If President Obama's naming of a Cabinet full of Washington insiders, most of whom played a part in bring about the current economic mess, wasn't enough to produce a sinking feeling in the pit of one's stomach, then the appointment of the President's Economic Recovery Advisory Board earlier this week certainly should have induced overall queasiness.

What began with the announcement that Clinton/ Capitol Hill insider Rahm Emmanuel, free trader to the bone, would be Obama's chief of staff has culminated in a Cabinet -- with the singular exception of Labor Secretary nominee Hilda Solis (and just maybe Hillary Clinton, we'll see)-- of "experts" who each played a role in bringing us year after year of trade deficits and the hollowing out of our major engine of wealth creation, our industrial base.  We've lost over 4 million manufacturing jobs and 40,000 factories employing 500 or more persons in the last ten years -- all courtesy of blind enthusiam for free trade.

It turns out that almost everyone in Washington is outraged at an $819 billion stimilus package -- but almost no one gave a fig as $750 billion trade deficits cut significantly into US growth annually. The economy would be at least $2-3 trillion larger annually were it not for these deficits.  It would also have many more good jobs for middle class families, who wouldn't have had  to dip into their saving or home equity or max their credit cards to preserve a decent lifestyle.

It turns out that for Mr. Obama -- in spite of the campaign rhetoric -- change means continuity, and that hope will soon mean despair as his administration unthinkingly tries to re-create the bubble economy that got us into this messs in the first place.  Worst of all, there seems to be no long-term plan for what the economy should look like at the end of four years and the expenditure of several, maybe many, trillions of dollars.  Call it industrial policy, call it economic planning, call it protectionism or worse, every other advanced country is doing exactly that.  You can't beat something with nothing -- and nothing is what we got so far in the way of policies to revive and expand our industrial base.

What happened to Paul Volcker's legendary feistiness when he chose his Economic Recovery Boards members -- or did Larry Summers and Emanuel choose them for him?  Volcker has been preaching for years --- almost as long as I have -- about the unsustainability of the "globalized" world trading system with its huge imbalances, including the build up of large foreign indebtedness here.  Yet he has surrounded himself -- again with one exception, the AFL-CIO's Rich Trumpka, with outsourcers and orthodox free trade thinkers.  The CEOs of GE, Catepillar, and Oracle -- come on!  They never met a US job they didn't want to ship overseas or a living wage they didn't want to cut. Economists Laura Tyson and Martin Feldstein?  I guess the only reason they have been appointed to the panel is that Adam Smith and David Ricardo are dead -- but they are worthy heirs wearing the mantle of fre trade orthodoxy.

Even the CEOs Obama gathered at the White House to push for his stimulus plan are free trade ringers.  The president said that they are the people who create jobs.  Sorry, Mr. Obama this country hasn't created a net job in an internatoinal traded industry in maybe 25 or 30 years.  Job creation in the private sector is in  the hands of small businesses == but domestic manufacturers have been systematically excluded from your Cabinet, your Economic Recovery Advisory Board, and your White House meetings.

Just to review some basic economics, there are three ways to create wealth: manufacturing, agriculture, and resource extraction.  That's it. The financial services industry is supposed to make its money on the spread between what it pays its depositors and what it charges its borrowers.  But it turned out that Bernie Madoff wasn't the only guy on Wall Street who was running a Ponzi scheme -- and his investors only lost $50 billion, a mere pitance in the multitrillion dollar nosedive in national wealth and retirment savings courtesy of Wall Street's creation of exotic but worthless financial instruments.

The failure of the federal government to police these instruments after the near collapse of Long Term Capital in 1997 put everyone on notice (including alan Greenspan, who helped arrange that bailout) of their inherent dangers was criminal. It makes the SEC's refusal to follow up on solid information that Madofff was a crook look like a pink tea party.

After this stimulus package passes into the economy -- and fails because it does not target wealth-creating US industry -- there are not many more opportunities left, because there are not many more dollars left before there is a complete worldwide loss of confidence in the dollar and a resultant collapse.

Mr. Obama has apparently chosen his path and surrounded himself with purveyors of failed thinking -- academic economists, politicians, and outsourcers from the business community.  He would be well advised to form a Domestic Producers Advisory Panel drawn from the three wealth creating sectors and laboe unions and meet with it often before the situation becomes irreversible. If he needs names, the US Business and Industry Council can provide them.  Without their advice, he and not George Bush is the 21st century Herbert Hoover.
 

In the disastrous November hearings on an auto bailout, Congress and the Bush Administration demanded business plans from the Big Three domestic auto makers – showing that they would remain viable into the future if they were given rescue funding.  The Big Three dutifully came back in December with their respective plans, but Congress stiffed them anyway.

This is the same Congress, of course, that has failed for years to write and pass a “business plan” for the nation.  Instead of finishing its yearly work, Congress relies on patchwork measures known as Continuing Resolutions and kicks the can down the road to the next Congress, leaving it to try to make some sense of the mess that the previous Congress has made with the nation’s finances. The following Congress, containing most of the same actors – and all of the rancor and partisanship (Cardinal Political Rule #1: party above country), doesn’t do any better. So chutzpah doesn’t begin to describe the demands the recently departed Congress placed on the Big Three (whose executives are admittedly without a doubt their own worst enemies).

The president, left to act in his favorite role as the decisionator, granted GM and Chrysler loan packages after several weeks of equivocating -- since he apparently did not want his place in history to include the title, “The Guy Who Left the Country with a Domestic Auto Industry.”  But the loans are only good until March 31, 2009 – when again it will be up to the new Congress and President Obama to take up the challenge.

But in the meantime, what, if anything, is the government doing to help the Big Three and their thousands of suppliers – who also supply much of the rest of U.S. domestic industry?  The conventional wisdom in Washington is:  Trillions for Financial Services, not a penny for Manufacturing.

Unfortunately, most of the auto suppliers can’t remain viable either without the auto-related chunk of their business.  That means that he thousands of other domestic producers are, right this minute, looking for replacement suppliers.  And guess where they are looking? Off-shore.  Sound familiar? Mindless government action forcing unwilling U.S. companies off-shore.  As an alternative, many are looking at completely moving their businesses off-shore close to a reliable source of supply and selling int what will be left of the American market from there.  I aviation, this would be known as a death spiral – with maybe one last remote chance to pull out.

What’s the government plan on foreign currency manipulation – which gives East Asian auto and auto parts makers a leg up on the Big Three?   The China Currency Act, known in the House as Ryan-Hunter and in the Senate as Stabenow-Bunning-Bayh, would give domestic companies the tools to fight foreign prices artificially lowered by currency manipulation.  The bill has been sitting around for two Congresses.  Barack Obama and Hillary Clinton are co-sponsors of the Senate bill.  Is there any chance that this bill will be on the new president’s desk, ready for his signature on January 20th?  No.  Let’s beat up Big three management and the UAW instead.  It’s so much easier for politicians and pundits to run their mouths than to actually do something constructive and pass effective legislation.

What is the government’s plan to address foreign Value Added Taxes, which the United States has seen as giving foreign competition a big boost for the last 50 years? Every president since LBJ (and all the Congresses since that time) have tried and failed to negotiate an end to the VAT rebate that occurs when a product is exported.  These export rebates, which are not countered at the U.S. border upon entry of the product, can range up to 25 percent.  Over 150 of our trading partners employ Value Added Taxes for precisely this reason:  it gives their exporters a big boost and a free ride into the U.S. market.
Again there is a bill that has been languishing in the House for two years sponsored by Reps. Pascrell, Michaud, Jones, and Hunter.  It would impose a border tax equivalent to the VAT rebate the product received in its home country. But the Ways and Means Committee has not even held one hearing on the bill.  Maybe Chairman Charlie Rangel (D-NY) is too busy tending to his tax-avoidance financial dealings or managing his numerous rent-controlled apartments in New York City to notice that the nation is hemorrhaging $750 billion a year in trade deficits, and that the VAT hurts U.S. producers in their home market and abroad – since U.S.-made products must pay the VAT upon entry to foreign markets, adding significantly to their prices.

There are numerous other unfair foreign trade practices that hurt the Big Three auto makers (which I will discuss in future blogs), but again Congress apparently has no plans to address them before March 31.  Why give the Big Three the famous “level playing field” that every Representative and Senator mentions in every stump speech?

Again, I ask, “Where’s your plan for business – in particular manufacturing business, Congress and the Executive?”  Throwing tons of the taxpayer money at the financial sector – without any oversight or controls – will not help the survival of manufacturing one bit.

 

Dear Mr. President-Elect:

You cannot have an effective Economic Recovery Plan without a strategic plan to revitalize the domestic manufacturing base. It is that simple. And at the same time, it's politically complicated because it means reversing decades of trade policies and international economic policies that will cause the East Asians, the Europeans, the developing world, and the multinationals B that spread so much money around Washington B to yelp loudly and in unison.  But it's got to be done or your Economic Recovery Plan will fail, the day of reckoning will just be postponed, and the climb out of the hole that we have dug ourselves into will be much more painful and costly    lasting a generation or more.

If the country is to come out of the current recession and not plunge further into a full blown depression, we need a massive effort to create wealth here in the US.  There are three basic ways to create wealth    manufacturing, agriculture, and resource extraction.  The financial sector does not create wealth    as its failed experiment with derivatives, credit swaps, and other exotic but meaningless financial instruments shows.  

The financial sector should make its money not on snake oil instruments but by loaning it to productive people, i.e., entrepreneurs who build factories and bring new ideas and new products to market    and employ their fellow citizens in doing so.  Over the last 20 years, finance has failed to do that effectively, seeing itself falsely as a wealth creator B when it was not.  In fact, the lust for wealth and greed were just dressed up in fancy, inexplicable instruments.  And now we are in the process of giving that industry a trillion dollars    without demanding any significant reforms    especially that the money be used to make loans here on shore to people and companies that can actually create wealth, employ their fellow citizens, and meets the needs and wants of the American people domestically.


We have lost 4 million manufacturing jobs and have seen over 40,000 larger scale manufacturing facilities close in the last 104 months.  We have created a trade policy and tax, environmental, safety, etc. policies that encouraging the outsourcing of factories and jobs.  We create wealth in China, Korea, Japan, Germany, et alia and then borrow that money back to sustain our middle class way of life. This system is collapsing and thus must be changed.  America must supply the goods and services its people want from its home market.

Clearly, there are few in policymaking who understand these basic facts.  The people that you have appointed so far    Emmanuel, Summers, Geithner, Richardson, Kirk, to name but a few    are those that helped create the house of cards that has collapsed. They are cheerleaders for the "globalized economy," which sounds very romantic and peaceful and interconnected but in fact does not exist.  They have created a system that simply allows foreign competitors to raid the US market with impunity while still largely keeping their home markets closed.

Where are the domestic manufacturers in your cabinet or administration?  Where are the CEOs of domestic   not multinational companies?  Where is the task force to create a strategic plan for domestic industry and agriculture ?

We cannot talk, negotiate, export, borrow, or print our way out of the financial crisis.  We can only domestically PRODUCE our way out of this crisis    creating wealth here at home and enjoying the volumetric effects of more productive money circulating in our economy   not the Chinese, Japanese, or German economies.  China needs to implement a developmental model that relies on domestic demand, not siphoning off wealth from our people and producers.  We need to rebuild manufacturing and put Americans back to work in good paying jobs with decent benefits.

Your administration needs to counter the Value Added Tax schemes of 150 of our trading partners with a border adjustable counter VAT surcharge.  Every trade round that has lowered tariffs has produced a concomitant rise in foreign VATs   which allows our trading partners to negate the effects of the tariff reduction.  Since the LBJ administration, Congress has instructed the Executive in every major trade bill to abolish the false distinction between indirect and direct taxation that is allowed under the GATT/WTO and that therefore permits the use of VAT export subsidies.  The Executive and the Congress have failed.  Foreign products get rebates upon being exported, but American exports to these same countries not only carry the cost of US taxation, but are then slapped with a VAT upon entry to foreign markets.  Small wonder that American producers find themselves uncompetitive at home and abroad.

The East Asians are notorious currency manipulators.  China's currency is reliably estimated to be 40 percent undervalued.  How can American producers compete with foreign products that receive a 40 percent discount through currency manipulation and an additional 20 percent through VAT rebates?  It's just not possible.

Then there are the problems of direct and indirect subsidies to foreign producers by their host governments, as well as tax holidays and massive intellectual property theft.


Simply put, products from these countries should not be allowed in American markets or, if they are, should be taxed accordingly to level the playing field.

Then there is the question or environmental, labor, and safety standards that our producers have to meet but foreign producers do not.  There are two ways to go: relax our standards B which no one wants to do B or enforce our standards on products entering our country at the border.  They don't come in at all B or if they are deemed safe, they pay the same costs B in the form of a surcharge B that American producers must pay.  Polluters must pay; again, it's that simple.

The auto bailout is absolutely necessary    but it must be structured properly    unlike the financial bailout, which is many times more expensive, and has not been structured at all.  Paulson and Geithner don't seem to know what they are doing    and yet you have appointed the latter as your Treasury Secretary. There is no oversight, no new regulation, and we have given them over a trillion dollars.  But we are ready to through away the core of our industrial base, the auto companies, rather than provide a secure loan for $25 billion.

Our state governments know auto assembly is a good economic deal.  The states fall all over themselves to give billions of dollars in incentives to foreign auto makers to locate in their particular state.  But the Executive and the Congress have taken the attitude "Trillions for finance, but not a die for manufacturing."  Manufacturing is the real economy. 70 percent of US R&D is done by manufacturers.  Historically, it is has been among the highest paying industries for the broadest numbers of working Americans.  The auto supply chain runs throughout the economy.  Auto parts makers also supply many other industries, but cannot survive if their Big Three business fails.  That will set off an immense ripple effect, sending remaining domestic manufacturers offshore to meet their needs. In fact, the failure of the Big Three is likely to be the biggest offshoring program ever B courtesy of lack of government understanding and foresight.

We ought to do with autos what we have still failed to do with banks B subsidize the mortgages rather than give the money to the financial industry directly.  Instead of helping the small guy, the homeowner in trouble, and keeping the money flowing through the system, we let the small guy fail and then set off a crisis of mammoth proportions.  If you don't want to give the Big Three money directly, then give car purchase vouchers to the American people.  They would have to be spent on Big Three products that are actually made here    not in Mexico, Brazil, Korea, Germany, Japan, etc.  We could Agreen up@ the program by getting all older vehicles off the road.

The program could be progressive.  The lower one's income, the greater the voucher.  $50 billion in a graduated program would probably put between 3   5 million new cars on the road, a significant increase over the 10 million expected to be sold here domestically this year.  The Big Three's creditors would continue to lend based on the income stream in the vouchers.  Plants could still be rationalized, but consumers (i.e., the market) would make the decision based on which cars are bought with the vouchers.


Want to send the auto makers into bankruptcy instead?  Fine.  But the bankruptcy needs to be structured in advance.  The banks getting the one trillion dollars have to be required to lend to the Big Three B not willy nilly, but to be part of and approve the restructuring plans B so they make 5 percent on the taxpayers money.  Not the glory days of derivatives, just old fashioned, solid banking.

The general point is that we don't, because of some bad management decisions and overly generous union contracts, say the hell with you to all the R&D, the engineering expertise, the production teams, the individual workers skills.  These will not be reconstituted if they are let go.  Our nation will be much poorer and deeper in the industrial hole if that happens.  The costs of reentry will be insurmountable.

And the idea that we will just cede our auto industry to Korea, Japan and Germany is so unsound as to defy description.   The amount of money flowing to foreigners in what economists call rents and the amount of control that implies is unacceptable.  Further, do not buy into the myth that the transplants are as American as the Big Three.  They make their purchasing decisions based on home-country considerations, what's good for their national champion companies B  not on price, quality, service, location, etc., i.e., the normal market factors that go into a purchasing decision.

In sum, develop a strategic plan for domestic manufacturing or fail. Your administration desperately needs new thinking.  Your appointments to date B with the exception of Joe Biden's choice of Jared Berstein to be part of his economic team B just don't cut it.  It's not change and hope; it’s more back to the future with retreads and old, in the box thinking.  Much more is needed if your presidency, and the nation, is to succeed.