It was heavily promoted well in advance, and I signed up early and waited with anticipation for GE's program on  American Competitiveness: What Works, that played for four days last week at Washington's Mellon Auditorium. It was well-organized and smoothly done. The only problem was that it didn't talk at all about American Competitiveness.

GE Chairman and CEO Jeff Immelt opened on an elaborate stage set on Monday with the ubiquitous Power Point presentation -- ten bullet points on what GE says makes it and America competitive -- stuff like customer orientation, operation across the value chain, networked talent, and similar business school speak phrases. Immelt is a practiced presenter, informal, tells good jokes, self-deprecating, extemporaneous, and smooth. Yet, by the end of his solo session I knew no more about the state of American competitiveness than before he began. There was no discussion of the trade deficit, the increasing gap between rich and poor, off-shoring, out-sourcing, income stagnation, relative international technological position or any other benchmarks of competitiveness.

The Immelt solo session was followed by a three man panel discussion moderated by Meet the Press host David Gregory. In addition to Immelt on the panel were Boeing CEO Jim McNerny and Dow Chemical CEO Andrew Liveris. Their discussion wandered a bit because Gregory had little concept of the competitiveness debate or even of what competitiveness means and wasn't well aware of when the CEOs were saying something significant and when they were just blowing smoke which was most of the time. So he couldn't dig in and ask good probing journalist questions. He did, however, ask the key question which is "what is preventing you and other CEOs from investing more in America, producing more in America, and bringing jobs back to America?

Because Immelt is the Chairman of President Barack Obama's Commission on Competitiveness and Jobs, you would have thought he would have a quick five or ten bullet point response. But neither he nor his fellow CEOs did. In fairness, Liveris, who has written a book entitled Make It In America, did emphasize the importance of making things in America. But the main response to the question by all three CEOs was U.S. government regulation. There is too much of it and it is too unpredictable and causes too much uncertainty, they said. McNerny said he thought the government should just get out of the way and let business do its thing. Liveris and Immelt were a little more moderate and did admit that sometime government regulation is actually necessary to assure proper working of market forces. But they too jumped on the excess and uncertain regulation bandwagon as pretty much the main reason why business can't invest and produce more in America.

That was it. No mention of the chronic overvaluation of the dollar as a result of the currency management policies and practices of a number of big exporting countries. No mention either of the big tax holidays and other investment subsidies offered by the likes of China, Singapore, Ireland, and others. Nor was there any talk of the influence of value added taxes that are rebated on exports but added to imports in countries that have such taxes. That the United States is not one of those countries puts it at a disadvantage in the global trade competition because its exports bear a full tax load when they leave the United States and then have the additional VAT added on at their destination. But, as I said, this was not a topic of discussion. (Nor was the format such that questions could be asked from the floor). There was also no mention of the policies of China, Brazil, and others that often condition access to the market on doing local production and R&D.

Indeed, Immelt had just concluded a deal to move his avionics division into a joint venture with a state owned Chinese company that has little or no prior experience in avionics. When I asked him if he had done the deal because that was the only way to get access to the Chinese aircraft market, he avoided a direct and answer and told me that GE had not been forced into the deal, that it had, in fact ,sought the deal, and that the arrangement would create jobs in America. That's all true, and yet it's not true. I'm sure GE did seek the deal, but because they could read in China's Five Year plan that aircraft and thus avionics are industries targeted for development. They could deduce that the only way to hope to get a significant part of the business was to do a joint venture and transfer technology into a Chinese entity. So they sought to do that. Yes, the deal will produce some jobs in America, but it won't be nearly as many as it would have been and should have been in a truly free trade environment.

Now, I actually don't mind the deal as such and if I were Immelt I probably would have done the same thing myself. What I mind is that the CEOs don't discuss honestly what lies behind their actions. They should be coming clean with the U.S. government and the public on the real forces that act upon them and on what the U.S. could do to influence those forces. The CEOs are not fulfilling their duty as citizens when they blow smoke about excess or uncertain regulation. Sure that is a problem sometimes, but it is not the only factor by a long shot.

As for the government just getting out of the way and letting business do its thing, the three CEOs didn't really mean it. In closing their remarks they all called for more funding for the Export/Import Bank to help finance their exports and they all called for Washington to redouble its enforcement of laws protecting intellectual property.

In short the show was a sham. I don't understand why Immelt allows his staff to get him involved in this kind of thing. He's a better man than that. He instincts are public spirited. Instead of government letting business be business, Immelt needs to urge that his staff let Immelt be Immelt.  

In their Oval Office meeting earlier this week, President Obama predictably warned China's visiting president-in-waiting Xi Jinping that China must play by the rules in international trade. It sounded right and fair and slightly tough as it was carefully crafted to do by top White House political advisers, and the president may even believe it. But he shouldn't have said it.

Put aside for the moment the indelicacy of implicitly calling the soon to be president of the a country that is the world's second most powerful and that highly values "face" (pride,dignity) a cheater. I mean, can you imagine the reaction here if Xi had lectured Obama on playing by the rules? But I digress.

There are three problems. The phrase "all must play by the same rules" implies that all are playing the same game, but in actuality they are not. In many instances there are no rules or the rules are vague, untested, and unclear. Even where there are rules, many countries have been ignoring them for a long time and there is thus strong precedent for not playing by the rules or even for interpreting the rules such that they are actually said to bless the apparent violations.   

I have said before this before and I must emphasize it again. The fundamental premise of all U.S trade/globalization talks and discussions is that the participants are all playing the same game of liberal, neo-classical, free market, resource endowment and comparative advantage based free trade. This is a totally false premise that immediately gets the discussions off in irrelevant directions. The global economy is, in fact, sharply divided between those who are playing the free trade game and those who are playing some form of mercantilism. Of course, there is a spectrum of attitudes and policies, but roughly speaking the Anglo/American countries, North America, and parts of Europe are playing free trade. Most of Asia, much of South America, the Middle East, Germany and parts of Europe are playing neo-mercantilism. It's like watching tennis players trying to play a game with football players. It doesn't work, and insisting on playing by the rules doesn't help, because both sets of teams are playing by the rules -- of their game. 

In any case, there are a lot fewer clear cut rules than most people think. For example, probably the biggest single factor in the off-shoring of large chunks of U.S. based production and millions of jobs abroad has been the packages of financial investment incentives offered by China and others to global companies to encourage them to relocate production. More jobs have been lost to these packages than to currency manipulation. But you can't complain about rules violations because there are no rules to cover these investment incentives. At the federal level, American doesn't offer such incentives but there is not WTO or IMF or other rule against it. Nor is the United States proposing any rules in this area.

Take the case of currency manipulation. China is surely manipulating its currency, but so have and do many other countries. Japan, South Korea, Taiwan, Singapore, and others all used currency manipulation is a major element of their export led miracle growth strategies. Some of these countries still to engage in currency manipulation and recently others such as Brazil and Switzerland have gotten into the game. Germany enjoys an undervalued currency because of its incorporation in the Euro. So here is a case where rule violation has been so prevalent that the violation is, in a way, the rule. So if something is to be done about it, that something will have to be a lot more powerful than a call for everyone to "play by the same rules."

We first need to get everyone playing the same game, and that is more likely to turn out to be football than tennis.

This week's Washington debut by China's prospective new President Xi Jinping provides an excellent opportunity for President Obama to un-confuse his administration's economic and security policies with regard to China and Asia.

In the fall, the president announced a drawdown of U.S. military deployments in Europe and the Middle East and a simultaneous strengthening of the U.S. presence in the Asia-Pacific region including the deployment of Marines to a new base in Darwin, Australia. These maneuvers, which also occurred in conjunction with expressions of U.S. concern about Chinese territorial claims in the South China Sea (or West Philippine Sea per Hillary Clinton), were all said to constitute a "Pivot to Asia" not only of U.S. forces but also of U.S. focus and priorities. At the Honolulu meeting of leaders of the Asia Pacific Economic Cooperation (APEC) forum in November, Obama emphasized that this Pivot is not aimed at any particular country but rather is being undertaken because the region is central to America's future prosperity. But this was transparent nonsense. U.S. forces have long patrolled China's coast and China's force modernization is clearly aimed at denying unimpeded access to its coastal waters to the U.S. Navy. In turn, Washington clearly sees China's build-up and its assertion of claims in broad reaches of the South China Sea as a security threat to certain allies and perhaps even to itself.

But then here comes the contradiction. China's ability to pose a threat is, of course, based on its increasing industrial, technological, and economic and financial prowess. China's rising power and influence arise not from its military strength, but from its economic success dynamism. Conversely, the decline of America's power and influence is the result not of loss of military capability but of economic competitiveness. Yet, in this circumstance, the United States is doing just about everything possible to enhance China's economic power and virtually nothing to counter the negative impact of that on the U.S. economy or to enhance its own competitiveness. Consider, for example, that the chairman of the President's Commission on Jobs and Competitiveness, GE Chairman Jeff Immelt, has just completed a deal to merge GE's avionics activities with those of a Chinese state owned company and to move a significant part of the activity to China. Intel has just opened a factory to produce Pentium microprocessors in China in part because China offered investment incentives that Washington refused to match. Everyone knows that China is manipulating its yuan in violation of both World Trade Organization(WTO) and International Monetary Fund (IMF) guidelines, but Washington not only refrains from doing nothing about it, it also even denies that China is manipulating.

In my mind, the whole concept of the threat from China is skewed. In the first place, the notion that Asia is central to America's future prosperity is wrong. Asia buys relatively little from the United States, engages in mercantilism that costs America investment and jobs, and subsidizes the off-shoring of U.S. production facilities and technology. Asia is a drag on American prosperity. Of course, that could change and we must hope that it does. But to think that America now has vital economic facilities in Asia that need to be protected by more American military presence is very wide of the mark at the moment.

But just for the sake of the argument, let's suppose Asia is central to America's future prosperity. Just what is China doing or likely to do in any military sense that would constitute a threat. Is China going to invade the United States or Japan or South Korea or any other significant country in the region? The answer is no. Is it going to occupy certain reefs and islands the ownership of which are in dispute? Possibly, but so what. Is it critical to American security that the highly questionable claim of the Philippines to certain coral reefs is forcefully defended? No. What about the claims of the Japanese and Koreans? Those are perhaps more serious in terms of U.S. obligations to defend Japan and Korea, but, on the other hand, Japan and Korea are major rich countries with large military forces that are capable of doing a fair amount for themselves. And they certainly should do the maximum before the United States jumps in and the United States should certainly not jump in if the Koreans and Japanese are not doing so. So all in all, it's hard to reason for the Pivot. The Chinese see it as a hostile move and it kind of is -- unnecessarily so.

The real problem is on the economic side. Here, if Washington thinks there is a threat from China, it should stop feeding the beast. But even if, as I argue, there is no military threat, there certainly is a threat that American power will be eclipsed by a combination of Chinese economic dynamism and American economic decline.

Thus, the best way to defend and assure the future prosperity and power, both military and economic, of the United States is to figure out how to compete with China and the rest of Asia. For starters this would mean telling Xi that neither he nor China should take anything personally because it's all just business. But the United States will initiate some investigations into how best to counter the problem of dollar over-valuation and will take steps to prevent it. He should further explain that the United States will be matching the investment off-shoring investment incentive packages of China and others and that he will take every legal step to convince Chinese and other producers that if they are selling in America they should make every possible effort to produce here as well and he will pressure and use tax incentives to persuade U.S. business leaders to make it in America. Finally, he should lay out the proposals he will make for adoption of a value added tax, a reduced corporate tax, a greatly increased government R&D budget, and other steps to spark a renaissance of American competitiveness.

This kind of program in conjunction with an actual reduction of the U.S. military presence in the Asia-Pacific area would constitute a Pivot to America. Xi might appreciate that as much as the American people. 

In the wake of my recent criticism of economists for their misunderstanding of the importance of manufacturing, I have been flooded with e-mail criticizing me for advocating protectionism and castigating my ignorance of the wage differential between Asia (especially China) and the United States. Let me hereby try to respond and again make the case for making it in America.

First, it is clear that there is a widespread misunderstanding of the extent and significance of the wage differential in manufacturing between the United States and much of Asia and particularly between the United States and China. Many believe labor costs are a large part of the total cost of production of most manufacturing industries and that the wage differential is too large for virtually any manufacturing to be done competitively in the United States as opposed to China, Vietnam, and other parts of developing Asia. This is in fact not the case. Consider that countries like Germany, Switzerland, Sweden, and Japan have wage and benefit costs far higher than those in the United States yet they maintain manufacturing sectors twice as large as a percent of GDP as the United States.

As I write I am now watching a News Hour report on Germany. One German CEO notes that his company has switched over the past twenty years from making cuckoo clocks to tunnel boring machines. The production of tunnel boring machines is not labor intensive, but it is quite technology and capital intensive. If Germany can be the world's largest or second largest exporter of manufactures in the face of cheap labor Chinese competition, surely the United States can do better than it is doing. In industries like semiconductors, machine tools, specialty machinery, pharmaceuticals, autos, nano technology, optical fiber, and many many more labor cost is a small part of the total cost and can easily be offset by economies of scale, transport cost, superior quality, special design, superior customer service, and lower risk and capital costs.

Most of the value in the Apple iPad for example is in parts that are not made in China. Only about $7 worth of assembly occurs in China. The parts are where the value is and they are made in Japan, South Korea, Taiwan, Germany, and even a few in the United States. Labor costs are not the reason why more of those parts are not made in America. The main reason is that the other countries have made it a matter of high national priority to assure that they produce key parts like semiconductors, digital signal processors, and electronic displays. Their industrial policies have included subsidies of various kinds, risk reducing government investments, buy national regulations, and currency manipulation.

This brings me to the second critique which is that for the U.S. government to counter these special foreign treatments would, in fact, amount to special treatment for U.S. manufacturers and constitute protectionism that would only further distort global markets. This is the position of mainstream, orthodox anglo-American economists. It is essentially a unilateral free trade view that rests on the belief that the structure of an economy and what it produces are of little significance. In effect, it holds that if you have a very competitive semiconductor industry with a large sunk capital investment that is suddenly undercut by the subsidized industry of another country, don't respond to the subsidy that is distorting the normal market forces. Rather, let your industry die, accept the loss of the capital investment, and the loss of the hard won skills of the workers, and move on to some other industry. Hairdressing is one that Christina Romer mentioned as a possibility.

This may be a purist kind of free trade, but it is not what the founders of the World Trade Organization (WTO) and its predecessor institutions had in mind when they said free trade. The rules of these bodies provide for complaints of unfairness and distortion of markets and for the imposition of penalties aimed at off-setting and correcting the distortions. These rules exist because those distortions are not accepted as part of free trade nor is it considered special or discriminatory treatment for an industry to receive relieve from the artificially imposed distortion.  If I and my friend are walking down the street and a thief robs me but not my friend, it does not constitute a special treatment of me as compared to my friend if the police capture the thief and return what was robbed to me. In the trade game, the robbery has mostly been done so far by the mercantilists who focus on manufacturing. Stopping the robbery and restoring the stolen property is not a matter of favoring manufacturing over services. Far from protectionism it is a matter of maintaining free trade and optimizing the gains from natural comparative advantage and from trade.

Casino chips, computer chips, what's the difference? They're all chips, right?

That seems to be what Berkeley's Christina Romer, the former Chairwoman of President Obama's Council of Economic Advisers thinks, and in that she faithfully reflects orthodox economic wisdom.

Writing in yesterday's New York Times, Romer debunks the present wide concern over the decline of American manufacturing and the call by many, including the president in his State of the Union address, for tax breaks and other policies to help shore up manufacturing. She first notes that services industries are as valuable to the U.S. economy as manufacturing, emphasizing that consumers value haircuts as much as hair dryers and that earnings from exporting architectural plans to Shanghai are as real as those from exporting cars to Canada.

This sounds good because all industries have their value and no one wants to denigrate a particular industry or type of respectable work. But it's just not true. Consumers may not value haircuts less than hair dryers but economists should. Production of hair dryers can be done in large factories that produce economies of scale. Such scale economies lead to lower prices, lower inflation, higher productivity and thus higher wealth creation for the whole economy. In addition, producers of hair dryers invest in research and development to foster innovation of new, more efficient, less energy using, and easier to produce dryers.

Now don't get me wrong. I love my barber and want to be sure she stays in business, but her work doesn't yield any of these benefits to the economy. It doesn't have economies of scale, falling costs, rising productivity, or investment in R&D. So while I don't want to lose my barber, I also don't want to lose my hair dryer production unless it can be replaced with something that contributes equally or more to wealth creation. And I don't see retraining the hair dryer workers to be hair dressers as a gain for the economy.

The truth is that manufacturing underwrites about two thirds of all the R&D done in the United States and contributes heavily disproportionately to increases in productivity in the overall economy. That makes it economically more valuable than most (but not all) service industries.

Next, Romer claims that the benefits of such things as the spillovers of clustering and of the acquisition of skills that are broadly transferrable are overstated as are concerns over the viability of the U.S. defense industrial base. She cites a couple of studies by professors at Harvard and M.I.T. along with a semiconductor industry study to support her view.

Well, maybe, but I've been involved in studies and the National Academy of Science and the President's Council of Advisers on Science and Technology have done studies that seem to support the importance of the innovation and production ecology. So we have warring studies. What I can say is that in interviewing I have personally conducted of deans of engineering schools, I hear again and again that the reason for the fall off in U.S. science and engineering graduates is that as a result of the decline of manufacturing there are no jobs for those graduates. The kids are not stupid. They see that and decide to study finance or communications or design or medicine where they can anticipate having employment.

Next, Romer argues that America's present high unemployment rate is not due to any decline of manufacturing but rather to a "profound shortfall of demand" that should be remedied not with aid to manufacturing but with further tax cuts and  macro-economic stimulus measures.

This argument baffles me. In the first place, given the present level of U.S. debt and the present political line-up, I don't know how Romer can imagine that she can get further macro-economic measures that will increase the budget deficit. But, more importantly, I don't know how anyone can say we have a shortfall of demand when our trade deficit is over 3 percent of GDP. That means that we are consuming and therefore demanding 3 percent of GDP (about $500 billion) in excess of our own production. The problem is not that we don't have enough demand. It is that much of our demand is supplied by imports. If the demand currently supplied by imports was entirely supplied by domestic production we'd have an additional 5 million jobs and unemployment would be 4 per cent instead of 8 percent. Our problem is not too little demand. It is too little domestic production. And since our trade deficit is overwhelmingly in manufactured goods (which any conceivable growth in services exports cannot balance), our problem is really too little production of manufactured goods

Just to drive the point home, let me cite a study by the U.S. Government Bureau of Economic Analysis in 2007 which shows that $1 of final demand in manufacturing generates $1.41 in additional intermediate demand. This is far about the next greatest demand generator which is the information industry at $1.14. By contrast retail industries generate only $.58.

Finally, Romer argues that whereas in the past manufacturing paid above average wages and was one of the few sources of well paying jobs for less educated workers this is no longer as much the case.

Okay, so it's not as much the case as it was thirty or forty years ago. But it's still somewhat the case. The average manufacturing wage is still above the general average wage. Yes, it's true that manufacturing jobs today require on average more education than in the past and that factories now operate with a lot fewer workers per dollar of production than twenty years ago. But that's no reason not to want as many of them as we can get. Don't forget that the wealth they create will be necessary to sustain demand for all those service jobs at good middle class wages.

Finally, the worst Romer error is her assertion that manufacturing is asking for special help and subsidies and that we have to choose between manufacturing  and services. This is a false choice and a kind of a straw man argument from Romer. What's really going on is that U.S. manufacturing has been the main target of industrial policies in Asia and Europe. Thus, for example, the semiconductor industries of Japan, Korea, and Taiwan have been heavily subsidized and protected and on that basis have taken a large part of the world's production away from the United States. At the same time, countries like Ireland, Israel, and Singapore have offered tax holidays, free land, cut rate utilities, and capital grants to induce U.S. and other global semiconductor makers to locate production facilities in their countries. They do this because, contrary to Romer, their economists and industrial planners think the spillovers and clustering and productivity gains are enormous. None of these pressures and inducements are being applied to services industries by foreign countries. Thus, U.S. proponents of manufacturing are not asking for special treatment or support that discriminates against services industries. They are merely urging that steps be taken to offset the market distortions being caused by the foreign industrial policies. If such distortions were being generated in services industries, they should also be offset.

The point is that we should not have to make some false choice between manufacturing and services. We should be able to have both in those industries in which America can be competitive on the basis of prevailing market forces. I don't understand why, instead of bashing American manufacturing, Romer and her colleagues don't bash the mercantilists and strategic industrial policy and trade regimes of much of Asia and Europe in defense of truly operating global markets.

In a thoughtful column in yesterday's Financial Times, Gideon Rachman laments the collapse of the Davos Consensus on globalization by noting that the two most important speeches made last week were President Obama's State of the Union address and a campaign speech by leading French presidential candidate Francois Hollande rather than any of the forgettable mumblings in Davos.

The problem that all three parties were addressing is that of high unemployment, falling living standards, and lost wealth in the western world in the context of globalization. Former EU Trade Commissioner Peter Mandelson spoke for the Davos consensus when he said that the job of politicians is to convince the public that globalization is good even when it is blamed for rising unemployment and falling living standards.

In contrast, Obama and Hollande spoke of improving the lot of the middle class, broadening the social safety net, asking the rich to pay their fair share in taxes, better regulating and constraining the financial industry, repatriating manufacturing and reindustrializing their domestic economies, and better enforcing the rules of the World Trade Organization and of other free trade agreements.  Hollande even spoke of "reasserting the sovereignty of the Republic", presumably against that of the mostly undemocratic multi-national institutions. Thus, while the solution of the global establishment as represented by the apostles of Davos is more of the same globalization that has contributed greatly to the present crisis and western misery, that of the leading candidates in the two most important western elections this year is to question some of the key tenets of globalization.

Now here is a key point. As reasonable as it may sound to question something that appears not to be working, Rachman, speaking for the establishment, warns that Obama and Hollande's proposals implicitly protectionist and thus dangerous. So once again the bogeyman of "protectionism" is rolled out to prevent any questioning of or change in the status quo conventional wisdom that free trade and globalization are always and everywhere a win-win proposition that inevitably maximizes wealth creation and welfare.

There are a number of problems with this somewhat knee jerk orthodox establishment reaction. For one thing, it's not at all clear why trying to enforce trade laws and globalization agreements is protectionist. It has become a kind of Pavlovian dog reaction on the part of the establishment media to label as protectionist any U.S. or other western concern for enforcement of trade rules while overlooking chronic rules infractions by a wide variety of global players. If Obama speaks of enforcement of the rules, he's labeled a dangerous protectionist, while no editorials or columns mention the conditioning of market access on technology and production transfer that is practiced by many countries, that is in violation of WTO rules, and that gives rise to Obama's call for rules enforcement.

Everyone seems to agree that free trade requires rules, otherwise they would not engage in the long hours of negotiation necessary to establish the rules. If all agree that the rules are necessary, how can it be protectionist to call for their enforcement? We must remember that non-compliance with the rules is usually much more protectionist than any enforcement effort. Indeed, I would argue that strict enforcement is far more supportive of free trade than looking at infractions with a blind eye.

A second, more fundamental question, is why anyone thinks that free trade and globalization are always win-win. In the first place, free trade and globalization are not the same thing. Globalization involves capital flows, direct foreign investment, and technology transfers that are not usually involved in plain old trade transactions. Economic theory holds that free trade is win-win, but only under certain restrictive assumptions such as that all markets are perfectly competitive, that exchange rates are fixed, that there is full utilization of resources, that there are no economies of scale,  and that there are no cross border flows of capital, technology, or labor. Obviously, those assumptions hold only in very few instances in modern trade.

Turning to globalization, there is even less of a theoretical basis for arguing that it is always a win-win proposition, and that argument is usually made without making a full accounting of the costs of globalization such as those affecting the environment, dislocation of workers, capital investment losses, and skills learning. The truth is that globalization may or may not be a win-win proposition depending on a wide variety of circumstances.

The final question is why economic orthodoxy condemns protection as always the most evil of phenomena. On the one hand, recent research by Berkeley's Barry Eichengreen and Dartmouth's Doug Irwin confirms that the Smoot-Hawley tariff frequently blamed as the prime cause of the Great Depression was not. I think most observers would agree that the mercantilist and state capitalist economies such as those of China, Japan, Germany, Korea, Brazil, Taiwan, and Russia all engage in a significant degree of protectionism and are also the ones presently enjoying the most success. As one observer has put it: "raw protectionism is the breakfast of champions." Well, maybe that's a little strong, but it certainly does look as if the economies with relatively more protection are doing better than the ones with relatively less.

Certainly, it cannot be denied that the mercantilists have gained the most power over the years. Countries with current account surpluses and large reserve holdings are the ones that increasingly call the tune in the global power game. Creditors are almost always in a stronger position than debtors.

In view of that maybe Obama and Hollande are simply thinking that if they "can't like em maybe they should join em.

As it always does this time of year, my inbox is filling up with messages of a certain kind. They all begin with: "I'm here in Davos" and then, in an intellectual form of name dropping, proceed to mention key words and phrases such as Geopolitical Risk, G-Zero World, and Rise of Regions. This, of course, sounds really heavyweight and important. But I am not fooled. Nobody knows what those words mean. The only purpose is inform me that the sender is among the elect glitterati who get invited to the World Economic Forum's annual meeting in Davos.

You have to hand it to Klaus Schwab, the founder and CEO of the Forum. He's the greatest showman since P.T. Barnum. Short, bald, and unimposing, he is what you envision when someone says "gnome of Zurich." Yet, despite his anti-charisma, Schwab has managed to persuade a large number of the world's top CEOs, politicians, academics, media stars, and bureaucrats that they have to be in a  cramped, second rate hotel in a cold Swiss village with mediocre skiing and food every year during the bridge weekend between January and February. Indeed, he has not only convinced these people that they have to be there, he has them begging him for invitations and prime spots on the program.

Of course, it's a combination of competitive vanity and convenience that makes it all work. Glitteratus A begs for an invitation because he/she can't stand the thought of not being there if Glitteratus B is there. The fact that many are there then makes it easy to do in a few days a lot of business with each other that without the meeting would take weeks or months. So, for organizing a nice party for them, the glitterati each pay Schwab anywhere from $50,000 to several hundred thousand dollars. I told you he's the best since Barnum.

The theory of Davos is that Davos man is setting the agenda for and leading the charge toward a fully globalized system of international relations. It is at the annual meeting that the Masters of the Universe divine the alignment of global forces and develop the marching orders that will guide them through the year after they descend from the mountain.

The reality is quite different. At the Davos meeting in 1997, Southeast Asia was designated the most dynamic region in the world. Only three months later, the Asian financial crisis that became a global crisis was triggered when Thailand effectively fell into bankruptcy. None of the seers and whiz kids at the annual meeting had even hinted at the possibility of such a development. And when the crisis struck, the Davos men running each of the concerned countries could not develop an agreed response. Indeed, the Asian Davos men/women totally rejected the solutions imposed upon them by the European and American Davosers.

Similarly, at the Annual Meeting of 2008, none foresaw the bailout of Bear Stearns, the failure of Lehman Brothers, or the collapse of real estate markets in the United States and Europe. Nor in 2010 did the Davos elite foresee the need that quickly arose in the spring for a huge stability fund to deal with the financial crisis of Greece and other peripheral European countries. In short, Davos man has consistently proven clueless and unable to set an agenda with regard to the global developments on which he is supposed to be the expert.

This is actually not surprising in view of the forum's two major flaws. The first is that the Davos meeting is a gathering of the global establishment. By definition, establishments are slow and even unable to see and understand developments that run contrary to the orthodoxy of the establishment. One should never expect the unexpected from an establishment institution. The second flaw is even more serious. It is that the theory of globalization underlying the Davos concept is false. That theory holds that globalization is a win-win economic movement that will enrich the whole world and thereby lead the nations to democracy and eternal peace.

This is false. Or, at least, it is false under present circumstances. Free trade and globalization are not necessarily win-win propositions. Indeed, they are only win-win on the basis of very restrictive assumptions such as that exchange rates are fixed, there are no cross border capital or technology flows, and there is no unemployment. Since these assumptions mostly don't hold in today's global economy, the truth is that globalization may well be a losing proposition depending on many circumstances. Certainly in today's circumstances, the incentives in the global economy are such as to tend to move production and wealth creation out of the United States to off-shore locations. They are also such as to tend to create unsustainable imbalances in global trade and capital flows. Thus, Davos suffers from a great and irreconcilable internal contradiction. The kind of globalization that is its raison d'etre is unsustainable, ultimately even for Davos man/woman.

This was confirmed this morning by none other than the New York Times which, in its lead editorial, commented that the United States cannot rely upon some "unseen hand" to guide development of its economic policy. The Times didn't learn that in Davos where Adam Smith's unseen hand of the market is the dominant GSP device.

Maybe the Times has learned what the true cognoscenti have long known. Anyone interested in knowing what's really happening or in changing the way things are doesn't go to Davos.

In a post last week, I asked why America's new strategy is to "pivot to Asia-Pacific" when America itself needs so much attention. Last night the president replied by making it clear that his real pivot is indeed going to be to America.

In a paraphrase of John F. Kennedy's famous "ask not what your country can do for you, but ask rather what you can do for your country," Barack Obama called on business leaders to reconsider the off-shoring of production and jobs and to "ask what you can do to bring the jobs back." What a beautiful response to the attitude recently expressed by an Apple executive who told the New York Times that Apple has no obligation to fix America's problems.

No, no. Not true, the president emphasized. "We're all in this together. There's nothing America can't accomplish if we all work together."

Sweet words. I've been waiting nearly 30years to hear a president say things like this. Perhaps sweetest of all were his comments on manufacturing. 

In a White House meeting a year and a half ago, the president asked me why Americans can't make things like high speed trains, batteries, flat panel computer and television displays. I said we could if we imitated the policies and attitudes of trading partners like Japan, South Korea, Singapore, and China. But Larry Summers, who famously argued that America doesn't need a manufacturing sector, was then the president's top economic adviser and that year's State of the Union speech contained nothing on manufacturing or bringing jobs back from abroad.

Now that Larry is gone, it seems the president realizes not only that he was asking the right questions all along but that an "economy built to last" must have a robust manufacturing base. In that earlier White House meeting, I argued that as long as foreign tax holidays and U.S. tax provisions made the tax load lighter for American companies if they off-shored production, they would do so. I urged the president to reverse those incentives. His proposals on corporate taxes last night are a big step in the right direction. Especially important was his statement that production overseas should not be advantaged over U.S. based production by special financial provisions. His proposals to make it easy for foreign students to stay in the United States after finishing their degrees, to massively upgrade U.S. infrastructure, to enforce U.S. and international trade rules, to turn the unemployment system into a re-employment system, and to drive for energy independence, are all very welcome.

To be sure, the speech was not perfect. The president should not hold his breath until U.S.-made cars roll on the streets of Seoul, as he suggested they will as a result of the recently concluded U.S.-South Korea Free Trade Agreement. He failed completely to mention currency manipulation, one of the most important practices negatively impacting U.S. and global trade. And his goal of doubling exports may be met but will not matter in the face of the fact that U.S. imports are more than doubling, so that the trade deficit is growing larger.

But these concerns should not obscure the importance of the fundamental shift in U.S. economic thinking that the speech represents. Heretofore, the policy of Republican and Democratic administrations alike has been unilateral free trade, unconcern with the structure of the U.S. economy and what it produces and provides, disdain of industrial policy that supports specific economic sectors like the auto and green energy industries, and emphasis on services and financial industries as the future of the U.S. economy. This speech represents an about face.

Less clear, but implied, is the possibility that it also represents a major reordering of national priorities. In contrast to most previous state of the union speeches, this speech hardly mentioned foreign affairs, national security, war, or terrorism. Does this mean that Washington has shifted from a focus on the priority of geopolitics to the priority of rebuilding America's productive base and reclaiming the American dream? Let's hope so.