidential candidates and the U.S. Congress are proposing.

In Congress, House Democrats appear to be gearing up for another economic stimulous package. More tax cuts or more money in the hands of people are well down on the list. Democratic presidential candidates have long discussed pulling out of Iraq and lowering the cost of health care. Various politicians have proposed investing in public works projects like roads, bridges and new schools.

NO ONE has a serious plan that addresses the approach the public in these swing states believes will be the most effective single way to remedy America's economic problems. The issue also has the smallest number of poll respondants who think that this would do nothing to help U.S. economic problems. Taking effective action to stop "American jobs from going overseas" is the only solution that a majority of the public in these states believe would do a great deal to help the economy.

Why are the candidates ignoring the issue? Check out chapter 3 in Trading Away our Future. Many of our leaders are like ostriches with their heads in the sand. And they lack an effective plan. Chapter 1 explains why trade deficits matter for the loss of U.S. manufacturing jobs.

NPR buried this poll result in a report that focused much more on health care and gas prices. The only mention it received was in passing. The title of the section doesn't even suggest that this is focussed on public views of what should be done.

Concerns About Jobs, Iraq

But according to the poll, the top two things people in Florida say would help the most are stopping American jobs from going overseas and pulling U.S. troops out of Iraq.

For Moskona, Iraq is an economic issue....

To clarify, it wasn't just the Floridians who said that stopping jobs from going overseas was the most effective solution.

I continue to believe that the trade issue could be central to this election. It is at the root of our financial difficulties. Although the hour is growing late, I believe that the candidate who actually addresses the trade issue in a thoughtful, realistic, optimistic and sensible way is likely to win in a landslide. We attempted to lay out such an approach in Trading Away Our Future. Chapter 10 summarizes our plan.

Banking Regulations Hearing

2008-07-15T13:00:00.001-07:00

National Journal's Congressional Daily Alert notes a planned hearing on bank reporting policies.

Finance. A hearing Thursday by the Senate's Permanent Subcommittee on investigations will focus on the role of Swiss bank UBS AG and a small Liechtenstein bank, LGT, in assisting U.S. clients seeking to avoid tax responsibilities. The panel, part of the Homeland Security and Governmental Affairs Committee, is investigating tax havens as Investigations Subcommittee Chairman Carl Levin, D-Mich., and ranking member Norm Coleman, R-Minn., press for passage of legislation to strengthen laws intended to stop overseas banks and their clients from using overseas accounts and shell companies to hide assets from the IRS. The senators hope outrage over the practice amid the economic slump will help advance their bill, which stalled in the Senate after introduction last year, and encourage the IRS to take steps to force overseas banks to disclose the names of American clients.

These tax shelter strategies are the result of the United States' decision to not impose any tax on interest income earned in the United States by foreigners. The removal of the withholding tax in the early 1980s is one cause of the dramatic growth of the U.S. trade deficit, part our pursuit of foreign savings. In addition this has helped drive down U.S. interest rates and U.S. savings rates.

Hopefully the investigation will also examine the abysmal lack of reporting carried out by U.S. banks. Unless foreigners with money in U.S. financial institutions voluntarily report their income on taxes, their home country will be none the wiser. Heritage foundation estimates several years ago when the IRS was considering revising the rules to report this income suggested that hundreds of billions of dollars were invested in the U.S. to take advantage of the loophole. (The Heritage Foundation thought this was a great thing).

Capital Gains -- Where's the Investment Gain?

2008-07-14T21:27:00.000-07:00

The capital gains tax rate is currently at a level lower than at any time since the beginning of the New Deal. Advocates of cutting capital gains tax rates argue that low capital gains tax rates stimulate investment. Are low capital gains tax rates stimulating investment?

A July 1oth story from by Robert Cohen for Newhouse News Service quotes Lee Burman, a senior fellow at the Urban Institute arguing that

the argument that low capital gains rates are important to investment and entrepreneurs is "overstated" He said that the lower rates tend to "fuel all sorts of tax-shelter activity, much of it unproductive, and benefit the wealthy.

Low capital gains tax rates are a good idea... except for the problems this creates. One of the reasons that tax revenue from capital gains taxes tends to go up when the taxes are cut is that this gives investors incentive to transform everything taxable into a capital gain. For instance corporations have been buying back their stock at an unsustainable pace in recent years, probably in part to create capital gains for their investors.

A partial solution to this problem is the one we propose in Trading Away Our Future. Tax any capital gain that is consumed at regular income rates. This would dramatically reduce the incentive for tax shifting. Any capital gain that is reinvested in a productive income-producing investment would not be taxed.

There would still be some incentive for tax shifting, but only with savings. And encouraging savings is not a bad idea for the U.S. economy at this time.

If policymakers would rather not reduce capital gains taxes in any form, an increase could also be structured along the lines we discuss, with consumed capital taxed at higher regular income rates, but reinvested capital gains taxed at lower contemporary capital gains rates. This would not reduce the incentive to invest or take risks to produce income in the future at all. It would reduce the incentive to produce (and then consume) capital gains.

US Trade Deficit For May at 59.8 Billion

2008-07-14T20:44:00.000-07:00

The trade deficit figures for May 2008 continue the pattern set in recent months. In spite of the weak dollar and the financial crisis, the trade deficit is stubornly slightly higher this year than it was last year. It could be worse: the 2007 defict was better than the deficit in 2006. It could also be better. A more rapid narrowing of the trade deficit would help put a basis other than credit under the dollar, and raise the odds of a soft landing.

The May 2008 deficit for goods and services stood at 59.8 billion dollars.

The May 2007 deficit was 59.4 billion.

Thus, the May deficit was the second highest on record for May, behind only the 2006 deficit.

Obama moving toward endorsement of nuclear energy

2008-07-13T13:55:00.001-07:00

The news from the political campaigns is excellent. Both candidates, McCain and Obama, are starting to compete to see who will be the candidate to most support investment in energy development. It looks like they are both going to support the development of both wind energy and nuclear energy. The result should be an increase in US investment and prosperity following the election!

The latest change is the movement of Senator Obama's campaign position from being against the development of nuclear energy when he spoke in Nevada on June 24, to being in favor of it this week. A July 11 article by Bonnie Kapp on the Fox News website gives a selection about Obama's remarks on energy investment at a town meeting in Dayton Ohio:

(W)hen a voter expressed concerns on storing nuclear waste ... Obama told the crowd that we have to utilize experts to figure out a way to store the waste safely because nuclear power has “a very big advantage” in that it doesn’t cause global warming and concluded that “nuclear power is gonna have to be a part of the mix. I know some people don’t like to hear that, but there is no perfect energy source.”...

“Every energy source has a problem, even energy sources that sound really clean, like for example hydropower. I was in Oregon, it turns out it’s messing up the salmon runs and the fish are being affected. You know wind is a great energy source except sometimes it’s not windy…I don’t think we can eliminate any single energy source….Solar, wind, biofuels - all these different approaches we should try and make different investments and figure out what works.”

Howard

The energy crisis could be a blessing in disguise

2008-07-11T09:47:00.000-07:00

By taking away investment opportunities from American businesses, foreign government mercantilism is reducing fixed investment in the productive sectors of the American economy. For a while, the lower interest rates caused by mercantilism increased investment in housing and in the retail sector, but with the housing crash, those investments have largely come to an end.

Some worry that the result of less fixed investment is that the government needs to run ever-increasing deficits just to try to produce enough aggregate demand for American products to keep people employed. (See for example Bill Gross's July commentary on the PIMCO website.)

Most economists, as exemplified by Andrew Batson's commentary in today's Wall Street Journal, live in a dream world in which the mercantlist countries reduce their trade surpluses on their own. According to their wishful thinking, the mercantilist countries (starting with China) will spontaneously abandon mercantilism. He writes, "Most economists deem a fall in China's huge trade surplus to be inevitable, and largely desirable." Our current presidential candidates are living in the same dream world due to the poor quality of advice that they are getting from their economists.

However, don’t despair. God has a way of providing for America. The energy crisis is actually a very promising development.

The United States could get a huge boost in fixed investment as a result of the energy crisis. I am especially encouraged by T. Boone Pickens’ commentary in the Wall Street Journal for investment in wind power. Senator Obama seems to like wind power also. And Senator McCain is talking about taking away the impediments to development of nuclear power.

If the government helps out by: (1) doing what Pickens suggests to move electricity generated by Rocky Mountain wind power to other markets, and (2) doing what McCain suggests to take away legal and government impediments to nuclear power, and (3) providing tax incentives for turning wind-generated or nuclear-generated electricity into a gasoline substitute, then we should get plenty of increased investment in domestic energy production that could be just what the doctor ordered for our economy.

Howard

Are Fred and Fran too big to save?

2008-07-11T06:14:00.000-07:00

The financial crisis symptom de jure: the struggles faced by Freddie Mac and Fannie Mae the giant mortgage loan repackaging companies chartered by the U.S. government, and (assumed to be) guaranteed by Congress. In fact the loan guarantees with the Treasury Department that are available to the companies amount to only a few billion dollars, so the US government's official obligation to help is miniscule. Bush administration suggestions that as part of a bailout, stockholders would loose almost everything hardly seem likely to improve the companies' capacity to sell stock in order to recapitalize after losses.

Which brings us to the question of whether the Fred and Fran can and should be helped. Everyone says that they will be saved if need be. But the costs? Quite possibly enormous. With price-to-market accounting, Freddie Mac is technically insolvent already.

The New York Times today has a story which suggests (without quite saying so) that the companies may be too big to save as well as too big to fail.

As government officials discuss various rescue plans — including taking over either or both companies in a conservatorship, others are pushing for more immediate action.

“We are potentially looking a crisis in the face, and we must not allow this to happen,” said William Poole, who retired in March as president of the St. Louis Federal Reserve. “The government must intervene.”
If a bailout were to occur, it would most likely make it more expensive for the United States government to borrow money in the future, since the government’s potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion. Moreover, such a bailout would potentially put taxpayers on the hook for billions to offset Fannie’s and Freddie’s losses.

“The major banks are taking write-downs of 20 percent to 50 percent of their assets,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. Just a 10 percent write-down in the value of Fannie Mae’s assets would be “a loss of $150 billion that taxpayers would need to offset. So you’re talking about the cost of another Iraq war.”

The most significant sentence is the one which asserts a bailout or takeover "would most likely make it more expensive for the United States government to borrow money in the future..."

Since the financial crisis began, many sectors of the U.S. financial system have lost much of their ability to borrow money. But money must be borrowed to sustain the trade deficits and prevent the dollar from collapsing. The US government itself has not seen the cost of borrowing increase markedly, with interest rates suppressed by central bank purchases.

If an when interest rates increase on U.S. government borrowing, the relatively managable 400 billion per year the U.S. currently pays in interest would also climb. This would set off a cycle of fiscal problems that might well trigger a free fall in the value of the dollar, and an economic collapse.

Chinese Espionage Raises "Concerns"

2008-07-10T09:37:00.001-07:00

The New York Times reports that a string of recent cases have revealed a pattern of systemtatic Chinese military and commercial espionage.

Joel F. Brenner, the intelligence community’s top counterintelligence official, said China was by far the leading practitioner [of espionage]. In an interview, Mr. Brenner described China’s information-gathering efforts as “a full-court press and relentless.” As a result, he said, few professional analysts “really think that what’s going on is anything other than an orchestrated, deeply thought-out, strategic campaign.”

The targets of the campaign?

Mr. Brenner said, not all the information-transfer cases involving China are part of that suspected government-led espionage effort. “Some instances are purely commercial and just involve greed,” he said.

On the military side, Mr. Brenner said, China is especially interested in improving its naval capability against any threat from the United States and obtaining intelligence that might be important in a military confrontation in the Taiwan Strait.

Are the two sides of the espionage campaign really that distinctive? As we argued in Trading Away Our Future, China's mercantilism aids China's military ambitions by strengthening the Chinese industrial base. Commercial espionage (one example noted in the article involved Boeing) may help China gain strategic advantages in the military as well as commercial sectors.

On the other hand, this is not to argue for increased U.S. military spending. Robert Scheer notes the irony of US military spending on programs designed to counter China's military.

Fomenting fear of China is essential to making the case for the whole range of high-tech war toys that no longer have a legitimate military purpose. But it's a sick joke. We are paying the Chinese the interest on the money we borrow from them to build very expensive weapons to counter weapons the Chinese have no intention of building.

T. Boone Pickens proposes excellent energy plan

2008-07-09T08:12:00.000-07:00

In yesterday's Wall Street Journal, oilman T. Boone Pickens came up with an excellent energy plan. He begins by identifying the problem succinctly:

Each year we import more and more oil. In 1973, the year of the infamous oil embargo, the United States imported about 24% of our oil. In 1990, at the start of the first Gulf War, this had climbed to 42%. Today, we import almost 70% of our oil....

(I)f we don't do anything about this problem, over the next 10 years we will spend around $10 trillion importing foreign oil. That is $10 trillion leaving the U.S. and going to foreign nations, making it what I certainly believe will be the single largest transfer of wealth in human history.

He then proposes the building of windmills in the Rocky Mountains. Specifically:

How will we do it? We'll start with wind power. Wind is 100% domestic, it is 100% renewable and it is 100% clean. Did you know that the midsection of this country, that stretch of land that starts in West Texas and reaches all the way up to the border with Canada, is called the "Saudi Arabia of the Wind"? It gets that name because we have the greatest wind reserves in the world. In 2008, the Department of Energy issued a study that stated that the U.S. has the capacity to generate 20% of its electricity supply from wind by 2030. I think we can do this or even more, but we must do it quicker....

My plan calls for taking the energy generated by wind and using it to replace a significant percentage of the natural gas that is now being used to fuel our power plants. Today, natural gas accounts for about 22% of our electricity generation in the U.S. We can use new wind capacity to free up the natural gas for use as a transportation fuel. That would displace more than one-third of our foreign oil imports. Natural gas is the only domestic energy of size that can be used to replace oil used for transportation, and it is abundant in the U.S. It is cheap and it is clean. With eight million natural-gas-powered vehicles on the road world-wide, the technology already exists to rapidly build out fleets of trucks, buses and even cars using natural gas as a fuel. Of these eight million vehicles, the U.S. has a paltry 150,000 right now. We can and should do so much more to build our fleet of natural-gas-powered vehicles....

Here is what he suggests the government should do:

The future begins as soon as Congress and the president act. The government must mandate the formation of wind and solar transmission corridors, and renew the subsidies for economic and alternative energy development in areas where the wind and sun are abundant. I am also calling for a monthly progress report on the reduction in foreign oil imports, as well as a monthly progress report on the state of development of natural gas vehicles in this country.

Pickens does not mention increased nuclear power, which should be part of the eventual energy mix. A nuclear plant, however, takes 4 to 6 years to construct. Pickens plan would begin to improve our energy situation much more quickly and could give us time to develop the other parts of the long-term solution. There is no reason why the United States can't eventually become completely self-sufficient in energy production.

Pickens may not realize it, but our failure to deal with mercantilism has left the United States facing an eventual energy crisis. If we were still a country with a strong export-oriented industrial base, we could export manufactured goods and use the proceeds to import oil. But given the fact that we have been giving away our industry to the mercantilist countries of Asia, especially Japan and China, we don't have the exports needed to buy energy. We need to vastly increase our own production of energy before the dollar collapses in world markets, because after the dollar collapses we won't be able to afford imported energy and will have to ration gasoline and oil.

Follow the following link to read Pickens commentary: http://online.wsj.com/article/SB121556087828237463.html?mod=opinion_main_commentaries

Howard

US Commerce Department sets tariffs on Chinese off-road tires

2008-07-08T15:50:00.000-07:00

In a move to protect the US tire industry from Chinese dumping, the U.S. Commerce Department today set a 210% duty on some brands of Chinese off-road tires, but not others. Here's a selection from the Reuters story:

The U.S. Commerce Department on Tuesday set final duties ranging up to more than 210 percent on millions of off-road tires it said were being sold in the United States at unfairly low prices.

"After a thorough investigation, the Department of Commerce has found that Chinese exporters of off-the-road tires have received government subsidies and sold at below the cost of production in the United States," said Assistant Commerce Secretary David Spooner said in a statement.

Titan Tire Corp, an Iowa-based company that makes off-road tires for agricultural, construction and industrial vehicles for customers including John Deere-Lanz Verwaltungs AG, and union workers filed two cases last year asking for import relief.

Nashville-based Bridgestone Corp, the world's largest tire and rubber company, has supported the case....

The case is one of several that U.S. manufacturers in businesses ranging from steel pipe to refrigerator magnets have brought over the past year against their Chinese competitors....

"China illegally subsidizes its industries and manipulates its currency to unfairly give an advantage to its manufacturers over American workers, and those Chinese companies must be punished in this case," Rep. Don Manzullo, an Illinois Republican, said in testimony to the U.S. ITC.

The ruling of course, does nothing against Chinese currency manipulations which subtract about 40% from the price of every Chinese product sold in the United States and add about 40% to the price of every US product sold in China. Recently the US Treasury Department told an incredulous Congress that China was not manipulating its currency, even though they have already collected about $1.3 trillion as a byproduct of these "nonexistent" manipulations.

There is a pattern emerging: The Commerce Department uses anti-dumping provisions to protect politically-active industries, while the US Treasury Department gives less-well-connected US industries to the Chinese government saying, in effect, "Take them -- we won't want them!"

Follow the following link to read the Reuters story about the new tariff: http://www.reuters.com/article/marketsNews/idUSN0830689920080708

Howard

Our trade agreement with Colombia would help in their fight against Communist guerrillas

2008-07-07T08:35:00.000-07:00

Senator Obama is quite selective over which governments go on his blacklist. One explanation is that he opposes governments that fight Communism but supports governments that promote Communism.

For example, the Colombian government is standing up to Communist guerrillas supported financially and militarily by the leftist government of its oil-rich neighbor Venezuela, and Senator Obama opposes a new free trade agreement between the United States and Colombia.

On the other hand, the Communist government of China is intentionally manipulating trade and has already stolen up to 2.5 million US manufacturing jobs. Yet Obama is pleased that China is growing economically and is politically stable. Specifically, here is a selection from Obama's remarks when he spoke to the Alliance for American manufacturing in Pittsburgh on April 14 2008:

Seeing the living standards of the Chinese people improve is a good thing - good because we want a stable China, and good because China can be a powerful market for American exports. But too often, China has been competing in ways that are tilting the playing field.

Obama is dreaming if he thinks that China will be a powerful market for American exports. The Chinese government is practicing a policy called "mercantilism" which intentionally maximizes exports but intentionally minimizes imports in order to steal industry from its trading partners.

Senator McCain is completely the opposite of Obama regarding the Colombian and the Chinese governments. Not only does he support our trade agreement with Colombia, but he was also realistic about China's government in a column that he wrote with Senator Lieberman on May 27. They wrote:

China's rapid military modernization, mercantilist economic practices, lack of political freedom and close relations with regimes like Sudan and Burma undermine the very international system on which its rise depends. The next American president must build on the areas of overlapping interest to forge a more durable U.S.-China relationship. Doing so will require strong alliances with other Asian nations and a readiness to speak openly with Beijing when it fails to behave as a responsible stakeholder.

Unfortunately, neither candidate is proposing anything that would deal with Chinese mercantilism. Obama at least supports a bill that, if acted upon by the Secretary of Treasury, could address Chinese currency manipulations. McCain has not yet proposed any action whatsoever. Both talk about free trade as if free trade were beneficial even when it is totally one-sided.

The latest story from Colombia illustrates the support that the Communist guerrillas are getting from the Venezuelan government. The Colombian government staged a rescue of hostages by flying in an unmarked helicopter while pretending to be acting for the guerrillas' leaders. The guerrillas readily cooperated.

You can read the story in James Taranto's Wall Street Journal online column. First he quotes the Associated Press story which told what happened from the viewpoint of rescued hostage Ingrid Betancourt:

The stunning caper involved months of intelligence gathering, dozens of helicopters on standby and a strong dose of deceit: The rebels shoved the captives, their hands bound, onto a white unmarked MI-17 helicopter, believing they were being transferred to another guerrilla camp.

Looking at helicopter's crew, some wearing Che Guevara shirts, Betancourt reasoned they weren't aid workers, as she'd expected--but rebels. This was just another indignity---the helicopter "had no flag, no insignia." Angry and upset, she refused a coat they offered as they told her she was going to a colder climate.

But not long after the group was airborne, Betancourt turned around and saw the local commander, alias Cesar, a man who had tormented her for four years, blindfolded and stripped naked on the floor.

Then came the unbelievable words: "We're the national army," said one of the crewmen. "You're free."

The helicopter crew were soldiers in disguise. Cesar and the other guerrilla aboard had been persuaded to hand over their pistols, then overpowered.

Then James Taranto finished off the story with a good Israeli joke from Haaretz:

An Israeli pilot whose helicopter was in trouble over the sea lands on an aircraft carrier. The captain chastises him: "How dare you? This is an American aircraft carrier." "Really?," says the Israeli innocently. "I thought it was one of ours."

This joke, however, misses the point. The Communist guerrillas must have had reason to believe that the helicopter could be one of their own. Most likely they knew that the Venezuelan government was providing them with helicopter support.

Howard

Public Opinion Continues to Shift on Trade

2008-07-07T08:24:00.001-07:00

Pollingreport.com summarizes the results of a recent CNN poll on trade. The question was: "What do you think foreign trade means for America? Do you see foreign trade more as an opportunity for economic growth through increased U.S. exports or a threat to the economy from foreign imports?" CNN first asked this question in November 2007, and then again in June 2008.

In November 2007, 46 percent of the public thought trade was an "opportunity" but by June 2008 only 41 percent held this opinion.

In November 2007, 45 percent saw trade as a "threat" but by June 2008 51 percent held this view.

CNN/Opinion Research Corporation Poll. June 26-29, 2008. N=1,026 adults nationwide. MoE ± 3.

Incidentally, this poll question has been asked by Gallup and CNN since 1992. The most recent poll is the first time a majority of the public believed that the US is threatened by trade. In May 2000, 56 percent believed that trade was an opportunity.

Trade can be both a threat and an opportunity for the economy. And the threat and opportunity can come through both imports and exports. However, given the disasterous mismanagement of US trade policy, the people are right about the threat.

The poisonous consequences of that mismanagement for the U.S. economy, our competitiveness, and the U.S. dollar are now being felt. The trade deficit and the irresponsible borrowing that supported it created a situation in which the dollar had nowhere to go but down. All the while, the trade deficit and borrowing helped reduce investment in U.S. manufacturing and other exportable capacity: exacerbating present challenges.

Economists rightly emphasize that with balanced trade there are efficiency gains from trade that are "pareto improvements". Potentially, the winners could compensate the losers and have resources left over. However, given imbalanced trade those losing their jobs to foreign competition have had millions fewer jobs to move to. There have been fewer winners and more losers.

Why Obama opposes building of nuclear power plants

2008-07-06T08:59:00.001-07:00

Senator Harry Reid of Nevada, the Democratic Party Majority Leader in the United States Senate, is opposed to the safe disposal of American nuclear waste in Nevada. He prevents any movement in the Senate of any bill that would provide for that disposal. There is no other credible alternative for long-term nuclear waste disposal.

On June 24, Senator Obama opposed the building of new nuclear power plants because the nuclear waste disposal problem has not been solved. Here is a selection from the Reuter's article:

LAS VEGAS, June 24 (Reuters) - U.S. presidential candidate Barack Obama on Tuesday criticized his rival John McCain's proposal to encourage the building of 45 new nuclear reactors by 2030.

Obama, a Democrat, said the Republican candidate lacked a plan for storage of the waste. It was among several energy-strategy ideas that Obama said were "not serious energy policies."

Obama was speaking in Nevada, a state where proposals to build a nuclear waste disposal site at Yucca Mountain have generated strong opposition....

He also took aim at McCain's plan to allow more offshore U.S. oil drilling.

"It doesn't make sense for America," Obama said. "In fact, it makes about as much sense as his proposal to build 45 new nuclear reactors without a plan to store the waste some place other than right here at Yucca Mountain," the Illinois senator said.

The U.S. Energy Department has applied for a license to operate a long-delayed nuclear waste dump at Yucca Mountain, about 90 miles (145 km) from Las Vegas.

Opposition in the U.S. Congress to the Yucca Mountain waste site is among the hurdles it faces. Senate Majority Leader Harry Reid, a Democrat from Nevada, is among those who oppose it....

Howard

How to Lower Oil Prices Now

2008-07-05T16:08:00.001-07:00

Can We Get Lower Oil Prices
Raymond L. Richman

Prof. Martin Feldstein in an op-ed piece in the Wall Street Journal, “We Can Lower Oil Prices Now” (7-1-08) argues that policy changes that are expected to decrease the future demand for oil or increase its supply could quickly lower the current price of oil. Producers of oil can lower the current price of oil by increasing output. What output they choose depends on their expectation of future oil prices. If the future price is expected to rise faster as a result of rapidly growing demand from emerging market economies like China and India, they will choose to reduce current output causing current prices to rise. But if they expect that current consumers will take action to reduce their future consumption, prices would not be expected to rise as fast. And if high current prices induce oil importing countries to produce more fuel from unexploited reserves reducing their demand for oil imports, again prices would be expected to increase at a lower rate. If the reduction in the demand were credible, current prices would fall. The fact that they continue to rise means that oil exporters do not expect reduced demand. OPEC pretends otherwise.

Chakib Khelil, the president of OPEC, whose members produce about 40 percent of the world’s oil, said this week that the oil cartel had concerns that future demand for oil might not be strong enough to justify investment to boost oil production, that further investment by OPEC to produce energy has been clouded by the uncertainty about future demand which arises from increased investment in alternative sources of energy, the impact of energy conservation, falling economic growth and the stepped-up search for non-OPEC oil reserves. Each of these factors could reduce future demand for oil and the cartel needs to see "a credibility of future demand.” If he meant that, such uncertainty should have induced a decline in the price of oil. It must be judged as sophistry.

The world’s largest producer, consumer, and importer of oil, the U.S., has no plans to increase its output of oil significantly in the short and medium term although it has sufficient oil reserves to provide all our needs for a century or more. True, the U.S. is subsidizing the search and use of alternative fuels, encouraging fuel-economizing vehicles, etc Judging by the reaction of OPEC members, these are not expected to reduce the demand for oil significantly. Indeed, the U.S. is spending as much to divert electrical energy from coal to alternative sources as it is to find petroleum substitutes. But there is no shortage of electricity, no crisis, not even high prices. Coal is abundant, nuclear energy available, etc. We do not have to import any of the inputs required to produce electricity. The billions we are spending so foolishly is not likely to change estimates of the future price of oil!

We are in a position to announce policies to make us self-sufficient, reducing our imports to zero. The mere announcement of these policies, were they to be credible, would cause a very substantial fall in the current and future price of oil. To be credible, the Congress of the U.S. must, at a minimum, permit off-shore drilling in the Atlantic and Pacific, drilling in the ANWR and on other public lands, and if we are really serious go all out to produce oil from our vast deposits of shale. As of now, OPEC is right on betting on little or no supply from the U.S. To convince them otherwise, cutting our imports from the two OPEC countries supplying us, Saudi Arabia and Venezuela, should convince them. Even more convincing would be to institute gasoline rationing!

However, with both Obama and McCain declaring themselves opposed to drilling in the ANWR and opposed to opening up public lands to drilling, it is no wonder that the price of oil keeps rising. The OPEC countries plus China and Japan are the real imperialist nations, the latter two because of their mercantilist practices that perpetuate huge trade surpluses. The U.S. is fast becoming a has-been imperial power. The enviriputians have nailed us to the ground.

The Murder of US Manufacturing

2008-07-04T04:39:00.001-07:00

Martin Hutchinson had an interesting commentary entitled "The Murder of US Manufacturing" in the Bear's Lair at PrudentBear.com. He discussed the upcoming sale of GE's applicance division to a foreign company who will likely move most production abroad while keeping the GE share of the US appliance market. Here is a selection:

GE's announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing's long and seemingly unstoppable downtrend since 1980.

That decline may seem an inevitable historical trend, and Wall Street's analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?...

To see how this happened, think back to the 1950s. Electric appliances were the major growth business of that decade, symbolizing the decade's new affluence. Forecasters confidently predicted that by 2000 robot appliances would be in every household, removing the drudgery of housework once and for all. As a youthful reader of Isaac Asimov's Robot stories I shared that confidence - after all, the computerization necessary for robot control systems, which had not existed in 1940 when Asimov wrote the first of his I Robot short stories, was already revolutionizing business management by the late 1950s.

Now it's not just 2000 but 2008. So where the hell are the robots? GE Appliances has no such offering; if you buy a GE vacuum cleaner you will still have do all the work yourself. Can it be that the technological optimism of the 1950s was misplaced, and that home robots will never exist, or will be invented only in the far distant future? You'd certainly think so from looking at GE's catalog of products.

However it turns out that GE is simply behind the curve. The iRobot Corporation of Bedford Massachusetts, founded by keen Asimov readers from MIT in 1990, manufactures fully robotized vacuum cleaners as well as some pretty neat robotized mine-clearing equipment for the military. iRobot's standard model runs around $300, less in real terms than an ordinary vacuum cleaner would have cost you in 1980. iRobot's total sales are only $250 million, which GE would no doubt class as a rounding error, but dammit, the company doesn't have GE's brand name or distribution network.

Had GE had the sense and innovative skill to develop robot vacuum cleaners, can anybody doubt that that product group's sales would today be several billion dollars, with appropriately high margins? It is thus clear that by starving GE Appliances of investment and, more important, of research dollars, and devoting the company's efforts to financial services, "Neutron Jack" and his cohorts have deprived the United States of a major new business and deprived us overworked consumers of a major labor-saving technology (unless we are lucky enough to find out about iRobot or its few small-company competitors)....

I agree with everything that Hutchinson wrote here. But to be fair to GE management you need to look at the reason why they failed to invest in appliance manufacturing while building up their financial business. The effect of the foreign government dollar purchases has been to take the profits out of US manufacturing while building up the profits in the US financial sector. In other words, GE management was responding logically to an international system characterized by growing mercantilism.

What GE failed to anticipate is that an international system characterized by growing mercantilism is not sustainable. The mercantilist countries eventually destroy the economies of their victims. US consumers no longer have the increasing wealth necessary to sustain increasing borrowing. As a result, GE’s investments in financial services have been proven to be a bad choice.

Howard

Expanding Outsourcing

2008-07-03T09:27:00.000-07:00

The range of jobs that can be outsourced continues to expand. The cumulative effect would be more global efficiency if trade wasn't so out of balance. The expanded outsourcing means that the absence of an effective trade policy by the U.S. (other than borrowing from tomorrow to pay for today's shipment) will hurt more workers in more industries. The New York Times' blog today discusses a move by the Orange County Register to outsource editing and page design to India. The post concludes:

What other choice is there, besides finding another line of work? White-collar knowledge workers” are beginning to understand what their factory brethren have known for years — that outsourcing is a spreading and inexorable phenomenon. Whether homegrown newspaper editing jobs are going to dry up for good is still hard to know. But for many workers in the rapidly changing American news business, the unthinkable now must be considered.

One of the comments on the blog puts an irony of the story rather nicely.

The author of the above piece may either have missed or simply been to PC to point it out, but the real irony here is that this is happening in ORANGE COUNTY - a conservative Republican constituency if ever there was one. I would guess that the conservative leaning paper has had more than one column in defense of outsourcing and further that they would be pro-free-traders. Ironic?

And indeed the editors of the paper had planned an article on the Role of Free Trade in Speading Freedom although it isn't clear they ever wrote it.

What to do...

2008-07-03T09:06:00.000-07:00

The Dollar is falling because it has long been overvalued, we have already sold and mortgaged our future quite thoroughly, and the trade deficit has a life of its own due to oil that will keep it from falling rapidly even as the dollar declines.

The best way out of this mess is to increase US production and exports.

Oil is one piece of this, and a vital part because of the way oil exacerbates the trade deficit and the vicious cycle this seems to be establishing with declines in the dollar. Expanded oil exploration in the US and perhaps offshore, oil shale production, and so forth.

But almost as important, the U.S. should to work to expand and encourage manufacturing and other exportable goods production.

The first step is to reset expectations so that potential exporters know that the US is not going to revert to a debt and deficits policy as soon as the crisis clears. One way to do this would be with tradable import certificates and a clear plan to move trade towards balance over a series of years.

In light of the credit crisis, it might be worthwhile to make federal loans available for companies seeking to expand domestic production. This would do the economy more good than current strategems to prop up the overvalued housing market.

Finally, we need to encourage Americans to begin saving money. One way to do this would be through tax policy.

But tax policy is only one part of the picture. When I was exploring banks in Europe to see whether I could move some of my savings to France, I noticed something very interesting about the way interest rates on bank accounts were structured in major U.S. banks and in French banks. I'm sure government policy has something to do with it. But... in France the small saver gets favorable terms and interest rates. The rates are somewhat worse for large deposits. In the U.S. rates are near zero for basic passbook savings acounts at most banks. If banks paid real interest on small consumer savings, many ordinary people would have a stronger incentive to save.

Why the Dollar has fallen

2008-07-02T15:00:00.000-07:00

Judy Shelton in her op-ed entitled “The Weak-Dollar Threat to World Order” (WSJ, 6-9-08) mistakenly attributes the fall of the dollar relative to the Euro to “accommodative Fed policy”, which must be news to Dr. Bernanke, and to protective threats emanating from the Democratic left. The reason the dollar has fallen relative to the Euro and other currencies is our annual trade deficits that exploded from $96.2 billion in 1996 to $708 billion in 2007. These put so many dollars in the hands of foreigners and their governments which they used not to buy our goods but to buy trillions of dollars of American assets, ranging from U.S. Treasuries to corporate equities. They began diversifying by investing their surplus dollars in Euro assets about three years ago causing the dollar to lose its value against the Euro and other currencies.

The view of the vast majority of economists and the current and past Councils of Economic Advisors is that increased trade is wonderful even if it is one-sided. They could not be more wrong. The consequences of the trade deficits include accelerated de-industrialization and loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation and instability as well as a depreciating dollar. Ms. Shelton seems nostalgic for the gold standard but the gold standard is no defense against the mercantilist practices of China, Japan, and the oil exporting countries as we show in our book Trading Away Our Future.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself has said that market forces cannot be relied upon to get the trade deficits under control. My co-authors and I explore these and other issues in our book just published, Trading Away Our Future (Ideal Taxes Association, 2008).

Dr, Raymond L. Richman, Prof. Emeritus of Public and International Affairs at the University of Pittsburgh.

Is Bernanke causing inflation?

2008-07-01T20:05:00.000-07:00

Asian Times online has a commentary by Spengler predicting an economic crash this year. He blames the current problems on the Federal Reserve's monetary expansion.

This got me looking up the June 26 Federal Reserve money supply statistics release which can be found online at: http://www.federalreserve.gov/releases/H6/Current/. Indeed Spengler is correct if just the first three months of 2008 are considered, but other than that period, Bernanke has been fairly moderate in his money supply growth. Here are the statistics that I am looking at:

Over the last twelve months, the Fed expanded money supply (M2) at a 6.3% rate,
Over the last six months, the Fed expanded money supply at a 7.7% rate
Over the last three months, the Fed epanded money supply at a 5.4% rate.

During this period, U.S economic growth has been very slow growing at about a 1% rate from October 2007 through March 2008. Thus we can deduce the following:

From June through November 2007, the Fed expanded money supply at a 4.9% rate, which would cause 3.9% inflation.
From December through February 2008, the Fed expanded money supply at a 7.7% rate, which would cause 6.7% inflation.
From March through May 2008, the Fed expanded money supply at a 5.4% rate, which would cause 4.4% inflation.

Bernanke is like a driver who first puts his foot hard on the gas pedal and then hard on the brake pedal again. He is not driving well. But, except for the first three months of this year, he has only been causing about 4% inflation.

Spengler does have one recommendation for avoiding the crash that I like. He writes:

Americans need a tax cut on savings, not on consumption. Shovelling liquidity into the system has made matters worse. But a shift from consumption to savings will increase the supply of long-term capital, bringing down the cost of equity to firms and long-term interest rates, including mortgage rates. Let the middle class save in pre-tax dollars....

Former governor of Arkansas Mike Huckabee's "fair tax" proposal goes even further, and in the right direction, eliminating all taxation of income, including income on capital, and substituting for it taxation of consumption. That's good medicine, but the patient probably is too weak to take it at the moment.

I agree that Huckabee's FairTax would be good medicine because it would increase American savings in the long-run, but I disagree with Spengler's statement that the patient would be too weak to take it for it to work in the short-run. The FairTax would have some instantaneous short-run benefits. Instituting the FairTax would immediately make corporate investments more profitable and would make American goods less expensive in foreign markets and foreign goods more expensive in American markets. The FairTax is exactly the medicine that the U.S. economy desperately needs, not just for the long-term, but for the short-term as well!

Howard

How do you get mercantilist countries to loosen their pegs to the dollar

2008-06-30T16:35:00.000-07:00

Many countries peg their currencies to the dollar. When the dollar goes down versus the euro, their currencies go down as well. As a result a falling dollar does not much effect their trade balances with the United States. Despite the falling dollar, they are able to continue to keep down their imports from America and are able to continue to keep up their exports to America. In order to keep these pegs, their central banks buy increasing amounts of dollars whenever the dollar falls. In order to buy these increasing dollars, they sometimes print their own currency, causing inflation in their own countries. They also get inflation simply because the price of oil and other commodities is rising so fast versus the dollar. They could avoid inflation by letting their currencies rise against the dollar, and indeed the Asian countries have recently been letting their currencies rise a bit versus the dollar.

The US Treasury, the Wall Street Journal editorial page, and some American economists want the Federal Reserve to raise the US interest rate in order to make it easier for these countries to continue to peg their currencies to the dollar. They figure that higher interest rates will cause more private investors to buy dollars, so that the governments that are pegging their currencies to the dollar will not have to buy as many dollars.

In his June 27 blog entry ("Does the Fed’s mandate now extend to Beijing, Moscow and Riyahd?"), Brad Setser discussed the current debate regarding whether the Fed should raise the US interest rates in order to help these governments. He wrote:

The battle lines here are increasingly clear: some argue that the US needs to adjust, by changing its monetary policy to help out countries pegging to the dollar, others argue the rest of the world needs to adjust by letting their currencies appreciate. The US is calling for other countries to have more monetary policy autonomy, and others are calling for the US to, in effect, have a bit less.

There are some who want the United States to pursue a strong dollar policy in order to reduce inflation among the countries that are pegging their currency to the dollar. They hold the United States responsible for the fact that the countries that are exploiting us through their mercantilism are thereby suffering inflation.

Others, including Setser and myself want the pegging countries to loosen their pegs and instead let their currencies rise against the dollar. We realize that if they did so, then these countries would buy more US exports and would export less to the United States. Setser writes:

The challenge, in my view, is how to bring the world back toward a true equilibrium — one that requires less government intervention in the foreign exchange market — over time.

Missing from Setser's discussion is any realization that most of the countries that are pegging their currencies to the dollar are doing so as part of a mercantilist policy designed to steal market share from US industry. I posted two comments to him about this, but he ignored them both. First I wrote:

Brad,

I agree with so much of what you wrote in this posting. But you missed the disastrous effect of reserve accumulation upon the US production.

You pointed out, correctly, that the exporting sectors of the emerging countries have been helped by their reserve accumulations, but you failed to point out the flip side, that exporting sectors of the US economy have been hurt. This is evident in the rapid fall in employment in the US manufacturing sector and the near zero net investment in US manufacturing.

A graph that you posted on June 12 in “Can the debate over trade – or globalization – be separated from the debate over exchange rates?” (http://blogs.cfr.org/setser/2008/06/12/can-the-debate-over-trade-%e2%80%93-or-globalization-%e2%80%93-be-separated-from-the-debate-over-exchange-rates/#more-3583) shows the effect of these reserve accumulations. That graph showed that the emerging countries have been increasing their exports to the United States but not increasing their imports from us.

Later I wrote:

Brad,

I agree with three points that I heard you saying:

1. That over time the oil exporting countries will import more goods.

2. That China could encourage lending to the Chinese instead of using their funds to sterilize dollars.

3. That the adjustment in China’s reserve purchases could be gradual. There is no need to go cold turkey.

The only thing missing from your post is a motive why the Chinese should change away from a policy which is working. They are about to purchase GE’s appliance business and grab its US market share. Detroit is on the ropes and they will soon move in to the US car market. Airbus is starting to move production to China so they should soon gradually be getting the commercial aircraft production business. They are building three new factories to compete with one of America’s remaining exports - heavy mining machinery.

I suspect that Japan changed policy in 2004 partly because they didn’t want to destroy America as a counterweight to China in Asia. China has no such motive.

I did not get ignored by others in the discussion that followed Brad's posting. For example, I had an active discussion with Ruiz Huizer about how to get mercantilist countries to reduce their currency accumulations. Here is a selection from what we wrote:

21. Rien Huizer Says: Great piece and interesting comments. Does anyone see a practical solution for how to get from 1.5 tr to .15 tr annual reserve growth?...

22. Howard Richman Says: Yes. We propose a new international system based upon balanced trade in our book, “Trading Away Our Future” (www.idealtaxes.com). The key is for the US to insist, unilaterally, on US trade with the reserve-accumulating countries moving toward balance over a period of 5 years. At the same time, the US has to take steps to enhance domestic saving. The immediate result of adopting such a policy would be a surge in investment in US exporting sectors.

23. Rien Huizer Says: Right, I guessed that you would suspend or abandon WTO. What about the FTA countries such as Australia and Singapore? And I guess that your program to boost domestic savings would involve reducing the gvt deficit by increasing taxes?...

28. Howard Richman Says: Rien,

You said: “Right, I guessed that you would suspend or abandon WTO.”

–> Although I would not object to the United States suspending or abandoning the WTO, that action should not be necessary. Article 12 of the Uruguay Round of GATT and the IMF agreement would both justify US action to balance trade.

You commented: “And I guess that your program to boost domestic savings would involve reducing the gvt deficit by increasing taxes?”

–>Reducing government budget deficits would certainly increase domestic savings, but that’s not what we recommend in our book. Our book reflects the lead author’s specialization in public finance. (He did his dissertation under Milton Friedman at the U. of Chicago.) In our book we recommend the following changes to the tax code to increase domestic savings:

1. Raising the capital gains tax to end the perverse incentive for corporations to buy back their own shares. We would accompany the tax hike with a provision that would allow taxpayers to reinvest their capital without paying tax, as homeowners now do when they sell one home and buy another. In other words, we would tax consumed capital, but not reinvested capital.

2. Reducing or eliminating the corporate income tax would help since corporations are doing all of the savings in America today. Doing so would not only enhance domestic savings, it would also reduce the opportunity cost of capital, thus enhancing fixed investment.

3. Moving away from income taxes and toward consumption taxes would help. We like the USA Tax, VAT, and FairTax. The USA Tax is the most progressive, but the VAT and FairTax have the advantage of being border adjustable, thus helping to level the playing field for American products.

The discussion continues from there. To read it all, go to: http://blogs.cfr.org/setser/2008/06/27/does-the-feds-mandate-now-extend-to-beijing-moscow-and-riyahd/#comments

Howard

We're in Wikpedia!

2008-06-28T20:12:00.000-07:00

Our book Trading Away Our Future is now in Wikipedia as the definitive book about Balanced Trade. Here's the Wikipedia entry for Balanced Trade:

Balanced trade is an alternative economic model to free trade. Under balanced trade nations are required to provide a fairly even reciprocal trade pattern; they cannot run large trade deficits.

The concept of Balanced Trade arises from an essay by Michael McKeever Sr. of the McKeever Institute of Economic Policy Analysis. According to the essay, "BT is a simple concept which says that a country should import only as much as it exports so that trade and money flows are balanced. A country can balance its trade either on a trading partner basis in which total money flows between two countries are equalized or it can balance the overall trade and money flows so that a trade deficit with one country is balanced by a trade surplus with another country."

A more extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. "A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance."

Follow the following link to read the entry: http://en.wikipedia.org/wiki/Balanced_trade

Howard

A Quick Fix to Our Economic Malaise

2008-06-27T19:54:00.000-07:00

A Quick Fix to our Economic Malaise
Raymond L. Richman

The current weakness of the U.S economy is attributable to the goods trade deficits that have grown from $189 billion in 1996 to $826 billion in 2007, the latter equal to the value-added of nearly 8 million industrial workers. In other words, it would take the export of the goods produced by 8 million American workers to bring trade into balance. No wonder that wages have been stagnating, that income distribution has been worsening, that the dollar has been falling, and that the economy has been slowing. During the first quarter of 2008, the trade deficit continued to grow although less rapidly: goods imported grew $52.6 billion compared with the first quarter of 2007 while goods exported grew $47.6. One quick sure way is to bring the trade deficits under control is by reducing imports. Unfortunately, too many powerful groups have a vested interest in perpetuating the trade deficits and everything that has been proposed has been labeled “protectionist” by a huge majority of economists. To paraphrase the late Senator Goldwater, protectionism in pursuit of a trade balance is no vice and allowing the trade deficits to devastate our economy is no virtue.

Free trade has sounded good since Adam Smith wrote his Wealth of Nations in 1776. Indeed, so good that few economists ever asked themselves what the consequences would be if one party practiced free trade and the other trading partner practiced mercantilism. Since the early 19th century, economists have denounced any action to restrict imports as protectionism. They sat and pontificated in their ivory towers on the benefits of free trade while the trade deficits grew and grew. Faith in the forces at work in free markets became the pied piper of America’s descent into economic stagnation. It has been obvious for sixty years that Japan was not reciprocating our free trade policy and that China, with her controlled capitalistic economy has not been doing so either. And the rise of oil prices, which accounted for 40 percent of the trade deficit in goods in 2007, met with no U.S. government response during its rise from $35/barrel in June, 2004 to $135 in June, 2008. While the supply of petroleum is highly inelastic, it is hard to believe that world demand has increased in four short years enough to send its price into the stratosphere. Unfortunately demand is highly inelastic, too. The solution to the game requires bargaining as in the case of monopsony versus monopoly.

It has been obvious since the 1973 oil embargo that we were becoming dependent for most of our oil on foreign sources, some of them hostile or potentially hostile. Thanks to Pres. Clinton’s veto of the Energy Bill in 1995 and repeated successful Democratic opposition to bills that would have authorized drilling in the ANWR and offshore, some of the world’s largest oil reserves located in the U.S. and off-shore could not be exploited.

Exports and Imports of Goods, incl. Petroleum
(Billions of Dollars)

Year	Exports of goods	Imports of goods	Trade deficit on goods	Less: Petroleum imports	Deficit excl. petroleum
1996	618.3	807.4	-189.1	72.7	-116.4
2000	784.3	1243.5	-459.2	120.2	-339
2004	818.3	1499.5	-681.2	180.5	-500.7
2006	1030.5	1880.4	-849.9	302.4	-547.5
2007	1152.9	1979.4	-826.5	330.7	-495.8

At the beginning of 2002 Americans could buy a Euro for ninety cents but as of June 2008, it requires $1.55, seventy-one percent more. The head of OPEC may be close to the truth when he recently declared that the U.S. is responsible for the high price of oil. The increase in cost is not nearly so great for Europe as it is to us given the fact that the price of oil is calculated in U.S. dollars.

The European Union allows the Euro to float in the foreign exchange market but China and Japan do not. China allowed the yuan to rise in value, from 8.3 to the dollar to 7.3 between 2000 and 2008, a rise of 12 percent, while Japan allowed the yen to rise from 102 to the dollar, to 135 in 2002 (32 percent) and down to 108 in 2008 (6 % over 2000). Indeed, the strength of the Euro is the result of the flow of dollars to the purchase of Euro-denominated assets, garnered from trade surpluses with the U.S. (and Americans fleeing the dollar, too). The fall in the dollar relative to the Euro makes American goods cheap relative to European goods and encourages U.S. exports by making European goods more costly discouraging U.S. imports from Europe. That’s the way free trade is supposed to work. The low values of the yen and yuan versus the dollar puts no pressure on our imports from Japan and China.

In fact, there is little evidence that the lower value of the dollar relative to the Euro has affected trade at all. Our trade deficit with Germany was about the same in 2004 and 2007. about $45 billion. Our trade deficit with China grew from $162 billion to $256 billion, an increase of 58 percent and with Japan from $75 billion to $83 billion, about ten percent. With all countries, the deficit increased twenty percent. No doubt, much of the increase consisted of petroleum imports. But no oil was imported from China, Japan, or Germany.

Our leaders, following the advice of their economic advisors, are acting as though our principal economic problem were a Keynesian insufficiency of domestic demand. Were that the problem, a “rebate” would indeed be helpful; it would increase domestic demand to the extent households spent the rebate on domestically-produced goods. But what can you buy that is produced in America? We need to produce the computers, the luxury autos, the TVs, the cell phones, oil, and other high-valued products we are now importing. Stimulating consumption now may have a modest temporary effect but what we face is a long-term slide into oblivion. We desperately need investment spending at home.

We have been over-consuming and under-investing for two decades. Last year, according to government statistics, Americans saved 4/10ths of one percent of their disposable income (income after taxes). In most Asian countries, households save a quarter to one-half their incomes. American business investment in 2006 barely exceeded depreciation allowances. We need net investment of 15 percent of GDP, just to have a three percent rate of real growth. Business investment is strong only in the health sector and technology sectors where the firms are protected from foreign competition by patents. Indeed, many corporations have so much in retained earnings and nothing to invest in that are buying back their own stock, a practice that benefits managers whose bonuses are based less on earnings that on the rising price of shares. (Paying that same money out as dividends would really benefit their shareholders with dividends currently taxed at the same rate as long-term capital gains. These include some well-known names, e.g., IBM.

For many years trade surplus countries like Japan, China and the oil-exporting countries invested their surplus dollars in American assets such as U.S. Treasury bonds. The flow of these funds to the U.S. prevented any downward pressure on the dollar but as the dollar began to show weakness, they reduced their purchases of U.S. assets and increased their purchases of Euro assets and assets in other countries. This strengthened the Euro and precipitated the decline in the exchange value of the dollar. The trade deficits are the real cause of the weak dollar.
The U.S. government in the person of Treasury Secretary Henry Paulson, has been trying to bring down the price of oil by treating its symptom, the low value of the dollar relative to the Euro, trying to get foreign central banks to support the dollar. That would do nothing to correct the cause of the dollar’s decline. The cause of the collapse of the dollar is the trade deficit.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself has said that market forces cannot be relied upon to get the trade deficits under control. We can easily reduce the trade deficits as we show in our recently published book, Trading Away Our Future. We have the legal right under WTO rules to impose barriers to imports from countries with which we are experiencing chronic trade deficits. We need to inform all of our trading partners with whom we have chronic trade deficits that they must purchase as much from us as we purchase from them and that effective next year, importers will be limited to 90 percent of their prior year’s imports. This will be in effect until our exports reach 90 percent of our imports. Likewise, we should reduce our imports of petroleum from OPEC members by ten percent of the previous year’s imports. This will make it necessary to ration gasoline and other petroleum products. Each household would receive marketable ration coupons which would provide a financial incentive to use less than its ration. Reducing imports of oil from Venezuela and Saudi Arabia, both members of the illegal cartel, OPEC, would also lower the world price of oil inasmuch as the supply of oil is highly inelastic. A small decrease in demand for oil would lower its price disproportionately.

Moreover, announcing that we will lift the prohibitions to drilling in the ANWR, off-shore, and on public lands would have an immediate effect of lowering the world price of oil.

The effect of these measures will be to strengthen the dollar, encourage investment, and stimulate employment in well-paid jobs in oil production, pipeline construction, and transportation and have beneficial secondary effects throughout our economy. End of recession!

- - - - - -

Dr. Raymond L. Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh. Together with Dr. Howard B. Richman and Dr. Jesse T. Richman, he recently published, Trading Away Our Future, (Ideal Taxes Association, 2008), a book which deals with many of the above issues.

Where's this headed?

2008-06-27T13:24:00.000-07:00

Steven Pearlstein's column today in the Washington Post argues that we are at the beginning of our economic woes rather than near the end.

He writes

The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes.

The diagnosis seems right on track to me. All that is missing, as some of those writing comments on the Washington Post noted, is a solution. I continue to believe that the solution in Trading Away Our Future is an appropriate one.

Dropping dollar hurts stock market

2008-06-26T20:59:00.000-07:00

The dollar has been overvalued for years, puffed up by subsidized financial flows that artificially inflate its value relative to trade fundamentals, as we discuss in Trading Away Our Future. Rebalancing is apt to be messy. And at present the dollar is alleged to be hurting the stock market. From a story on CNN Money:

The real problem is even though [the] Fed attempted to be more hawkish, it was not supportive enough of the dollar," Hogan said.

Crude-oil futures climbed to new heights, as weakness in the U.S. dollar, influenced by the Federal Reserve's decision to stand pat on interest rates, sent prices past $140 a barrel.

Crude for August delivery reached a high of $140.39 a barrel in electronic trading on Globex. The contract closed at a record $139.64 on the New York mercantile exchange, up $5.09, or 3.8%, for the session after trading as high as $140.

Until recently, the market applauded FED rate cuts. Now, it is alleged, the FED's failure to raise rates in causing the market to drop. An intriguing reversal.

Apparently investors are fleeing U.S. stocks for foreign currencies and oil partly because they believe that further devaluation of the dollar is ahead. This could easily become a self fulfilling prophesy for a while.

The Political Economics of Oil

2008-06-26T13:11:00.000-07:00

Economics teaches us that as the price increase, supply increases, and as the price decreases, supply falls. This is true in the long term for the oil market, I suppose, but in the short term because so many oil companies are nationalized, things can get a bit skrewy.

Twenty years ago, John Londregan, then at Carnegie Mellon, noticed something odd about how Iran, Iraq and some other countries responded to declining oil prices in the mid 1980s. Instead of pumping less oil, they pumped more. This contradicted economic theory. His answer was that the domestic political situations and financial demands faced by these countries meant that a decline in oil income was not politically acceptable. To compensate for lower prices, leaders pumped more oil.

Reverse the situation. Over the last few years the price of oil has been going up. But... as noted by Howard a few weeks ago on Trade-Wars, the amount of oil many countries are pumping has been dropping. Perhaps this is because the countries cannot produce more, as 'peak oil' theorists surmise. On the other hand, with the price so high, state owned exporters probably feel much less pressure to pump. Better to keep the extra oil in the ground to smooth out the budget cycle.

What cannot go on...

2008-06-26T12:16:00.000-07:00

Imballanced trade is, in the long run, unsustainable. It is also bad for the U.S., as we have argued extensively in Trading Away Our Future. It costs the U.S. jobs, future comparative advantage, and future debt payments.

Until very recently, China has had the best of all worlds from a mercantilist perspective. The Chinese government borrowed domestically at low interest rates, lent the money to the United States at higher interest rates, made money on the investment, sustained a non-market exchange rate, and subsidized its exporters.

A recent Reuters article suggests that the system of 'sterilizing' dollars earned from foreign trade is beginning to crumble on the edges. In particular, the decline of the dollar, combined with below-inflation interest rates in the U.S., and higher interest rates in China are conspiring to generate losses on the Chinese investment portfolio.

China's central bank used to make a tidy profit in managing foreign exchange inflows. When Chinese interest rates were lower than in the United States, the People's Bank of China made money every time it sold bills at home and invested its forex reserves in debt across the Pacific -- its own carry trade.

But that soured over the past year as Beijing raised rates and the U.S. Federal Reserve slashed them. The economics were further undermined by the yuan's faster appreciation against the dollar.

China's losses may be running to about $15 billion a month, or 5 percent of GDP on an annualised basis, Goldman Sachs economists Hong Liang and Eva Yi calculated.

The losses are not huge, compared to more than two trillion dollars worth of reserves. China's response has been to emphasize increased reserve requirements for Chinese banks, a strategy that is better financially.

Brad Setser's recent blog suggests that China now has less company at the task of supporting the dollar. Rising energy costs have led some East-Asian countries to begin drawing down reserves and selling dollars.

McCain proposes $300m prize for new auto battery

2008-06-25T05:46:00.000-07:00

Senator McCain's proposed $300 million prize for an improved auto battery is an excellent idea. America has the largest university-based research infrastructure to the world. If it could only be harnessed toward solving U.S. and world economic problems, we could see some huge advances in technology. Goal-oriented research works. That's one reason why wars usually lead to huge advances in technology.

I just hope Senator McCain goes further than just one prize and endorses the principle behind it. That principle is that prizes work, peer-judgment does not.

He should replace the current peer-review pre-approval process for research grants with a goal-oriented process involving prizes for the best, second best, and third best contributions toward achieving specific goals. The prizes would not have to be large. All we really have to do is to take the money that universities are currently getting through peer-reviewed National Science Foundation grants and turn it into prizes for achieving goals.

The current peer-reviewed process for awarding grants is forcing conformity upon academia. Any academic who differs from the academically-correct consensus loses funding. That's one reason why retired professors tell the truth about global warming while active researchers tend to keep quiet. That's one reason why my father, a retired economics professor, tells the truth about trade, while active economic professors keep quiet. The peer-oriented review process stiffles dissent from whatever is the prevailing academic opinion.

Peer-pressure is not a positive force in schools of any sort, not elementary schools and not graduate research institutes. If we would move from peer-reviewed funding to prize-oriented funding, the standard of income of the entire world would increase and the quality of advice that the US government gets from academia would also improve.

Howard

Wall Street Journal tries to explain away their obviously delusional editorial

2008-06-22T06:58:00.000-07:00

In a delusional June 5 editorial entitled The Buck Stops Here, the Wall Street Journal praised Federal Reserve Chairman Ben Bernanke for taking a strong-dollar position. As proof, they noted that Bernanke's stance had caused the price of oil and gold to fall for two days in a row. The very next day after this editorial appeared (June 6) the price of oil futures skyrocketed, rising by almost 11% in a single day!

In a June 20 editorial entitled Bernanke's Market Week the Wall Street Journal blamed the Federal Reserve. Specifically they wrote:

Earlier this month, Chairman Ben Bernanke signaled a turn in Fed policy to include a focus on maintaining a "stable" dollar. Sure enough, the dollar strengthened, the price of oil fell and stocks crept up. Then earlier this week, someone in the upper reaches of the Fed began leaking to the press in advance of next week's FOMC meeting that Mr. Bernanke saw no reason to raise interest rates this month, or indeed until the autumn.

Sure enough, oil shot up and gold rose back above $900 an ounce, with equities tanking in turn on stagflation fears. Throw in renewed worries over credit problems in the banking system, and the markets had a very ugly week.

What we can't figure out is what in the world Fed officials are thinking, assuming that's even the right word. The most precious commodity a Fed Chairman has is credibility. When he makes a widely advertised public commitment to maintain dollar stability, and then he or his minions leak that he has no plans to back that up with any action, he is squandering his own currency. Central banking isn't an academic seminar where ideas don't have consequences.

With inflation climbing around the globe, most of it inspired by dollar weakness, the Fed has a growing credibility problem....

The Wall Street Journal's attempt to get its foot out of its mouth relies upon its ability to rewrite history. They pretend that oil and gold prices started to shoot up last week after the Federal Reserve leaked to the press that they were not planning to raise interest rates this month. But oil shot up on June 6, way before the leak, while the Federal Reserve was still planning the higher interest rate policy to fight inflation that the Wall Street Journal was praising.

The Wall Street Journal also ignores the fact that the Federal Reserve's short-lived tight money policy plans were reversed partly because of a report that was released by the Bureau of Labor Statistics on June 6. That day, the Bureau of Labor Statistics announced that U.S. unemployment had shot up from 5.0% in April to 5.5% in May, which could explain why the Fed is not about to raise interest rates right away.

The editors of the Wall Street Journal are increasingly divorced from reality. It is amazing that the Republican leadership still tries to follow their economic advice. Fortunately for the United States, Federal Reserve Chairman Bernanke realizes that he shouldn't follow their advice.

Howard

Balanced Trade A Quick Fix

2008-06-20T13:10:00.000-07:00

Balanced Trade, a Quick Fix to our Economic Malaise

Raymond L. Richman

History will wonder how it was possible for the country which won nearly all the Nobel prizes in economics 1) to allow its trade deficits to grow in three short decades from chronic trade surpluses to a trade deficit on goods of $790 billion in 2007, 2) to witness factory after factory close down and move to Asia at the cost of laying off millions of industrial workers, causing wages to stagnate and the distribution of income to worsen, 3) allow the dollar to fall from $0.90 per Euro to $1.55, 4) to observe without flinching the escalation in the price of petroleum, The explanation is simple, the economists advising the Bill Clinton administration and the economists advising the G.W. Bush administration were all blind-sided free-traders, ideologues who did not want free trade challenged.

Why have the Congress and the Clinton and Bush administrations done nothing about a problem that cost us factories and jobs and a host of other ills. Because, as Lee Iacocca writes, “We worship at the altar of free trade, and it’s killing us. At the very least, it’s time we started charging admission to the American market. And the price of a ticket has to be a little fairness and reciprocity.”

Few economists asked themselves what the consequences would be if free trade were one-sided and trade deficits became chronic. I exchanged e-mails with one of Pittsburgh’s free-market gurus this spring writing him about some of my concerns and this is what he said: “If China wants to send us goods for our paper, what do we have to lose?” He blithely ignored what had happened to the U.S. economy as the result of a world flooded in dollars by the trade deficits.

The millions of Americans who lost their jobs believed it was due to uncontrollable market forces. The millions of others whose wages stagnated had no reason to believe that it was the result of something so esoteric as trade deficits.. And there were some who benefited. These latter include Wall Streeters and bankers, albeit temporarily as it turned out, and people with guaranteed incomes such as government employees and university professors and those on fixed incomes.

Economists blamed the worsening distribution of income on a lack of a skilled workforce as though the sophisticated computers, electronic goods, and luxury automobiles we have been importing require only unskilled labor.

Faith in the forces at work in free markets became the pied piper of America’s decline. It has been obvious for sixty years that Japan was not reciprocating our free trade policy and that China, with her controlled capitalistic economy has not been doing so either.

It has been obvious since the 1973 oil embargo that we were becoming dependent for most of our oil on foreign sources, some of them hostile or potentially hostile. Thanks to Pres. Clinton’s veto of the Energy Bill in 1995 and repeated successful Democratic opposition to bills that would have authorized drilling in the ANWR and offshore, some of the world’s largest oil reserves could not be exploited.

Exports and Imports of Goods, incl. Petroleum

(Billions of Dollars)


	1996	2000	2004	2006	2007

Exports of goods\1\	618.3	784.3	818.3	1030.5	1152.9
Imports of goods\1\	807.4	1243.5	1499.5	1880.4	1979.4
Trade deficit on goods (-)	-189.1	-459.2	-681.2	-849.9	-826.5
Less: Petroleum imports	72.7	120.2	180.5	302.4	330.7
Trade deficit excl. petroleum imports (-)	-116.4	-339	-500.7	-547.5	-495.8

At the beginning of 2002 Americans could buy a Euro for ninety cents but as of June 2008, it requires $1.55, seventy-one percent more. The European Union allows the Euro to float in the foreign exchange market but China and Japan do not. China allowed the yuan to rise in value, from 8.3 to the dollar to 7.3 between 2000 and 2008, a rise of 12 percent, while Japan allowed the yen to rise from 102 to the dollar, to 135 in 2002 (32 percent) and down to 108 in 2008 (6 % over 2000). Indeed, the strength of the Euro is the result of the flow of dollars to the purchase of Euro-denominated assets, garnered from trade surpluses with the U.S. (and Americans fleeing the dollar, too). The fall in the dollar relative to the Euro makes American goods cheap relative to European goods and encourages U.S. exports by making European goods more costly discouraging U.S. imports from Europe. That’s the way free trade is supposed to work. The low values of the yen and yuan versus the dollar puts no pressure on the deficits with Japan and China.

In fact, there is little evidence that the lower value of the dollar relative to the Euro has affected trade with Europe at all. As can be seen in the following table, our trade deficit with Germany, was about the same in both years, about $45 billion. Our trade deficit with China grew from $162 billion to $256 billion, an increase of 58 percent and with Japan from $75 billion to $83 billion, about ten percent. With all countries, the deficit increased twenty percent. No doubt, much of the increase consisted of petroleum imports. But no oil was imported from China, Japan, or Europe.

Trade Deficits with Selected Countries, 2004 – 2007

(billions of dollars)

Country	X – M 2007	X – M 2006	X – M 2005	X – M 2004
Total, All Countries	-790.30	-818.10	-767.10	-652.00
Canada	-64.20	-72.80	-76.60	-65.70
China	-256.30	-232.60	-201.70	-162.00
Mexico	-74.30	-64.10	-50.20	-45.00
Japan	-82.80	-88.50	-82.70	-75.20
Germany	-44.70	-47.80	-50.70	-45.80
France	-14.20	-12.90	-12.80	-17.30
Netherlands		13.80	-19.50	-19.20
Brazil	-1.00	-7.20	-27.60	4.30
Italy	-20.90	-20.10	-9.10	11.70

Our leaders, who rely on economic advisers, are acting as though our principal economic problem were a Keynesian insufficiency of domestic demand. Were that the problem, increased expenditures like the so-called rebate would indeed be helpful; it would increase effective demand 1.1 percent if it were all spent on domestically produced goods. But what can you buy that is produced in America? We need to produce the computers, the luxury autos, TVs, and other high-valued products we are now importing. Stimulating consumption now may have a temporary modest effect but what we face is a long-term slide into oblivion. We desperately need investment at home. We have been over-consuming and under-investing for two decades. Last year, according to government statistics, Americans saved 4/10ths of one percent of their disposable income (income after taxes). In most Asian countries, households save 15 percent or more. American business investment in 2006 barely exceeded depreciation allowances. We need net investment of 15 percent of GDP, just to have a three percent rate of real growth. Business investment is strong only in the health sector and technology sectors where the firms are protected from foreign competition.

It was easy. It was all done because American economists made an ideology of free trade. Since the classical economist, Smith, Ricardo, Economists denounce any action to restrict imports as protectionism. They sat, and continue to sit and pontificate in their ivory towers on the benefits of free trade while the trade deficits accelerated America’s de-industrialization causing the loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation, as well as a depreciating dollar.

For many years trade surplus countries like Japan, China and the oil-exporting countries invested their surplus dollars in American assets such as U.S. Treasury bonds. The flow of these funds to the U.S. prevented any downward pressure on the dollar but as the dollar began to show weakness, they reduced their purchases of U.S. assets and increased their purchases of Euro assets and assets in other countries. This strengthened the Euro and precipitated the decline in the dollar. The trade deficits are the real cause of the weak dollar. The falling dollar is the result of the fact that the trade surplus countries did not use the dollars they earned to buy U.S. goods or services but used them to buy financial assets here and increasingly abroad.

The U.S. government in the person of Treasury Secretary Henry Paulson, has been trying to bring down the price of oil by treating its symptom, the low value of the dollar relative to the Euro, trying to get foreign central banks to support the dollar. That would do nothing to correct the cause of the dollar’s decline. The cause of the collapse of the dollar is the trade deficit.

We can easily reduce the trade deficits. As we show in our recently published book, Trading Away Our Future, we need to inform all of our trading partners with whom we have chronic trade deficits that they must purchase as much from us as we purchase from them or we will enforce a trade balance by reducing our imports from them. If necessary, we may have to ration some oil uses, particularly gasoline.

- - - - - -

Dr. Raymond L. Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh. Together with Dr. Howard B. Richman, a teacher of economics on the internet and Dr. Jesse T. Richman, Asst. Professor of political science at Old Dominion University, they recently published, Trading Away Our Future, (Ideal Taxes Association, 2008, a book which deals with many of the above issues.

McCain's energy policy sounds good to me

2008-06-19T08:03:00.001-07:00

Here's a selection from an article about his speech yesterday at Missouri State University:

Republican presidential candidate John McCain is pushing for new nuclear power plants, carbon sequestration "clean coal" technology and off-shore oil drilling to meet the country's energy needs for the next generation.

"One obstacle to expanding our nuclear-powered electricity is the mind-sest of those who prefer to buy time and hope that our energy problems will somehow solve themselves," McCain said in his opening remarks at a town hall meeting at Missouri State University.

McCain pledged to "set this nation on a course to building 45 new (nuclear) reactors by the year 2030" if voters chose him over Democratic Sen. Barack Obama in November to be America's 44th president.

Increasing US energy production would not only lower the cost of energy, but would also strengthen the dollar, lowering the cost of everything that is imported. The nuclear power plants could, perhaps, fuel electric cars.

There has been a huge shift in popular opinion on two economic issues. The Democrats are just beginning to realize that popular opinion is now in favor of energy production, more than environmental protection. The Republicans are just beginning to realize that popular opinion is now in favor of strengthening US industry, more than keeping Chinese imports inexpensive. The November election is again up for grabs. The party that moves fastest to adjust to the new reality will likely win in November.

Howard

Subsidies at the Root of the China Price

2008-06-18T10:09:00.000-07:00

In an article from the June issue of the Harvard Business Review entitled "Subsidies and the China Price" Usha C.V. Haley and George T. Haley (both professors at the University of New Haven in CT) summarize their larger report on the use of energy subsidies to boost the Chinese steel industry. The larger report is available from americanmanufacturing.org/.

They write that

Many assume that China's cost advantage in manufacturing comes from cheap labor. But in China's burgeoning steel industry, our research suggests, massive government energy subsidies, not other factors, keep prices down. These subsidies have broad implications for how companies compete and collaborate with Chinese businesses.

According to the report, the subsidies go to domestic energy producers (e.g. coal mines) and are then passed along as lower costs to energy consumers including the steel industry. China continues to engage in strategic trade policies designed to boost its position in key industries.

In 2005, Beijing designated steel as a pillar industry for the Chinese economy. China was the world's largest producer of steel, with 27% of global production, but until then it had imported 29 million tons of steel annually. That year, China suddenly transformed itself from a net steel importer to a net steel exporter. In 2006, the country became the world's largest steel exporter by volume, up from the fifth largest in 2005. Today it remains the world's largest consumer and producer of steel, with 40% of global production. How did China make these astonishing gains so quickly and manage to sell steel for about 19% less than steel from U.S. and European companies? Labor accounts for less than 10% of the costs of producing Chinese steel, and Chinese steel doesn't appear to rely on scale economies, supply-chain proximities, or technological efficiencies to lower its costs.

Instead, what happened is that China boosted its energy subsidies, which now total more than 27 billion dollars per year.

The authors note that one important implication of their work is that foreign companies doing business with Chinese suppliers should be aware of the risk that subsidies underlying the "China Price" might be removed at any time because of political calculations. Companies should maintain supplier relationships with other sources until they are sufficiently confident in the "medium term" reliability of Chinese suppliers.

Another implication, not discussed in the HBR article, is that consumers and economists in the U.S. should not assume that low prices from China are the result of natural comparative advantage or low cost labor. It isn't cheap labor that gives Chinese steel companies an advantage, but cheap (e.g. subsidized) coal.

Although in the short term Chinese decisions to subsidize exports make those exports cheaper for us to buy, the longer term risk is that these subsidies will help Chinese producers gain other kinds of comparative advantage while driving other world producers out of business. In the short term, subsized and distorted export prices hurt American workers and companies in export-competing industries. In the medium term they could hurt all Americans.

My new letter to the Washington Times was published today!

2008-06-17T04:43:00.000-07:00

Two postings ago, I posted "A tale of three letters" and I noted that I had just e-mailed the Washington Times the third letter. The Washington Times ran it today. They gave it the title, "How to grow the economy." Here's the link: http://www.washtimes.com/news/2008/jun/17/how-to-grow-the-economy/

Howard

Ross Perot is Back

2008-06-16T13:45:00.000-07:00

Ross Perot recently rolled out a new website that uses charts to describe the condition of the U.S. economy and the risks posed by current fiscal imbalances. The website is http://www.perotcharts.com/. His charts are crisp and often interesting. For instance, check out his chart examining U.S. savings rates in comparision with a number of other countries http://perotcharts.com/category/challenges/savings/.

Unfortunately, Perot has not yet included discussion of the trade deficit in his list of issues discussed, although the trade deficit is closely related to several issues Perot does examine including savings rates, taxation policies and the federal budget. The public remains woefully underinformed about the trade deficit, with substantially fewer even aware that there is one than in the 1980s when it was a smaller portion of GDP.

A tale of 3 letters to the editor

2008-06-16T12:44:00.000-07:00

On June 6, a letter to the editor that I wrote was published in the Washington Times. This is what I wrote:

Balanced trade is the key

In his Tuesday Commentary column, "Economic Reality Check," Michael Barone cites many trees but misses the forest. He points out that the economy is not suffering from much unemployment (true), nor is there much inflation (true). Nor is the economy shrinking (true). He also points out that the growth rate is mighty slow, but he doesn't stop to analyze why. His conclusion: Barack Obama's "protectionism" would not help the United States economy.

What he misses is the reason U.S. growth is so slow despite the lack of unemployment. It is slow because businesses have not been investing in American production. They have not been investing because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade.

By the way, Mr. Barone is wrong when he calls Sen. Obama a protectionist. Mr. Obama would not likely do anything more to balance trade than Sen. John McCain. The main reason Sen. Hillary Rodham Clinton was solidly defeating Mr. Obama throughout the Midwest is because the manufacturing voters detected a phony.

As things stand, the Democrats will gain a huge victory in Congress of 1932 proportions as a result of delusional Republican economics as exemplified by Mr. Barone's column. The presidential race, however, is up in the air. Ohio, Michigan and the nation will go to the presidential candidate who persuades voters that he will do the most to balance trade.

HOWARD RICHMAN
Co-author: "Trading Away Our Future"
Kittanning, Pa.

On June 9, Don Boudreaux, Chairman of the economics department at George Mason University responded with his own letter to the editor. Here is what he wrote:

Trade Deficit Offset

Howard Richman argues "Balanced trade is the key" (Letters, Friday/Saturday) to America's prosperity. He's confused, as evidenced by his claim that America's recent economic slowdown is linked to its trade deficit. The United States has run a trade deficit for each of the past 31 years, some of which (like the present) were periods of slow growth, but many of which were periods of high growth. Indeed, the evidence suggests that higher trade deficits are associated with higher, rather than lower, rates of economic growth.

This last point highlights another of Mr. Richman's confusions. He thinks trade deficits mean less domestic investment. Not so. Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus - meaning net inflows of capital into the domestic economy. More capital generally means more growth.

DONALD J. BOUDREAUX
Chairman, Department of Economics
George Mason University
Fairfax

Last night, I e-mailed the Washington Times a response to Boudreaux's letter. Here is what I wrote:

How it Works in the Real World

In a June 9 letter to the editor, “Trade Deficit Offset,” Don Boudreaux, Chairman of the Department of Economics at George Mason University, disputed my contention in a June 6 letter to the editor, “Balanced Trade is the Key,” that U.S. investment would increase if we insisted on balanced trade with the mercantilist countries.

Specifically, Boudreaux argued that our trade deficits contribute to our economic growth: “Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus - meaning net inflows of capital into the domestic economy. More capital generally means more growth.”

Boudreaux's theory works on the chalkboard of his classroom, but in the real world, the exact opposite occurs. Instead of helping, inflows of financial capital slow the growth of the economy that receives them. In 2006 three International Monetary Fund economists (Prasad, Rajan & Subramanian) found that the more capital a developing country had received from abroad, the slower its economic development because of the harm to its exporting industries. Although the inflow of capital causes lower interest rates, it also causes a higher currency value which makes the products of that country less competitive in world markets.

Many Asian countries, especially China, have been intentionally manipulating their currency values to keep their exports high and their imports low. In order to conduct these currency manipulations they buy dollars and lend those dollars to the United States. Boudreaux thinks that this inflow of dollars from the Chinese government has been benefiting our country. But the inflow of capital into the United States drives down U.S. interest rates while at the same time putting U.S. producers at a competitive disadvantage when competing with Chinese producers.

As I pointed out in my June 6 letter, "businesses have not been investing in American production ... because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade."

Howard Richman
Co-author: Trading Away Our Future
Kittanning PA 16201

Howard

Economically Illiterate Populists?

2008-06-14T21:18:00.000-07:00

In a response to our article on American Thinker, AL wrote:
>Three things to note for economically illiterate populists.
>First, US manufacturing output was increasing with steady pace over last two decades.

There are a variety of arguments contra "economic populists" concerning US manufacturing. There is a grain of truth to them, but also they must be taken with plenty of salt.

One argument is that US manufacturing output is growing. While manufacturing output shrank for quite a time in the early part of the current decade, the broader claim is also misleading.

Alan Tonelson takes on this argument in the link below.
http://www.americaneconomicalert.org/view_art.asp?Prod_ID=2648

Another argument, versus China in particular, has to do with the relative share of worldwide manufacturing production in the US and China. As this analysis from the Heritage Foundation discusses, China's manufacturing output once adjusted for Purchasing Power Parity (PPP) is larger than that of the U.S.
http://www.heritage.org/research/AsiaandthePacific/wm1762.cfm

Another argument is that the U.S. share of global manufacturing has held largely constant since the early 1980s. The share of output statistics are deeply misleading because changes are often driven by exchange rates rather than anything more real. Our borrowing to finance the trade deficit (driving up the value of the dollar) makes us look like the manufacturing powerhouse we aren't. And the way these numbers are used is also deeply misleading. The U.S. share was well above 20 (or 22) percent for almost all of the interval. It is now, and only now, back down in the range it was when Reagan beat Carter.

>Second, loss of manufacturing jobs is due to increasing productivity; China is loosing manufacturing jobs also.

Increasing productivity does diminish the number of manufacturing jobs, and this is a good thing because it allows each worker to produce more and it thereby raises living standards. However, as we discuss in chapter 1 of Trading Away Our Future, several million manufacturing jobs do not exist in the US because of the trade deficit. The exact number depends on how you do the calculation and how you assume the trade deficit would be resolved. At the low end it is about 3 million, and at the high end about 7.5 million.

>Third, fast-tracking of Chinese economy is producing 1.5 billion of new consumers of US manufacturing goods, like aircrafts and i-phones, to name a few.

The Chinese population of 1.3 billion is a huge potential market. I sincerely hope that the U.S. can expand exports to China at a pace that at least matches the increase in China's exports to the US. I believe that China is in no hurry to let this happen, let alone encourage it. Lets start with airplanes. China imports passenger aircraft. However, the days of big orders forBoeing are probably near an end. The recent Chinese deal with Airbus included expanded requirements for Chinese parts sourcing on top of Chinese assembly for Airbus planes. (http://www.nytimes.com/2007/11/27/business/worldbusiness/27trade.html)

The i-phone has a long supply chain, like most manufactured products in our globalized world. But nearly all of the parts are produced in Asia, and the phone is assembled in China.
http://www.allroadsleadtochina.com/index.php/2007/08/15/iphone-made-in-shenzhen/

"Straight Talk from Clinton's Trade Negotiator" - We're published in today's American Thinker

2008-06-14T05:58:00.000-07:00

Here's how our commentary begins:

It is rare when a government official actually blames himself for his mistakes. That straight talk occurred in the June 4 issue of Foreign Policy in Focus when Robert Cassidy, President Clinton's Assistant U.S. Trade Representative for Asia and China, took himself to task for the trade agreement he negotiated with China. He began:

As the principal negotiator for the landmark market access agreement that led to China's accession to the World Trade Organization (WTO), I have reflected on whether the agreements we negotiated really lived up to our expectations. A sober reflection has led me to conclude that those trade agreements did not.

Cassidy notes that only two groups benefited from our trade agreement with China: "multinational companies that moved to China and the financial institutions that financed those investments, trade flows, and deficits." The American economy and the American worker were the big losers with up to 2.5 million manufacturing jobs lost.

Here is his passage in which he explains why his "free trade" recipe was flawed, even though he succeeded in reducing Chinese tariffs:

China has adopted an export-led development strategy [italics ours], the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%. Thus China's wages, in U.S. dollar terms, are 40% cheaper than they would have been if the currency were allowed to freely float. Similarly, foreign investors receive a 40% subsidy to develop operations in China. To add insult to injury, our exports are taxed at an additional effective 40% rate.

We would use the less-charitable term mercantilism to describe what Cassidy calls China's "export-led development strategy." The goal of a mercantilist strategy is not only to maximize exports, but also to minimize imports in order to steal industry from one's trading partners.

If you add the two manipulations mentioned by Cassidy together, the approximately 40% added by Chinese tariffs and value-added taxes and the approximately 40% added by Chinese currency manipulations, you find that American exports face the equivalent of an 80% tariff when being sold in China while Chinese exports to the United States face no tariff and get a 40% currency-manipulation subsidy from the Chinese government. With our trade deficit with China rising from $229 billion in 2006 to $252 billion in 2007, is it any wonder that American manufacturers are laying off workers?...

Follow the following link to read the entire commentary: http://www.americanthinker.com/2008/06/straight_talk_from_clintons_tr_1.html

Howard

America's Thrift Deficit

2008-06-13T12:55:00.000-07:00

Why did Americans stop saving? Although the report doesn't get to the bottom of the sources of easy money, a new think tank report summarizes some of the more proximate problems ably, and proposes a number of useful solutions including a move to taxing consumption instead of income.

The report is summarized in The American Interest by Barbara Dafoe Whitehead. A quote:

Why are so many Americans struggling with high levels of debt? Some blame individual greed and recklessness, and certainly human frailty and irresponsible choices are part of the story. Others point to a culture of rampant, corporate-driven consumerism, buttressed by marketing techniques so sophisticated as to exceed the imagination of George Orwell himself. If you can find someone who honestly denies that this is part of the problem, sell him a bridge before it’s too late. But soaring levels of household debt are also tied to another, often overlooked, source: recent changes in America’s institutional and regulatory landscape.

Both statistical evidence and common sense make it clear that this is so. As to the former, many other countries in the world are similarly embedded in a corporate market economy, yet few other advanced countries confront a debt debacle comparable to that of the United States. The variable that can most readily explain the data is the different institutional/regulatory environments in different countries.

As to common sense, it is evident that in money matters, as in most things that matter, authoritative institutions play a role in guiding individual choices and in setting cultural norms. Few people understand the full range of forces affecting them, or have time to acquire the knowledge and self-discipline necessary to make informed decisions.
That’s where authoritative institutions come in. They establish the norms, conventions and values that vest individual decision-making with broader social wisdom and knowledge. But not all institutional set-ups are created equal. Some inculcate norms and values that foster unwise choices or contribute to unjust outcomes. Such is the case in today’s American debt culture. Newly powerful and aggressive anti-thrift institutions are promoting behaviors and attitudes that have undermined our nation’s traditional culture of thrift. (http://www.the-american-interest.com/ai2/article.cfm?Id=458&MId=20)

Barbara Dafoe Whitehead is co-director of the National Marriage Project at Rutgers University. This essay is excerpted and adapted from For a New Thrift: Confronting the Debt Culture, a report released in May by the Commission on Thrift, co-sponsored by the Institute for American Values, the Institute for Advanced Studies in Culture, the New America Foundation, Public Agenda, Demos, the Consumer Federation of America and the National Federation of Community Development Credit Unions. Sources for all data can be found in the full report.

Falling dollar, high oil prices, and trade deficits

2008-06-13T11:20:00.000-07:00

The Falling Dollar, High Oil Prices, and Trade Deficits

Raymond L. Richman, Howard B. Richman, and Jesse T. Richman

Why have crude oil prices escalated during the past three years? Most economists attribute the rise to increased demand and the failure of supply to keep pace. And some believe the bubble has been caused by speculators, betting on the fact that the U.S. will continue to do nothing about it. According to other observers, the immediate cause of what appears to be a “bubble” in the price of oil during the past three years was the fall of the dollar relative to the Euro and other currencies during the past three years. Oil contracts are typically expressed in dollars. Measured in Euros which have appreciated about fifty percent against the dollar, the price of oil has increased hardly at all during the past half decade. While high oil prices have created a serious problem for the U.S., countries enjoying strong currencies have felt little pain at all.

We believe that the basic cause of the decline in the value of the dollar was our huge trade deficits which grew to a shocking $760 billion in 2006, falling in 2007 to $708 billion and rising again in 2008. The rising price of oil in dollars merely exacerbated the trade deficit and the dollar’s decline. The fall of the dollar against the Euro made American goods less expensive to foreigners and accounted for most of the reduced trade deficit observed in 2007.

Later they diversified into corporate securities. The latest manifestation is the so-called Sovereign Wealth Funds. Wall Street says this shows the confidence foreigners have in the U.S. economy! Well, that confidence has been waning; they have been using their ever-larger supply of dollars to buy Euro assets which strengthens the Euro and explains the collapse of the dollar relative to the Euro.

The administration’s economists denounce any action to restrict imports as protectionism. They sat, and continue to sit and pontificate in their ivory towers on the benefits of free trade while the trade deficits accelerated America’s de-industrialization causing the loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation, as well as a depreciating dollar.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself said in a speech while he was Chairman of the Council of Economic Advisors that market forces cannot be relied upon to get the trade deficits under control because of the foreign governments’ manipulation of flow of foreign savings to the U.S. The collapse of the dollar stimulated U.S. exports in 2007 but by April, 2008, the deficit was as great as ever thanks to higher prices of crude oil imports.

We do not need to submit passively to the high price of imported oil or a falling dollar. For thirty-five years we have been on notice that our dependency on imported oil endangers our economy and our security. Nevertheless, our government has prohibited drilling for oil on public lands like the ANWR and exploiting our huge resources of shale oil just as Canada began expoiting its oil sands. Congress should announce that drilling will be permitted in the Arctic National Wildlife Refuge (ANWR) and other public lands and offshore. How much oil is there in the ANWR? A U.S. geology mission in 1998 estimated 4.25 billion to 11.8 billion barrels. Just announcing that we would authorize drilling in the ANWR would cause the price of oil to fall substantially as speculators run for cover.

Drilling in the ANWR would have few social costs, environmental or otherwise. There is no evidence that drilling has had any effect on wildlife anywhere. Environmental concerns are sometimes legitimate. But this one is not. Drilling in Alaska has proven to be environmentally neutral. What better place to drill that an area devoid of humans. In any case the benefits would be considerably greater than costs. The oil that is foregone by the current restrictions on drilling has a market value of many hundreds of billions of dollars and the exploration, drilling, and pipelines would provide many thousands of good jobs directly and indirectly. And longer-term, we should continue to seek alternative sources of energy for transportation uses. The hybrid cars and projected use of electricity as a substitute source of power is already having an impact.

More can be done in the short-run. We can easily reduce the trade deficits. As we show in our recently published book, Trading Away Our Future, we need to inform all of our trading partners with whom we have chronic trade deficits that they must purchase as much from us as we purchase from them or we will enforce a trade balance by reducing our imports from them. If necessary, we may have to ration some oil uses, particularly gasoline.

A reduction of our imports of oil by ten percent would require the reduction of imports from current levels of 9.3 million barrels to 8.4 million per day. Only our imports from OPEC countries would need to be affected. Our imports of crude oil from OPEC in 2007 were about 38 percent of our total imports and Saudi Arabia and Venezuela alone accounted for 28 percent. Canada and Mexico are the other principal suppliers and balancing trade with them is not a great problem because our NAFTA partners are not imposing barriers to trade.

Reducing our oil imports ten per cent would cause a dramatic fall in world oil prices as soon as it were announced. A similar response could be expected when the U.S. simply announces that we will authorize drilling on public lands. The world price could be expected to fall by 20 percent or more. Americans will have to adjust to the reduced quantity of fuel available by making greater use of public transportation, sharing rides, using hybrid vehicles, etc. etc. The U.S. Department of Commerce has a stand-by plan for gasoline rationing and it, or a simpler version, could be implemented quickly.

The high price of gasoline is equivalent to a regressive tax, weighing most heavily on low income households. It is almost as regressive as a poll or head tax. It has the effect of causing low income families to reduce their consumption of other goods and services while middle and upper income families could care less whether a fill-up costs $30 or $60. Rationing would have the effect of reducing the price of oil and gasoline and all households would benefit thereby. Households willing to forego their entire ration should be authorized to sell them. It would be simple to create a market for them. (Just this sort of rationing plan was suggested by Prof. Martin Feldstein in a 2001 paper. (See http://www.nber.org/feldstein/oil.html.)

The Democrats will probably control the next Congress and administration. To date they have been subservient to the environmental lobby. It was Pres. Bill Clinton who vetoed in 1995 the authority to drill in the ANWR. And Senators Obama, Clinton, and McCain are all on record as opposing drilling in the ANWR. It is laughable that they and the President have enacted a law requiring the substitution of mercury-filled fluorescent lamps for incandescent lamps. There is not now nor does there ever need to be a shortage of electricity in the U.S. Prospective shortages of electricity can be blamed on opposition to new coal-powered and new nuclear plants. The high price of motor fuel and the trade deficits are the problem. What we need is a lobby as powerful as the environmental lobby that will advance, not diminish, the welfare of the American people.

- - - - - -

Dr. Raymond L.Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh; Dr. Howard B. Richman teaches economics on the Internet, and Dr. Jesse T. Richman is Asst. Professor of political science at Old Dominion Uniersity. Their book Trading Away Our Future, published by the Ideal Taxes Association (www.idealtaxes.org) deals with many of the above issues.

Brad Setser: "Can the debate over globalization be separated from the debate over exchange rates?"

2008-06-12T11:55:00.000-07:00

Brad Setser had a wonderful blog entry today.

I would like to think that I have influenced his thinking through my comments to some of his earlier blog entries, but that is not very likely. What is really happening is that he is following the trail of the same facts that we followed when writing our book. Here is how Setser begins:

I am often struck by how frequently debates over trade – and, more broadly, globalization – don’t bother to mention what strikes me as the most salient fact about contemporary globalization, namely that it has been marked by an enormous amount of government intervention in the foreign exchange market and a huge surge in the sale of US financial assets to emerging market governments.

Rather than trading US made goods for goods made in the emerging world, the US has – over the last say thirty years – financed the growth in its imports from the emerging world by selling US financial assets. That has to have had an impact on the composition of output in the US - -and the distribution of gains on globalization. It has favored those who generate financial assets (and import goods) over those who produce goods, for example.

And it seems increasingly difficult, at least to me, to maintain this pattern is entirely the product of the operation of free markets. Not so long as key governments are intervening so heavily in the foreign exchange market – and hoarding most of the oil windfall.

Take the most extreme example: China.

If 2000, China exported around $250 billion worth of goods, and its government bought about $15 billion of foreign exchange in the market. In 2008, China is on track to export about $1400 billion worth of goods, and its government is on track – at least judging from the April data — to buy about $900 billion of foreign exchange in the market.

Yet the popular discussion of trade and globalization rarely also mentions the enormous rise in government intervention in the markets – and the surge in the sale of US financial assets to emerging market governments....

The only thing missing from his post is the solution that we proposed in our book. (You can read a summary of that solution if you go to www.idealtaxes.com and click on "Chapter 10."

Follow the following link to read his entire entry, replete with references to the work of others that he disputes and graphs that support his arguments: http://blogs.cfr.org/setser/2008/06/12/can-the-debate-over-trade-%e2%80%93-or-globalization-%e2%80%93-be-separated-from-the-debate-over-exchange-rates/

Howard

Trade Deficit Up in April

2008-06-11T09:37:00.000-07:00

The trade deficit rebounded from a brief March 2008 drop. In April the trade deficit stood at 60.9 billion dollars. The trade deficit continues on a pace to beat the 2007 total. The April 2008 figures are 600 million higher than the April 2007 figures.

The deficit is headlined by twin deficits with China and OPEC. From the Commerce Department Press Release:

The April figures showed surpluses, in billions of dollars, with Hong Kong $1.4 ($1.2 for March), Singapore $1.4 ($1.5), Australia $0.8 ($1.5), and Egypt $0.3 ($0.4). Deficits were recorded, in billions of dollars, with China $20.2 ($16.1), OPEC $15.6 ($14.1), the European Union $8.5 ($7.5), Japan $7.6 ($7.5), Canada $7.6 ($6.4), Mexico $6.8 ($6.0), Nigeria $3.4 ($3.3), Venezuela $3.0 ($2.8), Korea $1.3 ($0.8), and Taiwan $0.9 ($0.3).

The twin challenges that must be confronted to bring trade towards balance are energy costs and the effects of mercantilist policies by China, Japan and others.

The mercantilists can be dealt with using import certificates to force trade into balance.

The energy costs are more difficult to address. In the long term, a set of policies that move the US away from dependence on imported energy would be great. In the short term, prices for energy are beginning to force consumers to rethink their consumption decisions. But for more rapid response, a system of tradeable gasoline rations would be more effective. Ray and I have discussed the idea before on this blog.

When I find time, I'm going to do a study of the distributional impact for various versions of the permits. Unfortunately, the distributional politics are apt to be a bit difficult. There are a few states (and individuals) who use very little gasoline. At the upper end things are more tightly clustered. This means that the benefits of tradable permits would probably be concentrated on a few individuals or places, while the costs would be more distributed. However, such a system would tend to benefit the poor, who consume less gasoline. The distributional effects are much more progressive than imposition of a high gasoline tax.

Here is the link for Feldstein's exposition of the idea.

http://www.nber.org/feldstein/oil.html

This page gives a sense of how different states stack up.
http://www.energy.ca.gov/gasoline/statistics/gasoline_per_capita.html

Modern Mercantilism

2008-06-10T17:09:00.000-07:00

I just explained the difference between modern mercantilism and 16th century mercantilism in my response to a comment by Twofish on Brad Setser's blog. Twofish wrote:

Historically the first example of a mechantilist economy was that of Spain. During the 17th century, you had massive amounts of gold and silver entering Spain. The basic problem with accumulating gold, silver or dollars is that unless you spend it, gold, silver, and dollars don’t produce anything, and China and the Middle East are ending up with inflation for many of the same reasons that Spain did. You have massive amounts of dollars coming in, and they aren’t doing anything useful.

I responded:

Twofish:

Your discussion of Spanish mercantilism is a bit inaccurate. The relevant century was the 16th Century, which is the century that France, England and the other mercantilist powers succeeded with stealing Spanish industry. That century ended with the failure of the Spanish Armada’s attempted invasion of England, marking the end of Spain’s rein as the dominant power.

Adam Smith justly derided mercantilism as being based upon the wrong goal. Indeed, the goal of the mercantilism of the day was to collect as much gold as possible because gold gave a monarchy the power to engage in foreign wars. The Spanish got their gold by stealing it from the Incas. England and France got their gold by encouraging their exports and restricting their imports. One of the main points of Smith’s “Wealth of Nations” is that a nation’s well being should be measured by its GDP (though he didn’t call it that), not the amount of gold in its treasury.

As you point out, when the goal of mercantilism was to collect gold, it eventually failed. The additional gold becomes part of the money supply and causes inflation.

The goal of the modern mercantilist nations is quite different. Their goal is to steal industries, not collect dollars or gold. When they get dollars, they lend them back to Americans (directly or indirectly) just as fast as they can.

I completely disagree with your analysis that the inflation in China at the moment is directly caused by their dollar accumulations. Unlike the gold of the 16th century, dollars in 21st century China are not a medium of exchange. That medium in China is the yuan (RMB).

The rising inflation in China is probably either due to the rising cost of imported oil and/or the expansion of the Chinese money supply. I suspect that it is due to both.

Howard

Follow the following link to read the entire entry and the responses there: http://blogs.cfr.org/setser/2008/06/10/shhh-don%e2%80%99t-tell-any-one-the-us-trade-deficit-is-getting-worse-not-better/#comment-108385

Howard

What the Federal Reserve Does...

2008-06-09T19:36:00.000-07:00

I've been grading AP US Government and Politics exams for the last week in Florida. As it happens, the question I spent the week grading about 1450 times dealt with fiscal and monetary policy. One part of the question required students to describe Federal Reserve powers. Many students have at least a basic understanding. A few are very sophisticated... and then there are the ones who took wild guesses. Among the misinformation, I learned repeatedly that...

The Federal Reserve sets the U.S. government's budget, decides U.S. government spending, prevents the U.S. government from running dangerous budget deficits, controls "everything", is relatively independent of the President and Congress because it's role is enshrined in the Constitution... or is relatively independent of the President and Congress because the role is not mentioned in the Constitution... etc. And then there were the students who completely wandered from the subject matter. One student gravely informed me that the Federal Reserve manages a wildlife refuge. Another misread monetary as military and told me about how the FED is in charge of all U.S. military forces. Another student informed me that the FED has a powerful role in law enforcement, and that without this role at monitoring behavior, Clinton would have gotten away with his affair with Lewinsky.

What it would mean if McCain picks Huckabee for VP

2008-06-09T09:01:00.000-07:00

Tom Head has an interesting posting on Tom's Civil Liberties Blog about the way that a vice presidential choice defines a candidate's identity. Here's his thinking about what Huckabee as VP would mean:

The selection of Huckabee or Brownback would indicate that the McCain campaign takes the concerns of the Religious Right very seriously, and is willing to position itself as more socially conservative in an effort to bring out the base. Choosing a candidate who identifies as socially conservative to such an extent would unite his party, but it could also seriously harm his credentials as a centrist.

Tom Head is correct when he wrote “the selection of Huckabee or Brownbeck would indicate that the McCain campaign takes the concerns of the Religious Right very seriously,” but he is only getting half of the meaning.

Huckabee was the one Republican candidate who differed with the broken Republican economics of today. He was the candidate who endorsed the FairTax and who was willing to say positive things about Fair Trade, not just Free Trade. The choice of Huckabee would define McCain as a Maverick who is not tied to the failed Bush economics.

Howard

Just how deluded is the Wall Street Journal. Let me count the ways...

2008-06-08T08:47:00.000-07:00

Sometimes the best discussions in blogs comes in the comments afterward. As the post ages, you have a chance to discuss an issue with someone that disagrees without other posts getting in the way. I had that experience posting this week on Brad Setser's blog. His original post was called "Really?" He was questioning a nonsensical statement in a Wall Street Journal editorial. Here is the discussion afterward between myself and Twofish who has his own blog at http://twofish.wordpress.com/:

Howard Richman Says:
June 6th, 2008 at 8:14 pm
Just how deluded is the Wall Street Journal. Let me count the ways:

1. They started out this editorial saying, “Mr. Bernanke’s words have come as a great global relief. As the dollar has strengthened in welcome response, the price of gold and oil has fallen in each of the last two days. But, just two days later the price of oil leaped upward!

2. They wrote what you pointed out was deluded — the idea that the falling dollar was causing a huge transfer of wealth out of the U.S..

3. They wrote that the poor Chinese are practically *forced* to peg the yuan to the dollar and that’s why they’re suffering from inflation. But if they weren’t working so hard to keep out American imports, they would let their currency rise to the level it should be, they would eliminate their 30% tariff on Michigan-made auto parts and their 30% tariff on US-made vehicles (including Pennsylvania-made Harley Davidson Motorcycles), and they would eliminate their just-imposed tariff on Wisconsin-made Bucyrus heavy mining equipment.

4. They missed the real cause of the weak dollar. While, it is true, as they claimed, that when the Federal Reserve borrows more dollars to raise the US short-term interest rate, it causes private foreigners to lend us more money, which can help the dollar rise in value. However, such borrowing is at best a short-run fix. It is like solving your debt problem by taking out a new loan. The fact is that the weak dollar is caused by our huge trade deficits!

Howard Richman
http://www.trade-wars.blogspot.com

Twofish Says:
June 7th, 2008 at 5:00 am
Richman: they would eliminate their 30% tariff on Michigan-made auto parts and their 30% tariff on US-made vehicles (including Pennsylvania-made Harley Davidson Motorcycles), and they would eliminate their just-imposed tariff on Wisconsin-made Bucyrus heavy mining equipment.

I really don’t think that would change things. If China removed all auto tariffs, then they would end up being imported from Mexico rather than the United States. The interesting thing is that the WTO negotiations between China and the United States were nowhere near as tough as the ones with Mexico.

There are two things that make US-China trade very different from US-Japan trade with respect to labor. The first is that with the exception of textiles, change the US-China trade balance really does not help manufacturing in the US. If China disappeared, then you’d end up with manufacturing going off to Mexico, Vietnam, or Bangladesh.

The second thing that makes the politics very different is that there are labor unions that benefit greatly from China trade. The International Longshore and Warehouse Union for one and the Teamsters for another.

Finally, I really think that the root cause of all of this is Iraq (just like a lot of the economic turmoil in the 1970’s was the result of paying for Vietnam). Think about it. The US has spent hundreds of billions of dollars fighting a major regional war. Your taxes didn’t go up. Where is this wealth to fight the war coming from? I don’t think it is much of a coincidence that the world economic system changed right almost the second that US troops marched across the border.

Howard Richman Says:
June 7th, 2008 at 9:01 am
Twofish,

I think you’ve missed the point of China’s increasing dollar reserves, as documented so ably by Brad Setser on this blog. China is following a strategy of maximizing exports and minimizing imports.

Mexico is not following that strategy. If their exports would go up with the United States, the peso would go up in value and they would import more U.S. products. Our trade with Mexico would go up withough our trade deficit increasing.

Although your analysis of the US economic problems during the Vietnam War is the conventional one, I disagree. Last year I took the time to look up what happened to money supply during that time period. Arthur Burns was increasing money supply far faster than the economy was growing. He was causing the inflation that occurred.

Howard Richman
http://www.trade-wars.blogspot.com

Twofish Says:
June 7th, 2008 at 8:52 pm
Richman: China is following a strategy of maximizing exports and minimizing imports.

I don’t think it is. In fact, I don’t think that the Chinese government really has anything that could be called a “trade strategy.” Things happen. The government reacts.

During WTO negotiations, China was extraordinarily flexible on a lot of issues, and there are lots of people in the Chinese government who think that a zero balance of payments is a good thing. There are people who disagree. This is makes decision making slow and rather ad-hoc.

One thing that is important to point out is that until 2003, China had a zero balance of trade. It imported large amounts of raw materials from resource rich countries and exported finished products to the developed world. This system broke down with the strain of the Iraq War.

Richman: Mexico is not following that strategy. If their exports would go up with the United States, the peso would go up in value and they would import more U.S. products.

Suppose China opens up to auto part imports. China gets those parts from Mexico. US plants get shut down. That doesn’t affect US-Mexico trade at all.

Richman: Arthur Burns was increasing money supply far faster than the economy was growing. He was causing the inflation that occurred.

Economic events tend to be multi-causal and can often be looked at in certain ways. For example, what was putting a drag on the growth in the US economy. Vietnam.

Also Burns had some limits in what he could do that are strikingly reminicient to some of the constraints that China is under. He couldn’t revalue the US dollar because that was pegged under Bretton Woods. He couldn’t really influence monetary policy because the US had fixed interest rate. He couldn’t influence fiscal policy because that was in the hands of Congress. So he really couldn’t do anything even if he wanted to, and since he was working under wrong economic theories, he didn’t want to change them.

One interesting thing is to read about Arthur Burns and his economic beliefs. It’s almost like reading something written in Medieval times since the economic theories he was using were so archaic (the Philip Curve, price controls, demand push inflation). But I have sympathy for him. What I worry about is the incorrect and disastrous thing that I believe that people will be laughing at thirty years from now.

Twofish Says:
June 7th, 2008 at 8:56 pm
I suppose it involves your point of view. The industries I’ve worked in (software and high technology ones) all make a great deal of money exporting to China, and so there isn’t this sense of China restricting imports at all.

Twofish Says:
June 7th, 2008 at 9:06 pm
One thing reason I think that China isn’t intentionally following an export oriented strategy is this.

Suppose in January 2001, you got a committee of Western politicians, labor union leaders, business executives, and economists together and asked this question. Do you think that China should adopt a fixed or floating exchange rate for the next ten years? I’ll bet that 90% of them would have said fixed exchange, and that all of them would have argued that it would have been dangerously irresponsible for China to consider floating exchange rates.

In January 2001, the main concern was that China would devalue its currency to boost trade and a fixed exchange rate was intended to prevent that. No one in 2001 that I know of predicted or even imagined that the US dollar would drop as it has, and so the idea that China adopted a system of fixed exchange rates to promote exports is flawed because that policy was adopted long before the current situation occurred.

For most of the 1990’s, the exchange rate was set so that China was running an overall trade surplus, and no one was complaining. And personally, I think China has been moving off the peg as fast as it can.

Howard Richman Says:
June 8th, 2008 at 9:06 am
Twofish,

I don’t think you are correct when you wrote that China was not following a strategy. Their strategy was invented by the Japanese. Economists call it “monetary mercantilism.” Peking University economics professor Heng Fu Zou explained how it works in a 1997 paper.

You are definitely correct that the economics problems of the Vietnam era had many causes. But I am also correct that the main cause of the inflation was Arthur Burns loose money supply. This was proved when Paul Volcker ended the inflation by tightening money supply.

Just because China had balanced trade with the world in 2003 doesn’t mean that they weren’t intentionally producing trade surpluses with the United States. They were getting a lot of direct investment in 2003. In general, such investment would cause trade deficits. Chinese dollar reserve accumululations have mirrored their trade surpluses with the United States since 2001.

As far as China buying autoparts from Mexico, I don’t think that is completely true. Last time I looked, Detroit automobilies still consisted mostly of parts made in the United States and Canada.

Whether exchange rates are fixed or floating does not matter in the least. The yen floats, yet the Japanese government controls the rate through their dollar purchases. The key is the Chinese government’s dollar purchases, not whether the rate is fixed.

Howard Richman
http://www.trade-wars.blogspot.com

Follow the following link to read these entries on Brad Setser's blog: http://blogs.cfr.org/setser/2008/06/05/really/.

Howard

How to slow the world-wide inflation

2008-06-06T07:29:00.000-07:00

The Wall Street Journal had an interesting editorial yesterday. They explained how the falling dollar is causing worldwide inflation and they urged that the Federal Reserve borrow money in order to drive up the US interest rate in order to slow that worldwide inflation. Here is their description of the world-wide problem:

The Fed's dollar indifference has sent an inflation shock through those dollar-linked economies. This week alone, we've read about price riots in Vietnam; inflation hitting 10.1% in Kuwait; Abu Dhabi contemplating price or wage controls; South Korean and Indonesian central bankers considering rate hikes; and the Chinese letting the yuan rise ever higher to curb inflationary pressures imported from the U.S.

Many of these countries are now delinking from the greenback. Meanwhile, the dollar plunge has translated into a net transfer of trillions in wealth from the U.S. to the rest of the world. The result has been the largest decline in America's global economic influence since the 1970s.

This argument has two huge fallacies: (1) that the mercantilist countries are helpless victims of US monetary policy, and (2) that the fall in the dollar is caused by the Federal Reserve not holding up US interest rates high enough.

The Mercantilist Countries Are Responsible

The Federal Reserve is not responsible for the inflation in the mercantilist countries. The mercantilist countries are responsible for that inflation. That inflation is occurring because their central banks are increasing money supply much faster than their economies are growing. For example, the Chinese inflation is likely being caused by the Chinese government printing yuan in order to use them to buy dollars so that they can keep their currency from rising against the dollar.

But the mercantilist countries have an alternative. THEY COULD LET THEIR PEOPLE IMPORT MORE AMERICAN GOODS! The Chinese government could let their currency rise to the level it should be. They could eliminate their 30% tariff on Michigan-made auto parts and their 30% tariff on US-made vehicles (including Pennsylvania-made Harley Davidson Motorcycles). They could eliminate their just-imposed tariff on Wisconsin-made Bucyrus heavy mining equipment.

The Real Cause of the Falling Dollar is Our Trade Deficits

It is true that when the Federal Reserve borrows more dollars to raise the US short-term interest rate, it causes private foreigners to lend us more money, which can help the dollar rise in value. However, such borrowing is at best a short-run fix. It is like solving your debt problem by taking out a new loan. The Wall Street Journal is ignoring a very basic economic fact. In the long run, when you import more than you export, your currency goes down in value. The way to strengthen the dollar is to reduce the trade deficits!

The Federal Reserve is not responsible for the falling dollar. The foolish policies advocated by the Wall Street Journal and followed by US administrations since 1984 which have caused the US trade deficits to climb, and climb, and climb, are responsible.

Follow the following link to read this Wall Street Journal editorial: http://online.wsj.com/article/SB121262433590346895.html?mod=todays_us_opinion

Howard

Bush Administration imposes tariff on Chinese pipes

2008-06-05T10:28:00.001-07:00

The Bush administration has acted, though only against one Chinese product, steel pipe. They are still pretending that China is not subsidizing all of their exports to the United States by buying dollars in order to hold their currency far below the value it would reach if it were freely traded.

The Chinese have already collected approximately $1.3 trillion dollars, as part of these currency manipulations. This is a huge amount, approximately equal to 9% of what the United States economy produces in a single year. It is impossible to not see what is going on, yet the Bush administration tells Congress that the Chinese are not manipulating their currency!

And the Chinese currency manipulations not only provide a direct Chinese government subsidy of at least 40% to all Chinese exports to the United States, they also provide an illegal import duty of at least 40% on all American made products sold to China. The International Monetary Fund rules specifically make such manipulations illegal. Yet the Bush Administration pretends that nothing is happening.

The 30% Chinese tariffs against US autoparts going to the Ford and GM factories in China were recently declared to be illegally high by the WTO, but where are the counter-tariffs from the Bush administration?

Nor, have I seen a single story reporting any objection from the Bush administration to the new 40% Chinese duties on US heavy mining equipment to protect the three new Chinese mining equipment factories, despite the fact that mining equipment remains one of the United States' biggest remaining export industries.

Perhaps because President Bush ran on a steel-protectionist platform in 1980, the Bush administation decided to act this time. President Bush, after all, likes to keep his promises.

There are four trade positions:

Free Trade - belief that no tariffs should be imposed to give one industry an advantage over another industry. For free trade to be beneficial it must be balanced.
Protectionism - belief that those industries that are on the government's favored list should be protected, even though that protection might hurt industries that are not on the government's favored list. Protectionism only hurts a country when trade is balanced, otherwise it can protect an industry without hurting other industries.
Mercantilism - a system that allows a government to manipulate trade in order to produce trade surpluses. Favored industries are protected without hurting other industries. Mercantilism is a system of protectionism that steals industries from trading partners when those trading partners tolerate trade imbalances.
Balanced Trade - a system that opposes mercantilism by assuring that trade is balanced. It can be practiced without providing any preference to one industry over another.

Under the Bush Administration's leadership, the Republican Party gives lip service to free trade ignores mercantilism and practices protectionism for those favored industries that have political influence.

Here is a selection from the Reuters story as posted on Forbes Magazine's website:

WASHINGTON (Reuters) - The U.S. Commerce Department said Friday it has set a combined import duty of around 700 percent on a major Chinese steel pipe producer to offset unfair pricing practices, and combined duties of more than 106 percent on many other Chinese manufacturers and exporters.

"Chinese subsidies and undervalued exports dumped in the United States by Chinese standard pipe producers put American producers at a disadvantage in the global marketplace and distort global trade flows," David Spooner, Commerce assistant secretary for import administration, said in a statement.

The department levied a 615.92 percent countervailing duty on standard steel pipe exported by The Shuangjie Group to offset Chinese government subsidies.

It also imposed an additional anti-dumping duty of 85.55 percent on Shuangjie Group exports to offset prices that Commerce said were "less than normal value."

The pipe's applications include plumbing and heating systems, air-conditioning units and automatic sprinkler systems. It is used to carry water, natural gas, steam and other gases and liquids.

The United Steelworkers union and a half-dozen pipe manufacturers in Illinois, Kentucky, Oregon, Pennsylvania, California and New Jersey filed a case last year asking for relief from low-priced Chinese imports....

The Commerce Department said other Chinese standard pipe manufacturers and exporters would face combined anti-dumping and countervailing duties of more than 106 percent.

It set a 69.20 percent anti-dumping duty on 31 Chinese companies. It also set an 88.55 percent anti-dumping duty on Jiangsu Yulong Steel Pipe Co. and on other Chinese suppliers not specifically named in the investigation.

In the countervailing duty probe, it set a 29.57 percent duty on Weifang East Steel Pipe Co, a 44.86 percent duty on The Kingland Group and a 37.22 percent "China-wide" rate on other suppliers.

The U.S. International Trade Commission must make a final determination by July 14 that Chinese steel pipe imports are injuring, or at least threatening to injure, domestic producers for the duties to remain in place.

If the ITC votes in favor of the duties, they will be retroactive to late 2007, Kaplan said.

Follow the following link to read the story: http://www.forbes.com/reuters/feeds/reuters/2008/05/30/2008-05-30T204854Z_01_N30307348_RTRIDST_0_USA-CHINA-TRADE-UPDATE-2.html

Howard

Robert Cassidy: The trade agreement with China that I negotiated for President Clinton has failed

2008-06-04T10:04:00.000-07:00

Writing today in Foreign Policy in Focus, Robert Cassidy, Assistant U.S. Trade Representative for Asia and for China for the Clinton administration, takes himself to task for the trade agreement with China that he negotiated. Here is how he begins:

As the principal negotiator for the landmark market access agreement that led to China’s accession to the World Trade Organization (WTO), I have reflected on whether the agreements we negotiated really lived up to our expectations. A sober reflection has led me to conclude that those trade agreements did not.

We failed to address the underlying fundamental market distortions that skew the benefits toward the few while leaving the rest of the economy less well off. As George Soros, in a Bloomberg News interview on the financial crisis, recently said, “…the system, as it currently operates, is built on false premises.” The premise on which our trade agreements are negotiated is at best flawed, if not broken.

And here is a key paragraph in which he explains why the trade agreement with China failed:

Using China as an example once again, proponents of the free trade model argue that China has a competitive advantage in wage rates that makes it ideal as the global manufacturing center that it has become. A closer examination, however, reveals that China has adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%. Thus China’s wages, in U.S. dollar terms, are 40% cheaper than they would have been if the currency were allowed to freely float. Similarly, foreign investors receive a 40% subsidy to develop operations in China. To add insult to injury, our exports are taxed at an additional effective 40% rate....

I would use a less-charitable term than Cassidy. He describes China's strategy as an "export-led development strategy." I would describe it as a "mercantilist strategy." The goal of an export-led strategy would be to encourage exports and imports in order to build trade with the rest of the world. The goal of China's mercantilist strategy is to export without importing. The facts that Cassidy recites support the mercantilist interpretation. China's goal is not just to expand its exports, it is using tariffs, non-tariff barriers, and currency manipulations in order to minimize its imports. It has already built up over a trillion dollars as a byproduct of currency manipulations whose goal is to keep trade imbalanced.

Even so, the entire piece is revolutionary. At last we have a member of the establishment admitting that he has been wrong all along on the China trade question. The only problem is that he does not have any solutions. He just thinks that the problem could be solved through better trade negotiations. Indeed our trade negotiations have been disastrous, but it will take more than better negotiations of trade agreements to solve the problems we are in.

The United States must insist that all of the mercantilist countries balance their trade with us over the next five years. If they don't comply voluntarily, we need to impose Import Certificates, tied to their imports from us, to balance that trade assuredly over that period.

The main objection to Import Certificates comes from those who are worried that they might throw a wrench into the many trade agreements that we have negotiated over the past years. There is plenty of room in those agreements to justify Import Certificates. Furthermore, as Cassidy demonstrates in this article, those agreements are not even worth the paper used to print them.

Follow the following link to read the entire commentary: http://www.fpif.org/fpiftxt/5274

Barone's Economic Delusion in today's Washington Times

2008-06-03T12:10:00.000-07:00

In his column in today's Washington Times, Economic Reality Check, Michael Barone cites many trees but misses the forest. He points out that the economy is not suffering from much unemployment (true), nor is there much inflation (true). Nor is the economy shrinking (true). He does point out that the growth rate is mighty slow, but he doesn't stop to analyze why. His conclusion, Senator Obama's "protectionism" would not help the United States economy!

What he misses is the reason why US growth is so slow, despite the lack of unemployment. It is slow because businesses have not been investing in American production. They have not been investing because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade.

By the way, he is wrong when he calls Obama a protectionist. Obama would not likely do anything more to balance trade than Senator McCain. The main reason why Senator Clinton was solidly defeating Obama throughout the midwest was because the manufacturing voters detected a phony.

As things currently stand, the Democrats will gain a huge victory in Congress of 1932 proportions as a result of delusional Republican economics, as exemplified by Barone's column. But the Presidential race is completely up in the air. Ohio, Michigan, and the nation will go to the Presidential candidate who persuades voters that he will do the most to balance trade.

Howard

Higher gasoline prices mostly caused by falling supply

2008-06-02T12:48:00.001-07:00

I have been thinking that increasing world-wide demand was causing oil prices to rise, but I was wrong. The main reason that oil prices have been rising is the constriction of oil supply. Several OPEC countries, including terrorism sponsors Iran and Venezuela, have been among those reducing their supplies to world markets. Statistics accompanying an article by Neil King Jr. and Spencer Swartz in the Wall Street Journal on May 29 report that oil exported by the top 15 oil exporting countries fell in 2007, as compared to 2006.

Here is a list of those countries that increased their exports in 2007, and that increase in thousands of barrels per day:

Angola +358
Russia +152
Iraq +47
Lybia +22
Algeria +20

And here is a list of those countries that decreased their exports in 2007, and that decrease in thousands of barrels per day:

Saudi Arabia -602
Mexico -255
Norway -221
Iran -165
Venezuela -158
Nigeria -90
Kuwait -73
Quatar -21
U.A.E. -16

By the way, Angola sells its oil to China.

Howard

Michael Ledeen calls China a fascist state and the Chinese government proves him right by censoring him!

2008-06-01T12:57:00.000-07:00

The following note appears in the May 30 entry on Michael Ledeen's blog:

Modern life offers many happy moments, but I’m particularly indebted to the People’s Republic of China for censoring the latest issue of the Far East Economic Review, which featured an article of mine on the cover. As Rowan Scarborough was kind enough to point out, the folks at FEER had asked me to update an old think piece, in which I had argued that contemporary China is difficult for us to understand, because it is something we haven’t seen before: the world’s first mature fascist state....

And here is the beginning of his censored piece in the Far Eastern Economic Review:

Beijing Embraces Classical Fascism

In 2002, I speculated that China may be something we have never seen before: a mature fascist state. Recent events there, especially the mass rage in response to Western criticism, seem to confirm that theory. More significantly, over the intervening six years China’s leaders have consolidated their hold on the organs of control—political, economic and cultural. Instead of gradually embracing pluralism as many expected, China’s corporatist elite has become even more entrenched.

Even though they still call themselves communists, and the Communist Party rules the country, classical fascism should be the starting point for our efforts to understand the People’s Republic. Imagine Italy 50 years after the fascist revolution. Mussolini would be dead and buried, the corporate state would be largely intact, the party would be firmly in control, and Italy would be governed by professional politicians, part of a corrupt elite, rather than the true believers who had marched on Rome. It would no longer be a system based on charisma, but would instead rest almost entirely on political repression, the leaders would be businesslike and cynical, not idealistic, and they would constantly invoke formulaic appeals to the grandeur of the “great Italian people,” “endlessly summoned to emulate the greatness of its ancestors.”

Substitute in the “great Chinese people” and it all sounds familiar. We are certainly not dealing with a Communist regime, either politically or economically, nor do Chinese leaders, even those who followed the radical reformer Deng Xiaoping, seem to be at all interested in treading the dangerous and uneven path from Stalinism to democracy. They know that Mikhail Gorbachev fell when he tried to control the economy while giving political freedom. They are attempting the opposite, keeping a firm grip on political power while permitting relatively free areas of economic enterprise. Their political methods are quite like those used by the European fascists 80 years ago.

Unlike traditional communist dictators—Mao, for example—who extirpated traditional culture and replaced it with a sterile Marxism-Leninism, the Chinese now enthusiastically, even compulsively, embrace the glories of China’s long history. Their passionate reassertion of the greatness of past dynasties has both entranced and baffled Western observers, because it does not fit the model of an “evolving communist system.”

Yet the fascist leaders of the 1920s and 1930s used exactly the same device. Mussolini rebuilt Rome to provide a dramatic visual reminder of ancient glories, and he used ancient history to justify the conquest of Libya and Ethiopia. Hitler’s favorite architect built neoclassical buildings throughout the Third Reich, and his favorite operatic composer organized festivals to celebrate the country’s mythic past....

Later in the piece, he discusses the delusion that China's growing wealth makes it more Democratic and less dangerous. The opposite is true. He wrote:

How, then, should the democracies deal with China? The first step is to disabuse ourselves of the notion that wealth is the surest guarantor of peace. The West traded with the Soviet Union, and gave them credits as well, but it did not prevent the Kremlin from expanding into the Horn of Africa, or sponsoring terrorist groups in Europe and the Middle East. A wealthy China will not automatically be less inclined to go to war over Taiwan, or, for that matter, to wage or threaten war with Japan.

Indeed, the opposite may be true—the richer and stronger China becomes, the more they build up their military might, the more likely such wars may be. It follows that the West must prepare for war with China, hoping thereby to deter it. A great Roman once said that if you want peace, prepare for war. This is sound advice with regard to a fascist Chinese state that wants to play a global role.

Senator Obama has stated that he is pleased that United States trade policy is stabilizing this fascist regime. Specifically, here is a selection from his remarks when he spoke to the Alliance for American manufacturing in Pittsburgh on April 14 2008:

Seeing the living standards of the Chinese people improve is a good thing - good because we want a stable China, and good because China can be a powerful market for American exports. But too often, China has been competing in ways that are tilting the playing field.

Senator McCain was more realistic about China's fascist government in a column that he wrote with Senator Lieberman on May 27. They wrote:

China's rapid military modernization, mercantilist economic practices, lack of political freedom and close relations with regimes like Sudan and Burma undermine the very international system on which its rise depends. The next American president must build on the areas of overlapping interest to forge a more durable U.S.-China relationship. Doing so will require strong alliances with other Asian nations and a readiness to speak openly with Beijing when it fails to behave as a responsible stakeholder.

Howard

Tonelson's analysis of Obama's trade policies

2008-06-01T09:13:00.000-07:00

In a column posted on May 27 at American Economic Alert, Alan Tonelson analyzes Obama's trade positions. Here is a selection:

As Presidential candidates, Clinton and Obama have talked more about U.S. trade policy failures, and they began acting like veritable globalization mavens once the primary schedule took them to manufacturing-heavy, highly unionized states like Ohio, Pennsylvania, and Indiana.

Their attacks on current and recent U.S. trade policies make broadly similar points – it’s sent too many good-paying jobs overseas, it’s especially bad for unions and the environment, and it’s run solely for the benefit of that powerful, greedy, and monolithic entity they call “business.”...

At best, Obama’s cursory approach is not trade-specific and stems instead from a broader disinterest in governing’s gritty details. At worse, it reflects either a genuine dismissiveness of the need to strengthen the economy’s productive base and healthy growth prospects, or an inability to conceal completely a fundamental agreement or at least high comfort level with how America’s place in the world economy has been changing.

Not that Obama’s campaign has been devoid of useful insights and genuinely informed observations about trade policy. His repeated point that seminal trade policy mistakes like NAFTA and expanding China trade were made during the Clinton presidency is much more than a politically inspired poke at his nomination rival. It represents an unprecedented acknowledgment by a nationally renowned Democratic figure that recent trade policies and their fallout represent thoroughly bipartisan policy failures – as well as a valuable reminder to the party that not all of today’s economic problems began on January 20, 2001....

Ultimately, however, what may speak loudest about Obama’s real trade policy views is the stubbornly elitist tone that has marked the candidate and his campaign. Take the (admittedly brief) schoolmaster-ish recitation of textbook-style open trade’s virtues and allegedly iron globalization-related economic realities that comes in virtually every major Obama statement on the subject.

“Now if we’re honest with ourselves, we’ll acknowledge that we can’t stop globalization in its tracks....” “I believe in trade. I think all countries can prosper.” “To win, we have to understand some hard realities. Not every job that’s left is coming back, and if somebody tell you they are, they’re not telling you the truth.”...

More evidence for this dispiriting proposition comes from Obama’s now-infamous “bitter” remarks to a group of San Francisco Bay area funders. Obama has denied accusing “small town” Americans of irrationally (though understandably) blaming “people who aren’t like them” or “immigrants” or “trade” for their “frustrations,” and tried to dismiss the ensuing controversy as classic, mindless “gotcha” journalism and mudslinging politics.

But that’s exactly what he said, and the substance – which is utterly erroneous – deserves extensive debate....

At some point, the failure to understand a big truth can legitimately be seen as an unwillingness to understand. Thus Obama’s ostentatious truth-telling may signal a deep-seated apathy about Blue Collar America – except as a voting bloc – and by extension, Blue Collar America may not be the only, or the most important audience for these remarks. Who might they be aimed at instead? This theory sounds all too plausible – the chattering classes, the largely Washington and New York and Cambridge, Mass.-based complex of party professionals, Wall St. and multinational campaign contributors, former officials, policy intellectuals, and editorial writers and other pundits that together define the respectable, internationalist and free-trading center of American politics and policy, and that together determine which office-seekers can claim its invaluable mantle.

Those blessed by this establishment invariably are treated as solid, dependable, responsible, statesmanlike, even gifted. Those who are not find themselves pigeonholed at dangerous nuts.

Could Obama’s truth-telling on trade be an exercise in assuring this establishment that, despite his unconventional racial and ethnic background, on one of their top economic priority issues, he’s safely inside the mainstream consensus - that he’s one of them? And does his success so far mean that his tactic has worked?

Few questions surrounding the already historic 2008 campaign will have more important answers.

Follow the following link to read the entire commentary: http://www.americaneconomicalert.org/view_art.asp?Prod_ID=2996

Howard

China now has $1.756 trillion in currency reserves

2008-05-30T04:47:00.000-07:00

According to Brad Setser, who keeps close track of the latest reports from China's Central Bank, China now has $1.756 trillion in currency reserves and is accumulating those reserves at its fastest rate ever, a rate approaching $1 trillion per year.

These reserves include both euro and dollars, but are reported to be preponderantly dollars. (The Chinese Central Bank does not disclose the currency composition of its reserves, so the proportion of each currency must be estimated.) These reserves are accumulated as a byproduct of the Chinese government's currency manipulations. The Chinese Central Bank borrows renminbi (also called yuan) from its own people, instructing its banks not to lend renminbi to Chinese citizens who are not favored by the government. Then they use those renminbi to buy dollars. The effect of those dollar and euro purchases is to cause the dollar and euro to go up in value verses the renminbi. This keeps Chinese wages low compared to US and European wages and allows the Chinese to steal industries from the United States and from Europe.

By the way, about a month ago the Bush Administration told an incredulous Congress that China was not manipulating its currency.

Howard

Heritage Foundation think tank goes brain dead on China currency manipulations

2008-05-29T08:51:00.000-07:00

In a policy paper, posted on the Heritage Foundation’s website, Ambassador Terry Miller, Director of their Center for International Trade and Economics, came out strongly against the Chinese Currency Manipulation Act of 2008, a bill that would combat the Chinese currency manipulations that put American products at a disadvantage when competing with Chinese products. Here are some selections from his paper, followed by my comments:

Contrary to the expressed goals of the sponsors, such measures are unlikely to stop the loss of manufacturing employment in the United States, or hurt the Chinese.

Miller is simply wrong here. The Chinese mercantilist economic policy is to export as much as possible to the United States while minimizing the amount that they import from the United States. They use their currency manipulations to do so. The result has been the loss of industry after industry to China.

The bill that Miller is denigrating is designed to end Chinese currency manipulations. It would not actually do so, but if the currency manipulations were ended, the Chinese currency would rise to the price that would cause trade between the two countries to be balanced. As a result the Chinese labor costs would rise tremendously as compared to American labor costs and China would be forced to import from the United States, so they would eliminate their tariffs on Michigan auto parts, Harley Davidson motorcycles, and Bucyrus mining machinery. American products that compete with Chinese products, such as Whirlpool appliances, would become more profitable and expand production. The result would add millions of manufacturing jobs to the American economy.

If he is talking about the Chinese people, Miller is wrong that the bill would hurt the Chinese. It would raise their relative wages compared to wages in other countries, making imports much less expensive to them. It would also force the Chinese government to loan hundreds of billions of dollars worth of renminbi to the Chinese people, instead of using those renminbi to buy dollars and then loaning the dollars to Americans. The result of these changes would be that credit would become available to the Chinese middle class, and there would be an immediate rise in living standards in China.

However if Miller is talking about the effect of the bill upon the Communist government of China, he is correct. If the Chinese government were to eliminate their currency manipulations, the middle class in China would be strengthened and Communist control would indeed be weakened. Miller continues:

Their primary effect would be to spur inflation and hurt American consumers.

Miller is correct that the bill would result in higher prices for Chinese-made products. On the other hand it would help American workers compete in the international marketplace because their wages would be more competitive with the substantially increased Chinese wages and also because American companies would invest in more efficient factories in order to expand US production.

As far as inflation is concerned, the result is debatable. Inflation is largely a monetary phenomena. The Chinese loans to the United States are making it impossible for the Federal Reserve to control inflation without holding short-term interest rates higher than long-term interest rates (what economists call an "inversion"). The Fed would actually have better control over inflation if it weren’t for the huge Chinese loans to the United States that are a byproduct of Chinese currency manipulations. Later he writes:

It is true that China's exports to the United States have risen rapidly over the last decade, too. However, that surge appears to have come at the expense of other Asian exporters, not U.S. manufacturers. In 1995, China and Japan together accounted for 23 percent of U.S. imports. In 2005, China and Japan together still accounted for 23 percent of U.S. imports. What changed was that in 1995, Japan accounted for 73 percent of those combined imports and China only 27 percent; by 2005, China's share had grown to 64 percent and Japan's had fallen to 36 percent.[8]

Miller is using the wrong statistic. In order to determine the extent that Chinese and Japanese currency manipulations have hurt United States manufacturing, it is necessary to consider imports as well as exports. The simple statistic to consider is the Chinese and Japanese combined trade surpluses with the United States. After all, the goal of their currency manipulations is to increase their trade surpluses with the United States. The following graph shows that the combined Japanese and Chinese trade surplus with the United States accounted for 0.9% of our GDP in 1996 and 2.5% of our GDP in 2007. In other words, since 1996, Chinese and Japanese currency manipulations have stolen the US manufacturing industries that would otherwise be producing 1.6% of our GDP.

Miller’s next argument shows that he is completely out-of-touch:

Assuming, for the sake of argument, that the renminbi is undervalued compared to the dollar, the question is whether this is as bad for Americans as politicians assert. It's true that a U.S. producer of a product that is in demand in China will normally sell more in China if the renminbi appreciates against the dollar. Similarly, a U.S. producer of goods for domestic consumption competing against Chinese imports will also normally sell more if the renminbi appreciates.

There aren't very many such firms, however. Chinese and Americans don't generally produce the same things. Indeed, it is through specialization, not competition, that both countries reap the benefits of trade. As noted above, Chinese exporters to the U.S. compete with other Asian economies for market share in the U.S. American firms compete with Europeans, Japanese, and Asians for market share in China. Changing the renminbi/dollar exchange rate will not significantly affect those trade flows.

Is Miller unaware of the fact that the Chinese just built three factories to produce the heavy mining equipment produced by Bucyrus and other American companies, while slapping a 40% tariff on Bucyrus mining equipment. Is he unaware of the Chinese have a 30% tariff on US cars, on US autoparts, and Harley Davidson motorcycles, while they build their own vehicle industries. Is he unaware that the Chinese are about to buy GE’s appliance business and then move those 300,000 jobs to China, leaving Whirlpool as the only remaining US appliance producer. He clearly doesn’t understand the mercantilist strategy of exporting, but not importing so that they can steal US industries. He continues:

Changing the exchange rate will, however, affect U.S. producers who use intermediate goods imported from China in their U.S. production processes. Renminbi appreciation will increase their costs of production. U.S. consumers of basic commodities like oil will also be hurt, as renminbi appreciation will make dollar-denominated commodities like oil cheaper for the Chinese. Chinese demand, already rising rapidly, will drive up the dollar price of such commodities worldwide, forcing American consumers to pay even more at the pump.

This particular quote is essentially correct, but tells only a small part of the story. Another part of this equation is that a change in the relative currency values will make US intermediate products, such as auto parts made in Michigan, less expensive to Chinese industries. Also, the continuing trade deficits caused by our loss of industries to the Asian mercantilists, are the real cause of the dollar’s slide. In the long run, if we continue to lose our industries, we will not be able to afford to import oil and other commodities. You need exports to import. Allowing these currency manipulations, as Miller would do, causes the United States to lose industry after industry, making the dollar ever more precarious. Miller is engaging in very short-term thinking regarding the price of commodities here. He continues with one final argument:

We get … more investment capital to help our economy grow and keep our unemployment rate low.

Currently the United States is getting so much unwanted investment capital flowing in from foreign governments who are manipulating exchange rates that the US long-term interest on US Treasury 10-year notes is less than zero, after subtracting inflation. The fact is that the United States will get little investment by our manufacturing industries, no matter how low the interest rate, until manufacturers realize that we are serious about balancing trade.

In the final analysis, Ambassador Miller is saying three things:

The Heritage Foundation favors American consumers more than American producers.
The Heritage Foundation thinks that US policy should support the Communist government in China.
The Heritage Foundation favors lower interest rates, even when real interest rates are negative.

It is truly a shame when a think tank goes brain dead. Follow the following link to read Ambassador Miller’s policy paper on the Heritage Foundation’s website: http://www.heritage.org/research/TradeandForeignAid/wm1919.cfm

Howard

Somebody is educating McCain about China's economic policies

2008-05-28T09:52:00.000-07:00

Senator McCain's position on China is shifting. In a column that he wrote with Senator Lieberman, "Renewing America's Asia Policy," that appeared in the May 27 Asia edition of the Wall Street Journal, for the first time (that I have noticed) he described China's policy as "mercantilist." This is an important word choice. It means that he (or Lieberman) recognizes that China's policy is to maximize exports while minimizing imports. Here is the relevant passage:

America must likewise get its relationship with China right. China's double-digit growth rates have brought hundreds of millions out of poverty and energized the economies of its neighbors. The U.S. shares common interests with China that can form the basis of a strong partnership on issues of global concern, including climate change, trade and proliferation. But China's rapid military modernization, mercantilist economic practices, lack of political freedom and close relations with regimes like Sudan and Burma undermine the very international system on which its rise depends. The next American president must build on the areas of overlapping interest to forge a more durable U.S.-China relationship. Doing so will require strong alliances with other Asian nations and a readiness to speak openly with Beijing when it fails to behave as a responsible stakeholder.

This paragraph can be compared to his naïve expectation of Chinese cooperation just 15 months ago (on February 23 2007), when he told the Seattle World Affairs Council:

And to talk about the Asian economies is to speak of China. I know some of our citizens fear the specter of Chinese economic growth, worrying that it will result in the loss of American jobs and the inability of our economy to compete. Others take the opposite view, trumpeting China's vast market potential, low labor costs, and exports, which allow American manufacturers to move up the value chain. America benefits from China's economic growth. But by the same token, its rising prosperity also raises legitimate expectations that China will behave as a responsible economic partner.

As Chinese businesses 'go global,' we must insist that they operate in an open, fair, and transparent manner, with sound, internationally-accepted standards for corporate governance. We should push Beijing to adopt a market-determined value for its currency, ensuring that trade is conducted on a level financial playing field. We need to convey to China that its go-it-alone approach to locking up energy supplies is unlikely to be either effective or sustainable, and that its environmental stewardship cannot fall prey to its economic ambitions.

In these cases, there is significant room for economic cooperation. The U.S. and China have a mutual interest in developing new and diverse energy supplies, improving energy efficiency, and developing environmentally sustainable energy alternatives. U.S. trade and investment in China's undeveloped rural areas can help create the broad-based growth Chinese leaders seek. China's rapidly aging society would benefit from U.S. private-sector involvement in building health care and pension systems, while Beijing's steps toward banking and financial reform will, if fully implemented, create new business opportunities for American companies. Finally, China's desire to construct a "knowledge economy" implies a mutual interest in protecting intellectual property and preventing counterfeiting.

Howard

Trade Deficits and Free Trade

2008-05-26T21:07:00.000-07:00

Trade Deficits and Free Trade

Raymond L. Richman

Bruce Bartlett, an adviser to President Ronald Reagan and a treasury official under President George H.W. Bush, writes in Reason Magazine (reasononline.com 5-26-08) “Herbert Hoover was rightly reviled for having the worst record on international trade of any president. The Smoot-Hawley Tariff, which Hoover signed into law in 1930 after a Republican Congress passed it, was a significant factor in deepening the Great Depression. Since then, every president has embraced at least the rhetoric of free trade. But actions and rhetoric are different things, and George W. Bush in particular has preached free trade while advancing the agenda of a petty protectionist.”

There are several things wrong with this statement. Herbert Hoover was not “rightly reviled”, the Smoot-Hawley tariff had nothing to do with the depression. The Smoot-Hawley tariff was passed after the stock market bubble burst in 1929. A thousand economists petitioned Pres. Hoover to veto the bill. It would not have mattered if he did not. Our trade deficit on goods and services amounted to less than three-tenths of one percent of the 1929 GDP; our surplus on goods and services actually declined from 1930 to 1938 as Table 1 indicates.

Table 1.

Year	1929	1930	1937	1938
Exports of goods and services	5.9	4.4	4	3.8
Goods\1\	5.3	3.9	3.5	3.2

Imports of goods and services	5.6	4.1	4	2.8
Goods\1\	4.5	3.1	3.2	2.2

Surplus or deficit goods & services	0.3	0.3	0	1
Surplus or deficit on goods	0.8	0.8	0.3	1

Gross domestic product	103.6	91.2	91.9	86.1
Deficit gds and srvcs as % of GDP	0.29	0.33	0	1.16
Source: BEA

As it turned out, foreign trade had little to do with the depression of the thirties. Monetary policy which permitted the bursting of the stock market bubble to force the closing of hundreds of banks was certainly the major culprit. The paper losses of those who gambled in the stock market need not have pushed the economy into depression. No real inputs were laid off. A comparable crisis is currently being prevented by a monetary policy dedicated to keeping liquidity and supporting the commercial and investment banks from a similar paper crisis.

George W. Bush rightly tried to protect the U.S. steel and textile industries from unfair competition. And Bush’s and Clinton’s alleged protectionism was too little to dent the enormous growth of the trade deficit from one-half of one percent of GDP in 1992 to 5.7 percent in 2006 as Table 2 indicates. It appears that the U.S. needed a lot more protectionism from foreign beggar-my-neighbor policies than either president was willing to give. We show that in our book, Trading Away Our Future. Failure to protect our industries from predatory mercantilist practices of trading partners such as Japan, China, permitting them to buy American financial assets instead of purchasing our goods is very likely to precipitate another depression.

Bruce Bartlett goes on to write:

One of Franklin Roosevelt’s first acts in office was to reverse Smoot-Hawley. He later insisted that freer trade be a key element of postwar planning, which led to the creation of the General Agreement on Tariffs and Trade. . .From then on every president had a hand in liberalizing world trade. John Kennedy initiated a round of multilateral trade negotiations, concluded under Lyndon Johnson, that eventually led to a reduction in world tariff levels by about a third. Under Richard Nixon, another round of trade negotiations began, known as the Tokyo Round, which Jimmy Carter finally pushed through an increasingly protectionist Democratic Congress in 1979.

All of these contributed to the worsening trade position of the U.S. which converted the U. S. from world’s leading creditor to world’s leading debtor. Whole industries were obliterated, millions of workers lost good-paying factory jobs, wages stagnated, the distribution of income worsened, and not only did the government become the world’s leading debtor but American private savings rate declined to zero, even corporate net investment declined to zero. Corporations began de-capitalizing buying their own stocks to create artificial capital gains to justify the enormous bonuses managers began paying to themselves. And why was this happening? Because of our tolerance of exploding chronic trade deficits as Table 2 shows

Table 2

Year	1992	1996	2000	2004	2007
Exports of goods and services	635.3	868.6	1096.3	1182.4	1643
Goods\1\	448	618.3	784.3	818.3	1152.9

Imports of goods and services	668.6	964.8	1475.8	1797.8	2351
Goods\1\	544.9	807.4	1243.5	1499.5	1979.4

Surplus or deficit goods & services	-33.3	-96.2	-379.5	-615.4	-708
Surplus or deficit on goods	-96.9	-189.1	-459.2	-681.2	-826.5

Gross domestic product	6337.7	7816.9	9817	11685.9	13841.3
Deficit on goods and servics as % of GDP	-0.53	-1.23	-3.87	-5.27	-5.12

The problem, as we see it, is that the U.S. is practically alone practicing free trade (notwithstanding the protection given a few industries and sectors.) The resulting consequences of trade deficits have been completely ignored by the entrenched economic bureaucracies in government and academia. They have never asked what the consequences of the chronic trade deficits are. The traditional answer is why should we object if countries want to sell us goods for paper dollars that cost nothing to print? What fools they are, our leadings economists exclaim, while China grows at double-digit rates and we grow hardly at all. We received an e-mail from a prestigious economist very recently who told us trade is good even when it is one-sided, we are simply getting goods with having to pay for them in goods.

Everybody knew that Japan’s market was closed to American goods while it pursued a policy of export-based development at our expense. Even the Chinese Communists pretend to be opening their markets when in fact they impose all sorts of barriers to closing the trade gap. When they decide to produce automobiles, they impose barriers on not only autos but auto parts and ask our companies to provide the capital for their new automobile industry. And our companies are pleased to oblige.

Lenin was not far off when he announced his new economic policy (NEP) in 1921. Privately, he assured his supporters that the policy was to enable the farmer capitalists to finance their own destruction. The USSR would long ago have surpassed the U.S. had Stalin’s orthodoxy not killed that policy. The Chinese Communists, obviously more intelligent than their Soviet counterparts, applied its NEP to industry as well as agriculture, enjoying the benefits of capitalism until they are ready to bury it.

Bruce Bartlett’s other points include the assertion that NAFTA, CAFTA, and including Colombia and Korea and others in a free trade area is a protectionist ploy. So far that has not been the case. Canada’s and Mexico are enjoying a trade surplus as other oil-producing countries are doing. The problem is not in the stars, it is us. We allowed OPEC, an illegal cartel, to restrict output of its members while we pay the price. We won’t drill in the ANWR while Russia exploits its tundra. We restrict consumption of coal, we throw money at foolish alternative sources of fuel. Worst of all, as Lee Iacoca says, we worship at the false god of Free Trade.

- - - - - -

Dr. Raymond Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh. He earned his Ph.D. in Economics at the University of Chicago. With co-authors, Dr. Howard B. Richman, economists, and Dr. Jesse T. Richman, Asst.Professor of Political Science at Old Dominion University,he is the author of Ideal Tax Association's recently published book, Trading Away Our Future (Pittsburgh, PA., Ideal Taxes Association (Web site: idealtaxes.com)

We are published today on Enter Stage Right

2008-05-25T20:07:00.000-07:00

Here is part of our column.

How to recapture the Republican advantage on trade
By Jesse Richman, Howard Richman, and Raymond Richman
web posted May 26, 2008

When a new issue emerges that is popular, sometimes one party captures the issue and wins elections thereby. At other times no major party will adopt the issue and third parties emerge to champion it. Finally, some issues are dealt with by both parties.

The Democratic Party, but not the Republicans, began talking about trade in 2006 when Senator Chuck Schumer took leadership, both on the trade issue and in enlisting Democratic candidates who would make trade an issue. The result was that the Democrats recaptured the House and Senate in 2006. Trade has also been a major issue in each of the recent Democratic special election victories in formerly solid Republican districts.

Public opinion on trade has shifted decisively against current policies. Americans are increasingly concerned that current trade policies are not serving the interests of the U.S. economy. In an October 2007 Wall Street Journal/NBC News poll, 59 percent of Republicans agreed with the statement that

"Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced demand for American-made goods, cost jobs here at home, and produced potentially unsafe products."

Enough of the 59 percent of Republicans who believe that foreign trade has been hurting the US economy are willing to vote on that basis that the party cannot afford to ignore them. People used to say that a conservative is a liberal who has been mugged. Many Republican voters are free traders who think their country is being mugged.

How has the mugging occurred? The Chinese government, the Japanese government, and others have been intentionally keeping trade unbalanced in order to steal our industries. They have been following the old mercantilist practice of selling to us without buying from us and have accumulated trillions of dollars as evidence of their manipulations. U.S. government policies have abetted rather than obstructed such strategies.

The result has been the loss of one U.S. industry after another, the decline in U.S. median wages as manufacturing workers move to the service sector, and the current stagnation of the American economy. Our trade agreements have been designed to reduce tariffs, but have not stopped our loss of industries because they have failed to address other trade manipulations.

In spite of the shift in public opinion, the Republican Party leadership has forged ahead as if public opinion had not changed one iota. John McCain on the stump dismisses voters concerns about trade. In January he told Republican primary voters in Michigan that their "jobs aren't coming back." During an early April trip to Wisconsin, he paid little attention when Bucyrus CEO Tim Sullivan told him about the new 40% Chinese tariffs on his company's mining equipment exports. In late April, McCain stood before a shuttered Youngstown Ohio factory and asked voters to reject the "siren song of protectionism." ....

To read the rest, go to http://www.enterstageright.com/archive/articles/0508/0508republicantrade.htm

Senators Stabenow, Bunning, and Bayh introduce S.2813: "China Currency Manipulation Act of 2008"

2008-05-25T15:24:00.000-07:00

Here is what Senator Stabenow wrote in her April 3, 2008, press release:

WASHINGTON -- U.S. Senators Debbie Stabenow (D-MI), Jim Bunning (R-KY) and Evan Bayh (D-IN) today introduced the China Currency Manipulation Act of 2008, which will put a stop to currency manipulation by China that is distorting international trade and creating a threat to the global economy. All three Senators also expect to work together in the near future to strengthen the trade remedies in Senate currency legislation reported by the Senate Finance and Banking Committees.

“Currency manipulation is a clear-cut form of unfair trade that is costing us jobs,” said Stabenow. “Our trade deficit with China continues to grow, hitting $256 billion last year, thanks in no small part to China’s manipulation of their currency. The solution is simple - we must hold countries that cheat accountable. America can compete with anyone when the playing field is level, and this bill is a much needed step in the fight for fair trade.”

In 1988, President Ronald Reagan signed legislation enacted by Congress that requires the Treasury Department to monitor the exchange rate policies of foreign nations, including China, and to report to Congress when any country intervenes to gain an advantage in trade with the United States by artificially depreciating the value of its currency.

Secretary Lloyd Bentsen cited China in 1994, but in the face of overwhelming evidence to the contrary, including a historic trade deficit, Secretary Henry Paulson maintains that China’s actions are unrelated to the obvious trade advantage that it gains by undervaluing its currency. The very recent nominal increase in the value of the yuan still leaves the Chinese currency undervalued by between 30 percent and 40 percent, according to trade economists who have testified before Congress. Last year, the United States trade deficit with China was a record $256 billion, the largest with any nation.

The Bunning-Stabenow-Bayh bill that is supported by the China Currency Coalition would require the Secretary of the Treasury to make a finding under the 1988 Act that China is manipulating its currency to gain an unfair trade advantage. It would require the Secretary of the Treasury to establish a plan of action within 30 days on its enactment with specific time frames and benchmarks to remedy China’s currency manipulation and to submit a report to Congress describing the plan. The legislation would also require the Secretary to seek consultations in the IMF under Article IV of the IMF charter with respect to China. The provisions in the bill are similar to those outlined in the currency legislation that was approved by the Banking Committee last July.

Here is the text of the bill

China Currency Manipulation Act of 2008 (Introduced in Senate)

A BILL
To require the Secretary of the Treasury to take action with respect to currency manipulation by the People's Republic of China and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `China Currency Manipulation Act of 2008'.

SEC. 2. FINDINGS.

Congress makes the following findings:

(1) The People's Republic of China has a material global current account surplus.

(2) The People's Republic of China has, since the beginning of 2000, accumulated a current account surplus with the United States of nearly $1,200,000,000,000, more than twice the size of the cumulative current account surplus of any other United States trading partner during the same period.

(3) The People's Republic of China has engaged in protracted large-scale intervention in currency markets, thereby subsidizing Chinese-made products and erecting a formidable nontariff barrier to trade for United States exports to the People's Republic of China, in contravention of the spirit and intent of the General Agreement on Tariffs and Trade and the Articles of Agreement of the International Monetary Fund.

SEC. 3. ACTION TO ACHIEVE FAIR CURRENCY.

(a) Determination- Notwithstanding any other provision of law, the Secretary of the Treasury shall--

(1) make an affirmative determination that the People's Republic of China is manipulating the rate of exchange between its currency and the United States dollar within the meaning of section 3004(b) of the Exchange Rates and International Economic Policies Coordination Act of 1988 (22 U.S.C. 5304(b)); and

(2) take the action described in subsections (b), (c), and (d) of this section.

(b) Action-

(1) IN GENERAL- The Secretary of the Treasury shall, not later than 30 days after the date of the enactment of this Act, establish a plan of action to remedy currency manipulation by the People's Republic of China, and submit a report regarding that plan, to the Committee on Banking, Housing, and Urban Affairs and the Committee on Finance of the Senate and the Committee on Financial Services and the Committee on Ways and Means of the House of Representatives.

(2) BENCHMARKS- The report described in paragraph (1) shall include specific benchmarks and timeframes for correcting the currency manipulation.

(c) Initial Negotiations- The Secretary shall initiate, on an expedited basis, bilateral negotiations with the People's Republic of China for the purpose of ensuring that the country regularly and promptly adjusts the rate of exchange between its currency and the United States dollar to permit effective balance of payment adjustments and to eliminate the unfair competitive advantage.

(d) Coordination With the International Monetary Fund- The Secretary of the Treasury shall, not later than 30 days after the date of the enactment of this Act, instruct the Executive Director to the International Monetary Fund to use the voice and vote of the United States, including requesting consultations under Article IV of the Articles of Agreement of the International Monetary Fund, for the purpose of ensuring the People's Republic of China regularly and promptly adjusts the rate of exchange between its currency and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair competitive advantage in trade.

This bill could work given a Secretary of the Treasury and a President who were determined to reduce the Chinese trade surplus with the United States. However, given the fact that the US Treasury Department is usually dominated by a banking industry that benefits from the loans that are a byproduct of Chinese currency manipulations and given the likelihood that the President will need Chinese government cooperation on international issues, it is unlikely to accomplish anything, except to give those Senators who sponsor it some political cover.

An effective bill would announce to the Chinese that they have to reduce their trade surplus with the United States by 20% each year (about $50 billion) and that failure to do so would result in the imposition of Import Certificates tied to their imports from us that would gradually eliminate their trade surplus with the United States over a five year period.

Howard

Fire Sale Time

2008-05-23T13:14:00.000-07:00

Time Magazine is running a largely insightful article this week on the trade deficit and its costs. Only two things are missing... a discussion of how to end the bleeding (e.g. policies that would reduce the trade deficit) and a recognition that foreign governments have played a role in abetting and sustaining the imbalances. None the less, it makes some good points. The title: America's Coming Garage Sale.

The real cause of the trade deficit is that Americans spend too much and save too little. That's true for both the government, with its mammoth budget deficits, and the average consumer. American household debt reached $13.8 trillion at the end of 2007, or more than double the amount in 1999. This debt-financed consumption has led to a level of imports well beyond the nation's ability to pay for them. Americans have no one to blame but themselves.

Now toss on top of that unstable situation the current financial chaos. One effect has been to depress the value of American assets, such as shares and property. This alone is impoverishing the average American. Housing price futures are predicting a more than 20% decline in Los Angeles home prices over the next 12 months. Christopher Wood of brokerage house CLSA recently wrote that the financial meltdown will "produce the most devastating wealth destruction" in the U.S., "which conventional monetary policy will be powerless to prevent." Americans are already getting poorer by the day.

So is the U.S. vis-á-vis the rest of the world. The losses at American financial institutions and fears of a coming recession have eroded confidence in the U.S. economy and depressed the value of the dollar against other currencies. The dollar has hit record lows against the euro, and last week sank to its weakest level versus the yen since the mid-1990s. That means all of those imports that Americans buy – from oil to toys – are becoming increasingly expensive, eroding the average American's quality of life. "By pursuing a policy of diminishing the dollar," says Thailand-based investment analyst Marc Faber, Americans "impoverished themselves relative to the rest of the world."

It also means that those mounds of dollars held by central banks and investors from Tokyo to Kuwait City are also deteriorating in value by the day. Yet the world can't just dump its dollars. Not only would that be incredibly destabilizing to the global economy, but it also would be effectively impossible. The dollar has been the reserve currency for decades and there are just too darn many of them out there to be converted into something else. Bankers in Beijing, Hong Kong and Dubai are stuck with the rotting stacks of greenbacks.

So the outcome is inevitable. As the financial crisis in the U.S. persists, the combination of decreasing asset prices and a weakening dollar will make the U.S. cheaper and cheaper to foreign investors. Irresistibly cheap. The U.S. is, after all, still a highly desirable place to own property, companies and securities. Foreign investors will see the crisis as a golden opportunity to buy prime pieces of Americana at bargain-basement prices. So all those dollars in banks around the world will flood back into the U.S. to buy stocks, bonds and property. Debt-burdened Americans, desperate for fresh cash, will be only too happy to sell — or be forced to sell. The U.S. will become one giant garage sale, where the buyers are Japanese banks, Chinese state-run investment funds and oil-rich Arab sheikdoms.

Of course, we've heard all of this before. For the past two decades, pundits have warned of the dangers of the trade deficit, while the U.S. has powered on. The big difference these days is that far more countries are awash in dollars today than there were in the 1980s. Even back then, if you remember, Japan recycled its surplus into U.S. assets when the dollar weakened in the late 1980s.

The upside to greater foreign investment in the U.S. will be the strengthening of the dollar and the resurrection of stock and property prices. The downside is that the foreign business community – especially in Asia – will own larger swaths of the U.S. economy. And it is these foreign buyers who will benefit from the increases in the value of assets and the dollar. In fact, such a shopping spree has already begun. Look at the list of investors that recapitalized Citigroup in recent months – investment funds of the Singapore, Kuwait and Abu Dhabi governments. In fact, Asian investors bought a net $50 billion of U.S. stocks and bonds in January alone, up nearly 30% from December. "The U.S. is getting pretty cheap," says Charles Change, managing director of boutique investment banking firm Accolade in Seoul. "You always want to buy low and sell high."

There is, simply put, no way out of this situation for America. If you don't believe me, perhaps you'll believe Warren Buffett. The Sage of Omaha predicted this very scenario in 2003 in an article in Fortune. He tells the story of two fictional islands, Thriftville and Squanderville. In Squanderville, the residents live beyond their means by importing from Thriftville in return for IOUs. Eventually, Thriftville converts this debt into Squanderville assets until Thriftville owns all of Squanderville. America, Buffett warned, was facing the same fate. "Our trade deficit has greatly worsened, to the point that our country's 'net worth,' so to speak, is now being transferred abroad at an alarming rate," Buffett wrote.
http://www.time.com/time/magazine/article/0,9171,1725094,00.html?xid=rss-topstories

Strengthening the Dollar

2008-05-22T20:29:00.000-07:00

To Larry Kudlow (kudlow@cnbc.com)
Your discussion this evening with five Wall Street economists -- Gary Shilling, Fritz Meyer, Invesco Aim; David Malpass, Bear Stearns; Joseph Battipaglia, Stifel Nicolaus; and Jim Awad, WP Stewart Asset Mgmt – about the need for a strong dollar, about the declining value of the dollar being largely responsible for the sky-rocketing prices of oil and other commodities, left one thing out – the cause of the decline in the value of the dollar. You seem to think that the world’s central banks can do something about strengthening the dollar. Wrong, as my co-authors and I demonstrate in a recently published book, Trading Away Our Future (Pittsburgh, Ideal Taxes Association). The cause of the falling dollar is the trade deficits which amounted to about 5-6 percent of GDP the last several years, about $710 billion in 2007, $760 billion the year before, with no real decline in sight. Foreign countries accumulated U.S. financial assets and kept the dollar’s value high for several years but increasingly began investing their dollars in Euro assets, raising the Euro’s value as previously they did for the dollar. But the book speaks for itself.

My qualifications, Professor Emeritus of Public and International Affairs, the University of Pittsburgh; Ph.D. in Economics from the University of Chicago. Milton Friedman was Chairman of my dissertation committee.

The trade deficit is a secret. Free traders ignore it or think it is wonderful that trade with China, Japan, and the oil-producing countries has been burgeoning. Larry, I’m a free trader but trade has to be balanced. Failure to balance trade has cost us millions of manufacturing jobs, caused wage stagnation, worsened the distribution of income and is the cause of the stagnating U.S. economy.

It should be no secret that the chronic trade deficits of the United States are a basic cause of the current miserable performance of the US economy. Why then have successive Councils of Economic Advisors, the Commerce and Treasury secretaries, the governors of the Federal Reserve System, Congressional leaders, and nearly all of the economists in academia kept silent while our trade deficits grew astronomically over the past three decades

The principal reason for their silence is that they are politically addicted to an ideology of free trade and do not want to appear to be espousing barriers to trade. A very recent illustration was an op-ed in the WSJ in which a distinguished economist, Prof. Ronald McKinnon ( “The Dollar and the Credit Crunch”, WSJ 3-31-08) discusses the sources of the enormous accumulation of dollar reserves, mentioning specifically China and the Gulf oil-producing states, without once mentioning the trade deficits. Of course not, they are a secret! $700 billion; it’s just money!

Or a couple of days ago, economist Fred Bergsten in the WSJ 5-20-08 denounced “The Democrat’s Dangerous Trade Games” as protectionism, likewise failing to mention the trade deficits. Actually I have no fear of a free trade area encompassing Colombia, Panama, etc. with NAFTA. They are no threat to our well-being. But getting trade into balance with China and OPEC is not protectionism; it is anti-mercantilism. It is pro free and balanced trade. Please read the book.

Call me at 412-682-1286 and I’ll send you a copy or go to the idealtaxes.com web site and order one for the grand sum of $12.95.

Yours truly,

Raymond L. Richman

Public Opinion on Trade

2008-05-22T06:00:00.001-07:00

A recent LA times poll tracks changing public opinion on trade policy.

The polling results are reported on http://www.pollingreport.com/trade.htm

Los Angeles Times/Bloomberg Poll. May 1-8, 2008. N=2,208 adults nationwide. MoE ± 3.

"Generally speaking, do you believe that free international trade has helped or hurt the economy, or hasn't it made a difference to the economy one way or the other?"

In November 2007, 44 percent though trade was hurting and 27 percent thought it was helping. In May 2008, 50 percent though trade was hurting and 26 percent thought it was helping.

Bush Administration: China does not manipulate its currency!

2008-05-21T19:31:00.000-07:00

Despite the more than $1 trillion US dollars that the Chinese government has collected as a byproduct of their currency manipulations, the Bush administration reported to Congress that China does not manipulate its currency. Here's a selection from the Associated Press story by Martin Crutsinger from May 15:

In a report it is required to deliver to Congress every six months, the administration said China needed to address the "substantial undervaluation" of its currency compared with the dollar. But the report said China did not meet the technical requirements under the law to be designated as a currency manipulator....

Treasury Secretary Henry Paulson had hoped to use a new series of high-level talks with Chinese officials to get the country to move more quickly in addressing not only the currency issue but a number of other contentious trade issues. However, those talks so far have had only limited results....

The National Association of Manufacturers, one of the leading groups pushing the administration to take a tougher line on China, expressed disappointment that the administration had chose again to refrain from citing China as a currency manipulator, a designation that would trigger negotiations between the two countries over the issue.

"Everybody in the world knows that China is manipulating its currency," said Frank Vargo, NAM's vice president for international affairs. "Treasury is continuing to hide behind the fig leaf of contending it can't determine China's intent."...

China is a major holder of dollar-denominated investments such as U.S. Treasury securities, which it buys to keep the dollar from falling in value against the yuan....

Sen. Benjamin Cardin, D-Md., said he could not understand why the administration was not taking a tougher approach on the currency issue. Sen. George Voinovich, R-Ohio, said his constituents were "livid" about the China trade issue. He accused the administration of failing to get tough with Beijing because the administration wanted Chinese support for dealing with North Korea over nuclear weapons.

In a speech in Beijing, Commerce Secretary Carlos Gutierrez warned that Chinese and U.S. officials needed to guard against rising economic nationalism in both countries, calling it a "troubling trend" that threatened progress on building economic partnerships between the two countries.

Hat tip: American Economic Alert

Howard

The Alfred E. Newman Approach to Trade

2008-05-20T07:57:00.000-07:00

Sometimes believing that something is true is enough to make someone think it is true. Even when the facts disagree.

Many economists believe that a decline in the dollar will lead to a drop in the U.S. trade deficit. And so in spite of the facts, they believe that it is happening. The only problem is... it isn't.

Today's example in a long line of similar misstatements comes from yesterday's WSJ column by C. Fred Bergsten of the Peterson Institute. Speaking of the costs of reduced trade negotiation authority for the president, Bergsten wrote:

We will lose billions of dollars worth of exports and the associated high-paying jobs – just at a time when improvements in our trade balance, fortified by continuing growth abroad and a highly competitive dollar, are cushioning our slowdown.

For the first quarter of 2008 the U.S. trade deficit was $210 billion. For the first quarter of 2007 the U.S. trade deficit was $202 billion. Improvement? What improvement?

So... why isn't the falling dollar helping the trade deficit? I can tell you in three letters: oil.

Factoring out petroleum, the trade deficit has been coming down. But the deficit in oil has been going up and up. Overall, it is a little bit worse than a wash.

McCain knows that China manipulates its currency, but thinks that talk can change that

2008-05-19T09:31:00.000-07:00

Senator McCain has been advertising that his economic plan will be to negotiate new trade agreemenst in order to increase US exports. Here is what he said about trade with Asia on February 23, 2007:

As China, Japan, and the European Union pursue closer trade ties with the rest of Asia and among themselves, the United States should set the standard for trade liberalization in the region. We need to conclude the ongoing free trade negotiations with Thailand and Malaysia, and then expand these benefits to other ASEAN states, which together constitute America's fifth largest trading partner. India's economy may grow faster than China's in 2007, illustrating the importance of securing greater U.S. market access to this economy of a billion consumers. A new economic partnership initiative with Indonesia would help spur growth and strengthen market institutions in the world's largest Muslim country. And the U.S.-South Korea Free Trade Agreement, which is currently under negotiation, promises not only economic benefits - South Korea is our seventh largest trading partner - but political ones as well: a bilateral FTA will help give economic ballast to our strategic relationship and thereby strengthen America's security posture in Asia.

Completing FTAs with Thailand, Malaysia, and South Korea, in concert with the agreements we have already struck with Australia and Singapore, should set the stage for an ambitious Pacific-wide effort to liberalize trade. Such efforts have very tangible impacts. As this audience knows well, wheat farmers in eastern part of this state, fruit and vegetable growers throughout Washington, manufacturing giants like Boeing and software titans like Microsoft - all of them benefit from and depend on foreign markets. By concluding bilateral and regional trade agreements, by revitalizing the Doha round of global trade talks, and by ensuring that America stands on the cutting edge of global commerce, we can ensure that the benefits of open markets reach all 50 of our states.

And to talk about the Asian economies is to speak of China. I know some of our citizens fear the specter of Chinese economic growth, worrying that it will result in the loss of American jobs and the inability of our economy to compete. Others take the opposite view, trumpeting China's vast market potential, low labor costs, and exports, which allow American manufacturers to move up the value chain. America benefits from China's economic growth. But by the same token, its rising prosperity also raises legitimate expectations that China will behave as a responsible economic partner.

As Chinese businesses 'go global,' we must insist that they operate in an open, fair, and transparent manner, with sound, internationally-accepted standards for corporate governance. We should push Beijing to adopt a market-determined value for its currency, ensuring that trade is conducted on a level financial playing field. We need to convey to China that its go-it-alone approach to locking up energy supplies is unlikely to be either effective or sustainable, and that its environmental stewardship cannot fall prey to its economic ambitions.

In these cases, there is significant room for economic cooperation. The U.S. and China have a mutual interest in developing new and diverse energy supplies, improving energy efficiency, and developing environmentally sustainable energy alternatives. U.S. trade and investment in China's undeveloped rural areas can help create the broad-based growth Chinese leaders seek. China's rapidly aging society would benefit from U.S. private-sector involvement in building health care and pension systems, while Beijing's steps toward banking and financial reform will, if fully implemented, create new business opportunities for American companies. Finally, China's desire to construct a "knowledge economy" implies a mutual interest in protecting intellectual property and preventing counterfeiting.

As important as all these steps are, the future trajectory of our economies lies not only in effective economic policymaking, new business opportunities, and the management of financial risks. Security and economic growth are intimately connected, and a threat to peace is a threat to prosperity. The overarching security challenge in Asia today is to preserve and extend American leadership, and to do so in a way that promotes the emergence of freer and increasingly open societies.

I have boldfaced the relevant passage in the above quote. It shows that over a year ago, Senator McCain realized that China was manipulating its currency in order to steal American industry, but he thought that this strategy was a very small issue. Moreover, he didn't realize that every one of the Asian countries that he was mentioning were following the same strategy.

Apparently, he did not understand that these currency manipulations are the lynchpin of their mercantilist strategies, designed to increase their exports and restrict their imports with the United States so that they can steal our industries.

If all he is going to do is "push Beijing" to end this practice, he won't even succeed with China. His policy will end in failure, just as President Bush's "jawboning" ended, just a little over a month ago, in complete and utter failure.

Incidentally, this quote suggests the possibility that McCain doesn't even realize that the yuan-dollar currency exchange rate is already determined by markets. If it weren't, there would be a currency black market. The Chinese government buys a massive amount of dollars in order to manipulate the prices of the two currencies. It may be true that he doesn't understand economics.

The key is not flexible exchange rates. The key is a gradual end to Chinese government dollar purchases. The Japanese government allows a completely flexible exchange rate between the yen and the dollar, but still manages to manipulate that exchange rate by buying massive amounts of dollars.

The only way to prevent all of the Asian currency manipulations, as well as their other restrictions on their imports of American-made products, is to impose Import Certificates on every country that has been accumulating dollar reserves. Otherwise, the mercantilist governments would continue to manipulate exchange rates in order to expand their exports while limiting their imports from the United States.

Howard

Bush's administration's jawboning trade policy with China ends in utter failure

2008-05-17T19:02:00.000-07:00

For the past several years, the Bush administration has been telling US manufacturing industries to just be patient. The Chinese government, who tightly controls the price of the dollar in terms of the yuan, would strengthen the yuan versus the dollar.

Indeed the Chinese government did respond to Bush administration "jawboning" by strengthening the yuan versus the dollar a bit, but not enough to actually cause our trade deficit with China to improve. Instead the trade deficit continued to worsen. On March 20, the Chinese government stopped strengthening the yuan as shown by the graph at the following website:

http://www.x-rates.com/d/CNY/USD/graph120.html

This graph shows that China has stopped complying with the Bush administration's request that it strengthen the yuan vs. the dollar. Bush's "jawboning" with China has thus ended in complete and utter failure.

It is not clear whether the Chinese ended their compliance with Bush's strategy in defiance of the Bush administration or whether the Bush administration themselves asked China to give up that policy.

Whatever the reason, the result is predictable. The Chinese will steal American industries at an even faster rate for a while.

Howard

GE is planning to sell its appliance division to the highest bidder

2008-05-16T14:36:00.000-07:00

General Electric is planning to sell off its appliance division to the highest bidder. The most likely candidate is a Chinese firm, though there are other suitors, all of them foreign.

The likely outcome is the loss of 300,000 more US manufacturing jobs when the Chinese firm moves GE's appliance production to China while holding onto GE's US market share, probably using the GE brand name.

If Import Certificates were on the horizon, then GE would be keeping this division. It would be anticipating that increased sales to China would make up for its falling sales in the United States. Instead, more American workers will get laid off, foreigners will get GE's market share in the US appliance market, and the US economy will continue its current stagnation.

Howard

Summers Sometime Solutions

2008-05-15T08:11:00.000-07:00

Two recent columns by Lawrence Summers in the FT argue for a readjustment of global priorities concerning trade. Summers begins by noting the shifts in public sentiment.

In the first column Summers notes that

making the case that trade agreements improve economic welfare might no longer be sufficient to maintain political support for economic internationalism in the US and other countries. Instead, I suggested that opposition to trade agreements, and economic internationalism more generally, reflected a growing recognition by workers that what is good for the global economy and its business champions was not necessarily good for them, and that there were reasonable grounds for this belief.

Summers column marks a marked retreat from the position of most economists. Perhaps he no longer belongs in the ostriches camp from Chapter 3 of Trading Away Our Future.

In the second column Summers highlights the importance of domestic capital investment to prosperity:

The most important reason for doubting that an increasingly successful, integrated global economy will benefit US workers (and those in other industrial countries) is the weakening of the link between the success of a nation’s workers and the success of both its trading partners and its companies.... Part of the reason why US workers (or those in Europe and Japan) enjoy high wages is that they are more highly skilled than most workers in the developing world. Yet they also earn higher wages because they can be more productive – their effort is complemented by capital, broadly defined to include equipment, managerial expertise, corporate culture, infrastructure and the capacity for innovation.... in an open economy ... Workers no longer have the same stake in productive investment by companies as it becomes easier for corporations to combine their capital with lower priced labour overseas.

Summers solutions are arguably steps in the right direction, though they don't go very far. They focus on taxes and regulation:

First, the US should take the lead in promoting global co-operation in the international tax arena. There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.

Summers does not note that the US is one of the larger such tax havens for non-resident foreigners. Because we abolished the withholding tax in the 1980s, almost all income earned by such individuals from US investments is tax free. Because the US treasury does not even report this income to foreign governments, avoiding taxes in their home countries is very easy. One of the negative consequences of this has been the trade deficits, which contribute to the disconnect between economic internationalism and the interests of US workers. The US can take unilateral action to reduce the impact of such shelters on the US economy, and it ought to do so.

Second, an increased focus of international economic diplomacy should be to prevent harmful regulatory competition. ... There has not been enough serious consideration of the alternative – global co-operation to raise standards. While labour standards arguments have at times been invoked as a cover for protectionism, and this must be avoided, it is entirely appropriate that US policymakers seek to ensure that greater global integration does not become an excuse for eroding labour rights.

This might help, and may be worth working towards. However, it is a long-horizon solution at best.