The New York Times’ editorial on the current “Jobless Recovery” last Sunday was useful – but not mainly for summarizing in detail the nation’s still-grim employment picture.  Rather, it was mainly useful for (a) unwittingly identifying the main flaw in the favored recovery strategies of the White House, Congressional Democrats, and so much of the punditocracy, and (b) once again spotlighting the big globalization-related blind spot in the conventional wisdom surrounding the economic crisis.    

Here’s the key passage in the editorial – “At no time in post-World War II America has it been more difficult to find a job, to plan for the future, or — for tens of millions of Americans — to merely get by.”  True enough in toto.  And it seems reasonable for the Times to conclude, as have so many others, that the best remedy for now is “more stimulus spending and government programs.”

But here’s the rub.  This “public option” will undoubtedly help many Americans “find a job” and “merely get by.”  But “plan for the future”?  Honestly.  Promoting such planning is exactly where government-created jobs will be least effective.  And the reasons would be obvious had the crisis not so completely discombobulated so many otherwise intelligent (though hidebound) observers of the economy.  

Yes, especially in this day and age, even before the recession, private sector jobs have been chancy enough.  How many times have we heard that lifetime employment is dead in this economically dynamic era, and that Americans should be prepared to change jobs and even careers frequently during their working lives?  And obviously, in normal times, the public sector offers a lot more job security.

But government-created stimulus jobs?  Private employment is a model of stability in comparison.  For such government-created jobs are the constructs of politicians.  And even those who don’t write off our elected leaders as hopelessly capricious have to concede that these kinds of government jobs are emergency jobs, and unlikely to survive normality’s return.

Why does this matter?  Because the Times is right to value jobs that allow Americans to plan with some confidence.  Without them, truly durable levels of borrowing and spending will remain distant dreams, as will durable levels of production and real wealth creation.  

But assuming that government-created stimulus jobs can fill the predictability bill shows just how incoherent much prominent economic thinking has become.  Such thinking undercuts a main justification for free market systems in the first place -- a goal that even few to the left of center want to achieve.  

Ironically, there is a highly reliable way to create jobs during this crisis without more deficit-widening stimulus spending.  It involves transforming our trade policies to foster the replacement of imported goods with domestically produced goods – made of course by American workers.  But the dogmatic trade extremists at the Times Editorial Board clearly won’t go there.  Neither will the equally dogmatic trade extremists of the Obama administration or occupying the Democrats’ leadership posts in Congress.  

Luckily for such Democrats and liberals, most Republicans and conservatives are equally blinkered.  This bipartisan brain-lock looks like the most bearish economic indicator of all.  
    




 

...Not that I’d ever think of saying “I told you so,” but President Obama’s decision last weekend to declare the swine flu epidemic a national emergency raises some important questions for uber-pundit Fareed Zakaria.  As I pointed out in a recent posting, (http://americaneconomicalert.org/blogger_home.asp?Prod_ID=37#3318), last spring, Zakaria insisted that the disease didn’t merit “sky isn’t falling” treatment from the international health authorities and the media, and slimed many of those who disagreed as troglodytes who didn’t realize how safe and secure globalization and international cooperation had made the world.  

But now that the sky is at least raining a few fragments, we can ask why on earth Zakaria assumed at that early point that this new malady would remain relatively benign?  Also, why did he assume that Washington and other governments and institutions would be able to keep a much more dangerous pathogen under control?  Finally, why are we still waiting for a statrement to the effect, “I blew it,” from Zakaria?

...Evidently General Motors CEO Fritz Henderson is just fine with taking tens of billions of dollars of taxpayer bailout money and then offshoring more and more of his company’s production and procurement.  And so far Washington is just fine with these decisions.  Earlier this year, GM decided to choose South Korean firm LG Chem to supply the batteries for its recently announced Chevrolet Volt electric car.  Last week, Bloomberg News reported, Henderson traveled to South Korea to announce, “We’ll continue expanding our supply base here, as Korea has lots of strong, efficient and competitive suppliers.”  Of course, American taxpayers have for decades spent billions and billions of dollars stimulating foreign economies.  Before the economic crisis, however, their contributions were clearly labeled “foreign aid.”

...What is it about sub-Saharan Africa that turns so many supporters and critics alike of current globalization policies into looney tunes?  As reported in an October 5 Forbes feature, the latest is card-carrying globalization cheerleader Glenn Hubbard, the Columbia University economist and chairman of George W. Bush’s White House Council of Economic Advisors.  

Hubbard and a colleague have apparently become determined to “pull Africa out of its desperate poverty.”  Their solution?  A modern version of the Marshall Plan, complete with debt relief for the unilateral opening of markets in the United States and Africa's other trade partners.  One compelling reason to support their idea?  In the words of Forbes reporter Michael Maiello, “[W]here economic reconstruction has utterly failed, terrorists can find root, as Somalia and parts of sub-Saharan Africa demonstrate.”  

There’s this one big hitch, though.  Since sub-Saharan Africa has none of the features that enabled the original Marshall Plan to succeed in post-World War II Western Europe, the Hubbard Plan will need “up to 40 years” to work.  In other words, until these proposals manage to turn sub-Saharan Africa into the kind of economic success it has never been,  we’ll have to hope we can figure out how to safeguard U.S. national security in other ways.
 

There is so much wrong with recent statements on China’s currency manipulation by senior Asian Development Bank official Yolanda Fernandez-Lommen that it’s hard to know where to begin.

“We should not push hard for China to appreciate the currency too fast,” she told Bloomberg News reporter Kevin Hamlin October 16.  “We don’t want to see China, the third largest economy in the world, unstable.”  Fernandez-Lomann, the Bank’s chief China economist, continued, “We were so worried when exports started to decline in China and sone of the export-related factories in coastal areas started to close down and unemployment and migrant workers became an issue.  And we were so concerned all over the world that China might collapse because exports were fading.”

It’s admirable to sympathize with laid-off workers anywhere, but Fernandez-Lomann’s compassion is awfully selective – and morally suspect.  For many of those laid-off Chinese workers got their jobs in the first place because of their government’s protectionist exchange-rate policies.  These give Chinese-produced goods and services major cost advantages in global markets (including China’s) for reasons having nothing to do with free markets and free trade.

And what of the victims of this exchange-rate protectionism outside China?  They include not only American workers and domestic companies, but their counterparts around the world – including in Asia, whose well-being is also supposed to be the ADB’s responsibility.  

After all, as a piece in yesterday’s Wall Street Journal reminded us, China’s yuan is linked to a dollar that recently has been falling steadily against major currencies in Asia as well as other regions.  The other Asians are hardly above manipulation themselves (not to mention every other predatory trade practice conceivable).  But when the dollar weakens against their currencies, so does the yuan – improving China’s competitiveness within the region in the process.

Even more important, Chinese currency manipulation may be staving off economic collapse and political chaos in China for now.  All too quickly, however, that’s likely to become a self-defeating policy.  The reason?  China’s currency manipulation and its resulting lopsided trade and capital flows continue to undermine global economic stability and boost the odds of a lengthy worldwide depression that would dwarf the current slump.  

Among the prime victims would be China itself and the rest of developing Asia, which clearly lack enough domestic demand to fuel adequate levels of growth.  That’s why exports dominate their economic strategies to begin with.

Finally, as the accompanying Bloomberg article revealed, there’s no bigger red herring than Fernandez-Lommen’s concern that China might appreciate “too fast.”  The yuan did rise by 21 percent versus the dollar from the time China first broke the peg in 2005 through July, 2008.  But China’s global surpluses and foreign currency reserves rose much faster, meaning that the degree of yuan undervaluation actually increased in terms of economic fundamentals.  And since mid-2008, the currency has gone nowhere, even though the reserves in particular  continue to swell.  

Therefore, the problem is not that the rest of the world might pressure China to act to quickly.  It’s just the opposite.  And as long as the United States, other major trading powers, and international institutions keep treating China with kid gloves, prospects for real worldwide economic recovery and a soundly based global economy will remain all too bleak.  
 

...That was some shining example of moral equivalence U.S. Trade Representative Ron Kirk gave us this past Wed.  I'm talking about his statement that the high-level U.S.-China trade talks next week would create a opportunity "to identify steps that each side can take to ensure that [trade] is fair, sustainable, and mutually beneficial going forward."  (http://www.ustr.gov/about-us/press-office/press-releases/2009/october/commerce-secretary-gary-locke-and-ustr-ron-kirk-co)  

Does Kirk really believe that the Chinese want trade results that are “fair”?  Can he point to a single action Beijing has taken to ensure that trade is “mutually beneficial”?  And can a government that has worked overtime to amass record surpluses that are endangering the world economy possibly have any clue about sustainability?  

I can almost hear the Chinese negotiators licking their chops.

...Still skeptical that U.S. trade and globalization policies are ruining the economy?  Then consider this report last week from Bloomberg News:  As of October 15, Wal-Mart was the only company in the Standard & Poor’s 500 stock index to have risen since the December, 2007 start of the recession.  In other words, the international economic policies pushed so hard by Wal-Mart and the rest of the outsourcing lobby evidently have forced so many Americans’ incomes so far down that now they can only afford to shop at Wal-Mart.

...Meanwhile, the globalization cheerleaders just grow ever more desperate in their insistence that the economic crisis was caused by everything but globalization policy.  In his latest New York Times column, Thomas L. Friedman opened up new frontiers of fatuousness as he sought to describe the new knowledge and skills that represent American workers’ only real chance of success in the Economy of Tomorrow.  

Quoting noted Harvard economist Lawrence Katz, Friedman sang the praises of “those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations.”  Even the less well educated can prosper, Katz added, if they “have some interpersonal skills – the salesperson who can deal with customers face to face or the home contractor who can help you redesign your kitchen without going to an architect....”

So that’s the Friedman-Katz recipe for future U.S. economic success:  Turn America into a nation of Wall St. whizzes and lobbyists.  And for whoever doesn’t qualify, there's great money to be made in the housing sector.  Sounds more like the Economy of the Recent Past to me.

...Speaking of dubious new economic strategies, I couldn’t help but notice a common feature – and a common omission – in all those articles about the post-industrial re-birth of Pittsburgh that appeared in the run-up to the G-20 conference in the one-time Steel City.  

As reporters gushed, at the heart of Pittsburgh’s comeback has been the University of Pittsburgh Medical Center.  And they certainly cited some impressive statistics.  For example, UPMC employs 50,000 (nearly a sixth of the city’s population!), spends $8 billion annually, and operates no fewer than 20 hospitals.

This story of a “meds and eds”-led renaissance in an old manufacturing city not-so-coincidentally  resembles many of President Obama’s hopes for the U.S. economy as a whole.  As he ringingly declared, “Pittsburgh stands out as a bold example of how to create new jobs and industries while transitioning to a 21st century economy.”  But these inspiring accounts uniformly left out one inconvenient detail:   The University of Pittsburgh Medical Center is a nonprofit.  That may be a fine business model for the “health care and higher education [sectors that] have replaced steel as the city’s economic engine,” as BusinessWeek put it.  But it’s a heck of a foundation for a capitalist national economy.
 

The more I read about the continuing spread of swine flu, and about all the unexpected characteristics that doctors and victims keep learning about, the more I think of the arrogant and self-serving take on the virus expressed by prominent globalization cheerleader Fareed Zakaria.  

When H1N1 first appeared, this past spring, numerous observers pointed out that America’s vulnerability to this Mexican-born disease was the latest big downside of NAFTA, and argued that maybe commerce between the United States and its southern neighbor needed to be curbed until more was known about the threat.  

Apparently, it was more than Zakaria could abide.  Once the earliest fears of this completely new flu strain failed to materialize, the Newsweek International editor and CNN talk show host plunged into scold mode.  “It certainly looks like another example of crying wolf,” Zakaria wrote in a May opinion column.  (http://newsweek.washingtonpost.com/postglobal/fareed_zakaria/2009/05/the_sky_isnt_falling.html)
Far from achieving pandemic status, swine flu had stricken a bare 4,800 confirmed individuals and killed 61, he noted.  Further, the world owed Mexico a debt of gratitude for reacting “quickly and massively,” bringing “transmission to a halt” by paralyzing its economy, and suffering billions in financial losses (in the words of an expert he quoted).  

“What did we get wrong?” Zakaria asked.  His answer:  Mainly, fear-mongers in the media and even international organizations, as they have done so often before, keep forgetting that our world today features “deep, structural forces” that “create stability.  We have learned from history and built some reasonably effective mechanisms to handle crises.”

Nearly 400,000 cases and more than 4,600 fatalities later, the case for such confidence looks a lot weaker.  But here’s the kicker:  Zakaria believes that “discussions of the global economic crisis” have been similarly warped by “the doomsday industry.”  I.e., critics of the globalization-spawned international economy for which he so enthusiastically shills have been determined to ignore the super job bailout-happy world leaders have done in staving off disaster.  

Let’s hope that Zakaria knows his economics better than his virology.  More important, let’s hope that the world leaders responsible for dealing with the situation recognize the folly of such complacency.

 

I’ve already written about how a combination of surging imports and nonexistent production data are torpedoing the effects of both economy-wide stimulus programs and industry-specific support measures, like Cash for Clunkers.  (See, e.g., my September 22 Washington Times column at http://washingtontimes.com/news/2009/sep/22/tonelson-deference-to-wto-hurts-us/).  Now we’re learning that these same problems could curb the expected environmental benefits of the latest of these policies – the taxpayer-financed consumer rebates Washington will be doling out to encourage the purchase of new, energy efficient major home appliances like refrigerators and dishwashers.

As reported in The New York times yesterday (http://www.nytimes.com/2009/10/19/business/energy-environment/19star.html?_r=1&scp=3&sq=%22Matthew%20L.%20Wald%22&st=cse), the Department of Energy’s vaunted Energy Star system for spotlighting energy-efficient appliances is shot through with loopholes.  Principally, an internal Energy Department audit found that the program allows manufacturers of a wide range of appliances to certify their products’ performance themselves.  And guess what – when tested independently, various products haven’t measured up to Energy Star standards.

Worse, more than garden-variety corporate fraud is at issue.  For all of the goods identified as misleadingly labeled by New York Times reporter Matthew Wald, and by a Consumer Reports investigation last year, come courtesy of South Korean or Chinese producers.  And given that many of these appliance sectors are marked by high and/or rapidly rising import penetration rates, it’s easy to conclude that labeling fraud either is already systemic, or will soon become so.

On September 30, the Times reported, the Energy Department and the Environmental Protection Agency agreed to tackle some of these problems.  And the usual proposals are kicking around – chiefly requiring independent Energy Star certifications for all appliances.  But no set of inspectors – public or private – can possibly test every appliance offered for sale in the United States.  Just as important, many of these products are produced in Asian countries with no tradition of rule of law, much less consumer protection or green-mindedness.  So the usual sampling techniques are highly unlikely to identify all the mislabeled products flooding into the country.  And hiring all the American inspectors that would be needed to monitor Chinese, Korean, and other foreign production facilities on an ongoing basis simply is unaffordable.

The best way to ensure that energy-intensive products are energy efficient is to implement trade policies that would discourage imports and increase domestic production.  All signs, however, indicate that the Obama administration’s fealty to outsourcing and importing interests trumps its commitment to tackling climate change as completely as it trumps its commitment to production-led recovery strategies.
 

...David Barboza’s account in today’s New York Times about how Chinese manufacturers are increasingly dominating world export market was fascinating enough (“In Recession, China Solidifies Its Lead in Global Trade,” http://www.nytimes.com/2009/10/14/business/global/14chinatrade.html?ref=todayspaper).  

But perhaps the most revealing point came toward the end, where Barboza noted that although the International Monetary Fund “is calling on China to...allow its currency to appreciate against other major currencies,” the United States has turned “silent in recent months, analysts say, partly because Washington is trying to improve relations with Beijing at a time when it desperately needs China to purchase American debt.”  

In other words, this is how low our outsourcing-focused trade policies have sunk the nation – it’s so deeply in hock that a multilateral organization is standing up for its true interests more vigorously than its own leaders.  The other side of the coin – this is how spineless, or dominated by outsourcing interests, the Obama administration has become.

...Another critical point emerging from Barboza’s piece is one that I made earlier this year in a piece for Industrytoday.com (“Drugs and Money,” April 21, 2009, http://industrytoday.com/article_view.asp?ArticleID=we166).  To quote Barboza: “China’s market share gains are mostly at the expense of countries like Japan, Italy, Canada, Mexico and Central America.”  And the Open Borders in government and the media (including on the Times editorial board) are still wondering why illegal immigrants keep flooding into the United States even during a downturn?

...Not that the media tripe about China currency issues has abated all that much.  Writing on his blog at Bloombeg.com (http://blogs.reuters.com/commentaries/2009/10/13/dont-worry-about-the-weak-dollar/), John M. Berry claimed that none of the countries victimized by Beijing’s exchange-rate protectionism “has a way to force the Chinese to change their policy.”  

I guess he’s never heard of the Currency Reform for Fair Trade Act of 2009, which not only has been introduced this year in both House and Senate and is endorsed by both Democrats and Republicans, but earlier versions of which have been kicking around on Capitol Hill for several years.  

The bill would use America’s enormous leverage as China’s biggest foreign customer to designate currency manipulation as an illegal subsidy under U.S. trade law.  Thus it would entitle victimized industries to seek offsetting tariffs.  Earth to Berry:  Passing the bill – which was also endorsed by President Obama when he was presidential candidate Obama – may not force a change in Chinese policy.  But since the price of everything exported from China is dramatically affected by currency manipulation, it sure could change the trade flows just as dramatically.

...Latest signs of the apocalypse: BusinessWeek reported in its September 28 issue (“Financial Innovation Under Fire,” by Peter Coy), that housing expert Robert Shiller, co-creator of the widely followed home price index, has launched house price derivatives investment products this year through a business venture.  Just what U.S. housing finance needs – more byzantine complexity.

Meanwhile, Bloomberg reporters Jody Shenn and Dawn Kopecki yesterday broke the news that Wall St. is pressing the Obama administration to include interest-only mortgages in its anti-foreclosure programs.  (“JPMorgan Pitches Interest-Only Mortgages to Boost Obama Plan,” http://www.bloomberg.com/apps/news?pid=20601103&sid=aBnddzF.B8zw)  

Even more impressive Shenn and Kopecki kept a verbal straight face when presenting a JPMorgan banker’s statement that financial institutions “‘understand the concern’ that using the periods to cut payments would mean borrowers’ balances won’t decline and their bills may later jump....”   Translation:  Wall St. still knows a cash cow when it sees one – especially if taxpayers remain on the hook for any losses.

 

The American Enterprise Institute’s Monday conference on export controls sure gave attendees more than they bargained for.  Not only did they get the skinny on the ins and outs of longstanding efforts to change the policies governing the overseas sales of defense-related goods.  They also learned how completely contemptuous Washington-based outsourcing interests can be of the nation’s Main St. manufacturers  

The magic moment came when I asked the conference’s first group of panelists about the U.S. government’s inspections of Chinese enterprises that have been approved by Washington to buy advanced U.S. products and technologies with military potential.  Many export licenses to these entities are approved only if the Chinese agree to American inspections of their premises to ensure that the exports in question are indeed being used for benign purposes.  But a 2002 Government Accounting Office report (“Export Controls: Rapid Advances in China’s Semiconductor Industry Underscore Need for Fundamental Policy Review,”  http://www.gao.gov/new.items/d02620.pdf) revealed that Washington often agreed to Chinese demands for advance notice of these inspections.  

Of course, that sounds like a great way to tell the Chinese exactly how long they have to hide whatever they want to conceal from Washington.  Is this still the case, I asked?  The panelists – who included a Commerce Department official responsible for the program – gave troublingly vague answers.  Much clearer, however, was this point raised by William A. Reinsch, president of the National Foreign Trade Council, an organization of multinational outsourcing companies which has led the private sector charge to gut export controls.

Reinsch – a classic Washington revolving-door case who supervised the Commerce Department’s export control activities during the Clinton years – ended his answer to my question in this way (and I paraphrase):  “Try this experiment, Alan.  Ask your organization’s member companies how they would feel if the Chinese government claimed the right to go through their factories whenever they pleased.”

I was so astonished at the moral equivalence set up by this argument that I failed to make the obvious rejoinder:  If our member companies wanted a Chinese product or technology badly enough, and it possessed enough military potential, then no doubt they’d agree to whatever terms the Chinese government imposed.  And no doubt the Chinese government would be smart enough to capitalize on its leverage and require the strictest possible conditions – an assumption of shrewd Yankee trader competence that clearly couldn’t be made about the U.S. government during Reinsch’s tenure at Commerce, or apparently today.

But the moral equivalence point is worth elaborating on as well.  For Reinsch clearly was equating (a) U.S. Business and Industry Council members devoted to safeguarding their country’s safety and freedom, and to obeying the law, with (b) Chinese entities subsidized, connected, and often outright owned by a government that is often hostile to U.S. interests, and that routinely flouts the agreements it signs.  

In the process, of course, he was accusing domestic companies like USBIC members of hypocrisy.  Talk about adding insult (to upstanding American businesses) to injury (of our nation’s very security).  
 

“Saturday Night Live” normally isn’t a source of insightful commentary about the economy.  But the NBC comedy show last weekend identified the same problem with the Cash for Clunkers program that we at the U.S. Business and Industry Council began pointing out months ago.  (See, e.g., my September 13 GLOBALIZATION FACTLINE item at http://www.americaneconomicalert.org/view_art.asp?Prod_ID=3296)  

As Fred Armisen, SNL’s Obama impersonator, noted on the latest show, "The 'Cash for Clunkers' program really stimulated the economy.  Unfortunately it was the Japanese economy... ''    Armisen was referring to the predominance of Japanese- and other foreign-brand vehicles – stuffed with foreign-made parts - on the list of best selling models under Clunkers.  

In other words, SNL’s writers recognized a problem that the bill’s Congressional sponsors decided to ignore.  They pushed through the plan even after realizing that America’s international trade obligations forced them to leave out Buy American-type provisions that would have enabled Clunkers to boost American growth, rather than American imports and debts.  

Few Big Media journalists measured up to the SNL standard, either – having generally overlooked the inevitability of these results while Clunkers was being debated.
 

As usual, the deeper you delve into the September preliminary employment figures released this morning by the government, the worse they look.  Specifically, the data reveal a continuation of all the major trends I wrote about in my May 15 AmericanEconomicAlert column on the steady meltdown in all kinds of private sector jobs. (http://americaneconomicalert.org/view_art.asp?Prod_ID=3240).

Not that the headline numbers for September employment weren’t bad enough.  Where the consensus forecast of economists was that some 175,000 more total jobs were lost last month, the actual figure came in 263,000 – more than 50 percent higher!   I wonder how many heads will roll in academe and the corporate sector over this miss.  September’s job losses also topped August’s (201,000) by nearly 31 percent.  

The bulls keep urging us to be heartened by the fact that the economy isn’t hemorrhaging jobs at the terrifying 500-750,000 monthly clip of the first quarter of this year.  But we (and they) need to remember that the smaller recent totals come on top of massive cumulative job destruction since the recession officially began in December, 2007.

The real problem, however, is that government keeps growing in importance as an employer – which no one except true-blue (red?) communists would consider a harbinger of future prosperity.  Back in the spring, when I last looked at these trends, government at all levels had reached 17.08 percent (the April figures) of the total U.S. nonfarm workforce.  When the recession was only one month old, in January, 2008, this percentage was only 16.22 percent.  

By last month, the government share of U.S. workers had edged up further, to 17.11 percent.  Worse, this increase came despite a 53,000 decline in government payrolls in absolute terms in September.  So private sector employment – the only kind that can generate healthy growth – kept falling even faster.  Today’s levels are still lower than those registered by the economy in 1975 – when government employment hit 19.35 percent of the nonfarm workforce.  But who has fond economic memories of those days?

The same story emerges after defining government employment more realistically – by including the heavily subsidized health care sector.  By this measure, government’s “real” share of employment stood at 27.31 percent in April, and grew to 27.55 percent in September.  In April, 2007, “real” government employment represented only 24.17 percent of total employment.  So its percentage of overall jobs has been growing even faster than that of government conventionally defined and, indeed, the health care industry actually added nearly 13,700 jobs in September.  

Florida Democratic Congressman Alan Grayson has (rightly) been slammed for claiming that Republican ideas on health care reform amount to hoping that Americans “die quickly” if they get sick.  But given the latest job figures and President Obama’s borrowing- and spending-focused recovery strategy, is it really over the top to suggest that his prescription for employment growth amounts to “pay skyhigh taxes and get sick often”?
 

The monthly economic statistics released by the government jump around a lot, and the weeklies fluctuate even more.  But the latest data unmistakably depicts a U.S. economy merrily inflating yet another debt and consumption bubble – and setting the stage for a bigger, even more destructive economic collapse than the one we’ve been witnessing since the summer of 2007.

The latest weekly initial jobless claims rose by 16,000 more than economists’ consensus forecast.  This increase did follow weeks of slow decline.  Yet another government report revealed that, in August, consumer spending jumped 1.3 percent (due in large measure to the short-lived Cash for Clunkers program), while incomes were up only 0.2 percent.  

The only bright spot in this picture – consumer confidence, as measured by the private Conference Board.  The September reading of 53.1 was down from a revised 54.5 in August and way below economists’ forecast of 57.  Hopefully, this dip signals that Americans are once again recognizing stubbornly high unemployment and stubbornly sluggish income gains as reasons to give their wallets a rest, not open them wider.  

If only the Obama administration and Congress understood the urgency of igniting new demand for American-made goods and services – the only way that any new spending will generate genuine growth and prosperity, not the phony crisis-prone versions that prevailed until recently.
 

Just got back from doing a segment on CNBC on U.S.-China trade.  These live sessions are usually great fun, especially when the gloves come off – as in this one.  Unfortunately, time usually runs so short that lots of major substantive points go unmentioned or get slighted.

Thank goodness, then, for AmericanEconomicAlert.org!  From now on, I’ll be using its blog features to fill in some of the gaps.

This morning, as usual, the CNBC producer with whom I was working asked me for some talking points on the subject.  Specifically, she wanted to know, “Can the U.S. avoid a trade war with China?  How can the U.S. influence China's trade policy?”  And she invited me to make any other points I thought were important.  They ran some snippets of my response during the segment – which you can see at this link:  http://www.cnbc.com/id/15840232?video=1279810600&play=1.  Here’s a slightly edited version of my complete response:

“Right off the bat, I hope we'll get a chance to mention that candidate Obama endorsed a very tough and smart currency manipulation bill once the Democratic primaries hit the factory union-heavy midwestern states in 2008.  And it's a bill that's been reintroduced this year. [Note:  Of course, I’m talking about the Ryan-Murphy bill in the House, which would declare currency manipulation by any country to be an illegal subsidy under U.S. trade law and entitle victims to sue for compensatory tariffs.  The Senate version was introduced by Debbie Stabenow, the Michigan Democrat, and Jim Bunning, the Kentucky Republican.  Unfortunately, I didn’t see an opportunity to make this observation.]

“But in April, Obama’s Treasury Department concluded that China is not engaged in currency manipulation after all.  We at the U.S. Business and Industry Council count that as a flagrantly broken campaign promise to domestic manufacturers and their workers.  A big question is how tightly the union supporters of the bill will hold the president's feet to the fire on this one.

“Re your other questions, China began the trade war back in the early 1990s.  It has consistently flouted international trade rules with a wide variety of predatory trade practices such as illegal subsidies, currency manipulation, intellectual property theft, and technology extortion.  Despite widespread predictions by panda-huggers, China's entry into the WTO has produced no significant change in this predatory, protectionist behavior.  Indeed, even the Bush II administration had begun criticizing China in recent years for becoming more protectionist. Worse, China's protectionism and export obsession was a major contributor to the U.S. bubble that burst so disastrously in summer, 2007 and left us – and the rest of the world – in the deepest recession since the Great Depression.

“So the question before Americans is do we blithely accept the kind of lopsided U.S.-China trade status quo that has already wreaked tremendous damage globally, and that is still lopsided enough to threaten future, even worse bubble-and-burst cycles? Or do we act to change it?

“Following from this point, unless the United States can reduce its massive, China-centered trade deficits, our nation will not be able to end the recession and crisis in the only viable, sustainable way possible – by producing our way out.  We will be forced to continue the politically expedient but economically disastrous course of temporarily propping up U.S. living standards by using borrowed foreign (to a great extent Chinese) money to stimulate more consumption and more borrowing.

“Unilateral U.S. action will be essential for two main reasons:

“1. China needs to remain export-obsessed to keep the lid on a potentially explosive domestic unemployment situation.  Revealingly, China's leaders (unlike many so-called American experts) know that their own consumption potential is way too small for them to grow and create jobs adequately by selling mainly to their own domestic market.  Chinese incomes generally remain far too low.  And containing unemployment is the supreme priority of China's leaders, because jobless workers filling the streets could eventually topple the regime.  And since there are few worse things in life than being a former Chinese leader, China’s current leaders cannot be counted on to make the needed changes voluntarily.

“2. The kind of global consensus needed for effective multilateral action is simply absent.  Too many third world countries that also are unavoidably export-dependent fear that policies initially aimed at China will eventually be aimed at them.  And too many high-income countries believe that they are better off cutting their own private deals with China -- as they have so frequently in the past.

“The Chinese will bitch and moan endlessly, but for the time being, they will have no choice but to acquiesce in these unilateral U.S. measures. As often noted, for the time being, our great indebtedness to them, along with their heavy reliance on selling to our market, means that Washington has the decisive leverage in this debate -- even though, as so many have observed, ‘China is our banker.’

“Over the longer term, however, we can by no means be certain that this ‘balance of economic terror’ (as National Economic Council chairman Larry Summers famously but somewhat misleadingly called it), will hold.  At some point, Chinese leaders may decide that, however dangerous the consequences of cutting off America's credit supply, the consequences of throwing more good money after bad at the United States will be worse.  Most ominously, Americans will have little or no influence over this Chinese decision.  So our leverage is decisive now, but by maintaining the trade status quo, we are turning it into a wasting asset.

“The Obama strategy of dealing with bilateral and global trade imbalances through stepped-up trade enforcement is a non-starter.  A problem this massive can't possibly be tackled effectively through piecemeal means like dealing with individual violations of trade agreements by our trade partners.  

Therefore, widespread restrictions on imports must be a vital part of any viable recovery strategy. If anyone opposing them has any alternative ideas that have not already been tried and failed, why in blazes have they waited so long to reveal them?”

If you check out the segment, drop me an e-mail at atonelson@aol.com and let me know how I did!  
 

Agreed:  South Carolina Republican Congressman Joe Wilson blew it form-wise, by the Amerian political system’s longstanding criteria, when he heckled the President during his health care speech to Congress (although maybe our elected leaders should start displaying some of the thick skin showed by British politicians and tolerating some of the rough-and-tumble displayed in debates in Parliament).  But what’s far more important is that Wilson was right.  Obama was clearly lying when he described as “false” the claim that “our reform efforts would insure illegal immigrants.”

It’s true that H.R. 3200, the bill referred to in the controversy, contains an express prohibition on providing health care benefits to illegal residents of the country.  But the bill lacks any enforcement mechanisms.  And that’s no accident.  Congressional Democrats defeated amendments to add such an enforcement mechanism in no less than three of the House committees to which it was referred.  Moreover, the enforcement mechanism proposed -- the Systematic Alien Verification for Entitlements Program (SAVE) -- is already widely used in federal social service programs.  

As a result, it's impossible to avoid concluding that Obama and his Congressional supporters really are determined to give this debt-choked country just about the last thing it needs -- an immensely expensive new health care system that's going to expend precious resources on gold-plated medical treatment for millions of law-breakers and their families.      

Not that any of the mainstream media reported the enforcement issue in any detail.  Congratulations to Lou Dobbs Tonight, on CNN, for telling the story comprehensively last night.  Sean Hannity of Fox News, meanwhile, deserves credit for giving Wilson the chance to explain the context on his program.

Bottom line:  A statement of legislative intent with no enforcement mechanism is worse than worthless.  It’s obviously a cynical attempt to fool the public.  And knowingly omitting a key portion of the truth is a lie under any meaningful system of ethics.

Unless Obama’s supporters are going to claim that he didn’t know about the defeated enforcement amendments?  That would be a stretch even for the supremely cynical White House Chief of Staff, Rahm Emanuel.  All of which strongly suggests that the President owes Rep. Wilson an apology of his own.  
 

From out in the Pacific Northwest comes a local newspaper story that provides a window into some of the key complexities surrounding American manufacturing today.  

In The Colombian last week, staff writer Michael Andersen reported on job training opportunities created by economic stimulus funds for skilled machinists in the Vancouver, Washington area.  The overall picture painted was extremely bullish:  Contrary to widespread impressions, non-trivial numbers of manufacturing jobs are going begging even in this Great recession, and will return on a grander scale once the economy recovers.  

Even better, although starting wages may be low (in the $12 per hour neighborhood), they can easily rise to $30 once enough experience has been amassed.  But this work entails operating, maintaining, and repairing state-of-the-art equipment, and production work for specialized “custom, short-order jobs”– not the kind of high-volume assembly work that has employed so many millions of Americans in recent decades.

Consequently, it’s vital that as many workers as possible take advantage of training opportunities such as a machining course described by Andersen that will be offered gratis thanks to a federal stimulus grant to the Southwest Washington Workforce Development Council.  

It’s vital for the country, too, suggest the local experts quoted by the author – for the kind of job shift occurring in the area in microcosm represents a shift to higher value industrial work.  Claims one of them,  "We're keeping the important stuff here, the research and development.  A lot of the high-production stuff is gone, but that's not a big loss. That's where all the boring jobs were."

Still, this carefully reported piece raises at least as many questions as it answers.  Some of the optimism it conveys rings true.  Certainly, lots of U.S. Business and Industry Council member companies – which are mainly small companies -- have in recent years complained that they can't find production workers with the kinds of advanced skills they need.  

When I’ve asked them about all the auto workers who have been laid off, they respond that these mass production assembly-line workers typically lack the creativity, the initiative, and the math skills needed to program and get the most out of the sophisticated near-million-dollar machines they typically need to use.

In addition, the future of a good deal of American manufacturing, as implied in this story, is indeed in small-batch work, and a major source of competitiveness – especially for smaller companies -- is the ability to quickly and cheaply rejigger production lines to handle a rapid succession of different kinds of orders.

Having said that, I haven't heard of any USBIC companies that are in hiring mode now, or that have been this year.  There are scattered signs of new orders, but if these firms do re-hire, they'll first bring back workers they've either just laid off, or whose hours they've just cut.

Also, when reading articles like this, it's important to remember four points from a national economy standpoint.  First, the new manufacturing jobs may well pay a good deal less than the mass production jobs that are gone, and possibly less than the older versions of the same jobs. That's evident from this story's reference to $12 starting wages.  

Moreover, the foreign competition faced by domestic U.S. manufacturing is by no means confined to the low-skill sector. Indeed, American industry faces a great deal of high-skill manufacturing job competition not only from Europe and Japan, but from low-income countries like China.  True, the low-income challenge is still in its early stages.  But why assume things will forever stay that way?  These countries have already made much more progress much faster than expected by most experts on industry and on trade policy.  That’s one reason to question the quoted assumption that much higher wages will automatically follow higher skill levels.

Third, one big reason that the low-income challenge will burgeon is that so much assembly work has already moved overseas – and inevitably  brought with it so much of the related supply chain, including some higher-skill machining.  The alternative – keeping both kinds of operations literally half a world apart – makes no sense if it can possibly be avoided.

Fourth, the future of the entire American manufacturing base cannot be one of niche, low-volume production.  As the above supply-chain point makes clear, there are too many critical linkages between high-volume work and low-volume work to imagine that the latter can thrive in the United States in isolation from the former.  

And of course, by definition, small-scale niche production creates relatively few jobs.  So it will lack the potential to fill the nation-wide earnings gap created by widespread outsourcing and pervasive import competition.  As a result, it will also lack the potential to address a fundamental cause of the economic crisis, or to give a major boost to economic recovery.

So even in this deep recession, there are indeed solid manufacturing job opportunities out there, and retraining programs like the one described here can indeed help workers seize them.  But let’s not kid ourselves – by themselves, and in particular, without big changes in outsourcing-focused U.S. trade policies, these programs unfortunately will remain much closer to a drop in the bucket than to a cure-all for what ails the economy generally, and domestic manufacturing in particular.
 

Michelle Caruso-Cabrera violated the top two rules of TV news and talk shows when she debated me on CNBC last Wednesday – Don’t Lose Your Cool and Know What You’re Talking About.  In the process, her over-the-top performance (which you can watch at http://www.cnbc.com/id/15840232?video=1212820119&play=1)
makes clear how thoroughly detached from reality cable talking heads in particular can become.  

As you'll see, the segment definitely has elements of high comedy.  At the same time, it raises genuinely disturbing questions about some Big Think issues -- like the media's role in our democracy and society, and about our future as a reasonably unified nation.  

I was warned that Caruso-Cabrera was loaded for bear when initially invited to appear in the relevant segment, which focused on the kinds of national security issues raised by the Dubai ports fracas of 2006.  Apparently, she’d read the articles that morning in The New York Times and Wall Street Journal detailing massive corruption on the part of The Waterfront Commission of New York Harbor, a bi-state government agency created to keep organized crime out of this critical port complex.  

According to a report by the New York State Inspector General, not only did top officials at the Commission turn the waterfront into a publicly run sinkhole of graft and bribery.  They endangered national security by misusing U.S. Department of Homeland Security funds and abandoning background checks on the longshoreman who work at this major gateway into the United States.

Aha! Caruso-Cabrera evidently thought.  The perfect opportunity to expose the xenophobic, protectionist phony patriots who forced a company based in the United Arab Emirates (Dubai Ports World) to scrap its plans to buy the management operations of six major American ports – including New York.  And that was exactly the premise of the segment:  The Dubai deal’s critics had warned that a foreign company – and especially one from an Arab Moslem country – would turn the U.S. ports into a highway for terrorists.  But an American government agency produced the same result!  Worse, Caruso-Cabrera argued, Dubai Ports World was completely clean.  The federal government’s investigation of the company had turned up no suspicious activity.

As Caruso-Cabrera’s on-air colleagues observed, she was practically jumping out of her seat in triumph as she made her case.  But as I quickly pointed out, like the Bush administration that so readily awarded DPW a good housekeeping seal, she either didn’t know much about the Emirates and Persian Gulf politics, or didn’t want to know.  The Emirates generally and Dubai in particular, I explained, have long records of serving as transshipment points for all manner of dangerous militarily relevant goods and technologies headed for rogue states and other troublesome countries.  Emirates customs officials have even looked the other way as parts for the roadside bombs that have killed so many American servicemen and women in Iraq and Afghanistan have been shipped through the port to Iran.  As a result, as anyone with an internet connection could easily discover, the professionals at both the U.S. Justice and Commerce Departments have been on their case for years.

And the fundamental problem is not that folks in the Emirates are such terrible people.  It’s even worse.  The fundamental problem is that they live in tiny, weak countries located right next door to much bigger, dangerous neighbors.  Moreover, such Gulf governments are anything but stable and face constant pressure from extremists.  No matter how much cooperation they pledge with U.S. export control efforts – and they’ve pledged lots – nothing less than the survival instinct will always make “Don’t ask, don’t tell” by far their safest option.

Caruso-Cabrera quickly tried to change the subject, insisting that Dubai Ports World doesn’t represent the Dubai government – it’s a private company.  But this response only revealed more ignorance.  Because the kind of bright line that exists between public and private sectors in the United States is much dimmer in most of the rest of the world.  And in a small country like Dubai, as I observed to her astonishment, it’s a safe bet that everyone in business is in bed with the royal family in one way or another.

Yet just as bad as Caruso-Cabrera’s knowledge vacuum were her logical failings.  So an American government agency did a shameful job and undermined national security in the process.  What are the implications?  What could she have been driving at?  That we should have let Dubai Ports World take over these facilities after all?  That foreign governments will do just as good a job as U.S. agencies in safeguarding national security?  Or better?  

Caruso-Cabrera never directly answered these questions when I posed them.  After having kicked off with the xenophobia charge, she pivoted and urged handing these responsibilities to private companies – whether from U.S. or foreign-owned – because American public officials obviously couldn’t be trusted.  Leaving aside Dubai Ports’ membership in Dubai, Inc., what could be loonier?  Maybe she was hot off a segment on health care, where it’s become all the rage to smear government as incapable of handling anything.  But privatize national security?  

Time was running short at that point, but I wish I’d had the chance to remind her of the hash made of airport security by private companies before 9-11 – including hiring foreign-born staff practically right off the boat.  The private contractors doing Pentagon work in Iraq haven’t exactly covered themselves with glory, either.  

At the same time, specifics simply shouldn’t be needed.  When government lets us down on core national security missions, the privatization option shouldn’t even be mentioned.  The conclusion that the agencies responsible should be whipped into shape or replaced with other agencies shouldn’t even be controversial.  The awareness that security is a quintessentially public matter, and that market forces and profit motives are at best marginal presences should be instinctive.  

But even in post-bubble America, a poster-child for the dangers of market extremism, Caruso-Cabrera’s performance indicates that these propositions may become pure Talking Head or even Infotainment Fodder, as deserving of time and as open for discussion as the cultural significance of Michael Jackson -- or Flat Earth-ism.  I’m all for unfettered debate, but if “Get the government out of my national security!” becomes a respectable position, it’s hard to know what core principles will be able to unite Americans anymore.
 

...As President Obama meets with his two other North American counterparts at the “Three Amigos” summit in Guadalajara, Mexico, it’s becoming clear that Canada’s main export to the United States is becoming trade policy hypocrisy.  As I noted in my June 1 GLOBALIZATION FOLLIES item (http://americaneconomicalert.org/view_art.asp?Prod_ID=3242), Canadian officials had been complaining loudly for months about the Obama stimulus bill’s Buy American provisions, and preaching to their southern neighbor that such allegedly resurgent protectionism harms all countries concerned.  But Canadian leaders kept responding with economic threats that are ... well ... protectionist.  Obviously, the Canadians don’t buy the common economic nostrum that the only measures worse than trade barriers are retaliatory trade barriers.

In advance of the summit, the Canadians were at it again.  Foreign Minister Lawrence Cannon told Secretary of State Hillary Clinton over the weekend that protectionism can only ``bring everyone down.''  And international trade minister Stockwell Day insisted that “Retaliatory trade measures always end up with both sides getting hurt.”  But then he proceeded to warn that “Congress should realize that they are risking retaliatory actions from Canada.”

And of course, Canadian leaders keep ignoring two key realities.  First, the only genuine difficulties they face from Buy American regulations stem from the refusal of their own provincial and municipal governments to sign the WTO government procurement agreement and open their markets to imports.  Second, with America representing 75 percent of its export market, and running a $7.1 billion trade deficit with its neighbor, if Canada ever did enter into a full-fledged trade war with the United States, Canada loses.

...But maybe these incoherent tantrums are not all the Canadians’ fault.  Maybe some blame lies with misguided American press coverage that can only enable the mushrooming sense of victimization and entitlement to the north.  Take the August 6 Bloomberg story by the usually sensible Mark Drajem.  The piece featured all sorts of whining by U.S. state and local officials supposedly being driven crazy – and forced to delay valuable job-creating infrastructure projects – by the need to satisfy the Buy American provisions, and to search for key products readily available only from Canada and abroad.

What the story failed to mention is that (a) the Buy American provisions have waivers for precisely this reason; (b) if customers can decide too quickly and easily that enough domestic goods aren’t available, over-importing would significantly reduce the stimulative effect of the stimulus; and (c) these procurement officials who are claiming sudden shortages seem to have waited till the last minute to find out where to get the needed products.  After all, it's not like the bill was passed just yesterday.

...I’ve needled those who have peddled Panglossian interpretations of government economic reports that were clearly dreadful by any sane standard (see, e.g., my May 15 entry at http://www.americaneconomicalert.org/view_art.asp?Prod_ID=3240, or my August 1 missive at http://americaneconomicalert.org/blogger_home.asp?Prod_ID=37#3275).  So it’s only fair that I acknowledge the genuinely-much-better-than-expected jobs report issued by the Bureau of Labor Statistics (BLS) last Friday.  Without doubt, a 247,000 decline in payroll employment in July was a vast improvement over the 467,000 job losses initially recorded in May (and since revised downward to 443,000).  

I’m still not in a celebratory mood, though.  It's not only because the unemployment rate remains at 9.4 percent, and not only because even this horrendous figure leaves out more than 2.3 million Americans who are “marginally attached” to the labor force – including 796,000 workers officially classified as “discouraged,” or not actively seeking work.  It’s not even only because the ranks of involuntary part-time workers hit 8.8 million or because the ranks of the long-term unemployed swelled by 584,000 to 5 million.  

I’m mainly still bearish because after having fired more than 6.6 million workers since the recession officially began in December, 2007, American businesses still downsized at breathtaking rates more than 18 months later.   Therefore, the recent improvement may simply reflect the spread of an auto industry situation described thusly by the BLS: “In motor vehicles and parts....July's seasonally- adjusted increase reflects the fact that previous job cuts had been so extensive that there were fewer workers to lay off during the seasonal shutdown.”  “Fewer workers to lay off,” but still a painfully long way from “no more.”  

...American economists apparently have decided that the recession is officially over.  The Blue Chip Economic indicators survey of private-sector economists showed that some 90 percent of those polled believe that the current (third) quarter of 2009 will be the quarter when the GDP figures return to the black.  Just as important, Nobel Prize-winner and New York Times columnist Paul Krugman reportedly agrees, along with former top Clinton advisor Laura Tyson, who also serves on President Obama’s Economic Recovery Advisory Board.  

Most of these folks probably never saw the recession coming, or even close, but let’s not be petty (at least as they see and a credulous media see it).  

In my August 1 posting (http://americaneconomicalert.org/blogger_home.asp?Prod_ID=37#3281), I wrote that the return of economic growth is essentially meaningless for the time being.  For if present trends continue, the sole reason would be government stimulus funds.  Hardly the capitalist ideal, to say the least.  But that’s not to say that significant milestones are completely lacking, or out of reach. How about this for a national goal?  Restoring the economy to its pre-recession size.  

Since the economy shrunk in inflation-adjusted terms by about $52.3 billion between the last ear’s second quarter and this year’s (the latest figures), or 3.9 percent, reaching this objective would require real expansion of just under 4.1 percent.  Even that’s pretty thin gruel, given that population keeps rising, meaning that our performance should keep improving.  But it seems better than focusing on a statistical illusion of economic health – the macro version of a dead cat bounce.  
 

...What could be more bizarre than the spate of financial news reports this morning linking the rise in stock futures to remarks by former Fed Chairman Alan Greenspan that “I’m pretty sure we’ve already seen the bottom” for the recession-ridden U.S. economy?  

Of course, that would be the same Alan Greenspan whose reckless loose money policies were largely responsible for triggering what he himself called a “probably once in a century type” of economic meltdown.  And by extension the same Alan Greenspan who was completely blindsided by the bursting of the resulting real estate and financial bubbles.  Talk about a contrarian indicator!  

...If your stomach is weak, stay away from videos of the latest edition of ABC Television’s “This Week” Sunday talk show.  This was the broadcast on which Greenspan made the above remarks.  Did host George Stephanopolous, however, make even the briefest reference to the former Fed Chairman’s disastrous policies?  Not a chance.  It would make all those A-List parties they both attend in Washington and New York so very awkward.

...Speaking of accountability, kudos to Newsweek and Washington Post columnist Robert J. Samuelson for describing in an early July column the blinkered, ahistorical mindset that led
"most economists" to be caught completely by surprise by the economic crisis.  Here are two more questions we wish Samuelson had examined, though.  First, why do so many journalists, including Newsweek and Post correspondents, still rely so heavily on these same narrow-minded thinkers for analysis and commentary in their economics coverage? And why don't these journalists at least inform their readers about these supposed experts' sorry recent track records?

...It’s now official.  President Obama acknowledges that he doesn’t “have a crystal ball” on the economy, either.  In the last two weeks, he’s said he lacks such an orb on economic growth trends and on employment figures.  If only such admirable modesty would extend to climate change issues.  The mechanisms and systems that have heated and cooled the earth over the eons are still even more of a mystery to climatologists than the forces generating growth and contraction in America are to economists.  But the President apparently thinks he knows enough about their near-future operation literally to remake the economy in an effort to forestall cataclysmic global warming.  Go figure.

...But don’t ask John Podesta, who heads the slavishly pro-Obama Center for American Progress.  In mid-July, Podesta, a former Clinton-ite outsourcer, was quoted in a Chinese government newspaper (the only kind!) that “When members of the U.S. Congress or the media claim that China is doing nothing to solve this [climate change] problem, they are simply wrong - although China still must do much more."  Two weeks later, Bloomberg News reported, Beijing announced a 3.3 percent cut in already subsidized gasoline and diesel prices.

To be sure, China had increased these prices three times since March.  But it reversed course because of “public concern that fuel costs are too high.”  Of all the times for the Chinese government to bow to public opinion.

...The newly released July auto sales numbers are creating euphoria about the “Cash for Clinkers” trade-in program enacted by Washington earlier this year.  The measure, which aimed at resuscitating the deeply slumping automotive industry, is widely credited with supercharging the pace at which vehicles flew off dealer lots last month.  In addition, as emerged late last week, Cash for Clunkers has been so popular that the funds appropriated to pay for the rebates to consumers have just about run out.

The rush is on to replenish the pot.  But before Congress and the administration act, here’s an important suggestion:  Add a provision limiting eligibility to new vehicles with 80 percent U.S. content.  Or at least how about a sliding scale rebate to encourasge the purchase of high U.S. content vehicles?  I.e., the higher the U.S. content of the vehicle, the more cash back you get.  What better way not only to encourage the use of more domestically made parts by U.S. and foreign-owned vehicle-makers alike, but to induce them to bring home offshored parts production?

If these changes aren't made, Washington should at least have the honesty to re-name the program “Cash for Toyotas” or “Cash for Imports.”  Because as the Wall St. Journal reported, and as was totally predictable, more than half the new cars bought under the program were produced by foreign auto companies.

That is to say, more than half the new cars bought with Washington’s subisidies were either imports, or vehicles made largely from imported parts.  Combine them with the Big Three vehicles that are either manufactured overseas or whose foreign content levels are not trivial themselves, and the bottom line is downright alarming:  More American tax dollars are financing economic stimulus in Japan, Korea, Germany, Mexico, China, and numerous other automotive-supplier countries than are financing economic stimulus in the United States.  And the proposed doubling of the program could simply double this effect.  

Further, as DC-area radio commentator Chris Core noted last week, even worse is the fact that American taxpayers now own so much of Chrysler and GM.  The Clunker program’s failure to favor domestic vehicles in any way means nothing less than that they’re subsidizing the competition.

...Finally, I still can’t get over how Chinese President Hu Jintao had to rush home prematurely from last month’s G8 summit in Italy because of the rioting that killed a reported 200 in his country’s far northwest Xinjiang Uighur Autonomous Region.  Kind of deflates all that bloviating we keep hearing about China’s ascendance to superpower status, doesn’t it?
 

The out-of-control spinning of rotten economic news continued apace yesterday as the government released its advance figure for U.S. economic growth in the second quarter of this year.  The lead of most coverage:  Since inflation-adjusted gross domestic product shrank at only a 1.0 percent annual rate from April through June rather than the 1.5 percent predicted by a well known poll of economists, the economy is stronger than previously realized, and the recession is closer to an end.

Bunk, for three main reasons.  First, this figure will be revised in late August – possibly downward.  Second, all the growth was accounted for by increased government spending, which jumped at a 10.9 percent annual rate in the second quarter, compared with a 4.3 percent decrease in the first quarter.  Meanwhile, personal consumption spending fell at a 1.2 percent rate in the second quarter, after actually expanding by a 0.6 percent rate in the first.  Private sector investment fell, too – though at a slower rate than in the first quarter.  And as for those promising foreign markets constantly touted by globalization cheerleaders, U.S. exports fell at an annualized rate of seven percent in the second quarter – on the heels of a 30 percent drop in the first quarter.  

The bottom line couldn’t be clearer, or less palatable, to the cockeyed optimists comprising most of the economics and business chattering class:  The private sector has absolutely no vitality whatever.  America’s is an economy surviving solely on government life support likeliest only to damage its longer term health.  

Third, a comprehensive revision of growth figures going back to 1929 showed that, during 2008, the recession was more than twice as bad as originally reported.  This revision (a once-every-five year exercise), was only mentioned in the middle of the press release from the Commerce Department’s Bureau of Economic Analysis.  But it reports that, although the previous figure for economic contraction for the first twelve months of the slump (which officially began in December, 2007), was 0.8 percent, the real figure was 1.9 percent.

In other words, the hole in which America was stuck was stuck by the end of last year was twice as deep as it appeared.  Whatever slowdown in the economy’s shrinkage is being witnessed is starting at a level considerably lower than previously recognized.  And the return of genuine prosperity is even farther away than previously thought.

It’s also critical to understand that the predominance of government-stimulated activity in the economy renders completely meaningless the question of when the figures will show the recession to be over.  If recent trends continue, it simply won’t matter whether or not the GDP readings turn positive at some point, or when exactly this point is reached.  It won’t matter for the same reason that it doesn’t matter whether doctors can keep a body technically alive after brain death with electricity or some other artifice.  

Growth generated solely by priming the economy’s pump with trillions of borrowed federal dollars is growth that can’t be sustained.  In fact, as with over-reliance on medical stimulants and painkillers, over-reliance on government stimulus can easily produce worse longer-term damage in an economy still curable through sounder, if slower-working and more arduous treatments.  

Specifically, thanks to a Bush-Obama-Bernanke economic strategy that’s neglected the hard work of promoting production in favor of ever more massive gimmicks to encourage lending, borrowing, and spending, the economy is doing nothing but add to its already dangerous levels of debt.  As a result, Washington is inflating an even bigger bubble than the one that just burst.  

The real question raised by this policy of economics as electro-shock is one you’ll never hear from officialdom or the pundit-ocracy:  How long will America’s Chinese and other foreign creditors allow this charade to continue?
 

Let’s give the benefit of the doubt to Washington Post columnist Michael Gerson and the supposed expert he cites in this morning’s article "A Humane Trade Reform" – Kimberly Ann Elliott of the Center for Global Development.  Let’s assume that they’re not simply shilling for outsourcing multinational business interests in their call for unilaterally opening U.S. markets even wider to imports from the poorest developing countries.  Let’s grant that they really do want to help these countries overcome the effects of the global economic crisis.  We’re still left with a depressing conclusion – they’re both guilty of inexcusably soft-headed thinking on trade issues.  

Gerson and Elliott bewail the sharp contraction that began in world trade flows once the crisis settled in.  One big reason for their alarm: “The world’s poorest countries are often the most dependent on exports.”  But a proposed response – providing wholly unfettered access to the U.S. economy for products from 70 of the world’s poorest countries – can only worsen the problem.  

How come?  Mainly because the new formal trade barriers erected by the United States and at least 29 other countries have had almost nothing to do with the trade implosion.  America’s certainly are too modest and too new to have even budged the needle.  And global trade has surged in recent decades despite the ubiquity and healthy growth of formal and informal trade barriers elsewhere.  

In fact, that seeming paradox leads directly to the real problem:  Trade volumes are cratering overwhelmingly because of America's excessive net imports.  The resulting trade deficits have produced so much debt that the nation is finally losing the creditworthiness underlying its longstanding role as the world's consumer of last resort and chief growth engine for its protection- and export-addicted trade partners.

Therefore, the best solution for all concerned is anything but trying to jam more net imports into an already bloated U.S. market -- as Gerson and Elliott propose.  That approach will simply boost still-dangerous U.S. debt levels even higher, reflate another, even more fragile, consumption bubble, and set the stage for a worse downturn -- meaning even more pain for the poorest countries.    

The best solution is to rebuild America's long-term capacity to finance its foreign purchases responsibly -- including from the poorest countries -- by reducing its overall net imports and trade deficits to sustainable levels.  

As I’ve pointed out frequently, so-called non-protectionist ways exist to accomplish some of the third world-oriented goals advocated by Gerson and Elliott.  

The high-income Eurozone members and Japan could voluntarily boost their imports from the world’s paupers from their presently stingy levels.  So could China, with its huge global trade surplus and nearly $2 trillion in foreign exchange reserves.  Beijing is becoming a “responsible stakeholder” in the world community, isn’t it?  (LOL).  Less compatible with purist free trade but hardly Smoot-Hawley-ish would be a Washington decision to take some of its import market for labor-intensive manufactures now dominated by China and handing it to its much poorer counterparts.

Unfortunately, the rest of the world shows no sign of wanting to relieve the United States of the burden of helping developing countries export their way to prosperity (the only real hope for development they have).  And restructuring America’s third world imports would require qualities that Washington shows no sign of displaying on the trade front – the willingness to set priorities and thus ultimately the ability to think.  

Of course, even progress on that front still would leave unaddressed the larger objective of major overall U.S. trade deficit reduction that the entire world economy so desperately needs.  Success will require going far beyond America's commerce with the poorest countries.  And given the shortsighted determination of America's leading trade partners to keep free-riding economically, a unilateral rebalancing of U.S. trade flows with these countries looks unavoidable.  

How revealing that Gerson’s column and Elliott’s proposal evince no awareness at all of these paramounrt realities.  It's just the latest reminder that an inability to think about trade isn't limited to America's leaders.  It's extends to America’s think tanks and the rest of the chattering class as well.
 

Yesterday’s industrial production report is definitely worth looking at more closely – and especially the optimistic spin (no doubt unwittingly) put on it by veteran AP economics reporter Jeannine Aversa.  

Just to be clear right off the bat – the point of this posting is not to knock Aversa, who has an incredibly difficult job.  The government’s economic data comes out fast and furious, and even though she and her wire service colleagues get advance versions, she’s still expected to digest it and provide a detailed report incredibly quickly.  Generally, Aversa and other spot news economic journalists meet this challenge admirably – though I gotta tell you, the Bloomberg and Reuters versions of this story were scarcely any better.  

But yesterday’s article, “Industrial activity logs smaller-than-expected dip,” shows just how misleading and even intellectually dangerous the expectations game can be.  First, it’s true that the overall preliminary June figure (which is dominated by, but not limited to, manufacturing), was down 0.4 percent from May levels – a performance that looks decidedly better than the May drop of 1.2 percent.  But hold on – that May figure represents a downward revision from the original preliminary May figure (which was 1.1 percent).  

So already, we’re starting from a lower baseline that previously thought.  And this means that the net fall-off for that two-month period has been worse than previously thought.  (Such revisions are routine in the world of federal economic data – not that there’s anything wrong with that.  We still have a huge economy, after all, and recent Congresses and Presidents have starved the government’s statistics-gathering agencies of resources.)  

Since manufacturing makes up 80 percent of the Industrial Production Index, the news for factory output was inevitably similar.   Manufacturing output in June fell 0.6 percent – half the 1.1 percent decrease in May.  But the May figure was revised downward from the initial assessment of a 1.0 percent drop.  So again, the baseline was lower than first reported, and the net two-month fall-off correspondingly greater.  No one rooting for the U.S. economy should be happy about that.

Even stranger was Aversa’s take on the year-on-year trends revealed by the data for the second quarter of 2009.   It’s worth quoting in full: “For the second quarter as a whole, industrial production fell at an annual rate of 11.6 percent, not as sharp as the 19.1 percent annualized decline experienced during the first three months of this year. ”

Talk about your Revolution of Falling Expectations!  In other words, first, domestic manufacturers cut their output back by an astonishing 20 some-odd percent in real terms (the Industrial Production Index is inflation-adjusted) from the first quarter of 2008 to the first quarter of 2009.  Then these same manufacturers came right back, starting in the second quarter of last year, and kept slashing production by double-digit percent rates.  This isn’t a sign of economic stabilization, or even an indication of circumstances becoming “less awful” (the new “good” for so many observers and investors).  This is the road to industrial extinction.

Appropriately, Aversa provided the perfect coda to this horror story as well – again, no doubt unwittingly.  She quoted John Engler, president of the National Association of Manufacturers, as expressing pessimism that factories would be “getting back on their feet any time soon.”  Consumers, he explained, “aren’t in a position to lead the economy back.”

No one, of course, should know this better than Engler.  His outsourcing-happy multinational members over the years have shed many of these consumers from their payrolls, and cut the wages and benefits of many others.  The upshot:  millions of American families forced to borrow recklessly to hang onto their lifestyles, and the crisis that our leaders are still struggling to understand correctly, let alone overcome.  
 

During the years framed by Vietnam and Watergate, American leaders crippled their ability to govern by creating credibility gaps – repeatedly making statements that clashed violently with readily observable reality.   What fate, then, awaits our leaders – and our country – today, given the Obama administration’s growing list of prouncements that clash violently not only with observable reality but with its own statements?    

The disorientation apparently afflicting the White House intensified this weekend, in the wake of the Labor Department’s unexpectedly terrible June employment report.  Vice President Biden made the biggest headlines with his confession July 5 that "There was a misreading of just how bad an economy we inherited."  But far more confusing and disturbing are the questions that statement raised.  

First, if Biden is right, then why would he think that the administration’s $787 billion stimulus plan is “the right package”?  Has a deeply flawed analysis really produced a correct conclusion?  

Second, it’s not as if President Obama was exactly talking up the economy during the campaign or the transition.  As he said in his weekly radio address last November 21, “we are facing an economic crisis of historic proportions.”  Moreover, the proportions of the stimulus – and every other aspect of the administration’s response – have been historic as well, at least in terms of the combination of spending and tax cut totals.  

Was it still too small?  As I’ve wondered in previous postings, did the President and his team somehow decide that $800 billion was a figure they could sell as “responsible,” whereas a penny higher would be universally condemned as “reckless”? (To be a fly on the wall during those conversations!) Was the package, and the rest of the recovery plan, just badly structured, as so many critics on the Left and especially the Right have charged?  Is the administration’s economy strategy largely off-track – for example, neglecting the need to stimulate production and over-emphasizing borrowing and consumption, as I and my colleagues at USBIC have argued?  These are questions that urgently need to be answered, especially as demands mount for a second stimulus.

Nor can the controversy be laughed off as yet another verbal mis-step by a gaffe-prone Vice President.  Christina Romer, the President’s chief economist, made virtually the same combination of incoherent statements the day the latest jobs numbers came out.  

“None of us had a crystal ball back in December and January,” Romer told Fox News July 2, adding mysteriously “I think almost every private forecaster realized that there were other things going on in the economy.”  (So these private forecasters were similarly in the dark, but still grasped the magnitude of the crisis better than the president-elect’s team?  How does that work?)  “It was worse than we anticipated,” she re-emphasized.   Nonetheless, Romer declared to a MSNBC interviewer the same day that “we do firmly feel we've put in place the right policies.”  

Throughout the history we Americans rightly celebrated this weekend, our country has been able to overcome the woes created by leaders who are corrupt or incompetent.  But are we ready for the challenges possible from leaders with the intellectual or political equivalent of multiple personality disorder?
 

...Call me spiteful, but that military coup in Honduras earlier this week couldn‘t help but remind me of one of the arguments made on behalf of the Central America Free Trade Agreement back in 2005. – specifically, the Bush administration’s claim that “CAFTA is a way for America to support freedom, democracy and economic reform in our own neighborhood.”  

Let’s hope the Obama administration keeps this in mind as it struggles to spark Congressional interest in Bush-era trade agreements with Colombia and Panama.  As any intellectually honest student of the region knows, the obstacles to establishing strong democracies in Latin America are too formidable to be hurdled by a few outsourcing- focused trade deals.

...Speaking of hemispheric trade issues, have you noticed the latest example of Canadian trade hypocrisy?  As I observed in a recent GLOBALIZATION FOLLIES item (“Hypocrisy in Canada’s Trade Policy,” June 1, http://americaneconomicalert.org/view_art.asp?Prod_ID=3242), Canada has spent more than a year blasting as dangerously protectionist American Democrats’ interest in re-negotiating NAFTA and Congress’ addition of Buy American provisions to the stimulus bill.  But that didn’t stop a senior Canadian official from insisting that GM limit its plant closings and job cuts in Canada because Ottawa had invested in the bankrupt auto maker.  

More recently, Canada now realizes that its refusal to include sub-national government procurement in CAFTA’s daddy, NAFTA, was a huge mistake.  As a result, U.S. states and localities have every legal right to discriminate against Canadian products in their procurement policies.  So all of a sudden, Canada has started to request a NAFTA re-negotiation – to cover procurement.

The United States, of course, would be unforgivably stupid to limit any NAFTA restructuring to this single issue.  After all, the Canadian sub-national procurement market is peanuts compared with America’s.  But the Obama administration should definitely hoist the Canadians on their own petard, and use Ottawa’s latest Canadian move to press for a full revamp of this fatally flawed deal.

...Another day, another ludicrous claim by the pundits and the media that the housing crisis is bottoming out.  Their evidence?  Tentative signs that home sales, whether of new or existing units, are falling at a somewhat slower rate.  The problem is that home prices keep falling as well.  If that inconvenient fact really should be glossed over, then clearly there’s a breathtakingly easy way to end the housing crisis once and for all.  Why doesn’t the Obama administration simply cut the price of all homes on the market to a dollar?  Or even better – fifty cents?  Sales would be sure to skyrocket then, and even hit new records.    

...More evidence from the Washington Post that repeating the latest cliches for the moment is no substitute for actual thought when it comes to looking at the economy.  In a June 30 editorial, the Post urged U.S. officials not to “stifle innovation” as they seek to overhaul regulatory strategies for the sector and improve protection for consumers.  I’m sure that Post editorial writers thought they were skillfully covering their behinds when they cast their position as a warning against “overcorrecting” the mistakes that led to the crisis.  But is anything like the level of financial innovation we’ve seen in recent years even remotely desirable?  At the very least, the burden of proof should be on the “innovators.”  And I strongly suspect that the foundations for a truly healthy U.S. economy won’t actually be laid until the country’s economic mandarin-ate realizes that the vast majority of finance needs to return to a plain vanilla state – banks borrow money at X percent, they lend at X+N percent, and investors buy stocks and bonds at certain prices in the hope that these prices will rise.  

The Post and other timid reformers may be right that plain vanilla finance will leave consumers (and presumably investors) with “fewer choices and higher prices” – especially for products like homes.  But as the nation should have learned over the last nearly two years since the subprime mortgage bubble originally burst, lots of choices and low prices are no substitute for genuine wealth-creation as foundations for genuine prosperity.  And if we as a society want to encourage innovation – which we should – let’s focus this impulse on creating higher quality, more appealing, more efficient goods.
 

Want to get a handle on exactly what's wrong with the U.S. government's approach to saving the auto industry in the United States (and this includes Congress as well as the Obama administration)? Look no farther than the Energy Department's decision earlier this week to lend $1.6 billion to Japanese auto giant Nissan to produce electric cars and batteries at its Tennessee manufacturing facility.

As I wrote at the end of last year on AmericanEconomicAlert.org ("Congress Must Ensure that the Big Three Bailout is Made-in-America," December 10, 2008, http://www.americaneconomicalert.org/view_art.asp?Prod_ID=3091), the legislation creating such low-interest loans contains some U.S. content provisions.  But there are no hard and fast requirements that the green vehicle and components output the program aims to foster be American-made.  Ample wiggle room exists to enable both domestically and foreign-owned auto and parts makers operating in the United States to import supertanker-loads of parts as well as capital equipment.  Nowhere is this likelier to be seen, incidentally, than in the battery industry, where virtually all of the world's high-value capacity is in Japan and elsewhere in Asia.

Nissan's Tennessee facilities have always been technically eligible for the loans (just like the older U.S. facilities of the other transplant automakers).  But the company's success in securing one of the first three automotive retooling loans (the other two recipients were Ford and California-based specialty electric car producer Tesla) spotlights dramatically how incoherent Washington's auto rescue strategy has become.

After all, even though Nissan lost money in fiscal 2008, it still boasts more than $29 billion in net assets.  Why should American taxpayers foot the bill for any part of its operations?  And Heaven forbid anyone should mention the decades of subsidies and protection that Nissan has already received from the Japanese government -- which have denied the U.S. economy so much production and so many jobs for reasons having nothing to do with genuinely free markets or free trade.  

One obvious answer:  The loan is needed to  ensure that Nissan does in fact make these cars and batteries in the United States, and employs American workers.  Yet this rejoinder just doesn't fly.  Ever since Nissan and the other transplants began producing in America, they have insisted that U.S.-based operations make eminent sense -- to help them hedge against currency risk, to bring them close to their customers and enable these companies to learn American tastes, etc.  In other words, Nissan and its counterparts have long proclaimed that they already have major incentives to produce in America.  Why are subsidies from Washington suddenly so important now?

Obviously, these Energy Department loans haven't been the only U.S. government support provided for the auto sector recently.  Tens of billions of U.S. taxpayer dollars have been spent first to stave off the bankruptices of GM and Chrysler, and then to try and keep them orderly.  But where is the logic in throwing big money at their competitors as well, especially since their nature as going concerns means that they should be able to finance major retooling themselves?

And here's where the auto loan program gets truly silly.  The legislation expressly restricts eligibility for loans to companies that are "financially viable" without federal support.  Clearly, GM and Chrysler haven't qualified for months.  This condition was included in the policy undoubtedly to enable government officials pose as no-nonsense guardians of the public purse -- who would never be so irresponsible as to lend taxpayer money to companies that could well be incapable of repayment.  

Normally, of course, such frugality is admirable.  But in this context, the main impulse seems to be covering politicians' behinds.  And this self-serving aim obviously ranked much higher on their priority scale than ensuring that total auto rescue resources are used where they're likeliest to achieve the greatest long-term good for the domestic economy.  

The kicker?  The Nissan loan was hailed by none other than Republican Senator Bob Corker of --- where else? -- Tennessee, who predicted it would help "establish our nation's energy independence" and "ensure that our country is on the leading edge of global technological competitiveness.”

This of course is the same Bob Corker who in the name of preserving free markets led the opposition to the GM rescue package starting late last year.  Between his enthusiasm for this new loan, and his support of the kind of individual state subsidies that helped determine the transplants' locational decisions once they decided to produce in America, it's obvious that his principles fly by the boards any time it comes to luring business to his state.  
    



 

...President Obama’s apparent strategy of carrying out George W. Bush’s failed trade policies continues.  Not content to excuse China’s currency manipulation last month, he decided to nominate a senior Bush trade official to be U.S. Ambassador to China.  And in his acceptance remarks, Jon Huntsman Jr., the Republican Governor of Utah who served as a Deputy U.S. Trade Representative under card-carrying panda-hugger Robert Zoellick, signaled his clear determination to treat the Chinese with kid gloves.

“You have my commitment,” Huntsman told Obama, “that we will take the U.S.-China relationship to new heights, focused not just on that which divides us, but more importantly, on that which unites us....”  For good measure, Huntsman added, “I'm reminded of my favorite Chinese aphorism. It goes something like this: (Speaks in Mandarin Chinese.) ‘Together we work, together we progress.’ This, more than anything else, I think captures the spirit of our journey going forward.”

According to Obama, Huntsman as a trade diplomat “stood up for America's economic interests abroad.”  We’d find this claim a lot more convincing if the ambassador-designate said anything remotely like that himself.

...Obama himself, meanwhile, displayed some left brain-right brain problems last week on China policy. At his town hall meeting in New Mexico, the President declared that “We can't keep on just borrowing from China, or borrowing from other countries...because...we have to pay interest on that debt....[B]ut what's also true is that at some point they're just going to get tired of buying our debt.  And when that happens, we will really have to raise interest rates to be able to borrow, and that will raise interest rates for everybody....”

Obama continued, “ As I said before, the biggest thing that we can do on that front is to deal with entitlements.”

Well, that’s certainly one way to avoid mortgaging the nation’s future even more deeply to lenders like China – which holds more U.S. debt than any other foreign country.  But a better way would be greatly reducing the still-mammoth U.S. trade deficit – much of which has been run up with China – and empowering more Americans to pay for their current expenses, their health care, and their retirement through their earnings rather than ever greater government handouts.  

Of course, the President blew a huge opportunity last month to do just that by directing his Treasury Department to declare that China is not manipulating its currency – in the face of massive evidence to the contrary.  

If he’s serious about strengthening the nation’s finances and reducing the debt burden on future generations, he’ll endorse the bill just introduced in Congress establishing whopping and prolonged currency misalignments like China as subsidies that can trigger offsetting U.S. tariffs.  Obama actually signed onto last year’s version of this bill once the Democratic primaries hit the manufacturing-heavy and delegate-rich battleground states of the Midwest.  Now that he’s President, why does he seem more interested in balancing the nations’ accounts on Americans’ backs rather than Chinese backs?

...The European aerospace giant EADS has recently provided more examples of multinational companies burnishing their images by selectively releasing information that the U.S. government has needlessly allowed them to monopolize.  

In a series of full-page issue ads run in major Washington, D.C. newspapers and posted on-line, EADS crows, “Our stimulus package puts 200,000 Americans to work every day.”  How?  The company claims that “Last year, EADS purchased over $11 billion of U.S. aerospace and defense products, supporting more than 200,000 high-paying American jobs and making EADS the largest international customer for U.S. aerospace exports.”

Trouble is, we currently have only the company’s word to go on.  Worse, such data raise at least as many questions as they answer.  For instance, that $11 billion worth of U.S. aerospace products purchased by the company in 2008.  What share of EADS global procurement do those goods represent?  And why just provide a snapshot?  How has that share changed over the years?  

Further, if EADS is going to tell us how much many U.S. aerospace products it buys as a company (and let’s make sure that those are all U.S.-made, not goods manufactured by the foreign affiliates of U.S.-owned companies), shouldn’t it tell us how many imports its U.S. operations purchase?  And again, how about releasing its U.S. trade balance figures for the last five or ten years?

As noted in my latest blog posting on the job-creation performance claimed for U.S. multinationals, (“Some Trade Policy Myths are More Equal Than Others,” May 14), EADS and the other global companies waging these public relations campaigns could easily clear up all these uncertainties simply by opening their books.  And if they don’t do so voluntarily, Washington should require publishing such information annually as a condition of doing business in the United States.  

The companies should jump at this opportunity – after all, full disclosure sounds cheaper than ad placements.  Unless they have something to hide?

...That was one strange anecdote in the Washington Post story last week about the stimulus bill’s Buy-American provisions touching off trade imbroglios between the United States and Canada in particular.  Reporters Anthony Faiola and Lori Montgomery told the tale of Duferco Farrell Co., “a Swiss-Russian partnership that took over a previously bankrupt U.S. steel plant near Pittsburgh in the 1990s and employed 600 people there.”

According to Faiola and Montgomery, the company makes coils at this factory “using imported steel slabs that are generally not sold commercially in the United States.”  But “the partially foreign production process means the company's coils do not fit the current definition of made in the USA.”  Therefore, its largest client – a steel pipemaker located a mile away – has decided to cancel its orders of the Duferco coil and buy instead from companies “with 100 percent U.S. production to meet the new stimulus regulations.”  

As a result, Duferco told Faiola and Montgomery that it has furloughed 80 percent of its workforce, and an exasperated senior executive asked them rhetorically, “You need to tell me how inhibiting business between two companies located one mile apart is going to save American jobs.  I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?"  And there the matter was left.

With all due respect to the Duferco workers who will be losing out, it should be pretty obvious why this “is good for America” on net.  After all, a product partly made abroad – with foreign workers – will now be made entirely in the United States – with American workers.  In particular, production of “steel slabs that are generally not sold commercially in the United States” will rise to meet the new demand.  Moreover, the increased production could lead to new scale economies that make the domestic production ever more efficient – and thus more competitive domestically and internationally.  Finally, the Buy-American regulations could persuade even Duferco to start using the domestic slabs, get itself back into the government procurement game, and win more work for its U.S. employees.  The resulting increased domestic competition would be good for everyone involved – except of course for foreign workers.  

Depending on one’s point of view, it’s fair game to criticize Buying-American for any number of reasons.  But let’s not get into the habit of mindlessly repeating foreign charges that Buying-American is doing what it’s supposed to.

...Fully a week later I’m still blown away by Ben Stein’s column in The New York Times acknowledging that the infamous Smoot-Hawley tariff of 1930 was far too small to affect significantly the U.S. or world economies, and his disclosure that the practice of blaming it predominantly for that era’s depression and  cataclysmic effects stems from a carefully calculated Wall Street Journal misinformation campaign.  Stein’s description is worth quoting at length:

“To say that the act, which applied to a distinct minority of imports and which raised tariffs generally by only about six percentage points, caused the Depression is almost comical. It did no good, but compared with the titanic monetary policy disasters of the era, the effect of Smoot-Hawley was probably very small, or so most mainstream economists believe.

“However, a number of well-known people, especially my former colleagues at The Wall Street Journal editorial page, the late Robert Bartley ...and Jude Wanniski, began in the mid-1970s to popularize the notion that Smoot-Hawley and not monetary policy mistakes was the real cause of the Great Depression.  This popularization was a form of intellectual entrepreneurship, in which people carve out an appealing idea and then try to make capital of it.”

It sounds more like “snake oil” than like “popularization” to me.  But I hope that all readers will send this passage to newspaper editorialists every time they peddle it.
 

When daily newspapers as we know them have finally gone the way the of the dodo, or dumb themselves down enough to make respectable people ashamed to be seen reading them, I’ll certainly miss some of their features.  

I’ll miss sports sections.  I’ll miss TV listings that I can see at a single glance rather than having to scroll through on my home-screen ten at a time.  I’ll miss the ease of turning pages rather than clicking a mouse.  But one thing I definitely won’t miss is the iron triangle that’s developed between newspaper editorial page staffs, their publications’ anointed columnists, and certain public issues where a strict orthodoxy is the only position expressed, and is protected at all costs – even (or especially?) if it means keeping readers in the dark.

Of course, one of these issue clusters encompasses trade and globalization, and the latest example of imperious media intolerance came this past Monday, May 11.  The Washington Post published a piece by syndicated columnist Robert J. Samuelson that was based in part on a claim with absolutely no factual justification.  Being familiar with what is and isn’t known on this subject, I submitted a short response explaining this critical mistake.  The article was “carefully reviewed” I was told in an e-mail two days later.  But the Post was “not able to publish” it.  

Fortunately, thanks to the blogosphere, analysts and readers are no longer at the mainstream media’s mercy.  So here’s what the Post considered unworthy of a single column inch:

Samuelson’s column focused on debunking myths about the tax payments of U.S. multinational companies – of which there are many, spread by numerous parties to this debate.  In the process, however, the author perpetuated a major myth about these companies’ job creation performance that has distorted and clouded the globalization debate since NAFTA was unveiled.

Samuelson portrayed as myth the view that “When U.S. multinationals invest abroad, they destroy American jobs.”  The reason? [M]ost overseas investments by U.S. multinationals serve local markets.” In addition, Samuelson contended, “Only 10 percent of their foreign output is exported back to the United States....” “On balance,” he concluded, “all the extra foreign sales create U.S. jobs for management, research and development...and the export of components.”

There are two fatal flaws surrounding this position.  First, the foreign sales of multinational companies do not create professional jobs because they are foreign.  They create these jobs because they are sales, period.  Such effects would be seen wherever the sales were made – including in the United States, where literally hundreds of billions of dollars worth of new growth opportunities exist in the form of the market share lost by these U.S. firms to foreign competition.

The logic behind Samuelson’s components point was stronger.  But so are the objections.  For existing publicly available data simply do not permit such employment-impact conclusions to be drawn.  Here’s why – and why it’s really important to know the data inside out before expounding on them.  The data on overseas sales measures only one trip made by a good produced by one of these multinationals abroad.  Nowadays, of course, complex multinational supply and production chains have emerged for many individual final products.  As a result, the components Samuelson mentions often make many trips within and across borders before they are actually consumed.

When the final products made by the multinationals overseas are consumed overseas, they do indeed boost domestic employment and growth on net.  After all, in these instances, the demand being serviced for such products is demand that is being added to existing domestic demand.  

As made clear by Samuelson’s phrasing, however, when multinationals’ “foreign output is exported back to the United States” and this output is consumed domestically, these net job gains disappear.  For these products are serving not net new foreign demand, but existing U.S. demand.  Indeed, net job losses could well result because this demand often is being served by foreign factories and workers that once existed in the United States.

America’s enormous trade deficits – which have grown along with the spread of multinationals’ offshore operations – indicate that the United States is indeed much and possibly most of the final market for goods produced through multinationals’ investments abroad.  Even stronger evidence has come in the form of a McKinsey & Co. study reporting that by 2002, U.S. multinational companies generated fully one-third of the American merchandise trade deficit.  It also showed that most of the deficit growth has taken place since the mid-1990s, when their overseas production investments increased substantially.

Luckily, I noted, there’s an easy way to gauge very precisely the effects of the multinationals’ foreign investments:  Require them to make public all data about their overseas production, sourcing, employment, wages, and imports and exports.  Nothing would shed greater light on globalization’s true economic impact on the United States – for the public and decision-makers alike.   Even better, we'll no longer have to rely on the Washington Post or the rest of the mainstream media to spread the word.



 

I was invited back to CNBC-Land Tues. night, May 5.  You know – that’s the surreal realm where reckless financial chicanery is still worshiped as “innovation.”  It’s where the (always deserving) rich are under endless, totally unjustified assault from the (rightfully) less affluent.  It’s where any insistence on accountability from Wall Street is scorned as ignorant, mean-spirited populism.  It’s where the louts and fakirs and blowhards responsible for the current economic mess are still viewed as oracles.  It’s where the real economy remains an afterthought at best and a wasteful anachronism at worst.  And not so coincidentally, it’s where President Obama and his aides are viewed as rabid protectionists.

In fact, that was the subject of the Tues. night segment:  Is the new U.S. administration irresponsibly about to spark a disastrous series of global trade wars?  Much of the discussion was pretty standard talk show stuff.  See for yourself at this link:  http://www.cnbc.com/id/15840232?video=1114965844&play=1.  But especially fascinating  was anchor Dennis Kneale’s response to my effort to yank the show back to reality right away.  He simply couldn’t deal with it – simply could not tolerate anyone challenging his premise right off the bat and threatening to ruin the tendentious playlet he planned to present.

Kneale is an avowed trade absolutist, and therefore his chosen angle was completely unsurprising:  the Obama administration’s alleged determination to pander to a Democratic Congress and to a know-nothing public, and pursue dangerously flawed economic programs whatever the risks to global trade.  

Specifically, Kneale contended, the stimulus bill’s modest expansion of Buy American government procurement practices and occasional talk of including carbon tariffs in any cap-and-trade program add up – deliberately or not – to a potentially devastating attack on international commerce itself.

Yet as is clear to even the minimally knowledgeable, this premise couldn’t be further off-base.  For starters, the stimulus’ Buy American provisions weren’t even proposed by the administration, and the White House is at most sending out mixed signals on the carbon tariff.  More fundamentally, it’s utterly inaccurate to claim that the world trade system overwhelmingly is shaped by free market dynamics, and that the only sources of protectionism are these new wrinkles in U.S. policy.  

In fact, Kneale’s accusations – and so many others like them –  may actually be warning shots across the administration’s bow.  In other words, Mr. President, don’t even think about taking any sensible trade policy steps to rebuild America’s productive base – and in the process, threaten the offshoring business model that’s produced such great short-term profits for multinational businesses, but has gutted the nation’s economic vitals and helped trigger today’s crisis  

So when Kneale led off the segment by asking me  whether trade wars were about to break out, I went on the offensive.  Trade wars have been waged for decades, I responded.  You’re half a century late on the story.   And the only country that has consistently abstained has been the United States.  Kneale’s comeback:  You’ll put the viewers to sleep with all this history.  Stick to the point.  

Now I can understand Kneale’s irritation.  I mean, if you can’t come off like a Master of the Universe, what’s the point of hosting a major cable talk show?  But that’s his problem, not mine.  Indeed it’s a big part of my job to explode pervasive globalization myths and fallacies.    

I think I undermined his set-up for the segment, and his transparent hopes for turning the specter of wild-eyed protectionists in Washington into a standard jumping-off point for trade policy debates. But you be the judge.  

And of course, this historical perspective wasn’t my only argument.  After his smackdown attempt, I pointed out that since virtually all U.S. trade partners depend heavily on exporting to America for any growth they can muster, they literally can’t afford this kind of conflict.  He seemed satisfied – though did he actually process the information?  Hard to imagine.

And so, after a few more volleys, another skirmish in the policy wars came and went.  I remain convinced that these media appearances cumulatively spur progress – that they can educate viewers and even cause journalists to question deep-rooted beliefs. (Stubborn and apathetic as most are, few are as ideological as Kneale.)  But I look out at the economy and at the continuing deterioration of America’s wealth-creating foundations, and I can’t help but think that time is growing awfully short.
 

I've long clung to the hope that the alleged experts in most other areas of life are considerably smarter than the alleged experts on trade policy and the economy.  But after reading a recent New York Times article on the swine flu epidemic, my grip is much weaker.  

“Containing Flu Is Not Feasible, Specialists Say,” declared the headline for Donald G. McNeil Jr.’s April 30 story.  Fair enough.  They’ve studied medicine, biology, public health, and other such subjects; I haven’t.  But even a layman can see that their thinking gets a little fuzzy at this point.

According to McNeil, the experts agree with President Obama’s claim at last week’s prime-time press conference that the horse is already out of the barn door for the swine flu situation.  Therefore, there’s no point in the United States closing the border with Mexico – or any country closing any border.  The logic behind this seems to be that there’s already been enough human traffic between the United States and Mexico that the virus is already getting the greatest possible opportunity to spread within this country.  

But as McNeil reports – apparently unwittingly – U.S. Homeland Security Secretary Janet Napolitano doesn’t exactly see it this way.  Last week, Napolitano told a Congressional hearing that border closure would impose “a very, very heavy cost for what epidemiologists tell us would be marginal benefit.”  

That’s rather different, and raises lots of important questions.  First, Napolitano’s answer indicates that closing the border would indeed result in a benefit to the United States.  Second, wouldn’t it be great if we could find out what Napolitano means by ”marginal" – and just as great to find out what the epidemiologists mean by this phrase, assuming it has no technical definition?  Third, is Napolitano’s statement suggesting that the epidemiologists she conferred with are qualified to judge the economic costs (“heavy, heavy”) of closing the border?  Fourth, do the epidemiologists themselves claim this economic knowledge?  That would be cheeky, unless most of them boast professional credentials in that field, too.  But Times’ reporter McNeil detected nothing unusual.

More troubling, the article strongly indicates that the real reason for the experts’ conclusions has nothing to do with this economics versus public health judgment call that the epidemiologists are only partly qualified to make.  Instead, it has to do with the following reality, described to McNeil by Dr. Michael T. Osterholm of the University of Minnesota:

“[M]any goods needed in a pandemic are made abroad....including most masks, gowns and gloves, electrical circuits for ventilators and communications gear, and pharmaceutical drugs and the raw materials to make them. (For example, most suppliers of shikimic acid, the base ingredient in the antiviral drug Tamiflu, are in China.) ‘You cut those off and you cripple the health care system,’ he said. ‘Our global just-in-time economy means we are dependent on others.’”

Boy – my next dose of Tamiflu can’t come soon enough!  I don’t doubt these claims of heavy dependence in vital health care products.  That’s what happens after decades of offshoring-focused trade policies that have decimated so many other critical domestic industrial capabilities as well.  And I’ve learned never to underestimate how blase most Americans and their leaders have become about these vulnerabilities.  

But it’s still shocking to see, at least judging from McNeil’s article, this complacency among those on the front lines of public health and safety – not to mention the unmistakable suggestion in this piece that only the ignorant or the alarmist would view the situation as unacceptable, much less reversible.  

Come to think of it, maybe the epidemiologists have been boning up on economics after all.
 

It was great as usual appearing on Lou Dobbs’ program the other night commenting on the relationship between the swine flu epidemic and U.S. trade relations with Mexico.  But invariably there’s more to say on the matter than the typical 10-second sound bite allowed.

Especially after President Obama’s prime-time press conference last night, it’s clear that the U.S. response is being limited by a desire to preserve U.S.-Mexico trade flows to the greatest practical extent.  Just as clearly, the disease’s movement into the United States is the latest sign that, in their rush over the last two decades to open America’s borders to third world imports, U.S. leaders from both parties recklessly ignored the huge risks to public safety they were running.  Just as important, they’ve adopted a politically logical, but substantively disgraceful, strategy of going out of their way to absolve America’s third world trade partners of any responsibility for these problems, and to paint the rosiest portraits of them humanly possible.  Call it Outsourcing Correctness.        

Why haven’t you closed the border, Obama was asked right off the bat last night.  His answer, in a nutshell: The experts say it’s pointless.  The horse is out the barn door, he insisted.  Too bad aggressive follow-ups are apparently considered rude in the Age of Obama.  For the obvious rejoinder was, “Like there’s only one horse in the Mexican barn?”  Heck, even Sen. John McCain, Obama’s presidential rival last year,  now says this option should be seriously considered, and there’s no bigger apologist for Mexico than the Arizona Republican.

Of course, McCain also comes from a border state, where they’re already closing public schools, whereas Obama now lives in the White House Bubble, which itself is surrounded by the equally surreal Beltway Culture Bubble.  In these cloistered realms, support for NAFTA is an acid test of respectability, and even sanity, and the president has clearly decided to go with this program, his skeptical campaign rhetoric notwithstanding.  

Having taken some ownership of NAFTA, Obama is also becoming vested in the idea that criticisms of Mexico are verboten.  By the same token, he’s glomming onto the idea that he must protect at all costs the claim pitched at Americans while the treaty was being debated – that Mexico is well on the way to becoming a fully developed country.  Indeed, during Bill Clinton’s presidency, Washington went so far as to secure Mexico’s acceptance into the Organization for Economic Cooperation and Development, an international organization of high-income democracies.

Protecting this portrait of Mexico at all costs explains why former President Bush so strongly opposed treating the introduction of Mexican trucks onto U.S. roads differently than the introduction of Canadian trucks.  NAFTA designated these two U.S. trade partners as equals.  Therefore, if Canada is assumed to have a reliable national highway safety and regulatory system, the same must be assumed of Mexico – despite a complete lack of evidence.  

The same kind of thinking was on display last year when Bush bent over backwards to avoid fingering Mexico as a likely source of the salmonella outbreak, until the evidence could no longer be ignored or slighted.  This Outsourcing Correctness hammered America’s remaining tomato growers, themselves early victims of broken NAFTA promises.  

But these policies are hardly confined to Mexico.  It’s become plain as day that whatever regulatory systems exist in China have no ability whatever to ensure the production of safe food and drug products, or even safe toys and children’s wear.  And given the vast scale of the Chinese manufacturing base and endemic corruption at all levels of Chinese government, it’s equally obvious that no such systems will exist for years and probably decades.

Yet American leaders in both major parties decided to admit floods of Chinese imports anyway.  That’s why when dangerous Chinese products kept appearing in American stores – as was inevitable and utterly predictable – Washington hemmed and hawed.  Acting decisively would have meant admitting how reckless our China and other third world-friendly trade policies have been.  Better to keep the public at risk and pretend that the problem could be solved by a few more government inspectors and greater cooperation with Chinese authorities than even to consider realistic measures like detailed product labeling.  For protecting our outsourcing government’s reputation and preserving multinational-company supply chains constituted the bottom line.  

So not only is President Obama in the process of giving us George Bush’s Mexico trade policies.  He’s on the way to giving us his predecessors’ politics-driven determination to coddle Mexico across-the-board.  Heaven knows what types of China product safety cave-ins are on the way.  Or whether Outsourcing Correctness for the next few years will come with a distinctive Obama twist – declarations that import and trade safety problems, like so many of the world’s problems, are really America’s fault.    

 

...Whatever you think of the merits, here’s one unmistakable result of the interest expressed by the Obama administration and Congressional Democrats in keeping the torture issue alive:  It’s largely driven the dismal economy off the front pages and out of the pundits’ columns.

...Similarly, whatever you think of the merits, here’s one unmistakable result of GM’s new announcement of 21,000 more U.S. factory job cuts:  That’s 21,000 more Americans who will be much less able to afford a GM car for the foreseeable future – even with once-in-a-lifetime incentives!  In other words, American multinational companies keep sticking with the business model of firing or impoverishing their best customers -- but this time, Washington is calling these shots.  And the Obama auto “rescue” strategy stands revealed as turning a once enormous high-wage industry into a much smaller low-wage industry.

...The ongoing popularity of crying “Smoot-Hawley” to squelch any proposed deviation from totally unfettered trade to encourage the production-led recovery America needs inevitably recalls the last analogy to dominate American politics and policymaking – the supposed lesson of Munich.  You remember – the idea that the failed Anglo-French appeasement of Hitler before World War II meant that the United States needed to fight anything that looked like aggression anywhere in the world or risk another global menace emerging?  

The mindless application of that supposed universal truth led the nation right into Vietnam, producing more than 50,000 needless American deaths, the utter waste of hundreds of billions of dollars, a serious warping of the U.S. economy, and a weakening of major American political and social institutions.  

Let’s hope the mindless application of the supposed lessons of Smoot-Hawley – that this U.S. tariff dramatically worsened and prolonged the Great Depression – doesn’t produce Vietnam-like results in economic policy.

...More bearish indicators from the Obama administration – signaling that it doesn’t understand how the economy really needs to be fixed, and that therefore prospects for restoring genuine economic health are worsening, not improving.   They came last week, in Treasury Secretary Timothy Geithner’s testimony to the Congressional Oversight Panel established in 2008 to ensure the optimal use of government economic stimulus and rescue programs.  

Geithner stated that the administration’s “central objective and our obligation is to ensure that the financial system is stable” – which is of course vital – “and that it is able to provide the credit necessary for economic recovery.”  Yet as appealing as that last goal sounds, it’s a recipe for inflating new economic bubbles in the context of the administration’s clear crisis strategy: (a)  spending literally trillions of dollars in hopes that the sheer magnitude of giveaways and subsidies will spark some signs of economic life; and (b) without a shred of evidence, counting on new government spending on green projects, education, and health care reform to become the economy’s “new foundation.”

None of this new tide of welfare, however, will produce growth that is sustainable unless the administration figures out how to stimulate the kind of private sector activity that will enable a critical mass of Americans to boost their earned incomes again.  In the process, of course, they'll become reasonable credit risks again.  Yet that goal, along with the manufacturing revitalization central to its achievement, remains conspicuously absent from the administration’s screen.  

...If you doubt any of the above, take a look at the latest figures from Geithner’s own Treasury Department on lending by 21 top recipients of Treasury bank bailout (TARP) money from January to February.  Overall lending was down six percent, total consumer lending and business and industrial loans were both off considerably, but loans for “first mortgages” jumped 29.71 percent.  

Moreover, if you look at Treasury’s figures in detail, the case becomes even stronger for fearing the recreation of a housing-led economy.  Overall commercial and industrial lending (excluding commercial real estate) was off 20.48 percent, but new commitments in this sector – which actually produces wealth – were off 32.47 percent.  That’s a greater decline than that seen in total consumer lending by these institutions (down 27.64 percent).

...MorganStanley economics whiz Stephen S. Roach has always been a strange bird, especially on the subject of China.  And it looks like he’ll be getting even stranger.

On the one hand, Roach was one of the first mainstream analysts to finger China’s large and growing reliance on export-led growth as a major cause of global economic imbalances whose dangers he was also early (for a mainstream analyst) to warn of.  On the other hand, he has emphatically denied that China’s grossly undervalued yuan has anything to do with either China’s orientation or the global imbalances.  And he has repeatedly upbraided U.S. officials for even rhetorically focusing on ending this exchange-rate protectionism and eliminating other Chinese trade barriers.  He would rather they address the imbalances by fixing America’s own shortcomings, mainly a rock-bottom savings rate (for which he also absolves China and its subsidization of U.S. consumption of all blame).  

Roach has rationalized this prescription by insisting that “A rebalancing of the Chinese economy is now under way that poses great opportunity for China and the broader global economy,” as he told the Senate Finance Committee just about two years ago.   Indeed, Roach told the legislators, “None other than China’s Premier, Wen Jiabao...has put his reputation firmly on the line” behind this shift.   Beijing above all needed encouragement to persist.  

Two weeks ago, Roach was singing a different tune.  In a March 27 op-ed in the official China Daily, Roach complained that “The Chinese government has been talking about [rebalancing] for three years....But it simply hasn’t happened.” “I have been very disappointed,” he pointedly added.  

Not that Roach has changed his recommendations – much less admitted their naivete.  “It is now high time for China to get much more serious about promoting internal private consumption,” he declared.  “China needs to take major initiatives....”  No sign has emerged, however, that China is finally changing its ways because foreign requests have become really, really serious.  Maybe if they put sugar on top?



  

  
 

The silly season in Washington usually begins around mid-August.  The President and Congress are on vacation, journalists are desperate for stories to write, and invariably some titillating scandal elbows its way onto the front pages – and stays there for weeks.  

This year, the silly season is months early.  Witness all the talk from President Obama, his surrogates, Fed Chairman Ben Bernanke, and so many others about the sprouting of the first green shoots of economic recovery.  And witness how hungrily it has been pounced upon by the wannabe cheerleading media.  Of course, unlike tabloid fodder, these statements and the credulous coverage they’ve spawned can do real damage – especially since they eerily repeat the analytical flubs that blinded the national economic mandarinate to the serial asset bubble-blowing that collapsed into this Great Recession.

Looking back in mid-2009, it’s as hard to believe the utter inaccuracy of the pre-crisis conventional economic wisdom as it is necessary to remember it.  For essentially the same crowd dominates policymaking today -- as well as the analytical and commentary safeguards that are supposed to at least slow the rush toward disaster.  And its members still have no idea how to distinguish fake prosperity from the real thing.

After all, way back in, oh, 2007, the mandarinate’s main buzzphrase was “the Goldilocks economy.”  The United States and the rest of the world had achieved near-Nirvana in terms of the major indicators and especially growth – not too fast, not too slow, just right.  What these geniuses missed was the supremely and unsustainably accommodative policy environment responsible for this supposed perfection – especially in the United States.  Interest rates had been driven to 50-plus year lows, the money supply surged, and the federal budget balance  experienced a record swing from modest surplus to big (though not record, in relative terms) deficit.  

In other words, the government spigots were open wider than during any previous peacetime period.  And guess what – the record stimulus that came pouring out produced some true growth.  Individuals, businesses, and government took this money and spent it.  Not all of it leaked overseas as payment for imports.  Enough of it stayed at home to finance the purchase of domestic goods and services, and thus create some domestic output and employment.  

If you ignored this flood of cheap money, the standard economic indicators looked just dandy.  Rigorous analysis, however, told a different story completely.  The record stimulus produced nothing like record growth.  Washington was in effect flooring the national accelerator, and the results were mediocre at best.  No evidence could be clearer that the economy’s engines of wealth creation were malfunctioning.  It should have been equally clear that when the stimulus tide receded – as was totally predictable according to everything known about economics – a major breakdown would follow.  Moreover, because U.S. imports nonetheless were considerably greater than U.S. output, and were rising much faster, the bubble became worldwide.  

The green shoots spottings resemble an instant replay – only the misinterpretation is even bigger and more dangerous.  Several recent government data releases indicate that the economy is deteriorating at a slower pace than at year-end 2008 and the first few weeks of 2009.  Most prominent forecasters are still feeling singed by previous displays of mid-crisis optimism, so few dare ringingly to declare a bottom to the recession – or the housing market or the manufacturing sector or the finance meltdown.  But to borrow a phrase from the fashion world, they’re happy to seize on slower worsening as the new improvement.  With apologies to Sir Winston, we may not be seeing the beginning of the end.  But we may be seeing the end of the beginning.  

All of which deserves a big, fat “Are you kidding me?”  The stimulus added to the economy since the crisis began in the summer of 2007 dwarfs that provided before the subprime housing bubble burst.  The federal funds rate has been cut to zero, taxes are being rebated, a nearly $800 billion stimulus bill has been passed, Wall Street has received a $700 billion bailout, AIG alone has gotten a separate $175 billion rescue package, the Federal Reserve is subsidizing and guaranteeing mortgages, consumer lending, small business lending, and inter-bank lending, of course unemployment compensation and other forms of transfer payments are being increased and extended, and the budget deficit is exploding.  All told, we’re talking trillions of dollars worth of go-juice.

And not only has all this stimulus produced nothing close to growth – as opposed to scattered signs of slowing deterioration.  The mandarinate has also emphasized with a straight face that actually shifting the economy into drive – or maybe even only neutral – may well require still more funding for the finance sector and housing, and more budgetary stimulus.

In other words, the green shoots – including the surprisingly and suspiciously robust bank earnings announced over the last two weeks – have literally been fabricated by the government.  They therefore bear no resemblance to growth as that word is used in responsibly precise business and economics English – expansion driven by a combination of income earned in the private sector and productive investments made by the private sector (which by definition have more economic staying power than the growth spurred solely by politicians).  Consumption fueled largely by government money – and money that is being borrowed massively, no less – and whatever new domestic production satisfies it, couldn't be more different from real growth.  It is simply increased economic activity that tells us nothing about the future.  At best, then, the economy is on life support and retains a pulse.  At worst, it’s still getting steroid shots.  

Of course, for a patient in critical condition, life support can be Step One for sustainable recovery.  But that assumes a treatment strategy not restricted to crutches, lots of healthy or repairable tissue and other organs still available, and the administration of other measures at some point to restore genuine health.  

In economics, stimulus efforts unquestionably can play this vital transition role and have often done so.  But this argument was hard to make even before the subprime meltdown, given the stunted pre-crisis growth of the economy’s genuinely productive sectors – especially manufacturing, which dominates them.  

These days making the argument is verging on the impossible, given how the fall-off in manufacturing production continues to be much faster than the fall-off in overall growth, and given Washington’s continuing neglect of this vital sector.  And the more manufacturing keeps shrinking in relative or absolute terms, the bigger the recovery challenge.  In fact, the deaf ear Washington keeps turning to these problems represents the most bearish indicator I can think of about America’s economic future.

  



 

More evidence that the Obama administration remains far from “getting it” on restoring genuine prosperity to the United States:  When asked recently by Washington Post columnist David Ignatius to describe the “vision” behind Obama-nomics, David Axelrod, the president’s campaign chief and senior White House advisor emphasized that the economy needs “a new foundation.”  Like a house, he explained in Ingatius’ April 2 column, “if it’s built on a soft foundation, it’s going to collapse.”  

True enough – except Axelrod specified that “The foundation to us is energy, health care and education.”  Talk about putting the cart before the horse!  The new foundation can be nothing other than a revitalized and greatly expanded manufacturing base.  Without one, Americans will never generate the wealth to meet any major challenge – including getting our national acts together on energy, health care and education.

...Not that economic ditzi-ness in America is confined to government officials.  Take this curious statement made by Nicholas Kristof in his April 2 column for the New York Times.  Kristof was whining yet again that the leaders of the world’s rich countries – this time at the G-20 summit – were ignoring developing country interests as they grappled with the economic crisis.  When we’re talking about America – a country that’s been impoverishing its own working class for at least two decades by keeping its market wide open to third world exports – the charge is factually nonsensical.  But at least the argumentation is rational.  Not so Kristof’s lament that “For Americans like me who deeply believe in multilateralism, all this is extremely disappointing.”

Seriously – how could any thinking person “deeply believe in multilateralism” as such?  This position make about as much sense as deeply believing in traveling by train.  Both are simply means to achieving ends.  In the case of riding the rails, the purpose is getting from one place to another, and the best choice of conveyance obviously depends on circumstances.  In the case of multilateralism, as with any other diplomatic strategy or tactic, the purpose is promoting the safety and well-being of one’s country – for Americans, the United States.  And the choice of means depends just as much on circumstances.

Unless America's interests are not Kristof’s priorities?  And other objectives take precedence?  Fair enough – whether they’re achieving a great global redistribution of wealth or creating world government.  It’s a free country (unlike most developing countries).  But Kristof should have the decency to reveal his agenda to his readers.  

Kristof’s column raises another important for and about multilateralists – which matters greatly to the rest of us because they are shot through the U.S. government, the media, and the rest of the American political class.  Disappointment with the G-20's record is making the multilateralists “doubt Europe’s seriousness,” he writes.  OK, what of it?  Do the multilateralists sit there wallowing in doubt?  Do they start thinking seriously about alternative strategies and tactics?  Given the disappointing nature of America’s partners have they, perish the thought, begun to question multilateralism itself?  Doubtful on both the last two counts.  For that would require the multilateralists to think more about the hard choices that inevitably must be made to achieve any great end, and less about simply feeling good about themselves.

...If it’s any comfort, ditzes abound abroad, too.  Take Jorg Kramer, chief economist of Germany’s Kommerzbank.  In a March 24, Wall Street Journal article, Kramer was quoted as boasting, “If the whole world were like Germany, there wouldn’t be any recession.”  A few lines earlier, however, the same article made clear that Germany’s recent economic nosedive stems largely from its heavy dependence on exports for growth.  Overseas sales make up 40 percent of German gross domestic product.  That means that even in good times, the whole world can’t be anything remotely like Germany – it’s mathematically impossible.  But the recession is also an unmistakable sign that too much of the world for too long has tried to be export-dependent like Germany, and aimed way too much of its output at the uniquely import-friendly United States.  Five lashes with a wet noodle for Journal reporter Marcus Walker for not mentioning either point.

...And some remarks make ditzi-ness look clear-minded.  No better examples can be found than the recent Sayings of Chairman...er, President... Lula – Brazilian leader Luiz Inacio Lula da Silva.  Lula burst into global headlines in March when he blamed the global economic crisis on “white-skinned people with blue eyes.”  Or was Lula just pushing some rich-country buttons?  According to British Prime Minister Gordon Brown, when he met with Lula before the G-20 summit, the Brazilian president told him, “[W]hen I was a leader of the trade unions, I blamed the government; when I became the leader of the opposition, I blamed the government; when I became the government, I blamed Europe and America.”  

But whether he’s a blatant racist or the Bill Maher of Latin America, Lula has left no doubt regarding his greatest fear about the world economy these days.  He told an investor conference in New York in mid-March that “Protectionism is a drug that provides temporary relief, but in the end leads to major crisis.”  No word from Lula, however, on what we’re supposed to call multi-trillion government stimulus programs financed by debt.

...Maybe I’d have the teentiest bid of confidence in the Obama administration’s emerging conduct of U.S. trade policy if the China section of the newest annual U.S. Trade Representatives’ report on foreign trade barriers didn’t match the previous edition word-for-word in so many passages.  Granted the report was written mainly by Bush administration appointees and career USTR officials.  Still, it was dismaying, to read in both editions that, by now, China should have implemented fully the market-opening commitments it made in order to become a World Trade Organization member and that, as a result “the United States has been working to hold China fully accountable as a mature member of the international trading system, placing a strong emphasis on China’s adherence to WTO rules.”  

Just as dismaying was reading the two reports’ identical conclusion that “At the root of many of these problems is China’s continued pursuit of problematic industrial policies that rely on repeated and extensive Chinese government intervention intended to promote or protect China’s domestic industries” and that “more still needs to be done.”  For the sake of all the victims of China’s trade cheating – and that now includes a world mired in recession and crisis – let’s hope that the China contents of the 2010 trade barriers study, and the continued futility of U.S. China trade policy, won’t be totally predictable, too.      

...Finally, a completely unsurprising sign that, despite the outbreak of the worst global economic crisis since the Great Depression, some people never learn.  In the March 2 issue of Forbes, demographer Nick Eberstadt recycles an argument first popularized in the 1990s by libertarian apologists for outsourcing-focused trade policies.  A decade ago, these authorities assured us that anyone blaming these policies for widespread economic distress among American workers was pathetically misguided.  The trade critics’ case rested on the fallacy that living standards are best measured by wages and other forms of earned income.  What could be sillier?  The real measure is consumption.  

Ten years and trillions of dollars of vaporized paper wealth later, Eberstadt applied the argument to the federal poverty rate: “It measures the wrong thing – and always has.  That thing is income.”  As a result, these hopelessly inaccurate official statistics have utterly misled policymakers by missing “how material conditions for our population in ‘poverty’ have been steadily improving.”  

Eberstadt actually makes a strong case that the officially designated poor really do live beyond their means and that the gap has been widening.  But rather than recognizing this as a recipe for disaster for low-income Americans, he calls the trend “welcome.”  Mistaking consumption -- and borrowing -- for real wealth were of course cardinal sins of Alan Greenspan's reign at the Federal Reserve, and helped produce today's national and global disasters.  Maybe Eberstadt worked at there on the side?
 

“Better enforcement” has long been what trade policy squishes talk about when they want to pretend to be seeking major change in U.S. trade policy rather than supporting what really needs to be done.  After all, it’s so much easier to claim America’s biggest trade problems can be fixed by hiring a few more bureaucrats and spending a few more dozen million dollars than to admit that the nation’s entire outsourcing-focused strategy has been wrongheaded since NAFTA’s conception.  

These suspicions were buttressed March 26 when Democratic members of the powerful House Ways and Means Committee sent President Obama a letter urging him to “think about ways that the United State can systematically improve its ability to eliminate barriers and open foreign markets to U.S. exporters.”

Obviously trade agreements should be enforced more effectively.  It was also encouraging to see these Members of Congress finger trade deficits as major contributors to the larger economic crisis.  But contrary to the Ways and Means Democrats’ suggestion, holding our trade partners’ feet to the fire, and especially opening foreign markets, won’t make a meaningful dent in the deficit.

For instance, the letter’s emphasis on particularly formidable individual foreign barriers ignores the fact that too many of our major trading partners are running economy-wide systems of protection.  They can't be effectively tackled piecemeal.  And the key decisions in these countries tend to be made informally, and behind closed doors, leaving little concrete, accessible evidence for U.S. negotiators or the U.S. trade law system to work.    

Many Ways and Means Democrats also apparently don’t understand that the dispute-resolution systems created in most U.S. trade agreements – whether bilateral or regional or global – are at best formulas for endless stalemate.  Why?  Because they give America no special standing, even though the United States is always the largest signatory economically, and its market is the biggest prize in any of these arrangements.  This is especially true of the World Trade Organization’s dispute-resolution system, for which the letter’s signers inexplicably seem to hold high hopes.  Thus all of these systems work as highly effective shields for foreign protectionists.  

The strongest indications that many Ways and Means Democrats are using the enforcement argument as a dodge comes from their voting records.  For example, their letter contained an annex urging stronger U.S. steps against currency manipulation – which would significantly reduce the trade deficit.  But their list of possibilities completely omitted the only measures that could actually accomplish this goal: the Ryan-Hunter bill and its Senate counterpart – legislation endorsed by their party’s president last year.  Maybe that’s because committee chairman Charles Rangel of New York and trade subcommittee chairman Sander Levin of Michigan have spent much of the last two-plus years bottling up this bill as determinedly as their Republican predecessors.

All the Ways and Means members who are Congressional veterans – including Rangel and Levin – voted against NAFTA and the absurd trilateral dispute-resolution system it set up.  But Levin, Richard Neal of Massachusetts, and Earl Pomeroy of North Dakota voted for the even worse and more powerful system set up by the World Trade Organization’s Uruguay Round agreement of 1994.  (Rangel, John Lewis of Georgia, and Pete Stark of California opposed it.)

More recently, five current Ways and Means members voted against the landmark 2001 decision to admit China into the World Trade Organization, and thus largely shelter it from the reach of the U.S. trade law system that still stands as America’s chief trade enforcement system.  They were Lewis, Stark, Danny Davis of Illinois, Bill Pascrell of New Jersey, and Shelley Berkley of Nevada.  But seven voted for it: Rangel, Levin, Neal, Pomeroy, John Larson of Connecticut, Earl Blumenauer of Oregon, and Mike Thompson of California.  

And although all the current Ways and Means Democrats voted in 2001 for a nonbinding resolution urging the President to preserve U.S. anti-dumping law and the entire trade law system in new WTO agreements, four years later, all of them voted against the move that would have protected these trade laws most effectively – U.S. withdrawal from the WTO.

So the best advice for evaluating Members of Congress who emphasize the need for better trade enforcement remains – be suspicious.  Be very, very suspicious.  And don’t let them off the hook for more fundamental trade policy changes.

 

CongressDaily published a pretty good piece March 19 by long-time trade scene observer Bruce Stokes.  His theme:  the need to overcome the global economic crisis by using trade policy measures to reduce the U.S. trade deficit.  

As Stokes recognizes – and USBIC has emphasized since the summer of 2007 – global economic and financial imbalances are among the crisis’ “principal underlying causes.”  

It was also encouraging that Stokes, a journalist who’s also done stints at the outsourcing-happy Council on Foreign Relations, among other establishmentarian think tanks, recognized that the deficit can’t be brought done solely by the usual proposed remedies – a higher U.S. savings rate, or an improved global exchange rate regime that prevents China-style currency manipulation.  

A “revamping of trade relations” will be needed as well, including measures that “encourage domestic production and discourage imports and outsourcing” and seek “reciprocity and...a more sustainable balance of benefits for the United States.”

The article could have genuinely great, however, had Stokes not taken a swipe at analysts who have warned for years that U.S. trade policies were leading to dangerous deficits and that U.S. restrictions on trade were the only realistic ways of preventing a worldwide economic disaster.  

As Stokes put it, the “reciprocity and a balance of benefits” he now advocates were “thinly veiled excuses for protectionism...when the world valued consumption over all else.”  

In fact, the critics' demands and the analysis behind them amounted to extraordinarily prescient alarm bells.  More important, if Washington ever does adopt the new trade agenda desperately needed by America and the world, recognizing the ongoing importance of the critics’ points will be essential.  If they're dismissed as one-time emergency measures, expect trade policy  backsliding and a much more destructive crisis re-run in the future.

 

Hats off to the New York Times editorial board.  On March 11, its members published the single worst commentary on U.S. trade policy in the history of the known universe.  And clearly, the competition has been cutthroat for decades.  In fact, “Mr. Obama’s Trade Agenda” was simultaneously so aggressively awful and so breathtakingly arrogant that it’s worth reviewing point by point.

The editorial begins by asking the simple enough question of what’s so terrible about a national economy turning inward during tough times and raising trade barriers to protect workers against foreign competition.  Of course, the question is loaded, because most proposals to raise trade barriers are responding to barriers overseas, and the predatory practices of our foreign trade partners.  Moreover, nowadays it is of course critically important that Washington do something to boost workers’ incomes reliably – so that they can repair their household balance sheets and base their living standards on their earnings rather than on endless borrowing.  Yet the Times’ narrow description of the problem has the inevitable effect of portraying all trade restrictions as simple welfare programs for individuals.  In fact, the fate of entire industries crucial to the nation’s prosperity and national security may be at risk today, too.  

The Buy-American provisions in the stimulus bill, however, don’t respond to foreign provocations as such (although virtually all of our other trade partners operate highly restrictive government procurement markets), so let’s not dismiss the question altogether.

More important, the answer to the Times editorialists “is clear.”  Trade, they assure us, “will play an important role in the world’s eventual recovery, transmitting economic growth from one country to the next.”  One problem, however, is that the answer is so clear to these pundits that they feel no need to provide a word of explanation or a shred of evidence.  So much for the media as a great public educator.  The message here seems to be “trust us.”

In addition, if the Times editorialists wanted to enlighten rather than propagandize, they would have noted that trade has played an increasingly important role in the world economy for decades.  Never had this been truer than in globalization’s final pre-bubble phase – marked by  breakneck trade liberalization with newly dynamic third world economies.  Further, this type of trade liberalization didn’t result from natural forces.  It stemmed from free trade agreements pushed by Washington, lobbied for lavishly by multinational companies that recognized their vast offshoring potential, and endorsed enthusiastically by the Times, among so many others.

Trade may have transmitted growth from country to country for a while.  But trade expanded in such grotesquely lopsided ways that it produced the economic imbalances at the heart of today’s economic crisis.  Obviously, critics like USBIC have been right, and the problem with greatly expanding third world trade was that these countries fell way short of the income levels needed for balanced and sustainable trade.  But even those still unconvinced by such arguments recognize that something has gone very wrong.  In particular, both former Fed Chairman Paul Volcker and current Fed Chairman Ben Bernanke have recently pointed to global imbalances and the failure to reduce them as a major source of the crisis.  But you wouldn’t know any of this from this Times editorial.

Possibly, the Times writers decided to make their case for promoting yet more such trade indirectly.  Hence the subsequent argument that “Protectionism”– something the editorial doesn’t feel obliged to define, either – “leads to further protectionism, and yielding to its temptation could unleash destructive trade wars that could crush any chance of recovery.”

Certainly many globalization cheerleaders say this – over and over.  But repeating a point doesn’t make it so.  And many other students of international trade have disagreed.  One of them was Adam Smith, a founder of capitalism itself, who viewed the erection of new trade barriers as justifiable to persuade protectionist countries to dismantle theirs, and permit mutually beneficial trade to take place.  Smith, by the way, stated this point matter-of-factly – as if anyone with a brain in their heads and any understanding of how bargaining works in the real world would recognize this instantly.  

The Times editorialists also have evidently forgotten that, despite the collapse of the global bubble produced largely by lopsided trade and related investment patterns, the United States still remains the world’s importer of last resort and main growth driver.  In fact, that’s why the rest of the world is so apoplectic about modest and entirely legal measures like Buy-American provisions.  These countries know that they still depend desperately on access to the U.S. market for their best growth opportunities.  

President Obama and, during the campaign, the Clintons, loved to caution Americans that China needs to be handled carefully, because you don’t want to anger your banker.  Well, leverage works the other way, too.  None of our trade partners will want to anger their best customer by far – and certainly not if that customer displays even an ounce of street smarts.  So maybe the Times editorialists could start to think about the realities of the world trading system just a teensy bit before dusting off their cliches.

Finally, on the trade wars point, let’s not forget that the global imbalances behind the economic mess owe partly to ineffective U.S. responses to predatory foreign trade practices in the first place.  And it’s not as if Washington hasn’t already tried to encourage voluntary change.    Unfortunately, the time for further talk has long since passed.  That strategy has already failed.  At this point, the world’s best hopes for a genuine recovery will require the United States to administer some tough love and start using its leverage to start changing harmful trade flows unilaterally.  At best, these measures will induce the other major trading powers to start helping to rebalance the world economy sooner rather than later.  At worst, it will finally embolden Washington to finish the job by itself.

The Times editorial took the now-obligatory swipe at the Buy-American provisions – and just as predictably failed to mention their complete legality under the rules of a World Trade Organization it typically exalts as the last word on what is and is not kosher in trade policy.  Another complaint was lodged about the restrictions placed on corporate stimulus beneficiaries that want to hire foreign workers under the H-1B visa program – though readers were left to guess the basis of this position, too.

Then the editorial got truly weird.  The Times scolded new U.S. Trade Representative Ron Kirk for appearing “ambivalent about the value of free trade.”  Specifically, Kirk believes “that not all Americans are winning from it and that our trading partners are not always playing by the rules.”  And he criticized the pending Bush-era free trade deal with South Korea as “unfair.”

But is the Times implying here that government officials – and everyone else – should never experience ambivalence about sweeping or complicated public policy goals?  What are Kirk and his peers supposed to do?  Simply wave some pom-poms?  Should they gravitate towards extreme positions – especially ones favored by the Times?  Forget about the substantive problems sure to flow from such absolutism.  Is this any way to nurture the culture of civility in American politics that the president and his fans like the Times editorial board claim to want?  

And what exactly is wrong with the content of Kirk’s positions?  Are all Americans winning from “free trade”?  Do all of our trading partners always play by the rules?  If not, what possible purpose does the Times think is served by concealing these realities?  Nor is it clear why the Times is so enthused about the South Korea deal – because once again, it refused to do the public the courtesy of explaining its thinking.

Still more bizarre is the Times’ criticism of the administration’s first annual trade policy report, especially the first flaw it mentions – a suggestion that a “discourse with the public be opened” on the merits of Korea and the two other pending trade agreements with Colombia and Panama.  Does the Times now oppose all efforts by government to solicit public opinion on critical issues?  Or only on issues where the Times thinks Washington is right – and presumably further debate should be prohibited, and the popular will ignored?  Some champion of democracy!

The Times editorialists are also adamantly opposed to efforts to “improve” the North American Free Trade Agreement.  Apparently, they view the treaty as beyond improvement – the Old Testament of public policy, a document from the Mountaintop itself.  In fact, perhaps that’s why these writers declined to elaborate on this position, either.  But why anyone else would agree with such views is a mystery.  Even if you think that NAFTA’s just fine good, what reasonable objection could there be to trying to make it better?  

But these views are models of clarity and good sense compared with the editorial’s position on the moribund Doha Round of world trade talks.  As the Times sees it, the talks “are flawed” in ways that it – yet again – never specifies.  Still, the writers continue, “the administration’s argument that negotiations are imbalanced because it is not clear what they offer to the United States is wrongheaded.  The administration should press ahead on a deal and try to revive at least some of its original intent.”

Where is Star Trek’s universal translator when we really need it?  Is the Times saying that the negotiations are in fact balanced and that their benefits to the United States are clear?  If so, a little evidence please?  Is it saying that the benefits are not clear but Washington should just assume the deal is balanced anyway?  Or is the Times saying that it’s not important that the deal be balanced in the first place?  

Then again, let’s not forget that the Times’ point is loopy whatever its real meaning.  For it’s never a good idea for Washington to sign trade deals it doesn’t fully understand.  And when  the economy is a wreck, the results could be disastrous.

This exercise in inanity is followed by some wishful thinking.  “If ever there was a need for collective action,” the editorial ringingly declares, “on fiscal stimuli, monetary policy, aid to the developing world, fighting protectionism – it is now.”  Such collective action might indeed be valuable, but since 18 months of almost nonstop global economic crisis have not yet produced it, what exactly do the writers think they are accomplishing by repeating this already widely made point for the upteenth time?  

Wouldn’t it be more productive to analyze why so little progress on the collective front has been made?  Or to offer some specifics on how to get from here to there?  Or to start suggesting alternatives?  Unfortunately, rather than proceed down these genuinely useful paths, the editorial literally dissolves into ignorance.

“A place to start the rethinking,” the editorialists advise readers, “is China and how to encourage increased domestic consumption and investment in China and other cash-rich Asian countries so they can start pulling the world out of recession.”  Like the call to collective action, this proposal falls under the category of “things that would be nice.”  But it’s even less likely to happen – for China and its Asian neighbors other than Japan are utterly incapable of playing this role for any extended period of time.  Their own export-happy behavior explains why.  

It reveals to anyone capable of rudimentary information processing that their current prosperity depends heavily on exporting to genuinely affluent countries like the United States.  Their domestic markets are too small – meaning that too many of their people are too poor – to support even their own growth and development.  That’s why they focus on exporting to begin with.  It’s completely unrealistic to expect them to start supporting America’s growth.  And Europe’s, for that matter.  

Japan, by contrast, is more than wealthy enough to be worth pressing on this point.  (So is Europe.)  But as in other cases, unilateral American action will surely be needed to make clear to the rest of the developed world that changing its own trade balances would be the smartest action it could take.

The Times’ editorialists, however, have saved some of their best for last.  It’s worth quoting in full:

“China’s leaders, in particular, need to understand that export-led growth no longer works for them or for the world.  The United States will have more influence if it stops beating on Beijing for its foreign-exchange policy and engages China’s leaders as partners, not rivals.”

It’s true that the export orientation of China and the rest of Asia (including Japan) needs to change – even though, as suggested above, the main effect of change in low-income Asia will not be to generate enough demand within their own economies to end the world recession.  Instead, the main effect will be to enable the United States to recapture enough of its own domestic market that has been lost to their exports, and to make enough new inroads in third-country markets, to bring its own national accounts into much more sustainable balance.

But what’s more striking about these two sentences is the Times’ failure to mention – why it’s unmentioned is anyone’s guess – that American leaders have been making high profile efforts to do just that for years.  Assuming they have heard of it, what do the editorial writers think former Treasury Secretary Hank Paulson’s Strategic Economic Dialogue was about?  Sniffing out more Chinese banking opportunities for Paulson’s old employer, Goldman Sachs?  

There were meetings in Washington.  There were meetings in Beijing.  Scores of ministers on both sides attended.  Paulson once even invited along Fed Chairman Ben Bernanke – a highly unusual step.  I know all this for a fact; I read about it in The New York Times.  I’m sure that Paulson and others at various points expressed in private some frustration at their Chinese interlocutors.  Not that the Americans ever saw this as anything other than an exercise in faking it (for the multinational companies that run U.S. China policy benefit from the status quo). But the Chinese refused to play along and even throw Washington a few crumbs.  

Yet with exception of a few U.S. trade law-related decisions so limited that the Chinese must have seen through them immediately, nothing that the Bush administration ever did or said could come close to being accurately described as “beating on Beijing.”  And although Congress has ranted and raged, and even though some members have proposed an effective anti-currency manipulation bill, nothing meaningful has been done, under Democratic or Republican leaders.  So what is the Times complaining about?

Like other policy fields, trade policy will only benefit from healthy debate, and there are surely defensible reasons for opposing the kinds of changes called for by USBIC and other critics.  But this Times editorial, and too many others like it, don’t contribute to healthy debate.  They are too completely permeated with too many non-sequiturs, too much empty bloviation, too many entirely unsupported claims, too much utter incoherence, and too much glaring ignorance.  In the process, pieces like this also clearly undergo far too little editing and receive way too little scrutiny of any kind.

If the Times had any genuine pride left in this work, it would apologize to its readers for inflicting this embarrassing waste of time and space on them.  And the paper owes a special apology to the principled and intellectually honest supporters of current trade policy.   Their reputations don’t deserve the smear this drivel is all too capable of creating.
 

Not to pick on Christina Romer – who our latest GLOBALIZATION FOLLIES item shows is confused, at best, about the state of the economy – but a recent speech shows that she’s also on shaky ground as an economic historian.

Consistent with the happy-talk tone suddenly adopted by the Obama administration last week, the new chair of the Council of Economic Advisors told a Brookings Institution audience on March 9 that “though the current recession is unquestionably severe, it pales in comparison with what our parents and grandparents experienced in the 1930s.”  Romer made the point in the process of offering “some crucial perspective” from her extensive studies of the Great Depression.  

But how useful exactly is this so-called perspective?  Even leaving aside Romer’s jaw-dropping claim that the economy’s fundamentals are sound (see GLOBALIZATION FOLLIES, March 17  edition), it’s hard to escape the conclusion that she’s setting an awfully low bar.  So today’s crisis “pales in comparison” with a downturn that nearly ignited a revolution in the United States, sparked fascist takeovers in Europe and Asia, and led to by far the bloodiest war humanity has ever conducted.  Pardon me for not being comforted.

Just as inexcusable is Romer’s omission of a crucial difference between the today and the 1930s.  Today, Washington has backstopped the economy with literally trillions of dollars of bailouts, lending guarantees, and transfer payments like unemployment compensation and food stamps, as well as practically free credit.  This stimulus surge came on top of half a decade of unprecedentedly loose money policies and a record peacetime swing in the federal budget balance from positive to negative territory.  All of this new rescuing and spending and subsidization have been financed with borrowed money.  And the economy is still shrinking at its fastest rate in a quarter century.  

This isn’t comforting.  It isn’t “perspective” that a thinking, sober human being would find anything but inane.  It’s cheerleading drivel.  And since a respected academic like Romer can’t plausibly claim ignorance as an excuse, this boosterism sure looks as cynical as any stock-pumping seen on CNBC.  Jon Stewart, where are you when we really need you?
 

Based on his comments last week, if Larry Summers is President Obama’s main economic advisor, Heaven help us all.  

Summers, chair of the White House National Economic Council, told the Financial Times in an interview March 8 that the top priority of world leaders today must be to end the recession by making massive and coordinated increases in government spending.  This effort, Summers specified, is now more important than correcting the chronic global economic imbalances that he has admitted ultimately caused the economic crisis.

“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that this is the right agenda now,” said Mr Summers.

Dealing with a disease’s main symptoms immediately, rather than its root causes, can be good emergency medicine  (though the sense of urgency clearly expressed by Summers early last week contrasts suspiciously with the more upbeat assessments he and other senior Obama officials began offering scant days later).  

Yet in today’s circumstances, the Summers approach will do precious little for the U.S. economy in the short run.  And in the long run, it will simply blow up an even bigger, more dangerous global bubble than the one that recently burst for a very simple reason that he clearly is loathe to acknowledge:  Thanks to the outsourcing-focused trade policies pushed so avidly by he and the other Clinton-ites Obama has returned to power, and by their Republican counterparts, the U.S. economy today is so import dominated that too many of the growth benefits this new spending ordinarily would create will leak overseas.  

In other words, what Summers slights as “the old global imbalances agenda” has never been seriously adopted by American leaders.  Their main international economic policies have in fact arrogantly ignored the warnings of critics and pumped up the danger levels ever higher.  

The trade agreements pursued by the Clinton and Bush II administrations overwhelmingly with low-cost export-led economies not only guaranteed an explosion of U.S. imports.  They also were utterly incapable of opening significant new final consumption markets for American exports.  Therefore, no one has any defensible reason to expect that increased overseas demand will significantly offset the effects of import leakage for U.S.-based producers.  

True, from time to time, U.S. leaders have complained about the export-led economic strategies of China and other major trading powers.  Indeed, as Deputy Treasury Secretary during the 1990s global financial crisis, Summers himself complained that the world economy had turned into a jetliner with only one working engine – U.S. consumption.  

But Washington never provided any concrete incentives to change priorities that had created so much new wealth abroad.  In particular, it never took the smart, tough policy measures needed to change the trade patterns responsible for the dangerous global imbalances.  Quite the contrary – U.S. policymakers kept on pursuing ever more outsourcing-focused trade agreements that could only make the problem worse.  

Moreover, America’s largely token global rebalancing efforts flopped miserably even when the export-dependent economies of U.S. trading partners were in good shape.  The recent decisions of so many of these countries to raise their already towering trade barriers yet higher makes glaringly obvious their intent to keep as many of the benefits of whatever new spending they approve in their own economies.  And of course, they will be working as hard as ever to grab as much as possible of America’s net new demand.  So mere exhortation is likely to continue getting the United States – and the rest of the world – nowhere fast.  

That’s why the United States must insist that any coordinated boost in global aggregate demand be accompanied by the shifts needed in global trade patterns to put the world economy at long last on a sustainable track.  And since the rest of the world is likely to resist such advice or simply pay it lip service – as will be made as clear as possible at the upcoming summit of the leaders of the world’s top 20 economies – unilateral U.S. action will be needed to jumpstart this process.  

Thus genuine U.S. and global recovery will remain dependent on the ability of America’s new leaders to shed their ideological blinders and on their willingness to administer the tough love so desperately needed by their own country and the rest of a shortsighted world.  In other words, that “old global imbalances agenda,” and especially measures that genuinely transform still-dangerous global trade patterns, finally needs to become Washington’s overriding economic priority.    


 

I’m still puzzling over Senator Max Baucus’ recent comments endorsing Ron Kirk’s appointment as U.S. Trade Representative despite the former Dallas mayor’s tax problems.  Baucus, the Montana Democrat who chairs the Senate Finance Committee, insisted that "Kirk is the right person for this job....I am confident he can successfully restore the confidence of Congress and the American people in a balanced international trade agenda."  

What’s puzzling is, how could Baucus or anyone else possibly know this?  Aside from a few perfunctory comments praising NAFTA and U.S.-China trade policy, Kirk is a blank slate on trade.  He clearly has given it no sustained thought either in or out of public life, and knows little about it.  Kirk’s confirmation hearings will obviously reveal whether Baucus and he have had recent private conversations in which Kirk has revealed blinding insights on the subject that he has chosen not to share with the public yet.  But unless “there is a there there,” Baucus’ statement will just stand as one more reason why so many Americans regard their elected leaders as tired jokes who will say anything in the interests of knee-jerk partisanship and simple self-promotion.

...Has General Electric CEO Jeff Immelt been smoking something funny?  In his yearly letter to shareholders last week, the head of the stock market-battered conglomerate wrote that “I believe a popular, 30-year notion that the U.S. can evolve from being a technology and manufacturing leader into a service leader is just wrong.”  For good measure, he added, “Our trade deficit is a sign of real weakness and we must reduce our debt to the world.”

I’d be more convinced that Immelt is truly adopting a USBIC-like outlook if he’d acknowledged explicitly that GE recently has been spearheading the offshoring of domestic industry and the shift to services – and if he promised to stop that first campaign and start bringing its foreign manufacturing home.  He and other senior executives have publicly declared that GE will be doing more than 50 percent of its global manufacturing overseas by 2010 – up from 28 percent in 2002.  GE has lobbied hard and expensively for all the trade agreements starting with NAFTA that have made offshoring such an irresistible option for the nation’s multinational manufacturers.  The company also sold off its plastics division to Saudi investors, has been exploring the divestment of its appliances division for months, and until now has clearly viewed its finance arm, GE Capital, as the wave of its future.  Moreover, Commerce Department figures show that GE and other multinationals are responsible for about 18 percent of the goods trade deficit Immelt has just bewailed.  

But the trade deficit remark – almost unheard of for a diehard globalization cheerleader – indicates that something else may be going on other than simple hypocrisy, or Immelt reacting to the bath taken by GE Capital in its real estate investments.  Any GE change of heart on globalization and offshoring-related issues could be hugely important, given that Immelt has just been named to serve on President Obama’s high-profile Economic Recovery Advisory Board.  It’s time to monitor the situation closely -- and start holding Immelt’s feet to the fire.

...More discouraging news from the Obama administration:  First, the president named investment banker and former journalist Steven Rattner as lead Treasury Department advisor on the new auto industry task force.  In other words, yet another addition to the task force with no firsthand knowledge of the obstacles to producing a competitive motor vehicle on American soil, and no experience in manufacturing whatever.  And yet another addition to the task force – and the larger Obama advisory team – who epitomizes the finance-crazy national economic strategy that has produced today’s spreading economic disaster.

Second, Obama has appointed former veteran U.S. diplomat Chas Freeman as Chairman of the National Intelligence Council (NIC).  Freeman’s nomination has sparked a mini-firestorm in Washington policy/media circles, but as usual when the chattering class works itself into a lather, some of the main charges and counter-charges are entirely beside the point.  

The main accusations against Freeman?  He’s been a board member of the Chinese state-owned oil company CNOOC, his Middle East-oriented think tank takes money from Saudi princes, and largely as a result, he’s offered excuses for China’s repression of human rights, and tilted against Israel on Middle East issues.  Some critics, like New Republic staff writer Jonathan Chait, also insist that this record reveals Freeman to be an extreme apostle of the realist approach to foreign policy.  According to Chait (and most other Washington policy groupthinkers), the realist strategy is most importantly characterized by its dangerous opposition to using foreign policy to promote moral goals.

The issue of Freeman’s foreign government ties of course matters hugely.  If he’s made a habit of being on such payrolls up to now, he’s surely going to seek similar opportunities once his latest stint in government is over.  And no one should think that current ethics laws will stop him.  Just look at how easily Obama has ignored them in staffing his administration.  In other words, Freeman’s employment history practically defines the phrase “conflict of interest,” and should be enough to bar him from the NIC job – especially since his chosen employers so far have done so much to undermine America’s security and prosperity.

On substance, however, Freeman is fatally flawed as well.  His biggest shortcoming by far has been his utter obliviousness to America’s need to maintain a world-class productive and technological base at home if it wants to safeguard its security adequately, much less remain a superpower.  The clearest sign of this supremely important blind-spot has been Freeman’s tireless promotion of a harmonious U.S.-China relationship as the best guarantor of achieving America’s essential goals vis-a-vs the PRC.  Of course, this quintessential establishmentarian  faith in the autonomous power of relationships has produced a decade-and-a-half of U.S. appeasement of China militarily and above all economically.  And the main victim has been America’s capacity to manufacture and to innovate.  

With the NIC serving as the intelligence community’s big-think ideas shop, that’s an outlook that would render it all but useless.  In other words, Freeman wouldn’t know a real realist if one showed up on his doorstep.  Neither would Chait and many other critics.

...Finally, more offensively ignorant claptrap from a key media inflator of the disastrously burst U.S. economic bubble, New York Times columnist Thomas Friedman.  In a February 10 column, Friedman once more parroted the views of a Cheap Labor Lobby pushing the line that recovery is best boosted by opening America’s borders even wider and encouraging the immigration of the world’s allegedly best and brightest.  

There’s always a reasonable argument over the long and short-term effects of different immigration policies under different economic conditions – though I’m glad it’s not my job to argue for increasing the nation’s labor supply at a time of spiking unemployment.  But what’s never reasonable or acceptable is getting your history wrong – and Friedman’s article did so whoppingly.  

Thus, Friedman claimed that America didn’t get “to be the wealthiest country in history...through protectionism, or state-owned banks or fearing free trade.”  But as known by anyone with more than the most superficial knowledge of U.S. history, it was precisely an overtly protectionist trade policy that was critically important to America’s drive to global economic, technological, and industrial leader by the turn of the last century.

In fact, inaccuracies like this are so eggregious that they must reflect either innocent ignorance or a conscious disregard of the truth.  They also should cast further doubt on the New York Times’ editorial procedures – which have already taken numerous richly deserved blows in recent years.  Do none of Friedman’s editors know their history, either?  Or is it standard operating procedure to give the paper’s superstars a pass no matter what drivel they write?
 

It’s always exciting when CNBC asks me to appear on one of their programs, and I am genuinely grateful for the network’s interest in my work.  But my latest CNBC experience – last Thursday night, Feb. 26 – just made clearer than ever that most of their star talking heads still haven’t the faintest idea of why the economy is falling down all around them.  And it convinced this native New Yorker that this won’t change until they come out of their electronic cocoons in and around Manhattan and start spending time in places like northeastern Ohio.

That’s actually where I was for most of last week, when my favorite CNBC producer called to inquire about my availability.  The segment they had in mind, she explained, would be a broad-ranging discussion about the future of domestic manufacturing, the need to Buy-American, the auto bailout and the industry’s role in the economy.  I’d be on for at least 15 minutes, the hosts -- Donny Deutsch and Charlie Gasparino -- would not be on my wavelength (no surprise there), but my instructions were to mix it up with those two.

I was especially psyched because the Ohio visit inspired me to come up with what I thought was a great talking point that could turn the tables on Deutsch and Gasparino.  Finance has revealed itself to be a zombie industry that deserves much blame for triggering the current Great Recession.  Yet there’s no doubt that most of America’s leadership and chattering classes still believe that, in the years and decades ahead, the U.S. economy should and will look more like Wall Street than like Cleveland, or Akron, or Youngstown, or practically anywhere else in Ohio, a state widely held up as the poster child for rust belt-driven economic decline.

But this establishment viewpoint has it completely backward, I realized.  The crisis stems ultimately from America’s failure to produce as much as it consumes, and from the official neglect of the nation’s wealth-creating sector that made the nation so dangerously dependent on debt and asset bubbles to fill the gap.  That’s why the United States desperately needs its  economy to look once more like today’s Ohio than like today’s Manhattan – to contain more factories and manufacturers than investment banks and hedge funds and bond insurers and securities raters and credit default swap counterparties and  serial mortgage predators.  

That’s how America will create the living wage jobs most of its families need to repair their household finances and live middle class lives without wracking up out-of-control debts.  That’s how the country will repair its own broken national finances and create first world levels of prosperity without similarly irresponsible borrowing.  And that’s precisely the message that needs to get through to CNBC, which, bizarrely, still seems proud to serve as the mouthpiece of a spectacularly failed “post-industrial” national economic strategy and its masterminds.

Unfortunately, I never got a chance to make these points on the air.  Part of the reason was no one’s fault.  The segment was shortened by some “breaking news” – live film of Bank of America chief Kenneth Lewis leaving an interview session with law enforcement officials.  But more of the reason was utter lack of interest by Deutsch or Gasparino in discussing manufacturing or the auto industry constructively.  I could barely get a word in edge-wise – and I’m hardly the shy, retiring type.

Still, two aspects of the segment were worth noting.  First, Gasparino revealingly kicked things off by pointing out that, judging from near-penny stock prices, investors didn’t seem to think the U.S.-owned automotive sector has much of a future.  Talk about clueless and myopic!  Talk about someone who has lived his whole adult life within an Upper East Side of Manhattan bubble and apparently can’t even conceive of the world, and the economy, that exist outside!  

My response, in a nutshell?  Who cares what these former alleged Masters of the Universe think?  They’ve brought the economy to the brink of disaster.  Why would anyone listen to them anymore?  What matters is the role of auto sector in the real economy, and how the nation will not remain an economic superpower without a big, strong American-owned automotive complex.

Second, Gasparino amazingly pooh-poohed my attempt to repeat a key point originally made by USBIC President Kevin Kearns – that Washington has unforgivably let down the auto industry (and the rest of domestic manufacturing), through its failures to create an affordable national health care   system and a sensible national energy strategy – not to mention its pursuit of an offshoring-focused trade policy.  

In fact, my host cut me off after my mention of health care – and accused me of dodging the question.  In other words, soaring health care costs have had nothing with the auto crisis, even though it’s been endlessly reported that health care has long been the single biggest cost component in automobile production.  

And then before I knew it, it was time for them to thank me for coming on, close the segment, and break to a commercial.  As I left the remote studio on the outskirts of Cleveland, got into my rental car and started the half-hour drive through a cold rainy night down I-77 to my hotel in Akron, I still couldn’t get over the paradox.

The sleek CNBC set with its superbly coiffed celebrity journalists and all the high tech gizmos that flash enough electronic data to turn our home TV screens  into digital fireworks displays – that glistening world and all the flimm-flammery it still glorifies – that has to be America’s past, a decidedly misspent phase of our nation’s youth.  And those factories and job shops that dot the landscapes of Ohio and so many other states (even New York north of the Bronx), and all their suppliers and the people they all employ – they need to be much more of America’s future.
 

Now that the economic stimulus bill is law, how hoodwinked must the three moderate Senate Republicans who put it over the top feel?  Arlen Spector from Pennsylvania and his Maine colleagues Susan Collins and Olympia Snowe struggle for weeks to keep the bill’s spending provisions under control, vote “Aye,” and still incur the wrath of countless Republicans and other conservatives who still considered it a porkfest.  Yet no sooner is the ink dry on the president’s signature than the Obama administration starts talking about a second stimulus.

...Speaking of the stimulus bill, here’s a statistic that deserved much more attention during the debate.  According to the DC Examiner newspaper, Senate Majority Leader Harry Reid of Nevada claimed that only some 58 percent of the Senate’s version of the bill “is job creating.”  Not that tax cuts and lots more safety net-type spending aren’t needed, and realizing that lawmakers add all sorts of unrelated riders onto every kind of legislation.  But 42 percent non-stimulus programs in a stimulus bill seems like an awfully high figure, and presumably Reid’s 58 percent reflects at least a little padding.  What a precedent for a democracy literally choking on debt!  What’s next – a defense bill that’s only 58 percent defense?  A food safety bill that’s only 58 percent food safety?  It looks like we need a truth in labeling law for the federal government as well.

...John Kerry hasn’t exactly been a fount of wisdom on globalization-related issues.  In fact, if he knew anything valuable about the subject, the Massachusetts Democrat might have just been sworn in for his second term as president.  But in arguing against including more business tax cuts in the stimulus bill, Kerry spotlighted a globalization-related loophole almost as important as those created by the failures to include high local content in most recent government support programs for the faltering economy (aside from infrastructure spending).  “If you put a tax cut into the hands of a business or family,” Kerry said, “there’s no guarantee that they’re going to invest that or invest it in America.  They’re free to invest anywhere that they want if they choose to invest.”  Given that, since the economic crisis first emerged in August, 2007, Washington overall has guaranteed nearly $8 trillion worth of lending of all kinds, that’s a huge loophole Kerry has identified.  Now, will he propose anything to close it?  Will he even remember he said this?  Don’t hold your breath.

...Was that a Freudian slip by President Obama during his Canada trip last week?  Have we gotten yet another sign that he either has all the wrong instincts on trade issues or is getting nothing but terrible advice?  At a joint press conference in Ottawa with Canadian Prime Minister Stephen Harper, Obama warned about the dangers of rising global protectionism and stated, “I think there’s going to be a strong impulse on the part of constituencies in all countries to see if we – they can engage in beggar-thy-neighbor policies.”  Am I right to be disturbed by the “we” Obama mentioned, despite his apparent mid-sentence correction?  Was this an abortive invocation of moral equivalence with no basis in fact whatever?  I just can’t help but wondering where it came from.  What in the world has the United States done to contribute to that trend?  Decided to apply Buy-American provisions to government procurement that we have every right to use according to international law?  And let’s not forget that even though it’s economy is now contracting, the United States is still running by far the world’s biggest trade deficit.  In fact, unless the U.S. trade partners that have for so long shortsightedly exploited America’s openness to imports start taking dramatic corrective actions of their own very soon, or unless Washington takes matters into its own hands, a crisis caused by the resulting massive global economic imbalances will only deepen.  Whatever the explanation, there’s all too much reason to suppose that a major attitude change by the president or his top advisors will be needed for him to start making these vital arguments.  

...The next time I hear some globalization cheerleaders gushing about how grateful Americans should be to all those foreign companies that help the U.S. economy so much and create so many jobs by buying up U.S.-owned companies, I’ll send them a quote given to the Washington Post last Wednesday by veteran auto industry analyst Maryann Keller.  Here’s how Keller  – who is no fan of Detroit – described the impact of Daimler’s takeover of Chrysler in 1998:  “When the Germans took the last flight to Stuttgart [after selling most of Chrysler back to the private equity firm Cerberus], they didn’t leave a lot of infrastructure in Chrysler to enable Chrysler to be self-sufficient in designing vehicles....Those skills have been lost in Chrysler because they were drained out of the company during the 10 years Daimler owned it.”          
 

The evidence keeps growing that, even though the United States is facing an accelerating economic meltdown caused primarily by chronic under-production and over-consumption, trade policy is not something that President Obama thinks very seriously about.  Case in point – the sweet nothings he tried to whisper into Canadian ears  leading up to and during his visit this week north of the border.  His aim: convince them that the recently passed Buy-American provisions in the stimulus bill were nothing to worry about.

Obama’s fundamental mistake was equating large trade flows with national economic health.  Thus he stated in an interview with the Canadian Broadcasting Corporation, “there’s $1.5 billion worth of trade going back and forth every day between [the United States and Canada] and...it is not in anybody’s interest to see that trade diminish.”  For good measure, his deputy national security adviser Denis McDonough told reporters in Washington, “This is no time to – for anybody to give the impression – that somehow we are interested in less rather than more trade.  And that’s what – that’s the message – that he’ll underscore.”

It’s bad enough that Obama and his aides feel the need to act sheepishly and apologetically about a U.S. decision that breaches or threatens none of America’s international trade obligations – including those to Canada.  If the Canadians want to blow a gasket over the issue anyway – perhaps to wangle some trade concessions from a guilt-ridden administration – they have a perfect right to do so, but America’s leaders should not play along, much less get suckered by these tactics.  

Worse, though, was Obama’s readiness to repeat such a seductive but dangerous fallacy.  Levels of trade have absolutely nothing to do with a nation’s prosperity, and simply changing them can have no effect on America’s crisis-stricken economy or the world’s.  More broadly, promoting trade as such logically cannot be an end of policy.  It can only be a means to an end.  

By contrast, the size of America’s trade imbalances is critically important – especially the wildly bloated dimensions they have assumed in recent years.  The makeup of America’s trade flows is essential to monitor, too.  

As my GLOBALIZATION FACTLINE item this week reported, the list of America’s fastest-growing goods export sectors last year looks like a list you’d expect from a low-income third world country.  It’s completely dominated by low-value commodities, rather than the advanced, high-value manufactures that are the keys to high living standards, continuing productivity improvements and technological progress, and healthy growth – not to mention world-class defense industries.

If you believe that there’s something to the  theory of comparative advantage, these trends should scare the pants off you.  Because that theory boils down to a simple conclusion that “What a country trades most successfully, it will wind up making most successfully.”  Therefore, the nation’s recent trade performance indicates that it’s well on the way to becoming a raw materials superpower.

Tragically, this is a fate that our Founding Fathers fought a revolution largely to avoid.  They understood that Britain’s plans to relegate the 13 colonies to hewer-of-wood and drawer-of-water status while the mother country dominated global industrial production would keep them economically destitute and politically dependent.  They recognized that the colonists’ only hope for true security, freedom, and prosperity was to win the freedom to manufacture.  Obama's rhetoric, though, suggests that we've had nearly a quarter century of independence and no positively sloping  presidential learning curve on net on trade.  

Finally, harping on the volume of trade is so ill-considered that it clashes violently with one of Obama’s highest priorities – reducing America’s dependence on foreign oil.  If somehow the United States could kick the oil habit, its oil imports would fall dramatically and so would the levels of its two-way trade flows.  This would be a bad thing?  That’s what the “more-the-merrier” school of thought on trade would say.  What could be loopier?

Truth to tell, Obama’s fluff about trade expansion finds a strong echo in much of what America’s trade critics say and write about the issue.  How many times have you heard them claim defensively, “Of course we want more trade.  Trade is great.  We just want it to be fair...” or something to that effect.  It’s a strong indication that, if we want to hold the president to higher standards on trade policy, we need to demand more of ourselves as well.
 

Maybe Bill Clinton has started inhaling after all?  Interviewed Monday on “The Today Show,” the inescapable former chief executive boasted that “if I had been president and my economic team had been in place,” the economic crisis never would have broken out.

Well, much of this vaunted team is back running the economy, courtesy of President Obama.  So we’ll see how quickly it cures the economy’s ills.  But exactly which policy geniuses Clinton was talking about?  Fed Chairman Alan Greenspan (not formally part of the administration, but reappointed twice by Clinton) –  the guy who helped hook the economy on bubble-ized growth after 9-11; who denied until it collapsed that the nation’s housing industry was headed for trouble; who actually encouraged people to take out adjustable rate mortgages; and who when discussing financial markets could utter the phrase “self-regulation” while keeping a straight face?

Was he talking about his former Treasury Secretary Robert Rubin – who, as described in a previous posting, not only helped drive Citigroup into receivership in recent years, but who while serving in government during the 1990s helped further addict the country to imports, lay the foundation for the entire economy’s bubble-ization, and also championed the financial deregulation measures that turned Wall St. into a welfare recipient and brought the world to the brink of Great Depression 2.0?  Or maybe Clinton was talking about Rubin’s successor at Treasury, Larry Summers, who faithfully supported all these disastrously shortsighted policies as well – and who has been rewarded by being named chair of Obama’s National Economic Council.

Of course, as The Decider for two terms as president, Clinton himself deserves the most blame for all of these decisions.  These days, living the coddled life of a former president and greatly enriched by lavish book deals and speaking fees, he can afford to remain in Dreamland about the economy’s problems and their real causes, even as he continues propagating myths about the illusion of prosperity he conjured up.  But the rest of us are in a very different place – especially President Obama, and especially if he wants to keep his job beyond 2013.  

Indeed, Clinton’s delusions – no doubt shared by most of the Clinton-ites who have just returned to power – represent the strongest argument imaginable for Obama to widen his advisory circles far beyond these ultra-orthodox thinkers.  His presidency is still just beginning, and he can still rectify this fundamental mistake.  

Many other Democrats need to start better understanding the fake boom of the 1990s, too.  For eight years, and especially during last year's presidential campaign, they relentlessly transmitted the message that all of the nation's economic ills began the day George W. Bush entered office; before that, economic Nirvana reigned.  

But the failures that have brought America and the world to the brink of disaster were thoroughly bipartisan -- and indeed global.  Genuine recovery will never come if most major actors at home and abroad keep ducking responsibility




 

Here's an item that definitely deserved to be buried in paragraph 15 of a 16-paragraph news story earlier this week about Secretary of State Clinton's trip to the Far East. After droning on and on about how Clinton's Tokyo visit might affect Japan's sclerotic and largely irrelevant political system (the bureaucrats are still clearly in charge) and on the equally antiquated U.S.-Japan security relationship, Washington Post reporters Glenn Kessler and Blaine Harden delivered this zinger:  

"With the collapse of Japanese car and electronics exports in recent months, the country is also looking for a new export stream to the United States, and the government believes it could be green technology.  Since the oil shocks of 1973-1974, experts say, no industrialized country has been more rigorous or effective than Japan in perfecting machinery and management systems to squeeze more economic growth out of less imported energy."

This reporting conforms generally with research I'd done for an article at Industrytoday.com last summer.  But the Post piece also tells me that the idea that these sectors will create "jobs that can't be outsourced" looks even more naive than I originally thought.  

After all, a job that's outsourced is a job that existed in the United States in the first place.  Yet there may be so many "installation-ready" Japanese green systems already in existence that the green employment in the United States will rarely even get to this point. And you can just imagine Japanese producers chomping at the bit at all that stimulus money the United States is preparing to spend.

The message to President Obama and the rest of the green manufacturing and technology lobby couldn't be clearer:  Either put Buy-American provisions and high U.S. content standards in these prospective programs fast, or the only economies that will be stimulated by Washington will be mainly overseas.

...It was unusual to say the least to read about Moody's report earlier today predicting a 70 percent chance of GM and Chrysler going bust despite Washington's bridge loans.  Is this the same Moody's that (like the other ratings agencies), blessed all those subprime mortgage securities with the Triple-A seal of approval?  Just wondering.

...Finally, April Fool's day seems to have come early at one prominent Washington think tank.  How else to explain the e-mail I got from the Center for Strategic and International studies today inviting me to a conference next week on "Revitalizing the U.S. and Global Economies"?  

The featured speakers will be none other than former U.S. Trade Representatives William Brock and Carla Hills, and former senior Clinton administration trade official and Stuart Eizenstat.  That's right -- three of the folks most responsible for addicting the U.S. economy to over-importing and hyper-outsourcing, and in turn for the global and economic disaster unfolding before us.

This e-mail is so funny on so many levels it's hard to keep track.  Is the idea behind the conference that those who led us down the road to near ruin know best how to get us back?  What a shame, in that case, that the nation didn't trust Herbert Hoover to end the (first?) Great Depression.  Or Jimmy Carter to whip stagflation.

And even if you don't think Brock and Hills and Eizenstat have all been catastrophically wrong about trade policy and globalization literally for decades, what is the point of showcasing participants who agree on virtually everything?  

What will the transcript read like?  "You're right, Carla." "You're right, Stu."  "You're so right, Bill."  "Yes, protectionism. Very terrible. Tut-tut." In fact, why even go in the first place if you know exactly what the speakers are going to say?  And of course, God forbid a dissenting voice should be permitted on the stage. (In this vein, if you think I'm going to show up and content myself with asking the Gods of Policy questions from the peanut gallery, think again.)  

Which is why this invite has to be a prank.  Otherwise, it would be embarrassingly clear that CSIS is just another way to spell "out of touch."    
 

Who knew that Treasury Secretary Tim Geithner is such a car guy!  Or National Economic Council Chairman Larry Summers.  Yet apparently both are so intimately and completely in tune with the U.S. auto industry’s needs that they have been named by President Obama to head his new task force on revamping Detroit.  

Seriously – the third task force member named so far, United Steelworkers’ union advisor and Wall St. veteran Ron Bloom, does seem to have the experience dealing with manufacturing and with organized labor that a durable auto rescue will require.  But little confidence should be inspired by Obama’s apparent intention to fill out the rest of the task force with his other Cabinet-level economic advisors (including, presumably, whoever becomes Commerce Secretary and thus the president’s chief liaison to private business), along with the Secretaries of Transportation and Energy.

Save possibly for Bloom and Labor Secretary Hilda Solis, do any of these academics and financiers and politicians know or care much about the pervasive trade barriers – including value-added taxes – that for decades have shut Detroit out of export markets in places like Japan and Korea and the European Union?  Or that have relegated the Big 3 to junior-partner status with state-controlled counterparts in China?  

Will anyone on Obama’s team ask how the industry can keep firing tens of thousands more workers and slashing its remaining blue-collar wages to near-Wal-Mart levels and still find enough customers who can afford its products?  In fact, has it occurred to any of them that the creation of a huge post-World War II American middle class keyed by Detroit was a magnificent achievement that shouldn’t be destroyed to preserve a bubble-prone race-to-the-bottom blueprint for the global economy?

Is the Obama task force going to push Washington finally to clear up the national health care mess that has bled white the automotive sector and so many otherwise competitive manufacturing industries?  Will it force through the American political system an energy policy that brings some sanity and stability to fuel prices, and gives auto-makers an energy transition plan they can count on?  Can anyone expect the Obama group to challenge the shortsighted federal and state policies that encouraged Detroit’s protected foreign rivals to set up shop in the United States without assuming any significant portion of the nation’s collective pension and health care burdens, and that permitted the transplants to receive lavish subsidies to boot?  Would it even occur to the Obama task force to require high U.S. content standards in its master Detroit rescue plan – to ensure that the virtuous production-consumption cycle needed to spark a healthy recovery is fostered mainly in the United States, not overseas?

The need to ask these questions at all is answer enough to any of them.  And here’s a final, perhaps fatal, irony.  Anyone who knows anything about the U.S. auto industry knows that one of its biggest mistakes was replacing the kind of car guys who created this industrial and wealth-creating colossus in the first place with finance guys less interested in the product than in crashing the great casino party Wall St. had begun to put on.  Now finance guys like Geithner and Summers are supposed to save an industry that their instinctive outlooks helped to devastate.  Just when a crisis-ridden U.S. economy needs a decisive move toward a production orientation,  the finance guys are handed more power than ever.
 

Events have been coming so fast and furious that they challenge the skills even of a machine-gun typist and mile-a-minute talker like me.  At times like this, the best I can hope for is to rap out a bunch of observations before the headlines change yet again.  I think I'll call blog entries like this "..And Another Thing" -- because that's how I find myself thinking.  And away we go.

How's this for irony?  Congress ties itself up in knots trying to ensure that its Buy-American provisions conform with the nation's treaty obligations.  But judging by the news coverage this morning, our trading partners are still waxing indignant.  How long before our leaders  realize that the rest of the world will never be grateful for our efforts to be good boys and girls?  And in truth, it's not entirely our trade partners' fault.  

For decades, Washington has spoiled them rotten.  American leaders have encouraged these countries to view the United States as a gigantic piggy bank from which they can just take and take indefinitely.  After enabling this irresponsible behavior for so long, why should anyone expect any change just because this completely unsustainable behavior -- by all parties -- has  led the global economy to the brink of catastrophe (to quote President Obama).  So the United States continues to enable, and the rest of the world remains spoiled.      

Here's an idea for exercising real leadership -- make clear that we're going to save the world despite itself, and then take the unilateral trade actions needed to accomplish this goal.

...Continuing with the Buy-America tempest.  It's clear that, from a legal standpoint, the United States can't carry out a Buy-American policy by violating its treaty obligations.  In fact, the supremacy of treaty law under our Constitution is so firmly established that Congress' language to this effect was wholly unnecessary.  

At the same time, it's obvious that these same treaty obligations are going to reduce significantly the stimulative effects of the stimulus -- just when the nation needs more than ever the kind of growth shot-in-the-arm Buying-American can deliver.  

For this reason alone, these treaties need to be scrapped (and all have withdrawal provisions -- not even an international law-happy Washington would neuter its sovereignty that completely) or overhauled.  So President Obama and Congress -- let's start that much-discussed review of all U.S. trade policies pronto.

...Another month, another Commerce Secretary hopeful down the drain.  I couldn't help but notice that, in withdrawing from consideration for that post, Senator Judd Gregg did not mention trade policy as one of the deal-killer issues.  An oversight?  Or was this outsourcing purist  entirely comfortable with Obama's studied ambiguity on trade so far?

...As USBIC has pointed out, Obama should treat this turn of events as a golden opportunity finally to add a domestic manufacturer to the Team of Outsourcers he has otherwise assembled to serve as advisors.  Not that the president has deviated much from the Washington pattern so far.  America hasn't had a domestic manufacturing advocate as Commerce Secretary since Malcolm Baldrige during the Reagan years.

...Or maybe Obama will just go into the tank altogether on the Commerce pick and say something like, "I can't find any qualified non-lobbyist American citizens for the job, so I'm naming an H-1B."

...One encouraging byproduct so far of the economic crisis:  Hardly any globalization cheerleaders rationalizing the trade deficit by arguing that it's a sign of the nation's strength because America can borrow enough abroad to finance it. (And, presumably, by this logic, the bigger the better!)  

Yes, the economic mandarinate has doggedly resisted attributing any the economic crisis to decades of perverse trade policies.  But it's now a commonplace for mainstream analysts to recognize that the country has long failed to produce as much as it consumes, and that the resulting overindebtedness has collapsed into the current meltdown.  As discussed in previous posts, some influential commentators have walked right up to the line of adding two and two.  But identifying the trade policy connection is still taboo.

...Finally -- what a lousy last few weeks for Senator John McCain!  First, the Arizona Republican loses the presidential election and comes perilously close to becoming a national laughing-stock.  Then the Arizona Cardinals lose the Super Bowl at the last minute.  And finally, a normally spineless Senate emphatically rejects his effort to strip the stimulus bill of any Buy-American language whatever.  

Hopefully his losing streak will continue with a failed effort to push a pro-amnesty, pro-illegal immigration bill amid economic crisis and soaring unemployment.  Or will cold reality finally impose some limits on McCain's chronic economic cluelessness?    
 

Buy-American provisions will apparently be included in the economic stimulus bill.   Reportedly, the final version follows the diluted measure approved by the Senate.  Buy-American restrictions would be placed on all manufactured goods procured in connection with federal infrastructure and other stimulus programs.  But these restrictions must be applied in a manner consistent with U.S. obligations under the various outsourcing-focused trade deals mistakenly signed by Washington since NAFTA.

Although this outcome wouldn’t be nearly as good as the original Dorgan proposal – which left out any reference to treaty obligations – it’s still a decent step forward, and is downright remarkable given the literally hysterical opposition of the Outsourcing Lobby.  Chiefly, the United States won’t have to buy any stimulus-related manufactures from countries that haven’t signed the World Trade Organization agreement on government procurement – and that list includes exceptionally troublesome trade partners like China, India, Brazil, and Russia.

(One qualification bears mentioning, however – Hong Kong, treated by the WTO and the U.S. government as separate from China on trade matters – has signed the procurement deal, raising the specter of massive transshipment.  Both Congress and the administration need to be prodded to make sure this doesn’t become a major loophole.)

Almost as important, the survival of these provisions in the stimulus bill sets a potentially important precedent for ongoing and upcoming U.S. efforts to support private industry.  The auto industry's retooling loans already contain some Buy-American-like provisions, but as I've written, they need to be greatly tightened up.  Later this year, Washington will undoubtedly consider some program to promote so-called Green manufacturing, and Buy-American provisions will be necessary to ensure that it's also Red, White, and Blue manufacturing.  And we can be sure that government aid proposals for numerous other sectors of the economy will keep attracting attention as long as the economic crisis drags on.  

As seems to be his wont, President Obama has floated above this particular fray for the most part – despite his campaign promise to “fight to ensure that public contracts are awarded to companies that are committed to American workers.”  He did emphasize the need for the United States to live up to its commitments and avoid sending any “protectionist” signals.  But he didn’t come down like a ton of bricks on the Buy-American proposals, either, and left himself enough wiggle room to support what appears to be the final version.  

But how nice it would have been had Obama not been so apologetic about the Buy-American measures!  How refreshing it would have been to have a president whose first instinct was not reassuring our trade partners that we wouldn’t do anything reckless, but calling them on the carpet for hypocrisy in light of their own pervasive trade barriers.  How inspiring it would have been for him to have pulled a Ronald Reagan – to have dared these diehard mercantilists to “tear down those trade walls” before vilifying the world’s most open major economy and leading engine of growth.  

Clearly, Obama has limited wellsprings of outrage in his personality to begin with, and just as clearly, they’re unlikely to get activated when his own country is in the cross-hairs.  But just as clearly, these thoughts were never even suggested to Obama because they’re anathema to the Team of Outsourcers he’s chosen to fill most of his administration’s top economic jobs.  

Yes, he’s the “decider” (to use Bush-ian vocabulary) and the vision guy (his own version).  But changing trade policy and reviving the nation’s productive base obviously have never been high priorities for him, and his first instincts are undoubtedly to consult with the Larry Summers and Rahm Emanuels with whom he has chosen to surround himself.  And clearly, both top appointees were lying in wait.

So that’s why it’s been important for USBIC and other trade critics to protest Obama’s choice of advisors – and why it’s even more important for the president to broaden his sources of input.  After all, these are the folks whose enthusiasm for outsourcing-focused globalization has led the country and the world to the brink of ruin.  And they themselves have no record of welcoming dissenting views, either.  

Moreover, as Obama has repeatedly said, diversity is the life blood of democracy, maintaining the kind of vibrant marketplace of ideas that produces the best possible decision-making.  Why do U.S. trade and manufacturing policies remain such conspicuous exceptions to this rule?
 

What a week for U.S. trade policy – undoubtedly the most important since Barack Obama won the presidency!  This is a long posting, but with it covering the weird Judd Gregg nomination, the fate of Buy-American legislation in Congress, and the make up of the president’s new Economic Recovery Advisory Board, I’ll bet it’s worth your while.

First, the utterly bizarre nomination of Republican Senator Judd Gregg to be Commerce Secretary.  I noted in my Feb. 2 posting that Gregg had supported all the outsourcing-focused trade deals since NAFTA that had done so much to stunt the growth of the U.S. economy’s productive base and help trigger the deepening economic crisis.  

But there’s even more to worry about in the Gregg record.  This free trade purist has also voted against every effort to strengthen or preserve U.S. trade laws that has come up before Congress since his election.  

President Obama may admire Gregg’s personality, or his ability to play well with others.  But if he was looking for someone with the faintest inkling of the international challenges facing domestic manufacturers – whether they’ve been Made in the USA through outsourcing policies, or produced abroad by the predatory practices of our trade partners – Gregg ain’t the guy.  In fact, he’s so either brain-dead on these issues or knowingly in the outsourcers’ camp that maybe the best domestic manufacturers can hope for is that the Commerce Department remains a bit player in U.S. trade policy.  

At the same time, Commerce is supposed to be the voice of business – all business, not just the outsourcers.  If Commerce doesn’t care about domestic industry’s main problems, it’s hard to see where domestic companies can turn.

Next came the Senate’s handling of the Buy-American amendment inserted into the upper chamber’s version of the stimulus bill.  In a sharp break with past patterns, the Senate’s Buy-American provision, introduced by North Dakota Democrat Byron Dorgan, was considerably better than the House’s.  

The House Buy-American provisions were industry-specific, simply specifying such policies for any iron and steel and textile products procured in connection with stimulus programs.  The Dorgan amendment extended this treatment to the rest of manufacturing – which would maximize the benefits for the entire industrial sector.

Lamentably, the Dorgan amendment sparked a hopelessly confused debate over the legality of such measures under World Trade Organization rules – a debate further muddled by a flood of misinformation spread by the outsourcers.  

We at the U.S. Business and Industry Council agree with all of you out there asking why American policymakers should give a fig about what our trade partners think about policies manifestly in the domestic economy’s interest – especially when most of these countries have much bigger trade barriers than the United States, and have been adding to them so furiously as the economic crisis has gone global in recent months.  Unfortunately, WTO legality matters to virtually all members of Congress, and even to most of its trade realists.  So it can’t simply be ignored.

But the Buy-American debate was ludicrous from the start.  First, the House iron and steel-specific provisions simply applied existing Buy-American preferences for infrastructure programs to the stimulus bill.  The iron and steel measures in particular – by far the most important – have been around since 1982.  Much the same is true for the textile measures.  Despite the outsourcers’ fear-mongering, they haven’t sparked any trade wars that we have identified, precisely because they have been grandfathered out of the free trade deals we have signed since then and the WTO’s agreement on government procurement.  

The procurement agreement’s terms further undermine the outsourcers’ claims – albeit in a hard-to-understand way.  The reason is that this agreement does not cover the entire WTO membership.  Only 38 of the 150-some-odd WTO members (including the United States) are parties, including 27 European Union countries and Canada (but not Mexico).  So even if the WTO agreement doesn’t permit iron and steel-related Buy-American laws, this prohibition would only apply to those 37 other countries.  

Many of our most important trade partners, not just Mexico but China, India, and Brazil, have cholsen to be outliers.  So American officials legally can already shut any of their products – not just iron and steel – out of U.S. procurement markets.

The genuinely new wrinkle added by the Dorgan amendment was its addition of other manufactured goods to the iron and steel products that already enjoy Buy-American treatment.  Legally, if it chooses, Washington can already decide to exclude from infrastructure markets the whole range of manufactures imports from non-signatory WTO procurement code countries.  But it can’t treat non-iron and steel products from signatory countries this way.  Hence the ruckus raised regarding this measure by the outsourcing lobby.  

What happened on Wednesday night was that Dorgan agreed to restore the status quo by accepting in his amendment the proviso that it must be applied in accordance with all of America’s existing treaty obligations.  So in other words, his amendment now adds absolutely nothing to Washington’s legal authority to prioritize its own producers and workers and citizens in economic policy.   But it still does instruct the U.S. government to exercise this authority in new ways -- to incorporate all manufactures that might be imported from countries outside the WTO government procurement pact.  So like I said told Lou Dobbs’ reporters when they interviewed me on the subject on Thursday – it’s a classic case of one step forward, three quarters of a step back.    

But here’s where we return to the critical issue of the WTO’s role in U.S. trade policy, and the damage that can be done by U.S. officials’ determination to be good boys and girls.  As I’ve written in many other articles, it’s an outlook based on a completely unrealistic and fallacious understanding of the WTO.  Domestic manufacturers -- many of whom seem to value such goody-goody behavior, too -- need to start working harder to change this mindset, before the WTO stranglehold over American decision-making takes down our economy, and the entire world economy.

The main misunderstanding about the WTO – by no means s it fundamentally a legal-judicial body, dedicated to promoting the rule of law in international commerce.  Like every other international organization ever created, it’s a political body, in which all member countries (except You Know Who) use all peaceful means possible to create advantages for themselves.  

That’s why there simply is no such thing as a national policy that either is or is not flatly and predictably WTO-legal.  “Legality” means nothing more than “Whatever the WTO majority wants at any given moment.”  That is to say, the goal posts are always moving.  The so-called rules of the game are changing constantly.  American officials who try to meet these standards are engaged in a fool’s quest.  

How could it be otherwise?  The vast majority of WTO members don’t take bedrock legal principles seriously when dealing with their own people.  Why would they become believers when dealing with foreigners?   Many other countries boasting legal systems worthy of the name present a somewhat different problem.  The EU and Japan in particular do take the rule of law seriously.  But they also ignore it frequently, especially in economic policy.  In that sphere, they rely heavily on what political scientists call “administrative guidance.”  That’s just a fancy term for – literally – various members of their powerful, unaccountable, opaque bureaucracies deciding behind closed doors to erect whatever trade barriers they feel like, whatever the public and more accountable political leaders think.  And P.S. – they don’t feel the need to broadcast their decisions publically, much less to apply them uniformly and predictably.  

And of course, all the other WTO members, which have long pursued export growth-led economic strategies, have been utterly determined to keep the U.S. market much wider open to their products than vice versa.  So do the outsourcing multinational companies that want to supply the U.S. market from many of rhese countries.  

Therefore, whether they consider the rule of law completely laughable, or only one among many worthwhile approaches to governing, all of these countries have had a strong overriding interest in setting up an international dispute-resolution system with only the veneer of legality – the better to sucker and manipulate a rigidly legalistic United States.

In other words, the WTO is a system designed to serve the interests of outsourcing multinationals and predatory traders.  If this system continues to determine what international economic policies Washington can and can’t carry out, the United States will be doomed to terminal decline.  And because America remains the world’s market of last resort, the rest of our trade partners will end up in even worse straits.

Final thought on the WTO: Since its creation, analysts on all sides of the issue have focused on measuring its effects by examining America’s record in the dispute-resolution system -- i.e., how many cases have we won and lost?  Critics in particular have asked more pointed questions: Have the wins and losses been comparably important?  Do the decisions really solve the problems in question?  Does the appeals process enable losers in the cases to drag them out forever?  

But the stimulus imbroglio this week shows that the most important measure of the WTO’s influence is its capacity to intimidate American officials and prevent them from enacting policies that promote America’s interests.  Domestic manufacturers have encountered this problem with the Ryan-Hunter and Stabenow-Bunning-Bayh currency manipulation bills, as one of the opponents' main weaopons has been the WTO legality argument.  This past week, we’ve just received another reminder of the WTO’s real power.  Will the nation wake up before its economic sovereignty is gone altogether?  

Therefore, even in the not-so-long run, nothing would strengthen domestic manufacturing as much as a U.S. withdrawal from the World Trade Organization.  This goal should be much higher on our list of priorities.  This game has to be totally changed, for our sake and the world’s.  If even we don’t take up this cause, who will?

Finally, the makeup of President Obama’s new Economic Recovery Advisory Board deserved much more insightful press coverage than it actually received (not that I'm surprised).  As USBIC pointed out in a press release, it’s an insult to domestic manufacturers that the only members from industry were the chiefs of two stalwarts of the outsourcing lobby – Jim Owens of Caterpillar and Jeffrey Immelt of General Electric.

Owens’ company represents the more complicated story.  Caterpillar, as its publicists endlessly crow, has indeed maintained high levels of U.S. employment and is a major exporter.  Moreover, its exported goods are actually consumed in their destination countries, because they’re overwhelmingly finished goods.  In other words, Caterpillar isn't like, say, Intel, which exports semiconductors all over the world, but sees many come back to the United States as the brains of countless electronics products.  

At the same time, Caterpillar has chosen a very – shall we say, distinctive – American competitiveness model.  It crushed its union and introduced one of the first two-tier wage systems at a large manufacturer operating in mainly union states.  For years, recent hires at Caterpillar have been paid Wal-Mart-like wages.  What a great formula for business success and national prosperity!  Let’s by all means encourage all companies to adopt it!

GE, however, is a long-time outsourcer, plain and simple.  And it’s publically announced its intentions to send even more work overseas – not that any American journalists have bothered to report it.  At a November, 2006 investor conference, GE stated that it performed about 28 percent of its global manufacturing outside the United States.  By 2005, this percentage had risen to 41 percent, and senior executive Lloyd Trotter estimated that the share would exceed 50 percent by next year.  

A month later, Immelt himself told another group of investors that he was expecting the share of GE’s global manufacturing in low-cost countries like China to double in five years, to 38 percent.  I’m waiting for the president to explain how these plans are going to boost output and employment in the United States.

And let’s not overlook this irony.  A White House statement lauded the Advisory Board idea for its potential to “bring a diverse set of perspectives and voices...to bear in the formulation and evaluation of economic policy.”  Last November, in announcing his plans to create the board, Obama observed that “The walls of the echo chamber sometimes keep out fresh voices and new ways of thinking....”

But what in the world is new about the Caterpillars and GEs of the world shaping American economic policy?  In fact, they’ve been running the show for decades.  Here’s something that would be completely new – giving a seat or two on this panel to a domestic manufacturer who has been working his or her tail off to keep output and jobs in the United States.  This panel sure doesn't represent "change we can believe in.”  It’s business-as-usual, and if it continues much longer, it’s going to keep sinking us deeper and deeper into recession and worse.  
 

I knew that Senator Judd Gregg, the New Hampshire Republican widely reported to be President Obama's leading candidate to head the Commerce Department, was a staunch supporter of outsourcing-focused trade policies.  But until I checked his record, I had no idea how staunch.  And for how long!

Gregg began representing the Granite State in the Senate in 1993 -- the year NAFTA was approved.  He began voting with the outsourcers then and he's continued ever since.  Most Favored Nation status for China, WTO membeship for the People's Republic, the Uruguay Round world trade agreement, fast track, CAFTA, free trade with sub-Saharan Africa, the Caribbean Basin, Vietnam, Peru -- you name it on the outsourcers' agenda, and Gregg has been for it.  

To put the icing on cake, he's a major Open Borders proponent, too.  The only significant exceptions to this dismal record have been support for County-of-Origin labeling for food products, and for economic sanctions against the brutal military junta in Burma.

Even recognizing that President Obama has not exactly been a full-throated critic of these trade policies, the gap between his record and views and those of Gregg's is yawning -- especially on NAFTA and on China.

At the same time, Gregg's nomination would be consistent with Obama's presidential record of appointing strong supporters of outsourcing-focused trade policies to key trade-related positions in his administration -- like U.S. Trade Representative, which will presumably be held by nominee Ron Kirk, and the White House National Economic Council chair and Chief of Staff post, filled by Larry Summers and Rahm Emanuel, respectively.

As Mayor of Dallas, Kirk was a backer of NAFTA as well as of breakneck trade expansion with China --though clearly he didn't eat, drink, and sleep trade policy.  Summers, a Clinton-era Treasury Secretary, has been a primo globalization cheerleader since Day One.  And Emanuel, a key Clinton White House staffer, was assigned to push NAFTA through Congress whatever phony promises had to be made and whatever misleading statements had to be issued.  

Of course, Obama will remain The Decider of U.S. trade policy's basic direction.  And he's clearly a believer in the strategy of hugging one's rivals tight.  But as a result, many of the biggest battles over trade policy's heart and soul might be fought inside his administration.  At a time when major changes on this front are urgently needed to get the U.S. economy back on a healthy growth path, that could become a recipe for dangerous delay.  
 

As made clear in my GLOBALIZATION FOLLIES item of January 26, and in USBIC’s press release three days before, it was great to hear Treasury Secretary Timothy F. Geithner repeat in his confirmation hearings President Obama’s view that China is manipulating its currency.  What wasn’t so great was reading many of the other observations made about America’s China policy in his written answers to questions from Senate Finance Committee members.  

Collectively, they were enough to indicate that someone somewhere in the new administration is engaging in a little back-pedaling.  And my suspicions have just been fed by a Reuters report today that the president is about to call Chinese President Hu Jintao to assure him that he’s not going to take any hasty action on this front.

Given the importance of the domestic manufacturing sector to America’s hopes for restoring its economic health, and given how much of domestic industry has been ravaged by China’s predatory trade policies, this kind of temporizing is the last thing the economy needs now.

The main problem with Geithner’s written remarks was their complete failure to acknowledge that Obama has already endorsed a very specific U.S. response to currency manipulation by any country.   Once the Democratic primary campaign entered the big, vote-rich, manufacturing-heavy battleground states of the Midwest, he and his remaining rival, Senator Hillary Clinton, both signed onto the Senate version of the bill that would subject currency manipulators to countervailing duty cases filed with the U.S. trade law system.  

These cases are considered to be very user-friendly, and could be easily used by any industry viewing itself as a victim of currency manipulation – which could literally be any industry, since currency policies operate across the board for traded goods and services..  That’s why the Senate and House countervailing duty bills were the only pieces of currency legislation introduced recently in Congress that are actually capable of solving the manipulation problem.

But nowhere did Geithner’s remarks even mention these bills.  Indeed, many of them sounded like restatements of the Bush administration’s failed policy positions.  All these problems were on display in his response to Maine Republican Senator Olympia Snowe’s question about his preferred policy or legislative fixes for manipulation.

Actually, Snowe’s question was somewhat offbase itself.  It didn’t evince any awareness that Obama had endorsed the countervailing duty bill, either.  But the Geithner response was more troubling.  “[W]e look forward,” he said, “to a productive economic dialogue with the Chinese government on a number of short- and long-term issues.  The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. “  

Geithner described how growth had slowed greatly in China, and argued that because China is such a big global economic player, “a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis.  Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to pass a stimulus package here at home.”

For starters, this statement ignores a big lesson that U.S. policymakers should have learned after decades of fruitlessly trying to rebalance trade flows by encouraging more growth overseas.  Obviously, all else being equal, fast-growing countries are going to import more than slow-growth countries.  But all else is rarely equal.  Trade flows are also decisively influenced by trade barriers and other predatory trade policies like currency manipulation.  Cases in point – countries like Japan and Korea have had long years of blazing-fast growth at various times in recent decades.  Yet their imports, especially of manufactures, remained meager because their national economic strategies were wholly mercantilist.

China is pursuing such policies as well; therefore, more Chinese growth is no guarantee of more Chinese net imports.  In fact, since China remains an export-led economy, more growth will probably produce more net exports – just as it has for most of the last decade.  

The analysis in Geithner’s statements also reveals a fundamental misunderstanding of China’s role in the world economy lately.  Contrary to the point suggested in his remarks, China is not a major contributor to global growth.  Yes, it’s growing fast, and yes, its own growth has become a significant share of global growth.  But because this growth’s orientation is export-led, and because it has produced enormous global trade and current account surpluses, China is actually subtracting from global growth.

On a net basis, the only basis that counts, it is depriving the rest of the world of growth opportunities and growth itself – just as the United States, with its continuing import and consumption-led growth, and its massive deficits, has been adding such opportunities and actual growth to the global totals.  The problem with this American role, of course, is hat it’s always been completely unsustainable.  As the global nature of the economic crisis makes abundantly clear, it literally destroys its own foundation – the ability to finance consumption responsibly, through earnings instead of borrowing.

Which brings us to another big problem with Geithner’s remarks.  Like his predecessor at Treasury, Hank Paulson, Geithner spoke of the need to change China’s export orientation.  And that would certainly help rebalance not only dangerously lopsided bilateral economic flows, but dangerously lopsided global economic flows.  

As I explained in my January 26 posting, however, China is simply too poor to relay mainly on its own consumers to maintain anything like current growth, manufacturing output, and employment levels.  It desperately needs exports to fill the gap.  In addition, unlike generations of American leaders, Chinese leaders don’t believe that the best long-run economic performance can be generated mainly by consuming, much less by importing.  Their economic strategy, like those of most of its Asian neighbors, emphasizes production. That’s why, even before the economic crisis, China’s growth kept growing  more export-led, not less, despite repeated U.S. and other entreaties.  Now that the U.S. economy has run aground largely because of under-production and over-consumption, can anyone seriously expect Beijing to become more receptive to such advice?

Finally, in a similar vein, one of the underlying assumptions of Geithner’s remarks is about as demonstrably false as you can get.  Washington for decades has been notoriously unsuccessful at persuading other countries that Americans know best what is good for them, and therefore at achieving  trade policy goals by encouraging social and economic reform abroad.  

That’s one of the biggest reasons that a unilateral response to currency manipulation like the countervailing duty bill is ultimately going to be the most effective response.  It’s going to be the fastest-working response, too – which should count for a lot with an administration clearly determined to overcome the economic crisis ASAP.

Not that explaining America’s views to China or any other country is a complete waste of time.  Far from it.  But the right message has to be chosen.  In whatever high-level dialogues the Washington conducts with Beijing from now on, these points should be emphasized again and again: “Precisely because Chinese and so much other global growth is export-led, precisely because this reality is not going to change significantly anytime soon, and precisely because so many of these exports are sent to the United States, you have an overriding self-interest in recreating sustainable growth in the United States even if this requires near-term sacrifices on your part.  Because you’ve been unable and unwilling to recognize this dilemma yourselves for so long, we’ve decided to take matters into our own hands – for our good as well as ours.  You can either help us do this by finally speeding up your own internal readjustments.  Or you can get out of the way.”.      
 

The counter-attack against Buy American proposals clearly is underway.  There are lots of reasons to worry about this campaign to beat back measures to require high U.S. content standards in all U.S. government stimulus programs and other measures to support American business (like the auto rescue package).

After all, the counter-attack is coming from the exact same interests that have benefitted hugely from outsourcing and the global economic crisis it produced by hollowing out domestic manufacturing and the rest of the U.S. economy's wealth-creating sector.

Despite these disastrous results, these folks still have massive resources at their disposal. They're still major players in economic policymaking circles despite the Democratic party takeover of Washington.  And of course, their views still dominate mainstream media coverage of these issues.

But if common sense winds up having any influence on decisions by President Obama and Congress, their efforts won't stand a chance -- because they're completely incoherent.

Take one of the outsourcers' big arguments --that forcing participants in infrastructure programs to use American-made steel would unforgivably waste precious taxpayer dollars and increase inflationary pressures.

As I pointed out in my January 10 GLOBALIZATION FOLLIES item, the inflationary pressures created by infrastructure-related steel spending wouldn't even come close to moving the national economic needle.  Moreover, even the outsourcers acknowledge that the domestic steel industry is only operating at 43 percent of capacity.  So it's going to take an awfully long time for any inflation-inducing production bottlenecks to appear.  P.S. -- much of the rest of domestic manufacturing is in the same boat, or will be soon.

But here's the weirdest part of the outsourcers' critique.  As even the economic establishment increasingly acknowledges, deflation is the biggest economic threat we face now. In other words, the main price-related worry of the nation and the world is that they'll start falling faster and faster as more and more economic actors hunker down and hoard their remaining assets.

Indeed, Fed Chairman Ben Bernanke and everyone else in the know would be ecstatic to detect a whiff of price buoyancy anywhere.  That would go double if it resulted not because of production bottlenecks, but because domestic companies and their workers received stable sources of income.  In the process, the addiction of workers in particular to endless borrowing and debt accumulation would be eased.

If Washington's left brain and right brain are communicating (always a big "if"!), it won't take them too long to realize this.  

Finally, as I pointed out in a CNBC interview yesterday, let's dispense with all the baloney about how Buy American provisions would destroy competition and efficiency, and leave the field open to loser companies.  

The U.S. economy is still far and away the world's largest; current dollar gross domestic product will still approach $14 trillion if Friday's latest government status report shows a big fourth quarter 2008 drop as expected.  And this enormous economy still contains a huge number of highly competitive domestic companies.  Limiting government procurement to their products and to domestic supply chains should generate plenty of competition.  

By contrast, keeping these domestic businesses trapped in a no-win struggle against foreign governments and the entities they lavishly sponsor and subsidize has nothing to do with free trade or competition.  Worse, it would inevitably perpetuate and possibly worsen the trade imbalances that have brought the nation and world to the brink of disaster to begin with.  
 

Forget about the commode per se.  And the credenza.  They're not the most scandalous aspects of John Thain's decision last year to order the expenditure of more than $1 million in company money to renovate the executive suite at Merrill Lynch into which he had just moved.

The most scandalous aspect is that by his own confession, even after the credit bubble's bursting was clear, the former Merrill Lynch Chairman and CEO still hadn't a clue as to where the economy was heading.  

Thain went on the redecorating binge, he explained, "a little bit more than a year ago in a very different economic environment and a very different outlook for Merrill and the financial services industry."  He added in an interview that the renovation "really started in December of '07.  So the financial industry hadn't melted down yet."  

Now nobody's perfect and no one has a completely clear crystal ball.  And no one can reasonably quarrel with Thain's expectation back then that Merrill would ultimately survive and become successful again.

But by then it was obvious to many observers that the Mother of all De-leveraging Processes had begun around the world, that the U.S. financial sector was especially vulnerable, and that historic economic difficulties lay ahead.  After all, why else would Fed Chairman Ben Bernanke have opened the monetary and other spigots under his control in a way not even his loose-money-happy predecessor Alan Greenspan could have imagined?  

As his new drapes were being measured, however, none of this apparently even occurred to Thain -- or very many others of this ilk, though they were literally paid fortunes to have nearly clear crystal balls.  Or crystal balls sharp enough to anticipate once-in-a-lifetime crises.  Why else would they command such astronomical compensation?  To be blindsided completely?

Thain is now unemployed, his new partners at Bank of America evidently convinced that he hid from them the full extent of Merrill's balance sheet horrors.  And American finance has become the world's biggest receipient of corporate welfare.  But as the Associated Press has just enterprisingly reported, nine out of ten senior executives at financial institutions that have received taxpayer bailout money remain in their jobs today.  That is to say, the inmates are still running the asylum that used to be known as the world's greatest economy.      
 

At first, I was going to rake Washington Post columnist Sebastian Mallaby over the coals for his January 25 column warning President Obama not to press the Chinese too hard on currency issues.

Then I realized: The nation and the world at large owe Mallaby a big Thank You.  His column explains perfectly -- perhaps better than anyone else's so far -- why continuing to treat the Chinese with kid gloves can only produce further failure and prolong the global economic crisis.

Commenting on Timothy F. Geithner's confirmation testimony last Friday, Mallaby argued that the Treasury Secretary-designate was correct in labeling China a currency manipulator.  He even went so far as to characterize these Chinese policies as "arguably the most important cause of the financial crisis" -- echoing points made by Financial Times columnist Martin Wolf that I spotlighted in my January 22 posting.

But here's where Mallaby went above and beyond the call of duty. First, unlike Wolf, he missed the screamingly obvious point that China's currency manipulation matters so much to begin with because the United States over the last two decades has decided to trade so voluminously with China.  And the agreements and policies that sparked the rapid growth in U.S.-China trade were really outsourcing agreements that inevitably led to enormous imbalances and the credit bubble that came to dominate the U.S. economy.

If the United States didn't trade with China much at all, or in the dangerous way pushed by the outsourcers, China's currency policy would be of no greater concern to America or the world than China's athletics policy.

Fortunately for discerning readers, the piece got worse.  According to Mallaby, it would be "counterproductive" to impose sanctions on China.  After all, he claimed, the Bushies tried this and failed.  As if their policies weren't dominated by the same outsourcing interests -- which benefited hugely (at least in the short term) when China has cheated on currency and other trade policy fronts?  

Moreover, Mallaby warned, such measures would spark a disastrous trade war.  Evidently no one told him that Beijing has just increased export subsidies on nearly 7,000 products.  In other words, the latest phase of its own long trade war on America and the rest of the world has already begun.

What would Mallaby propose instead?  Basically, more of the same failed approach.  U.S. officials should keep asking the Chinese to replace their export-led economic strategy with one dominated by domestic consumption.  

Yet anyone with a lick of sense would understand why these urgings -- even if sincerely made -- will remain fruitless.  China is simply too poor to sustain the kind of economic progress to which it's grown accustomed -- and which its leaders desperately need to keep a lid on the politically explosive unemployment rate -- by selling internally much more of what it produces.  If this were possible, wouldn't the Chinese already be doing this?  

In fact, Beijing is so incapable of relying on domestic growth that it has instead chosen to subsidize its U.S. customers.  That's why it is still flooding the American economy with enough credit to sustain U.S. overconsumption without pushing interest rates way up.  The last few weeks have also taught us that China is even willing to accept no return whatever on its purchases of U.S. debt in order to keep this house of cards standing.

The final piece of transparent silliness peddled by Mallaby: America's best hope is for China to learn the lessons he feels OPEC absorbed after oil price spikes in the '70s and '80s backfired on the cartel by undermining global growth and thus demand for its oil.  

How great would that be?  Even ignoring how this supposedly wiser OPEC pushed oil prices to the $150 per barrel neighborhood last year, here's the result Mallaby presumably would applaud -- a world where China continued to control America's access to credit, its growth, and its very economic fate the way OPEC still controls world energy markets and prices.  And of course, this world would remain even more financially fragile than the one we're living in now.  

So three cheers for Sebastian Mallaby!  And let's hope that President Obama has become a regular reader!
          
 

What was House Ways and Means Committee Chairman Charles Rangel trying to do last Friday when he spoke with Bloomberg Television about his agenda for this year?

Rangel said he was pleased that the Obama administration views China as a currency manipulator, adding that it's consistent with his own long-held belief.  That's fine -- although the Chairman has adamantly prevented his own committee from taking productive steps on the matter, thereby preventing the entire House from acting, too.

Less fine was Rangel's statement that the administration "can either resolve it diplomatically, resolve it with the World Trade Organization or we can resolve it by legislation."

Granted, his district is the most manufacturing-light in the country.  But Rangel has national responsibilities, too -- which is why it's inexcusable that he's still content to make vacuous calls for "diplomacy" or recommend sending the currency issue to an anti-American kangaroo court like the WTO.  

The need for his committee and the entire Congress to act is years overdue.  The longer Ways and Means keeps stalling, the more competitive domestic companies will close or downsize because of the predatory exchange-rate policies of China and other major Asian trade powers.  The more American workers will lose their jobs or see their paychecks and benefits shrink.  And the longer it will take for the United States to start overcoming the economic crisis in the only feasible way -- by producing its way out.

Oh -- and not so incidentally -- the fewer homeowners will be able to keep up with their mortgage payments.

Equally inexcusable is Rangel's failure to keep up with his own president and the leader of his party.  During the campaign, President Obama unequivocally endorsed the only measure introduced in Congress that can actually solve the currency manipulation problem -- the Ryan-Hunter bill and its Senate counterpart, Stabenow-Bunning-Bayh.

During the Bush years, Congress was always ahead of the Executive in doing the right thing on trade policy and strengthening America's invaluable productive base.  Is the situation about to be reversed under the Obama administration?  

It's time for Rangel, Congress' Democratic leadership, and the rest of the House and Senate to get moving, catch up to the president, and do something for the economy besides spew out more welfare.  The president could help by telling Congress that he wants the right currency bill on his desk without further delay.
 

Straight from the "Stranger than Truth" department:  Multiple sources report that U.S. Trade Representative-designate Ron Kirk has named as his chief of staff one Julianna Smoot -- yes, as in Sen. Reed Smoot, one of the sponsors of the Hawley-Smoot Tariff of 1930, which according to legend triggered every terrible event of the 20th century (including disasters that preceded it).

Not that there's any reason to suppose that Ms. Smoot has the slightest receptivity to any tariffs -- or even much familiarity with trade policy.  She's best known for being a world-class "bundler" for the Obama presidential campaign, even earning the sobriquet "the $700 million woman."

But maybe a champion fundraiser is just what the nation needs to reduce its mammoth trade deficits?  Sending Smoot around hat in hand to America's trade partners certainly sounds more promising than many of the other ideas being pushed in Washington these days to rebalance U.S. trade.

At the least, her appointment could usefully further spook America's trade partners about the intentions of a president many already fear is a wild-eyed protectionist -- and produce some long overdue results for America's productive sector on the trade front.  
  

 

Three cheers for Democratic Congressman Robert Brady of Pennsylvania!  The Chairman of the House Administration Committee has just banned the sale of Chinese-made souvenirs by the gift shop at the brand new Capitol Visitor Center.  

Brady, whose committee oversees the operations of every facility on the House side of the Capitol complex, seems to have been especially offended that the gift shop was selling Chinese-made facsimiles of the Statue of Freedom, which stands atop the Capitol dome.  The item’s availability at the shop, Brady was quoted as declaring by the Politico newspaper, “does a disservice to the millions of American workers who are losing their jobs and their ability to support their families.”  

Brady added that he feels “very strongly that souvenirs sold in House gift shops should be produced by U.S. companies.”  What a concept!  In retrospect, it's amazing that it's taken this long to put such policies into effect.  But  maybe now he and like-minded officials will extend this policy throughout the entire federal government.

In that vein, we’re still waiting for similar statements by Brady’s Senate counterpart, none other than the famously media-friendly Charles E. Schumer of New York.  AmericanEconomicAlert.org readers might remember him as co-sponsor of a tough-sounding China tariff bill he later wound up lobbying against.  

Even better, Brady's decision adds momentum and  another precedent to the efforts of USBIC and other manufacturing interests to require strict Buy American requirements to any government stimulus programs or other official support for private enterprise.

But there has been lots of other inappropriate Chinese merchandise for sale in Washington, D.C., lately, and it will be harder to deal with.  A quick inspection of several Union Station gift shops showed every Obama inauguration souvenir containing a label to be made overseas – in countries like Honduras and Vietnam as well as China.  Particularly offputting were the Obama baseball caps whose labels sported a big American flag over the words “Made in Vietnam.”  Lots of non-garment trinkets had no country of origin labels at all.

Not that the president or his supporters can directly control such activity. But it would be great if the White House issued a statement declaring that every purchase of a foreign-made Obama souvenir clashes sharply with the president’s focus on fighting for working families.
 

Yesterday’s entry discussed how Financial Times columnist Martin Wolf is moving – inch by inch – towards recognizing how outsourcing-focused trade deals helped trigger the economic crisis.   His performance contrasts sharply with that of his Pulitzer Prize-winning Washington Post counterpart Steven Pearlstein, whose recent line on globalization-related issues resembles a stock chart these days.    

Like Wolf, Pearlstein understood early why America’s over-consumption and under-production were threatening to produce the Mother of All Global Crack-ups.  But all too regularly, he lapses back into the kind of globalization drivel that’s become de rigeur from think tank hacks  constantly tacking with the wind.  The volatility, in other words, seems out of control.  But it sadly creates little opportunity to capture value.

Pearlstein’s January 21 piece found him back in drivel mode.  His main point was unexceptional enough in this week of national euphoria (except on Wall St.!):  President Obama, almost uniquely in American politics, knows that we keep getting the wrong answers on economic policy because “we keep asking the wrong questions, talking about them in the wrong language, and limiting ourselves with false choices.”  As a result, the President boasts the potential to reshape our national economic debate and help hammer out “the grand bargains that have always been within sight but never within reach.”

After the lengthy 2008 presidential campaign, I’m still waiting for transformational thinking from Obama.  I’m also waiting for advisors remotely capable of generating it.  But heck, he’s only just begun.  Pearlstein doesn’t have this excuse.  That’s why it was so appalling to see him portray the following as an example of productively recasting the trade policy debate:
“[The U.S. Chamber of Commerce agrees to increase taxes and tariffs to support an expanded program of income support, health insurance and retraining programs for displaced workers, and in response organized labor lifts its opposition to all trade treaties.”

I mean, like it hasn’t been ten years since even Americans who have not won Pulitzer Prizes learned that even many of the highest wage, highest skill jobs could be offshored?  How many manufacturing companies have sent overseas not just production but labs?  How many others have offshored their IT management to India, or contract with firms that do?  How many non-technical jobs in law, finance, and other fields have gone the same route?  And how many of the American jobs that remain in these fields have become much lower paying jobs thanks to this bargain-basement foreign competition?

It makes me want to connect Pearlstein with some of the Boeing Co. engineers I began running into when they became concerned about offshoring.  “Don’t tell me to get educated,” they’d say.  “I’ve got a Ph.D.”  P.S. – they knew they couldn’t rest on their credentials.

Perhaps Pearlstein’s column did serve one valuable purpose, though – reminding readers yet again of the mush that passes in Washington circles for boldness.  That’s why it’s so important for Obama to develop the broadest possible circle of advisors.  Maybe he could start with someone – besides Labor Secretary-designate Hilda Solis – who hasn’t already served in the outsourcing Clinton administration?
 

For more than a decade, I’ve been arguing that at the heart of America’s trade policy problems – which in turn have done so much cumulative damage to our economy – has been Washington’s two decade-old decision to focus U.S. trade liberalization efforts on third world countries.  And for more than a decade, these arguments have largely fallen on deaf ears – even among many trade policy critics!  But encouragingly, a small but important sign that the global economic policy mandarinate is waking up has just appeared in the Financial Times.

Essentially, I’ve said that these agreements haven’t even been trade deals but outsourcing deals – because the regions and countries we’ve signed them with, going back to NAFTA, were too poor, small, broke, protectionist, or some combination of these qualities to be net importers of U.S.-made goods and services.  Their main value to the multinational companies that lobbied so furiously for these agreements was as low-cost export platforms for supplying the U.S. market.

Since global investment flows are so tightly (and understandably) linked to trade flows, once multinational companies realized their strategy would succeed, they’d send outsized levels of productive investment to these countries to build up their export capabilities.  Corporate profits would surge, but the U.S. economy’s productive base would be undermined, and for the global economy, an unsustainable situation would be created that couldn’t end well for anyone, rich or poor.

The high-income economies that the world would inevitably keep relying on to consume goods and services would see their productive bases wither – and with them, their ability to finance this consumption responsibly, through earnings.  Productive capacity would increasingly flow to low-income countries – but their huge labor gluts would inevitably ensure that for decades they would remain unable to consume anywhere near the levels at which they could produce.  

What was distinctive about these arguments has been their emphasis that the global diffusion of manufacturing away from countries like the United States, burgeoning industrial and technological competitiveness in countries like China and India, and dangerous worldwide economic imbalances, didn’t just happen spontaneously, through impersonal natural economic, technological, and historic forces.  These trends were created by decisions made in corporate boardrooms and the corridors of power in Washington.

Such warnings have been proven correct by America’s wholesale shift over the last decade to debt and asset bubble-fueled growth rather than production and income-fueled growth, and the mega-crisis this has finally triggered in the world economy.  

By the same token, however, these warnings also make clear that the crisis can be undone by reversing the underlying man-made mistakes.  And none other than Financial Times columnist Martin Wolf, a distinguished economist in his own right, has displayed some recognition of these real origins of the crisis.

In a January 20 column, Wolf not only repeated his oft-stated view that the crisis is not simply financial in nature, and is instead “a product of the global economy.”  He also did something fundamentally new.  He suggested (very delicately, to be sure!) that outsourcing-focused trade policies have been the main problem.  

How else to interpret the following passage?  “What then is the global failure?  It is the malign interaction between some countries’ propensity towards chronic excess supply and other countries’ opposite propensity towards excess demand.”  More specifically, how else to explain why these production-heavy and consumption-heavy economies are “interacting” in the first place?  

Obviously, the trade agreements that have grown like topsy since NAFTA’s inception have been the keys.  By guaranteeing outsourcing multinationals wide open and permanent access to their target U.S. market from Mexico, China, Vietnam, Central America, or wherever, they encouraged these global firms to set up export platforms in these countries to begin with, which led to the rapid expansion of trade (most of it of course imports into the United States).

Just as obviously, the only way to rebalance the U.S. and global economies sustainably, and bring the crisis to an end, is to roll back these agreements and use smart, tough trade policy moves to lure production back to where its markets are mainly located.  

Wolf is far from ready to endorse such moves.  His column makes clear that he clings to the fantasy that developing countries will shift voluntarily towards more consumption-led economic strategies – even though they keep expressly rejecting this option.  As a result, he’s still intellectually stuck warning against a “resurgence of protectionism” unless these changes come about.  

So it’s great to see Wolf coming closer to the only explanation of the crisis that can simultaneously show us the way out.  I just wonder, though, if he’ll permit himself to draw the unavoidable policy conclusions, and help educate decision-makers, before true catastrophe strikes.
 

I was just as inspired as anyone by President Obama’s call to sacrifice during his Inaugural Address.  Which is why I was so puzzled by his choice of a manufacturing company to visit last week to mobilize public support for his economic recovery plan.

Obama visited Cardinal Fastener & Specialty Co. of Bedford Heights, Ohio, not far from Cleveland.  It’s a company I’m familiar with.  About two years ago, I paid it a visit along with U.S. Business and Industry Council President Kevin Kearns to try to persuade its President, John Grabner, to join our ranks..  Grabner listened politely and asked some perfectly reasonable questions.  But upon hearing our views that revitalizing domestic manufacturing will probably require restricting trade flows, he made his top priority clear (and I paraphrase of course):  “You mean I’m going to have to pay more for my BMW?”

Grabner of course has every right to think whatever he wishes about trade policy.  And I was pleased to read in the press coverage of the visit that his company – which among other things builds the very large, super-strong bolts needed for big energy systems like wind turbines – expects to be doing more business and hiring more workers (especially if the government – i.e., taxpayers – decides to subsidize alternative energy projects big-time).  

But although Obama could not have known about Grabner’s apparent worldview, I hope that next time he decides to visit a domestic manufacturer, he consults with USBIC first.  We’d be happy to direct him to any one of the 1,850 business owners who are members.  And we guarantee that every one of them will be able and willing to think about more than the fate of their favorite status symbols.
 

In his Inaugural Address, was President Obama trying to send a not-so-subtle and in fact defeatist messsge to Big 3 autoworkers and other domestic industrial employees?

We're talking of course about the passage -- portrayed as an admirable example of sacrifice -- about workers who agree to take pay cuts to save their fellow employees' jobs.  

There's no doubt that everyone involved in the domestic auto industry will have to give up something to maintain a viable, U.S.-owned automotive sector.  But there's also no doubt that many sacrifices have already been made in the industry.

How much better it would have been for Detroit -- and the rest of domestic manufacturing -- to have heard a ringing Obama promise to do whatever it takes to preserve domestic production and jobs against the predatory foreign trade practices that have decimated them in recent decades.  

And for good measure, as U.S. Business and Industry Council President Kevin Kearns keeps saying, Obama could have added something about the government doing its part in getting energy and healthcare, as well as trade policy, right.    
 

Yes, it's hard for presidents and presidents-elect to vet all their Cabinet nominees adequately (see "Bill Richardson" and possibly "Ray LaHood"). But it's striking nonetheless that we now have a new president but we still don't have a new Secretary of Commerce-designate.

Not that this is a make-or-break decision for President Obama.  Commerce is the cabinet agency most directly concerned with manufacturing, but the president is the one who determines U.S. manufacturing policy, not the Commerce chief.

All the same, it's hard to avoid concluding from this episode that manufacturing and its challenges don't sit atop the Obama priority list -- and that this sector still doesn't get the respect in Washington it deserves.  

Think of it this way: Can you imagine the Agriculture job staying vacant this long?  Or the Labor job?  Everyone knows that their main constituencies would raise holy heck if so dissed, and they'd be listened to promptly.  

Most important, however, the Commerce delay is another sign that manufacturing doesn't get the respect that the country needs.  Because the only way out of this economic crisis -- as we at the U.S. Business and Industry Council were the first to observe -- is for America to produce its way out.  And with manufacturing dominating our country's genuinely productive sector, this means above all revitalizing domestic industry.

Moreover, although the Commerce chief's power will be limited, the president is going to encounter difficulties communicating with domestic manufacturers systematically and effectively without SOMEONE in the top job at 14th and Constitution.  

So once the inaugural hoopla is over, let's hope for the whole economy's sake that a competent Commerce Secretary is named quickly -- and that the administration's economic policy starts focusing just as quickly on productive fundamentals.  





 

Ain’t life just full of amazing coincidences?  On January 9, Bob Rubin resigned in quasi- (and thus totally inadequate) disgrace as Senior Counselor and board member of the financial giant cum welfare queen Citigroup.  The move came almost exactly ten years after the former Treasury Secretary was famously lionized – along with former Fed Chairman Alan Greenspan and Deputy Treasury Secretary Larry Summers – by TIME magazine as a pillar of the Committee to Save the World.  

Those were indeed the days for these outspoken champions of outsourcing-focused U.S. trade deals and unfettered globalization.  In case you forgot, Russia and much of East Asia and Latin America were convulsed by sequential financial crises during the late-1990s.  The crackups were so big and unexpected and the contagion spread so rapidly that many feared a worldwide economic collapse.  (Sound familiar?)  

Thank heavens, TIME’s editors decided, Rubin and Greenspan and Summers were running the free world’s most powerful economy.  They expertly steered the planet past the danger, saved the day, and even averted major systemic damage.  In so doing, they once again demonstrated the virtues of free global markets, and taught a valuable lesson to those foolhardy Asian protectionists in particular.

How times change.  Greenspan has now been exposed as the economic equivalent of a drug pusher.   He enabled Americans’ overspending addiction for most of this decade and created the illusion of prosperity by throwing unheard of amounts of cheap money at consumers.  Savvy analysts recognize that he responded to the late-90s financial crisis essentially the same way – by blowing asset bubbles.  

Rubin and Summers also played key roles in this supposed strategy.  In particular, they persuaded President Clinton to in effect bail out the bankrupt Asian and other third world mercantilists by keeping the U.S. economy fully receptive to their exports no matter what.  Explained the president to a Tokyo audience in 1998:

“I made a decision with the full support of my entire economic team that we would do everything we could to leave America’s markets as open as possible, knowing full well that our trade deficit would increase dramatically for a year or two.   I did it because I thought it was a major contribution we could make to stabilizing the global economy and the economies in Asia.”  

Rubin, Summers and the rest of the Clinton-ites supported these steps even though they must have known that these export-led economies would try to recover by flooding the United States with super-cheap goods.  They also must have known that U.S. outsourcing multinational companies would try exploit such largesse to the max.  Clearly, their own countrymen’s jobs and earnings – not to mention the productive base of their nation’s economy – weren’t even on their screens.  No wonder that after a decade of such bipartisan economic irresponsibility, America and the world find themselves careening toward a second Great Depression.

Citi’s woes over the last year finally tarnished Rubin’s Golden Boy reputation.  After all, if the Senior Counselor and board member was such a whiz, why did the company make such boneheaded moves?  I mean, I could have ruined Citi in return for a much smaller payout.

Tragically, Washington remains way behind the curve.  Since Citi literally began falling apart over the last year (the company just announced this morning a break-up into two units), Rubin has remained a policy heavyweight.  His proteges, like Summers, Timothy Geithner, and Jason Furman, were all either major Obama campaign advisors or big-time economic decision-makers (especially Geithner at the New York Fed).  And these and many other Rubin-ites have been tapped to staff the incoming administration at the highest levels.  

Moreover, Rubin created and for several years has financed the so-called Hamilton Project, a think tank inside the Brookings Institution aimed largely at preventing the Democratic party from rejecting outsourcing-focused trade policies.  The main Hamilton message?  Yes, these policies have created many more economic losers than we promised, but the best response is compensating them with crumbs of welfare and false promises of job-training and reeducation.  Nothing must interfere with the march of outsourcing.  True, this thinking is simultaneously silly and cynical -- and utterly un-Hamiltonian.  But it has greatly influenced the national trade policy debate, and Obama in particular -- largely because it has Rubin's imprimateur.  

Rubin's resignation letter made clear that he has no intention of moving to the policy sidelines.  “...I intend to intensify my engagement with public policy,” he declared, “for example, the type of activity we have done at The Hamilton Project, where we have charted a more effective way forward in many economic policy areas.”

Some wag once wrote that, in Washington, nothing succeeds like failure.  We can hope the Obama administration has the good sense not to make Bob Rubin and the demonstrable sham of Rubinomics the latest example of this syndrome.   So far, however, the president-elect’s instincts seem to be just the opposite.

A final irony: Several observers (but none I’ve seen in the mainstream media), have noted the suspicious circumstances that surrounded Rubin’s move to Citigroup to start with.  After all, he and Greenspan were among the 1990s leaders pushing hardest to repeal the Depression-era Glass-Steagall restrictions on financial corporations.  Among other stipulations, this legislation required the separation of investment banking and commercial banking.  

Glass-Steagall was repealed in 1999, and enabled Citigroup and others to be created as “financial supermarkets” in the first place.  In the process, of course, they became “too big to fail,” and we taxpayers are now bankrolling them – sky-high executive compensation and all.  Rubin’s tenure at Citi began that year, and earned him at least $115 million through last week.  Sound fishy to you?

But here’s the irony:  The main substantive argument that Rubin and others made reflected globalization-related considerations.  How, they asked, could American financial institutions compete adequately against foreign counterparts not hamstrung by Glass-Steagall-like regs?  In particular, how could they compete against the scale their competitors enjoyed?  

Wall Street and its shills insisted that the only response was what I call “globalization defeatism”: the United States has no choice but to adopt these foreign practices.  For as everyone knows, America needs the rest of the world more than the ROW needs us.

Of course, Rubin & Co. had it (and still have it) completely backwards.  The United States still holds at least the plurality of the cards – despite the globalizers’ best trade-related efforts to squander them.  The answer to Wall Street’s 1990s competitiveness problem was to recognize that doing business in America for foreigners is a privilege, not a right, and to use U.S. leverage to require foreign entrants to conform to our standards.  If they refused, that would be their decision to make.  But would many of them really have let their pride shut them out of the world’s largest and deepest capital markets?  Get serious.
 

AmericanEconomicAlert.org regulars know that for several years, the U.S. Business and Industry Council has been keeping a Manufacturing Trade Index.  This unique dataset tracks trade trends for 50 capital-intensive, high tech manufacturing sectors -- the kind all our leaders claim to realize form the main pillars of the nation's security and prosperity.  

Thanks to the work of USBIC's ace research assistant Megan Chidester, the MTI enables AmericanEconomicAlert.org visitors not only to zero in on the global competitiveness of these key sectors.  It also makes possible assessing manufacturing's position without lumping these sectors in with others -- like consumer electronics or apparel -- that for better or worse, no one with any clout values anymore.  

Finally, the MTI measures the export and import categories that provide the most accurate portrayal of domestic industry's performance -- domestic exports and imports for consumption.  Unlike the more widely used total exports and general imports, these data strip out a lot of the transshipment and re-exporting common in several critical manufacturing sub-sectors.
  
The MTI hasn't quite made it over to our revamped website -- but have no fear.  It's on the way!  In the meantime, a quick look at the November figures -- based on this past Tuesday's monthly government trade report -- reveals a troubling picture.

In November, the overall manufacturing trade deficit totalled $46.11 billion.  That's a full 13.41 percent lower than the average monthly figure for January-November, 2008.  But the deficit for the 50 Manufacturing Trade Index industries -- "the good stuff" -- totalled $10.15 billion.  That was only 4.06 percent lower than the average monthly MTI figure for 2008.

So although the dramatic decrease in November imports and exports shrunk both the overall manufacturing trade deficit and the MTI deficit, the overall manufacturing deficit shrunk three times faster.  

In other words, these core industries may be losing global competitiveness compared with the rest of manufacturing.  That can't be good news for a country with no real choice but to produce its way out of the economic crisis.          
 

Last Friday’s jobs report was indeed a certifiable economic disaster.  As the Labor Department informed us, 524,000 non-farm jobs were lost in December.  This bloodbath came on top of the 584,000 lost in November, and the two months served up the first back-to-back half-million-plus job declines in the 70-year history of the survey.  I trust the folks over at Guinness World Records have been notified.

In fact, the really important numbers were even worse – the ones that showed that the nation’s worst job performer continues to be manufacturing, the sector most heavily affected by America’s outsourcing-focused  trade policies.  This data shows that we keep moving farther and farther away from the essential goal of producing our way out of the economic crisis by creating jobs good enough to enable a critical mass of Americans to maintain first world living standards through their earnings, not their borrowings.  Manufacturing is the only part of our economy with any track record of achieving this goal.

So we should be very upset that although the 524,000 non-farm jobs lost in December represent 0.39 percent of that category’s total, the 149,000 manufacturing jobs represent 1.13 percent of the jobs in that sector – a share nearly three times bigger.

The same pattern held for all of 2008.  Last year, 1.88 percent of all non-farm workers (2.59 million) lost their jobs, but 5.74 percent of manufacturing workers (791,000) lost theirs.  And blue-collar (non-supervisory) manufacturing workers fared worse still, with 7.17 percent of them (712,000) getting pink-slipped.

As of December, 2008, overall manufacturing employment plummeted back to levels first hit in February, 1942.  And the last time the figure was this low was March, 1946. For production workers, today's employment levels are the lowest since November, 1940 -- more than a year before Pearl Harbor.

As a result, manufacturing workers overall now (again, as of December, 2008) represent only 9.58 percent of the total nonfarm workforce.  American history’s most tried-and-true creator of middle class jobs for working class people has been gutted by incompetent trade policies (admittedly among other problems), and we wonder why so many of our fellow citizens tried to maintain their living standards by piling up debt.  Let’s just hope our leaders figure this out, and start solving the problem by fixing our trade policies, before the Chinese stop bankrolling us.    
 

Our Follies and Factline series have always focused on a central goal of the political blogosphere -- finally bringing some accountability to the mainstream media.  Obviously, these print and broadcast organizations have many great accomplishments to their credit, but for too long, they were powers unto themselves, answerable only to stockholders. (And because so many are family held or owned largely by some financial angel, even this inadequate check on their power was generally absent.)

Nowadays, of course, Big Media is getting it from all sides, and although lots of the cyber attacks are superficial, nonsensical, or just plain unfair, lots more are hitting home.  Nothing could be healthier for our democracy.  And nothing could be healthier for our endangered economy.  After all, these same media are almost completely obtuse about the real roots of the deepening crisis -- the outsourcing-focused trade policies that have exported so much of our productive economy, and left us dependent on keeping afloat by borrowing recklessly and inflating asset bubbles.

As a result, on a regular basis, I think I’ll go review a single edition of a major newspaper or magazine and tick off some of the stranger offerings -- chiefly those that inadvertently reveal more about the mule-headedness of this brain-dead establishmentarian outlook than Big Media would want readers to know.  In fact, the idea came to me over breakfast yesterday, while flipping through my local paper, the Washington Post.  The sheer volume of cluelessness -- and hypocrisy and deceit and vapidity -- produced by one 24-hour news cycle shocked even me, and I’ve been spotting these problems for years.   So here’s some of what the paper offered its readers on Thursday, Jan. 8.

Where better to start than the latest George Will column (“End Run on the Treasury”) in which one of our leading omni-pundits -- whose expertise spans creation itself -- attacks the recent decision to make GM’s finance arm, GMAC, eligible for aid from the Troubled Asset Relief Program (TARP)?  Not that this Wall Street welfare measure shouldn’t be lambasted for everything from its violation of free market principles to its blank check nature.  

But Will’s hissy fit yesterday focused on the alleged unfairness of giving GM and Chrysler (which also owns part of GMAC) a subsidy that their foreign competitors don’t enjoy.  It made me wonder why Will has never protested the billions of dollars of tax breaks and other subsidies lavished for decades by numerous states -- especially in the south -- on the transplant automakers that Detroit never received.   This means that for decades the GMs and Chryslers and Fords and U.S.-owned parts makers have been paying the taxes needed to pay for a first world society and all its benefits while the Toyotas and BMWs and Hyundais have received such advantages for free.  And don’t forget that the transplants still get major subsidies from their home governments, not to mention the gift of hermetically sealed domestic markets.  

It’s almost as if Will‘s reporting consisted entirely of interviewing free market hypocrites Richard Shelby and Bob Corker.  These were the Republican Senators from transplant hosts and subsidizers Alabama and Tennessee, respectively, who suddenly turned into free market purists last month when the Big Three’s came to Washington seeking  bridge loans.

The page two story “Congress Urges Spending Restraint” falls into another category altogether -- which might be called Reporting without Thinking.  Not that correspondent Lori Montgomery has been the only perpetrator.  This syndrome now completely dominates coverage of the economic issues raised by the last year’s worth of government rescues and bailouts.  Montgomery dutifully reported that Democratic Sen. Kent Conrad of North Dakota, Chairman of the Budget Committee and his House counterpart, Rep. John Spratt of South Carolina, are troubled by the $1.2 trillion federal budget deficit likely to be produced by (a) President-elect Obama’s stimulus plan and (b) the barely imaginable sums the Bush administration and the Federal Reserve have pumped into Wall Street and the rest of the economy since the credit bubble burst. (Similar kvetching came from the Post editorial board in “`Years to Come’” -- yes, the same Post editorial board that so energetically backed the $700 billion no-strings-attached Wall St. rescue.)

But where have Conrad and Spratt and the Post editorialists been during the last year -- a desert island?  Washington has already showered literally trillions on the shrinking economy.  What’s $775 billion more -- one Obama estimate for his program's price tag.?  Will Washington’s domestic and foreign creditors really be impressed by America’s fiscal restraint if the stimulus is scaled back to half a trillion?  Or are Conrad and Spratt -- and any other surviving budget hawks -- calling for greater cuts?  

At the same time, you have to wonder about the calculations inside the Obama camp.  Why stop at $775 billion?  Why not an even trillion?  Why the pretense of prudence and precision?  Who on earth would fall for it at this point?  In fact, with the numbers this astronomical, why limit the stimulus at all?  If investors worldwide have been eagerly lending the country all the trillions needed to pay for all its rescues and bailouts -- and they have, as proved by barely positive nominal interest rates -- why not just keep the printing presses running indefinitely?  Why not cut out industry and financial middlemen and just directly give all Americans all the money they could ever want?  Or why not cut everyone's taxes to zero, or therabouts?  That's where nominal interest rates are.

Sound crazy?  In fact, Fed Chairman Ben Bernanke and other senior officials have made absolutely clear that Washington will spend whatever it takes to prevent further economic deterioration.  What’s the difference?  And most economists have applauded this resolve.  So why quibble about a few hundred billion here or a few hundred billion there (assuming, again, that budget hawks are even talking about anywhere near this much)?  In for a dime, in for a dollar.  And if there’s even the slightest problem with this reasoning, where in blazes are the economic and financial journalists whose job is supposed to be pointing it out?    

Most curious of all perhaps was Zachary Goldfarb’s piece on outgoing Treasury Secretary Hank Paulson’s speech outlining his views on the future of the newly nationalized federally created mortgage giants Fannie Mae and Freddie Mac.  Much of Paulson’s speech seemed to be yet another desperate attempt to reconcile the clashing imperatives that nearly destroyed these two entities to begin with -- and created much of the housing bubble.  In other words, it made frighteningly clear how deeply in La-La Land U.S. leaders remain on the economic crisis’ causes and on the necessary cures.  If only the reporter had conveyed even minimally how utterly contradictory and convoluted official thinking still is -- and not just on Paulson‘s part.

On the one hand, Fannie and Freddie have anchored the nation’s longstanding objective of maximizing home ownership.  On the other hand, this subsidy was not supposed to create moral hazard.  That‘s why the government never made its guarantees of Fannie and Freddie lending, not to mention their trading operations, explicit.  

To his credit, Paulson’s proposal to turn the mortgage giants into heavily regulated utility-type entities recognized to some extent that housing finance has to drop its quest for super-profits by expertly managing outsized levels of risk.  Fancy investing and trading operations would be canned, the organizations would only back sensible mortgages, and returns consequently would be limited.  

But why keep the government involved at all -- and the taxpayer on the hook -- for such  cut and dried activity?  After all, before Fannie and Freddie, the United States for years boasted numerous purely private companies that conducted such business.  In fact, it still does.  They are called banks, and by lending their own deposits out responsibly (because they were their deposits), they profited quite handsomely.

Paulson’s answer showed that he still wants to square the circle.  Fully private mortgage would lack sufficient “scale” -- meaning that it couldn’t achieve the goal of universalizing home ownership regardless of income or any other means.  But if turning home ownership into an entitlement is really the aim, then why not keep the giants nationalized?  Neither of Paulson’s answers here made the slightest sense, as Goldfarb might have pointed out through that time-honored practice of quoting anonymous experts.  

First, Paulson argued, only the private sector can properly evaluate risk -- even though in his utility model, government judgment would intrude constantly and massively.  Second, and utterly weirdly, he contended that nationalized mortgage financing would eliminate “the private-market stimulus to innovate.”  Say what?  Innovation -- in the form of securitization -- in what should be an intrinsically humdrum business deserves much blame for the mortgage mess and housing bubble to begin with.

In theory, government promotion of home ownership is reasonable and even admirable.  In particular, helping low-income people become economic stakeholders can boost them into the middle class to stay.  But Washington has long given homebuyers a huge subsidy in the form of the tax deductability of  mortgage interest, and the policy produced gains that should have satisfied any American leader or voter.  Government-guaranteed mortgage lending on top of this is simply wretched excess and, as recent experience proves, inevitably becomes welfare in disguise.

But even those with more faith in Washington’s financial and management skills need to recognize the new realities imposed on the housing scene by the deflated economy-wide bubble:   Greatly expanding home ownership is a goal that the United States now simply can’t afford.  That‘s for genuinely affluent countries -- those that actually create wealth – not countries like the United States, which mainly consume hyperactively.  So the only responsible, adult conclusion to reach is that, at least for the time being, we’ll have to settle for being a nation of renters -- which is only a disgrace if you frown on living within your means.  

And here’s an idea that the mainstream media should start covering – by contacting groups like USBIC:  If our leaders find this fate unacceptable, they can restore the dream of even broader home ownership not by spending even more money that the country doesn’t have, and saddling even more Americans with unplayable debts, but through policies that create opportunities to lift sustainable earnings once again.  And that means reviving manufacturing and the other wealth-producing sectors of the economy.          



 

Hi, folks.  As you've seen, the U.S. Business and Industry Council's AmericanEconomicAlert.org website has a new look and new features -- including blogs that will be written by me and by USBIC's President, Kevin L. Kearns.

These blogs will be produced on top of our opinion articles, and GLOBALIZATION FOLLIES and GLOBALIZATION FACTLINE series, and will enable us to share information and analysis on a practically ongoing basis -- and as soon as major news developments break.  

Actually, USBIC is hardly a stranger to the blogosphere -- or at least its main animating idea.  As early as 1996, we started the Factline and Follies series precisely to free ourselves of our dependence on a generally indifferent or hostile national media to communicate with the outside world.  

We realized that new technologies enabled us take our message about Washington's fatally flawed globalization policies directly to our target audiences -- whether elsewhere in the media,  government, the business and policy communities, or the general public.

Our initial weapon of choice was the fax machine.  Admittedly, the cutting edge had moved a ways by then.  But in those ancient times, we worried that e-mails could be too easily deleted without opening.  And websites of course were just getting off the ground.

As soon as we got AmericanEconomicAlert.org's predecessor site up and running, we included the Factlines and Follies, adding the web to our transmission channels.  But the new blogs will help us provide you with even more up-to-date material.          

The first blog entries were posted just before New Year's, but the whole site is still in shakedown-cruise mode, and I'm mulling over titles for mine.  One I like so far is "Bubble Nation:  Chronicles of our Outsourcing-Warped American Economy." I think it nicely captures the idea that our economic crisis ultimately stems from trade policies whose main purpose has been sending as much of the economy's productive base offshore as possible.  The inevitable result?  A country increasingly dependent on borrowing and inflating asset bubbles -- rather than creating wealth and earning income -- to finance our first-world living standards.

But I'm also interested in any suggestions you readers may have.  Feel free to send any brainstorms, or any other comments, to alant114@gmail.com.  I can't promise I'll answer every letter (assuming a deluge is on the way), but they'll all be read, they'll all be appreciated (even brickbats), and I'll respond to as many as possible.      
 

The more I think about it, the more the auto rescue plan authorized by President Bush looks like a pyrrhic victory at best for the U.S.-owned and located automotive industry and a huge, genuine victory for its foreign rivals.  Three big reasons have already occurred to me, and I’m sure more will in the coming days.

First, even if this strategy works and Detroit emerges from the other end viable and competitive and all the other adjectives with which Washington is enamored, the U.S.-owned automotive sector will become much smaller than its German, Japanese, and possibly Korean counterparts.  Unless next-generation Detroit vehicles just blow away the competition and regain big chunks of home market share, U.S.-owned companies will end up being too small to produce enough cars and light trucks to satisfy ongoing U.S. demand.  The capacity just won’t be there.  And the resulting increase in market share for the Germans, Japanese, and South Koreans will mean even more in the way of imported vehicles and parts -- exactly what the deficit- and debt-strapped U.S. economy can’t afford and thus doesn’t need.  

Second, if Washington doesn’t hold the Big Three and the major parts makers to high U.S. content standards, and doesn’t use trade policy to offset the foreign firms’ other continuing cost advantages (like protected home markets), then Detroit will be forced to step up its own burgeoning offshoring and importing.  The U.S.-owned companies might remain competitive this way (although it sure hasn’t been a panacea so far – re-visit the claims made for the U.S. auto industry in the pre-NAFTA debate), but the U.S. economy would suffer.

Third, Washington has just given the transplant operations the whip-hand on automotive industry wages.  At this point, the Big Three will have to reduce their workers’ pay to the transplants’ levels by the end of 2009.  But who’s to say that the transplants would keep wages where they are?  Especially in an environment where even their sales are also hurting big-time, why wouldn’t they cut further?  Where are their workers going to go in protest?  GM?  And further wage depression in the automotive sector cannot help but ripple throughout the economy.  What a great way to wean Americans from their addiction to debt!  Impose a potentially unending series of deep pay cuts on working families!

 

Here’s the real problem with President-elect Obama’s appointment of former Dallas Mayor Ron Kirk as U.S. Trade Representative.  It’s not that Kirk is the rabid free trader that some have portrayed him as.  He clearly doesn’t know enough about the subject and hasn’t thought about it deeply enough to have rabid feelings of any kind.  Nor, in a related vein, is it that his expressed instincts on the subject are all wrong.  These mainly reflect the realities that Texas views itself as a gateway for Latin America commerce, that gateways prosper no matter which way the traffic flows, and that the bipartisan conventional wisdom in Texas politics has long been “Trade Good.”

Moreover, the U.S. Trade Representative has usually not been a major policy formulator. Think of Clinton-ite Charlene Barshefsky, the current incumbent Susan Schwab, and her predecessor, Rob Portman.  They were simply good soldiers.  They carried out marching orders dictated at the White House and the Treasury Department.   In this sense, Obama has been right to tell Washington’s professional transition watchers that he will set the tone and direction on policy across the board.

The real problem with the Kirk appointment is that Obama has for the time being run out of opportunities to receive against-the-grain advice on trade policy in a systematic way, from inside the administration.  With the exception of Labor Secretary-designate Rep. Hilda Solis of California, the entire top level of his entire economic team is made up of dedicated outsourcers -- and Solis will be too busy with more domestic labor issues, especially card check, to be weighing in regularly and influentially on trade policy.

(Of course, I’m leaving out for the moment Hillary Clinton, Secretary of State designate, who ran a much more vocal presidential campaign on trade. It is difficult to know whether she was breaking with her husband’s administration’s trade policies for purely political reasons or whether all those trips to the trade-devastated cities in upper New York State caused her to get religion. She’s already building an empire at State, but whether she will have time to weigh in on trade, where State has been historically weak, with the multiple foreign policy crises facing her and the nation remains to be seen.)

Nor has Obama displayed any ardent desire to receive against-the-grain advice on trade policy.  But as the economic crisis inevitably deepens, he may at some point realize that the only viable way out is for the nation to produce its way out, and to a great extent, that’s going to require substituting domestic output for imports.  None of his vaunted team will be able to say anything useful to him on this score, unless they prove to be more flexible and pragmatic on this cluster of issues than they have been so far.  

Bottom line:  For the foreseeable future, most of the best opportunities to force desperately needed changes in trade policy will result from working with and through Congress.  Hmmmm.  Wasn’t that the case with the outgoing administration, too?