When I was a young Reagan administration official, Margaret Thatcher was a particular hero of mine. But looking at her impact in retrospect and with the benefit of more maturity and experience, it seems to me that she has left a very mixed legacy.
I had lived and worked in Europe in the 1970s as Director of European Marketing for Scott Paper Company based in Brussels. I remember having been appalled at the decline of Britain's economic performance and at the erosion of its standing in the world at that time. The constant strikes, the increasingly dilapidated infrastructure, and general mood of gloom were irritating and depressing.
One incident in particular was extremely revealing. Scott's affiliate in Italy, Burgo-Scott, had installed a new paper machine at the same time as the British affiliate, Bowater-Scott. As it happened, the two companies bought exactly the same type of machine. After a year of operation, the Italians reported that their machine was producing at the rate of 50,000 tons per year. This was astonishing news because Bowater-Scott was reporting a production rate of only 35,000 tons per year. But the British affiliate had been in business much longer than the Italian affiliate and had a reputation for excellence. Indeed, the other international affiliates were all judged according to the standards established by the British affiliate.
So at first there was great skepticism in at the Brussels headquarters about the Burgo-Scott numbers. "I mean, you know how Italians are. Of course, they are exaggerating," it was said. But the Italians swore they were telling the truth and invited outside engineers to come and see for themselves. Sure enough. Burgo-Scott was doing what it said it was doing, and that was a lot better than Bowater-Scott. Repeat this example a thousand or so times across the economy and you get an idea of what was happening to Britain.
Thatcher played a key if not decisive role in stopping that rot. One reason why the Reaganites loved her so much was that she stopped it by getting the government's hands out of a lot of pies and letting market forces have free play. Deregulation, privatization, an end to subsidies, and a halt to labor union tyranny was the order of her day, and it worked in many positive ways. Of course, she was greatly assisted by the development of the North Sea oil fields that compensated for lagging British competitiveness in manufacturing and technology. But with competition, free markets, sound government finances, and renewed animal spirits, Britain climbed back from the number six spot among world economies to number four, at least until the arrival of China and Brazil.
Of course, her high point was the determination with which she defended the Falkland Islands. There was never any question of her backbone or of her dedication to a strong and proud Great Britain.
But here is where the questions arise. Despite her valiant fight for the Falklands, Britain today is militarily and geopolitically weaker than it was then. Indeed, it is questionable that the British navy and army forces today could carry off a defense of the Falklands. A major reason is that Thatcherism shared the major weakness of Reaganism -- the faith in laissez faire, that left to themselves market forces and free trade will automatically optimize welfare and productivity.
Thus Britain had little or no response to the strategic industrial and trade policies of countries like Germany, Japan, Korea, and now China that focused on catching up to and displacing major British industries like autos, steel, electronics, and machine tools. Manufacturing as a percent of GDP fell from 25 percent to around 12 percent and the economy became ever more dependent on the financial gnomes of London. But now we have seen that the gnomes have feet of clay that are dissolving in the aftermath of the great recession and global financial crisis. With the North Sea oil fields now going dry, Britain has little to sell beyond some lovely real estate.
That may last for some time, but somehow it's not the way one expects that Maggie would have wanted things to go. On top of that is the problem of the growing gap between a wealthy elite and increasingly poor average citizens. When Thatcher came to power, 1 in 7 British children lived in poverty. By the end of her reforms that number had risen to 1 in 3. The privatization of many of Britain's national companies and large parts of its infrastructure at bargain basement prices enormously enriched British banks, but did little or nothing for the average bloke. The focus of the entire economy became short term financial gains. This is probably not what Maggie had in mind.
Finally, her hostility to the rest of Europe and the EU was chauvinistic and short sighted. Some today are saying she was right about Europe and right not to have the UK in the euro. Well, maybe. But imagine an EU with a truly committed UK at its core. Britain could have balanced Germany, helped create a euro that would have had a banking union behind it, provided powerful impetus to gaining political legitimacy for the EU parliament and presidency.
But that didn't happen. And as things stand, it's not at all clear that the UK has a bright future.
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One thing you can say for new Bank of Japan (BOJ) Governor Haruhiko Kuroda is that he's not timid. As the late President Lyndon Johnson was fond of saying, "sometimes you have to throw in your whole pot." That's what Kuroda has just done with the Bank of Japan's pot.
He and the bank are going for broke by buying as much government debt as necessary to create an inflation rate of 2 percent. The initial move will have the BOJ buying twice as much as the U.S. Federal Reserve has been buying in its quantitative easing campaign to get the U.S. unemployment rate down to 6.5 percent. But the BOJ has also promised to go far beyond even this uncharted territory if necessary to get to the targeted 2 percent inflation rate. The major question now is whether this will work or whether the country will just wind up broke.
Already the move has pushed the value of the yen against the dollar down from Y76/$ to Y96/$ for a devaluation of a little more than 25 percent over the past few weeks. As was the case when the Fed's quantitative easing (QE) measures led to a weakening of the dollar, the BOJ's QE induced yen devaluation has raised cries of alarm (as well as of satisfaction). For instance, the CEO of GM Korea has called on the Korean government to intervene in currency markets to buy dollars and yen in an effort to weaken the Korean won as a way of preserving the export competitiveness of Korea based auto production. Other Korean exporters have joined this chorus. Conversely, some Japanese auto executives have told me that it is now Korea's turn to suffer under a strong currency as Japan has been until recently.
Nor is this very concern very different from that of the Swiss who have tried to maintain export competitiveness by intervening in currency markets to prevent the Swiss franc from rising above prescribed levels against the Euro. Brazil and others have acted in similar ways in response to similar concerns.
At a moment when Japan is applying to enter the negotiations for a Trans Pacific Partnership Free Trade Agreement (TPP) and the United States and the EU are entering into negotiation of a Trans Atlantic Free Trade Agreement (TAFTA) and Japan is talking about a possible free trade agreement with the EU, these currency moves raise major trade issues. For instance, no one wants Japan to languish in continued deflation, but nor do the Koreans (and the Euro-American producers in Korea) want Japan to exit deflation at the expense of Korean exports and employment.
A major difficulty with all the free trade agreements is that their provisions do not deal with the impact of currency fluctuations. The original General Agreement on Tariffs and Trade (GATT) was established under a fixed exchange rate international regime, and the WTO did not adjust trade provisions to a floating currency regime when it came into being. The result is that the removal of tariffs and other trade impediments can be overwhelmed in a matter of days or weeks by precipitous currency movements. Countries are then urged not to engage in "protectionist" policies in reaction. Switzerland, for instance, was condemned by many economic analysts and policy makers for its policy of defensive currency intervention which is a kind of protectionism. But what's a country to do? Industrial adjustment in real life is not as quick as in the econometric models.
It is completely unrealistic under prevailing currency circumstances to negotiate meaningful free trade agreements that might roughly conform to the rules of comparative advantage. Accordingly, the trade negotiators should expand their agendas to include some provisions for dealing with the impact of non trade related currency movements. For instance, countries like the United States and Japan that are engaging in massive QE might be expected to levy export taxes that would sterilize the trade impact of the QE. Or provisions might be established under which countries are authorized under specified conditions to impose temporary floating rate surcharges on imports from countries engaged in currency intervention and/or massive QE.
I know, I know. This raises the possibility of many dangers. Nevertheless, it seems that we should deal with the real world rather than persist in trying to impose the conditions necessary for the maintenance of a theory the assumptions of which have long been inoperative.
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I was a graduate student in Japan in the early 1960s and was privileged to become acquainted with America's then ambassador to Japan, Edwin Reischauer. A Japan scholar at Harvard who was fluent in Japanese, he had been named ambassador by President John F. Kennedy in what turned out to be a brilliant appointment.
Reischauer was warmly welcomed by the Japanese at a critical moment in U.S.-Japan history when the course of the bilateral relationship was being established in the wake of the U.S. occupation. By appointing someone who spoke their language and who knew their history, Kennedy not only flattered the Japanese, but he sent the message that he took Japan seriously enough to send a serious person to Tokyo to represent the United States. By dint of his knowledge and language ability, Reischauer was able to shape opinion in Japan to make it favorable to America and he was able to send insightful analyses of the Japanese situation to Washington. He built a foundation upon which the U.S. -Japan relationship flourished for a long time.
After Reischauer, it became standard procedure for presidents to appoint prominent persons with high government experience to the ambassadorial post in Tokyo. Former Senate Majority Leader Mike Mansfield was President Reagan's pick. Mansfield had also spent a lot of time learning about Japan in the course of his career and while he didn't speak Japanese he understood and emphasized that at that time (the early 1980s) "the U.S.-Japan relationship was the most important bi-lateral relationship in the world bar none."
He was followed by the likes of House Speaker Tom Foley, former Vice President Walter Mondale, and Under Secretary of State Mike Armacost. With the exception of Armacost who does speak Japanese, none of these were what you would call Japan experts, but all were policy heavyweights with important connections in Washington and around the world.
Barck Obama broke this pattern by appointing as Ambassador a successful Silicon Valley lawyer who had no previous knowledge of Japan, but who had been an extraordinarily successful fund raiser for the election campaign. This is not to say that Ambassador John Roos has been a bad Ambassador. Indeed, I would say he's been pretty average. But it is to say that he's no Reischauer or Mondale.
Now, we learn that Caroline Kennedy is likely to be the new ambassador to Tokyo. I'm sure she's a lovely person and a good lawyer and author and, of course, she comes from a prominent American family and was wise enough to choose the right father. Even more wisely, she supported Barack Obama politically at a critical moment.
But she knows little of Japan, speaks no Japanese, and is not particularly experienced in world affairs and diplomacy. Here we are at a moment when China and Japan are at loggerheads over the Senkaku Islands. This could easily turn into a shooting conflict. North Korea is saying that it is in a state of war with South Korea and that it is turning on its nuclear generator. And the United States is trying to conclude a major international free trade agreement in which the United States and Japan will be the major players. In short, this is a serious moment -- a Reischauer moment.
But this appointment is an ornamental one. It tries to evoke the good feeling of the Kennedy years, but without the substance of those years.
Do you think Caroline might have the good sense to turn it down and urge Obama to imitate her dad with a Reischauer-like appointment?
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Although it is currently in the process of disposing of its shares in an orderly fashion, the U.S. government still owns a piece of General Motors (GM). That makes recent statements by top GM executives in South Korea extremely interesting and noteworthy.
In a recent interview with the Financial Times, GM Korea CEO Sergio Rocha urged new Korean President Park Geun-hye to help manufacturers based in her country by manipulating the value of the won to keep it undervalued as a spur to exports."
"On our left and right side, they do things to support their own industry, to allow them to export -- both China and Japan, " said Rocha. The won has strengthened by 6 percent against the dollar over the past year and by a whopping 27 percent against the Japanese yen which has been falling as a consequence of weak yen policy of new Japanese Prime Minister Shinzo Abe. According to Société Générale, South Korea "stands on the front line of the Asian currency war." As consequence of Japan's policy to drive the yen down, the growth of sales of the Korean auto makers in the crucial U.S. and European markets (they have no sales in Japan) has slowed dramatically. Mr. Rocha underlines that "the Korean won is moving in the wrong direction" while noting the GM remains committed to its decision to invest $7.5 billion in South Korean manufacturing over the next five years.
Of course, people are accustomed to thinking of GM as the quintessential American company and so may wonder why GM wants Korea to join in the currency manipulation game. But the truth is that GM is a major producer in Korea and exports about 80 percent of what it produces there. It is thus very sensitive to the effect of fluctuations of the won with regard to the yen, dollar, and Chinese yuan. It will lose sales in the U.S. market to Japanese and Chinese producers if the won is too strong.
What makes this so interesting is the posture of the U.S. government. As an owner of GM it is implicitly associating itself with Rocha's complaints. Yet at the official level, the U.S. Treasury, the White House, and the State Department all maintain that, Rocha to the contrary not withstanding, there is no currency manipulation going on in China or Japan. Indeed, for the past four years, the Secretary of the Treasury has carefully and steadfastly refrained from making any finding of currency manipulation by anybody even when countries have been accumulating enormous dollar reserves as a result of dollar buying in the global currency markets. Maybe Rocha and Jack Lew, the new U.S. Treasury Secretary, should Skype for a while -- I mean, nothing to lose.
Even more interesting is the fact that this question of currency, which Rocha and GM obviously find of central importance to their trade prospects, is not included in any way in the presently on-going negotiation of the American led Trans Pacific Partnership Free Trade Agreement (TPP). Ford Motor company is objecting to the inclusion of Japan in the TPP talks because Ford shares GM's concern about the efforts of Japan to drive down the value of the yen and the potential of that to distort trade elsewhere while negating other market opening measures in Japan. But the U.S. government is rejecting this complaint and insisting that no currency manipulation is taking place.
Just to add to the mix, in a recent meeting at the Sasakawa Peace Foundation in Washington D.C., Ford executive Steve Biegun's argument that Japan's auto trade is distorted by currency management by the Japanese government was vigorously rejected by several representatives of the Japanese auto industry present in the audience.
Here is a fundamental split of opinion about something that should be subject to factual examination and analysis and that lies at the heart of the question of the significance of free trade agreements and indeed of free trade itself.
Maybe Rocha is right. An aggressive currency intervention policy by the South Koreans might be just the catalyst needed to persuade Japan, China, and others to talk seriously about currency policy in the context of free trade.
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By announcing that Japan will join the U.S. led negotiations for a Trans Pacific Free Trade Agreement, Prime Minister Shinzo Abe has taken a bold decision that is likely to produce great benefits for the land of the rising sun - probably at the expense the United States, the land of rising deficits
In joining the talks Abe is going against the expectations of many leading Japan watchers (including this one) as well as against the wishes of his party's strongest core supporters in the broad Japanese agricultural industry. He is also going against the wishes of much of the powerful medical and service industry lobbies. It is precisely because of this opposition that his move is so bold and revealing of perceptions that few believed Abe was capable of having.
Japan's agricultural, medical, and service industry sectors have never been robust. Indeed, the original Japanese economic "miracle" was built on a two tier economic structure that has endured now for nearly three quarters of a century. The national export machine that conquered markets in industries like steel, autos, and semiconductors was based on massive investment in and large scale production by manufacturers for global markets. This was and is the Japan of Toyota, Canon, and Panasonic. But the industries that are more domestic in nature - agriculture, food production, medical supplies, and service industries of all sorts - have been highly protected or never had to face intense global competition just by dint of the localized nature of their business. These sectors have always been inefficient and far less productive than the same industries in the United States and Europe. Nevertheless, because they faced no competition they made lots of money and donated a lot of that to Abe's Liberal Democratic Party (LDP) in order to ensure that they never would face competition.
So bucking these lobbies is out of character for LDP leaders, but it's absolutely necessary for Japan because these unproductive, uncompetitive sectors have become a huge drag on the country's overall economy. If Abe can use the TPP talks to break up their cozy monopolies and reduce their subsidies he will have done a great service for Japan. Especially if reduction of agricultural subsidies can lead to the freeing up of land for larger size residential housing that would drive domestic demand for more goods to fill the houses.
But here's the crazy thing. In principle, Abe and his party can reduce subsidies, tariffs, and restrictive regulations unilaterally. If such moves would be good for the Japanese economy ( and they would be), Abe doesn't actually need a TPP negotiation to do them. Of course, I understand that the politics of the situation may make it easier for him to make the requisite moves in the context of a trade negotiation. That way he can tell his constituents that he has no choice. He has to yield to "gaiatsu" (foreign pressure) if Japan is to obtain concessions from its trading partners for its exports.
The problem is that while the TPP as presently structured holds the promise of many good things for Japan it will almost surely result in a further increase of the U.S. trade deficit and a net loss of U.S. jobs. The reason for this is two-fold. On the one hand, practices and policies like currency manipulation, investment subsidies, administrative guidance, and cartel arrangements that cause the main distortions to trade are not even on the agenda. So consider that since Abe became Prime Minister in Japan with the express objective of reducing the value of the Japanese yen, the currency has indeed fallen by more than twenty percent. This has quite naturally resulted in a surge of Japanese exports, but neither the policy nor the result will be discussed in the TPP talks. What will be discussed is tariff reductions on a range of products on which tariffs are mostly already very low. For example, U.S. tariffs on autos are 2.5 percent, obviously not very significant in comparison to a 20 percent move in exchange rates.
On the other hand, the structures and government -industry relationships of some markets make them more difficult to penetrate than others. Take the auto industry as an example. Japan has zero tariffs and on paper its markets are completely open. The United States has a 2.5 percent tariff on autos and a 25 percent tariff on some trucks. Yet the United States imports more than a third of its autos while Japan imports around 7-8 percent of its vehicles. Let's forget about whether U.S. auto makers can compete in Japan. Let's assume for sake of argument that they can't. But among the most competitive auto companies in the world today is Korea's Hyundai. It is gaining market share in all major markets and often at the expense of the Japanese producers. But Hyundai has announced that it will not even try to penetrate the Japanese market because the hidden barriers there are so high.
The TPP is not going to change the structure and deeply ingrained practices of these markets. It will make the easy to penetrate U.S. market a bit easier to penetrate and will essentially bless the currency manipulation that the export led economies use to beggar their neighbors. U.S. consumers may benefit from some price reductions but that will be outweighed by the loss of jobs and downward pressure on wages exacerbated by a larger trade deficit in the wake of the proposed TPP.
But it will be good for Japan.
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For most of my life it has generally been accepted that Switzerland is about money -- hot, quiet, frightened, sweaty money in large amounts. It has also been understood that a particular class of people called the gnomes of Zurich run everything in Switzerland and cause most of the world's economic and financial problems by doing whatever is best for the money without regard for the people.
When Lyndon Johnson had to impose an interest equalization tax to prevent outflow of U.S. capital it was because of the actions and policies of the gnomes. When Richard Nixon had to cut the dollar loose from gold, it was again because of the machinations of the gnomes. I mean, I so badly wanted to be a gnome when I grew up. They were so powerful and it seemed like what they did was so much fun.
Well, that was then. As of last week, there are no more gnomes in Zurich or even in Europe for that matter.
In a national referendum, the Swiss electorate voted to give shareholders the right to veto the salaries, bonuses, and overall pay packages of senior corporate executives and board directors. Indeed, there are to be no signing bonuses, golden parachutes, or special compensation payouts to executives when their companies are taken over in corporate buyouts. Violation of these rules can result in fines of up to six years of salary and prison terms of three years. These strictures will become part of the Swiss constitution.
This vote followed an incident in which Daniel Vassella, the long time builder and CEO of Novartis had attempted to obtain a contract upon retirement that would have paid him $75 million for consulting and for not working in any way to compete with Novartis. Not normally known as revolutionaries, Swiss voters reacted to this and other practices of Swiss banks and corporations with a vote of 68 percent in favor of the new rules and limits.
Perhaps even more significant is the recent ruling of the EU Commission that all bankers and banks doing business in the EU as well as all employees of EU banks in countries outside the EU must have their bonuses limited to no more than their annual salaries. Now, I know that to you, gentle reader, this may seem quite generous. But you have to realize that for gnomes it is tantamount to penury.
Of course, these actions are only those of a small country and of an EU Commission ruling dealing only with one industry sector. But they have a much larger significance by dint of the fact that they represent a widespread popular demand for a new approach to the standards of corporate behavior and governance. Or perhaps it is a demand for a return to older standards. I mean, can you imagine Henry Ford even suggesting or even thinking that he'd need a consulting contract to prevent him from going to work for a competitor once he stepped down from being Founder and CEO of Ford?
The Swiss vote and the EU Commission ruling remind us of an old verity of business life. For more than two thousand years, corporations have gained life by being chartered by the bodies that rule a society. The point of incorporating is to gain special privileges within the society. These may include limited liability, access to special financial offerings or to special taxation. The reason a society and its state charter corporations is because the society thinks the corporations may do things to benefit the society that will not be possible in the absence of the corporations. In other words, the purpose of the corporation is to serve the society that charters it.
The presently ruling (at least in the Anglo/American world) doctrine of stockholder sovereignty holds that the corporation has a fiduciary duty to maximize the return to shareholders of its efforts. But the interests of shareholders are often at odds with the interests of investors and other stakeholders. And the very fact of the necessity to have a charter in order to operate as a corporation strongly reinforces the notion that the public grants special privileges to the corporation because it (the public) believes the corporation will deliver benefits to the entire society. If it is not doing so, but rather, delivering benefits only to a small privileged group, it has no justification.
As the Swiss are showing us, it is not the public that should serve the gnomes but rather they who should be serving the public. This goes for the gnomes of Wall Street as well as of Zurich.
Since Japanese Prime Minister Abe's recent visit to the White House there has been a lot of double talk both in Tokyo and in Washington about the proposed Trans Pacific Partnership Free Trade Agreement (TPP) and Japan's possible entrance into its negotiation.
From the beginning of the TPP negotiation process , the Obama administration has emphasized that, if completed, this deal would be a so called 21st Century free trade agreement. This rubric is meant to imply that it would be a thoroughly free market deal with none of the fudges and exclusions that have marked virtually all previous free trade agreements. None of that this time, said the White House. This , the administration has insisted, will be a gold plated model of what future free trade deals should look like. In particular, for starters, the administration insisted that all participants in the talks agree up front that no sectors of the economy be excluded from the liberalization negotiations and that all participants be prepared to agree to remove all tariffs.
The reason for the emphasis on a very high level of free trade purity is the growing doubt on the part of the U.S. Congress and the American public in general that these free trade deals actually result in the opening of foreign markets to exports of U.S. goods and services. In many previous instances, such as the recently concluded U.S.-Korea Free Trade Agreement, predictions that the deals would result in surging U.S. exports and a reduction in the U.S. trade deficit have turned out to be not only wrong, but essentially the opposite of what as actually occurred. U.S. imports have surged in response to further opening of U.S. markets, but despite apparent opening abroad, U.S. exports have lagged and the U.S. trade deficit has gotten larger.
So there is great skepticism in the Congress about rosy White House forecasts for further free trade deals. And it has been to overcome this skepticism that the Obama team has been insisting that the TPP is going to be the gold standard for free trade.
But the problem has been, that the present proposed membership of the TPP is not so impressive. Some have called it "The United States and nine dwarfs" referring to the fact that aside from the United States, the other countries (Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam) all have small economies. To make the TPP meaningful, Washington has been hoping to get Japan and possibly Korea involved. Conversely, in Tokyo, there has been concern that if Japan is not involved, it will be disadvantaged in its trade in Asia and also may lose a chance to obtain closer security relations with the United States as well.
But, there is a problem. Japan's agricultural sector is very strongly protected behind tariffs that reach as high as 700 percent. And, the agriculture lobby is extremely powerful politically. It does not want Japan to join the TPP. Unfortunately, Prime Minister Abe's party is heavily dependent on the agriculture lobby and its votes.
So a formula has been developed to get around this problem. Japan has been saying that there is no need to commit to full removal of tariffs ahead of negotiations because that is what the negotiations are supposed to be about. Thus Japan can join the negotiations and test what kind of a deal might be concluded and then decide if it wants to continue of not depending on how much it might have to reduce protection.
It seems that Washington has bought into this formulation in its effort to get Japan into the talks and to make the deal a serious deal by having another major economy as a party to it. But in doing so, the White House is inevitably signaling that, in fact, the deal won't be gold plated. There will likely be some exclusion or some fudge that will allow some level of continued protection in so called sensitive sectors.
If so, we'll be looking at an old style 20th century kind of deal for the 21st century.
Sometimes the value of an idea depends on the passage of time.
Take for example the proposal for a U.S. -EU Free Trade Agreement (FTA). The recent White House announcement of the start of negotiations to achieve such an agreement has been widely greeted with approval and support. This was not always the case. Back in 1997 when the Council on Foreign Relations published the first book calling for such a deal, the proposal was widely rejected and sharply criticized by the leading think tanks, commentators, and other purveyors of the conventional wisdom. It was said that such a deal would threaten to destroy the nascent World Trade Organization (WTO), that it wouldn't really produce much in the way of economic benefits because the two economies were already highly integrated, and that it was objectionable because it represented nothing more than the with guys ganging up against the rest.
A lot of water has gone over the dam in the past seventeen years and now, wonder of wonders, the very same people who made these earlier criticisms are now by and large singing the virtues of a potential agreement. Now they are saying that the deal may be necessary in order to save the WTO, that it could kick start economic growth in both the United States and Europe, and that such a deal between the two major western economies would assure the setting of liberal standards before other less open and liberal economies become more dominant.
By the same token, in his New York Times column yesterday, David Brooks said his dream Obama would propose introduction of a value added tax (VAT) that could be used to offset the impact of much of the income tax, rising young family debt, and rising entitlement costs while also enabling reduction of corporate taxes. It all sounded so good coming from David that I wondered why the idea had been rejected when I proposed it back in the 1960s and when numerous other colleagues have proposed it since. I proposed it for a reason that wasn't mentioned by Brooks but should have been. It is that virtually all the other countries in the world have such a tax which is rebated on exports and imposed on imports, thus acting as a kind of indirect tariff on imports and subsidy for exports. For example, let's say that Volkswagen in Germany produces a Passat and exports it to the United States and that the VAT in Germany is 20 percent (its actually about 17 percent, but let's make the math easy). If the car is sold in Germany by VW for $40,000 with the VAT included, it will sell into the United States at $32,000. Meanwhile, if Ford sells an Explorer in the U.S. market for $40,000, its Explorers exported to Germany will be sold at $48,000. The widespread prevalence of this tax combined with America's allergy to it, is a major contributor to the chronic U.S. trade deficit, loss of jobs, and loss of U.S. tax revenue.
Brooks seems to think Republicans would back this kind of a tax. All I can say is that in my experience in the Reagan administration and from my observations of the two Bush administrations, Republican economists think of a VAT as anathema, as protectionist, and as something Americans shouldn't do. Maybe Brooks can convince them they're wrong, not least because they are. But it's also a good idea even if it is an old one.
Tonight's final example comes from a just released MIT study labeled Production in the Innovation Economy (PIE). Essentially the study by an eminent panel of economists, engineers, and political scientists concludes that more domestic production of a wider variety of items maximizes innovation and reduces the overall cost of production. That the loss of spillovers and externalities constitutes a high but difficult to quantify cost of the off-shoring of production has long been suspected by a few industry analysts such as Harvard's Willy Shi and Gary Pisano and IBM's former chief scientist Ralph Gomory. But any hesitation about breaking up the supply chain and moving parts of it offshore, has always been strongly attacked by economists as costly protectionism contrary to free trade. Now, after decades of argumentation, the distinguished MIT panel has concluded that the old arguments weren't so dumb after all.
All this brings to my mind the wisdom of the old Swahili aphorism that: "Before a man does away with the old Gods, he must first make sure he has something of value with which to replace them."
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.