In nominating Jack Lew to be his next secretary of the Treasury, President Obama has chosen a particular type of Washington insider.
It's the kind who comes to Washington after law school and goes to work on the Hill as an assistant of some sort to a congressperson or senator. He/she becomes the brains for that particular politician and also becomes a skilled political and public relations operative and a loyal party player. At some point, a transition is made and this inside congressional type moves into an administration where by dint of non-stop wonk work, congressional connections and savvy, loyalty, and personal dedication to officials higher in the chain of command and particularly to whomever the president is he/she rises rapidly to a senior level. When the term of the administration is eventually finished, the insider moves out of government to make some money and to obtain private sector credentials, but always there is the possibility and intent of a return to government at a very high level.
This type of insider can be extremely valuable. He/she knows how Washington works, where all the bodies are buried, what's been tried before and what has worked and what hasn't worked. He/she is not particularly well known to the public, but is known and trusted by all the people who count in the party and the broader policy and political world.
Jack Lew is a quintessential example of the type. A former congressional aide, he worked as director of the Office of Management and Budget (OMB) in the Clinton administration, then left government to work for Citigroup, and then returned to government in the Obama administration at OMB followed by his present stint as chief of staff to the president.
Obama seems to like this Washington type. In addition to Lew, National Security Adviser Tom Donilon is in this mold, as is National Economic Commission head Gene Sperling. Undoubtedly Obama likes them because they are knowledgeable, hard working, loyal, connected, and without ambitions for elected office.
Especially, in the current environment of ongoing struggle in Washington over debt ceilings and federal spending, Obama is clearly counting on Lew's encyclopedic knowledge of the budget and of congress to keep the government operating and to make the cuts the president wants to make while maintaining the spending he wants to maintain.
From this perspective, Lew is an ideal candidate for Treasury Secretary. On the other hand, this type of Washington insider does have a weakness. It is the flip side of source of the great strength. It is having been inside the Washington box for most of one's adult life. Thus, the great question in the case of Jack Lew is whether he can think outside that box.
Assuming he is confirmed, he will be replacing Tim Geithner for whom he is a virtual clone in many respects. Geithner, a protégé of former Treasury Secretaries Robert Rubin and Larry Summers, has been very competent at keeping the old machinery running in pretty much the old way, but he has been much less impressive in introducing change either domestically or internationally. The U.S. banking system remains a catastrophe waiting to happen. As Frank Portnoy and Jesse Eisinger make clear in the current issue of the Atlantic, no one understands the risks being carried by major U.S. banks like Wells Fargo including their own top executives and boards of directors. They continue to guess at the risks and prices involved in extensive trading of complex derivative instruments for which there are no public markets. Will Lew, also a Rubin protégé, be more imaginative and/or forceful in resolving this issue? That is a major question.
Perhaps even more important is the international stage. Over the past four years, Geithner has largely maintained the policies and global machinery that have seen a continuation of massive U.S. trade deficits and the off-shoring of U.S. productive capacity and jobs. This was to some extent compensated for by the introduction of fiscal and monetary stimulus to the domestic U.S. economy. But the situation will become increasingly difficult. On the one hand, most of the world is planning to grow by exporting. The EU has introduced massive austerity and, in effect, the entire EU has become Germanized in that it can only grow by dint of increased exports. Japan's new government is actively trying to devalue the yen and otherwise to generate growth through greater exports. China and the other BRIC countries are all focused on exports as a major source of new growth. The major market to which they are all planning to export is, of course, the United States.
But Obama needs to create jobs too. Given the budget and spending problems, he won't be able to use the same stimulus measures as during his first term and the Federal Reserve has already used most of its monetary ammunition. This suggests the need to create jobs by reducing the U.S. trade deficit. Beyond this issue, there is also a crying need to update the global economic and financial machinery to reflect a globalized world in which the United States is less dominant and in which China and other developing countries have become major players
Can Lew think outside the box to grapple with these issues? That is probably going to be the big question.
Pete Souza/The White House via Getty Images
Over the holidays, I read an interview in which a leading global intellectual spoke in glowing terms of the great miracle by which hundreds of millions of Chinese, Indians and other Asians have been and are being lifted out of poverty by the superior economic policies of their governments.
This is by now an oft repeated tale. We are told again and again how China has enjoyed three decades of economic growth in excess of 10 percent annually and how India and now others are decoupling from the west and establishing their own independent growth dynamic. Indeed, in the interview I read, the intellectual being interviewed contrasted in a negative way the present crises of the EU and of the U.S. fiscal cliff with the on-going growth phenomena in Asia. He particularly emphasized that Asia will soon surpass Europe and America as the center and most dynamic part of the world economy.
We are all aware, of course, of these trends and we all easily use and accept the language of miracles and wonders. Yet, as I read the interview, it occurred to me that we may well be greatly overstating what is happening and even misinterpreting the true significance of events.
What I mean is this. These economic "miracles" have now been occurring with regularity and for some time. First there was Germany's "Wirtschaft Wunder" recovery from war time devastation. Then there was the Japanese economic "miracle" proclaimed in 1964 in a cover story by the Economist. There followed the "miracles" of the Asian Tigers (South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia) in the 1970s and 1980s. These all had pretty much the same ingredients and the formula was largely same in all cases. Domestic consumption was suppressed while savings and investment were strongly promoted. Investment was channeled into mass production industries characterized by economies of scale and rapid increases in productivity. To justify such large production facilities and investments, exports were emphasized and currencies were kept undervalued in order to assure trade surpluses. In the cases of Germany, Japan, Korea, and Taiwan, U.S. aid was initially important as was U.S. military procurement. In all cases, a relatively open U.S. market and the readiness of the United States to accumulate current account deficits was of critical importance.
Given this history and the ready availability of the ingredients, I wonder if the surprising part is not so much the existence of the current Chinese, Indian, and other Asian "miracles" as their rather late development. I mean, if Japan could have a miracle in 1964 and Korea and Taiwan could have miracles in the 1970s-80s, why couldn't China, India, and others have done the same?
The answer is that they could have. But they were locked into ideological and other political mindsets and commitments that prevented them from easily taking what seemed the obviously most potentially successful course. Over the past twenty-thirty years, in response to necessity and new, pragmatic leadership they have gotten on their present course. The question now is whether they can stay on course and change course in accord with changing circumstances generated by their own success.
The truth is that all the old miracles tended to become unsustainable. They resulted in over-investment, excess capacity, trade frictions, and declining growth rates. Some countries like Singapore managed to adjust and change course in line with changing circumstances, others like Japan have not been able so easily to do so.
That will be the test for China, India, Brazil, Indonesia, and other current miracle countries. Will they be able to sustain growth as the conditions of their initial success change? That will be the real miracle story.
During the 1980s trade conflicts with Japan, the Reagan administration initiated one series of negotiations under the rubric Market Oriented Sector Specific (MOSS) talks. The idea was to negotiate intensely at a high level to remove all the barriers to market entry in selected industry sectors in which it was believed U.S. exports were very competitive.
Some of us among the negotiators wondered if MOSS really meant More Of the Same Stuff.
Now as I read of top U.S. officials and Japan wonks in the think tanks hailing the return to power of former Prime Minister Shinzo Abe and his long dominant Liberal Democrat Party (LDP) as a blessing for the United States, I wonder if they all have Alzheimer's. I mean it's so clearly a case of MOSS - More Of the Same Stuff.
I studied at Keio University in Japan in the 1960s, lived and worked in Tokyo as a business consultant in the 1970s, and served as one of the chief negotiators with Japan in the Reagan administration during the 1980s. With the exception of one roughly two year period, the LDP ruled Japan over that entire time. So I got to know the LDP. Indeed, my consulting office was on the same Nagata-cho block as the LDP headquarters.
One thing I learned is that the LDP is neither liberal nor particularly democratic nor a party. It is significantly rooted in the nationalist groups that ruled Japan prior to and during World War II. Indeed, the early post-war LDP Prime Minister Nobusuke Kishi was at one time classified as a War Criminal. He was also the grandfather of just elected Prime Minister Abe. In his previous term as Prime Minister, Abe, like many of his LDP predecessors, made a practice of regularly visiting the Yasukuni Shrine, a monument to Japanese nationalism whose museum continues to this day to present an erroneous , highly propagandistic version of the background and course of World War II. He has supported those who deny that the Japanese army forced Korean, Filippino, and other young girls into prostitution as "comfort women" for Japanese soldiers despite incontrovertible evidence that it did.
Just recently, Abe's new government has said it is reviewing, with the possible intent of revising, the twenty year old official Japanese government apology to the Comfort Women. Given that it took nearly fifty years to get the apology in the first place, the mere announcement of a review is, at this point, an incredible manifestation of bad faith that should bring forth an outcry of revulsion from Washington.
The Party has only survived over the years because of its strong links to the countryside and Japan's highly protectionist and highly over -represented agricultural interests. Think of the agricultural areas of Japan as the global epi-center of Gerrymandering, with each rural vote worth far more than an urban vote. This is the heart of LDP country.
Economically, the LDP has always at heart tended to be mercantilist and protectionist. It has championed government support of key industries like steel, semiconductors, ship-building, and electronics and has consistently pursued policies of manipulating the yen to keep it undervalued as an indirect subsidy to exports and an indirect tariff on imports. It has fed at the trough of the quasi cartels that control much of Japan's economy and has fought to defend and protect them. It does not at all resonate to the free market vibes of Adam Smith and David Ricardo in the way that Washington and New York do.
For years, U.S. officials and analysts have called on Japan to "rebalance" by shifting from an investment and export led economic growth strategy to a domestic consumption led strategy and by halting manipulation of the yen. Indeed, at one point, Prime Minister Yasuhiro Nakasone vowed that Japan would become "an importing super-power."
It has taken many years and the extraordinary aging and shrinking of Japan's population, but finally in the past year, Japan has begun to run a trade deficit, although it still accumulates current account surpluses because of the large earnings on its enormous stock of overseas investments.
So what is Abe proposing by way of stimulating the economy? Yup, you guessed it. He wants to drive up exports and get back to trade surpluses by again manipulating the value of the yen to drive its value down against that of the dollar. This, of course, would increase Japanese exports , especially to America, while holding down Japanese imports.
He also wants the Bank of Japan to further reduce Japan's almost zero interest rates as a way of stimulating investment. In all his speeches is not a word about structural adjustment, reform, smart regulation, or measures to mitigate Japan's inexorably advancing demographic disaster.
If this doesn't sound to you like America's dream new government for Japan, you're right. It's not.
So why are so many American leaders and policy wonks extending open arms, kisses, and hugs to it? For starters, there's just plain familiarity. We've known them for a long time and the devil you know may be better than the devil you don't know.
But the key factor is what it has always been -- the great game of geo-politics. In the past, it was the Cold War and the U.S. and Japan against the Soviet Union. Now, it's America and Japan against China. This new Abe gang supports and fosters America's geo-political priorities and deployments in Asia. It enables and encourages Washington in its "pivoting to Asia" which appears, in fact, to mean containing China largely by means of a bigger American military presence.
Washington may warn China about currency manipulation but there has been no response to Abe's calls for manipulation of the yen to foster Japanese exports. As in the past, the United States continues to subordinate its economic interests to its geo-political objectives
The names may have changed, but it's as I told you at the beginning -- More Of the Same Stuff -- MOSS.
In 1963, my senior thesis in college was a paper criticizing the Domino Theory rationale for the Vietnam War that was then getting started. According to the theory, if South Vietnam went communist, all of Southeast Asia and perhaps all the rest of Asia as well was destined automatically to follow. Thus, the fate of free Asia and even of the free world rested on whether or not South Vietnam went communist.
I remember getting a less than stellar grade on the paper which said that the theory was bunk. Forty years later, twice wounded Vietnam vet and U.S. Senator Chuck Hagel told me that based on his experience he'd have given me an A-plus.
Hagel and I became friends and allies after his election to the Senate in 1996. Both of us were old fashioned Republicans of the internationalist stripe. Think Bob Dole or George H.W. Bush. We wanted responsible government but we didn't hate government. More importantly we didn't believe in Imperial Government.
The U.S. response to the Al Qaeda attack on the World Trade Towers became a matter of great concern for both us. I thought President George W. Bush missed a great opportunity for world leadership by not using global satellite TV to do a world hook-up and use the time zones to rotate around the globe thanking the countries like France, Britain, Russia, Japan, and others for their support and condolences and publicly inviting their leaders to the ranch for a weekend of consultation and strategy making with regard to a comprehensive program to wipe out Al Qaeda and its brand of terrorism.
Hagel was intensely uncomfortable with the "for us or against us" attitude that came to characterize American policy in the wake of nine-eleven. He bristled at the term "axis of evil", thinking that it foreclosed the possibility of diplomacy. While he supported a tough policy toward Saddam Hussein's Iraq, he often cautioned that, "the military option alone won't work." He argued then and continues to argue that U.S. efforts to foster democracy through unilateral intervention are doomed. As head of the Atlantic Council, he has called for the United States to lead creation of a new world order by reforming (rather than attempting to strangle) international organizations to accommodate the rise of the likes of China, India, Brazil, and others.
In 2002, I think I was perhaps the last western analyst to interview Yassir Arafat. At the time he was barricaded in his Mukata headquarters which was surrounded by Israeli tanks that had been stationed there by order of then Israeli Prime Minister Ariel Sharon. This, of course, was all in the wake of the breakdown of the Camp David talks at the end of the Clinton administration and the outbreak of the second intifada. Despite the failure , which Israel and Clinton blamed on Arafat, he maintained that he remained committed to the two state solution.
When I later discussed this interview with Hagel, I mentioned that I was unsure to what extent Arafat was, in fact , committed to the two-state solution. Hagel noted that whatever Arafat's emotional leaning might be, in the end, there really could be nothing other than a two-state solution. Since then, he has continually pushed that view. He has also advocated direct talks between the United States and Iran and has urged that the United States offer inducements to Hamas to change its behavior and to reconcile with the Palestinian Authority on the West Bank rather than attempting to oust it from its position in Gaza.
These views are now generating a drum beat of anti-Hagel commentary from Israel and from parts of the U.S. Jewish, Christian Zionist, and neocon communities. For example, the Weekly Standard quotes one Republican aide as saying: "This (Hagel's views) is the worst kind of anti-Semitism there is."
Well, this anti-Semitism charge is getting old and over-used. Hagel was a U.S. senator, not a member of the Israeli parliament. His job has been to think about what's good for America. Interestingly, there are many who feel that in doing so he's also been a good friend of Israel in the sense that friends don't let friends drive drunk.
One can, of course, disagree with his views and even oppose his nomination on policy grounds, but it would be an injustice not only to Chuck Hagel, but also to the United States of America if his nomination were blocked because of unfounded charges of anti-Semitism. Hagel is an honorable person who has bled for his country and served it above and beyond the call of duty. We'd be lucky to have him as secretary of defense.
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So it looks like Chuck Hagel is on track to become Secretary of Defense, and Susan Rice has just gotten off the tracks to the office of the Secretary of State. Jack Lew seems to be headed for Treasury. But what about the office of the real heavyweight -- that of the Secretary of Commerce?
Having so far heard no names, let me suggest one of my own. GE Chairman and CEO Jeff Immelt.
I know, I know. I've poked at him in the past and criticized his decisions regarding moving some of his businesses to China and the conflict of interest he has in chairing GE while also chairing President Obama's Commission on Jobs and Competitiveness. But this is like when you justify punishing your kids by telling them that you are only chastising them because you love them. If you didn't love them, you wouldn't waste the time to try to correct them.
I've only been going after Immelt because I think he has the potential to do something really quite significant. Instead of just making more money, he holds within himself the possibility of making history. He has the right instincts about the global economy and America. He knows we Americans should be producing more of what we consume and exporting more of what we produce. He knows America as a nation is competing at a significant disadvantage in the global marketplace. He hasn't so far been able to do much about it because as head of GE his interests are often at odds with those of the United States. Therefore, I want to take him out of GE and put him in a spot where his only mission is to make America more competitive.
Why would he want to take the job and a 99 percent pay cut you ask? I know you think I had my tongue in my cheek when I called Commerce the heaviest weight department. Well, of course, partly I did. But partly I didn't. Think about it this way. The United States has been pursuing a so called "pivot" to Asia by re-emphasizing its military deployments and commitments in the region and by loudly announcing that it's "back" and means to stay for a long time.
Now, that's all well and good, but the United States has not been losing influence and power in Asia and the rest of the world for lack of soldiers and military commitments. It's been losing power and influence because it has become increasingly uncompetitive economically. President Obama has recognized this to some extent be suggesting the creation of a Department of Business to succeed the Department of Commerce. This suggestion drew snorts of laughter from the mostly conventional wisdom pundit class, but it's actually a good idea. Instead of having things like the Export/Import Bank, the office of the U.S. Trade Representative, the Small Business Administration, and a dozen other business oriented agencies scattered over the landscape, it makes sense to combine them into one major department.
In a world of globalization, the Commerce Department already has very great potential power. None of the recent Secretaries of Commerce have understood the latent power and influence it has. Too many of them have unthinkingly agreed with the notion that Commerce is just a grab-bag of agencies thrown together without rhyme or reason. But this only manifests their ignorance and lack of imagination. In fact, the Secretary of Commerce has the power to offset currency manipulation by countries with export led growth strategies. He/she has the power to stop or foster foreign investment in the United States. I could go on, but you get the idea. The Commerce Secretary, if he/she wanted to, could become as much or even more of a heavyweight in the cabinet as the Secretaries of State, Treasury, and Defense.
Immelt has labored in the shadow of Jack Welch for much of his life. It's unlikely he'll be able to top Jack at GE. But by serving his country in a critical role at a critical moment, he could do something far more satisfying and meaningful. He could lead an American Renaissance.
I think he might like to do that and I hope President Obama will turn to him and ask him to take the job.
Several recent news items have highlighted the need for an overall U.S. manufacturing policy.
Last week, Apple announced its decision to move production of some iMacs back to the United States from China. The announcement immediately gave rise to a buzz of excitement as well as to questions about the economics of such a move and whether it was just a cosmetic decision aimed at generating good will toward Apple from Americans and deflecting criticism or whether it was actually a harbinger of change in the overall global supply chain. Closer examination suggested that it was more than a cosmetic PR move and that, indeed, it might signal a broader shift of at least some manufacturing from Asia back to the United States.
For one thing, there is a desire on the part of Apple as well as other leading companies to protect intellectual property better by controlling the design and production of key components. There is also a desire not to become overly dependent on parts suppliers who are also competitors. Beyond that is the fact that most of the production of Apple products is capital and technology rather than labor intensive, meaning that this production can be done very competitively from a U.S. base. The more labor intensive assembly operations are less competitive in the United States, but they account for a relatively small part of overall costs and value added and by doing them in America the company gains much greater control over key aspects of production. Furthermore, even this part of the production process is rapidly becoming more automated and less labor intensive.
But in their announcement and subsequent discussions, Apple executives emphasized that in moving production back to the United States they faced the obstacle that American workers with critical skills are in short supply. They attributed this to flaws in the U.S. educational system, saying that American schools no longer teach many of the subjects that Apple workers would need to know.
In fact, there may be some truth in this, but the larger truth lies elsewhere and has been well identified by Harvard Business School professors Gary Pisano and Willy Shih in there spectacular new book, Producing Prosperity: Why America Needs a Manufacturing Renaissance. They point out that historically many of the skills necessary in various manufacturing industries were taught on the job by the industries themselves rather than by the schools. Indeed, these skills often involved knowledge and company industry specific activities that schools would not be likely to have or be able to teach. They note that one reason why companies in the same industry tend to cluster together is because the existence of these skills in a broad work force constitutes a kind of commons similar to the common pastures of medieval times.
But this commons has been to a significant extent destroyed over the past thirty years by the outsourcing and off-shoring of production to Asia. With the production lines went the teaching and development of skills as well as a significant part of the innovation generation chain. The notion that manufacturing and innovation were independent of each other has been shown to be false and that is a major reason why some manufacturing is returning to the U.S. But to foster that the commons of operations levels skills must be reconstituted as Shih and Pisano emphasize. This skill development is not something that our schools ever entirely did. Much of it was on the job training.
Thus, what is needed now is some collaboration between Apple, the school systems, and the U.S. government. The government could provide training grants to schools for development of specific skills. Apple could work with the government and the schools to identify the needed skills, to assure employment for those acquiring said skills, and to provide the part of the training that can only be done on the job.
A U.S. Department of Commerce that was truly on the job would already be moving to identify industries susceptible of reshoring their manufacturing and identifying the infrastructure, skill sets, and other needs they may have as they undertake more production from a U.S. base.
A second item in the recent press is the news of the buyout of advanced U.S. battery maker A123 Systems by China's Wanxiang America. This is another example of what happens when we operate with half baked policies. Sad to say I predicted exactly this scenario nearly four years ago. At that time, a meeting was held in Vice President Biden's office to discuss how to promote development of an advanced battery innovation and production capability in the United States. This was in response to the question posed by President Obama as to why we couldn't produce advanced batteries in America. Some at the meeting proposed providing various levels of financial grants and tax breaks as a way of stimulating U.S. based R&D and manufacturing. I urged caution, pointing out that other countries like Japan, South Korea, China, and Germany were already spending heavily in the same area. I argued that unless the United States was prepared to match the spending and subsidies of the other countries, any money it spent would go down the rat hole because it wouldn't be sufficient to allow a U.S.-based company to compete with the big boys from abroad. Unfortunately, it has turned out that I was right. A123 couldn't compete with the Chinese and others and so now will become Chinese itself. Or maybe I should say Chinese-American. I do hope that Wanxiang will be able to exploit the A123 Systems technology from an American base. But the real lesson here is, again, that a Commerce Department that was on the job would know the global situation and have a comprehensive strategy either for really competing or for not spending money that is sure to be lost.
Finally in the recent news has been discussion of the U.S. shale gas bonanza and how to exploit it. Some are pushing for large scale exportation of liquefied shale gas to take advantage of high prices abroad. Others are arguing for limiting exports in order to keep prices low for consumers and manufacturers in the United States. A well thought out policy could probably accomplish both goals while also providing financing for upgrading U.S. infrastructure and education. For example a tax on shale gas as suggested by Washington Post columnist Steve Pearlstein could be used to fund infrastructure and education upgrades. Competitive manufacturing analysis could guide the development and execution of export regulations that would assure a continuing energy cost advantage for U.S. based manufacturing while also allowing substantial profits from the export of liquefied shale gas.
Again, a Commerce Department and an Energy Department that were on the job would already be developing proposals for these benefit optimization policies.
So the key question is what is the Secretary of Commerce doing?
Since the re-election of President Obama, I've been fielding phone calls from friends and commentators around the world who are asking about the U.S. fiscal cliff. It turns out to be extraordinarily hard to explain.
The first problem is the notion of the cliff itself. It, of course, exists because the members of congress agreed that if they couldn't agree on policies and procedures to reduce the U.S. federal budget deficit and the long term trajectory of U.S. national debt by the end of this year, they would automatically allow a doomsday scenario to unfold. That scenario would allow President George W. Bush's tax cuts to automatically lapse and be replaced by the marginal tax rates that obtained under Bill Clinton while also automatically cutting about $600 billion of defense and other discretionary spending. It has been anticipated that the impact of this would be to a shift in U.S. GDP growth in 2013 from about plus 2.5 percent to about minus 2.5 percent growth. In other words, a rather nasty recession.
The first question from Japan was how congress could agree on something as draconian as this as an automatic solution but could not come to a discretionary agreement on milder and more balanced measures. In other words, why would congress decide to allow the house to burn down automatically at the turn of the year but not decide to remove the matches and gasoline before then? Are congresspersons mostly pyromaniacs? Isn't it their job to work out compromise budgets precisely so that the house won't burn down? Why would they deliberately choose a doomsday automatic scenario knowing there was a greater than miniscule chance that it would actually be triggered? I tried to explain that ideologues would rather be dead and right than wrong and alive, but I'm not sure my Japanese friend understood.
Another question came from Australia. "How much are we talking about," my friend asked? " I mean, is it anything that couldn't be covered by an increase of a few percentage points on high income earners?"
I explained that President Obama's idea is to increase taxes by 3-4 percentage points on the top 2 percent of income earners but that this proposal was being stubbornly and energetically resisted by the Republican party leaders in the Congress.
"What is the top tax rate right now," my friend asked. When I told him it was about 43 percent including state taxes and social security he was flabbergasted. "But we already pay much more than that in Australia," he said, and added that Australia's top all in tax rate of 46.5 percent is about the same as most other leading countries while the U.S. rate is among the lowest, being fourth from the bottom out of 34 countries. "Why," she asked, "is it so hard to ask rich Americans to pay what other rich people pay in other advanced countries?"
Another good question. I offered the explanation that many U.S. leaders are convinced that raising taxes would reduce growth and act as a drag on job creation. But my friend pointed out that Australia is booming and creating many more jobs than America despite having much higher tax rates. She continued that Germany also has much higher tax rates and is also running the world's largest trade surplus. She suggested that America should consider the possibility that its lagging growth rate and trade deficit might stem from paying too little in taxes rather than too much. Recent economic research, she emphasized, has shown that rising income inequality like that in the United States can itself be a drag on growth.
Next was an old colleague in France who asked about the expenditure side of things. Could things like defense, social security, and health care spending be substantially slashed? I explained that total annual U.S. defense spending is over $1 trillion when the costs of the CIA, State Department, Veterans health care, and other defense related activities are all included. My friend pointed out that that sum is more than equal to the defense expenditures of the rest of the world combined. "You could cut that in half and still be spending about the same as the next fifteen countries," he said.
Then he turned to health care. He noted that at 16-17 percent of GDP, U.S. spending on health care is about double that of France and most other developed countries like Japan, Germany, Britain, and Canada. These countries all have universal coverage for their citizens and these citizens all have significantly longer life spans than U.S. citizens and fewer infant mortalities. Why couldn't America just copy and imitate some of these national policies and plans for health care delivery?
What could I say? He's right on both counts. I don't think I made any of my overseas friends understand the cliff, but I did come to realize that from abroad it makes America look feckless and incapable of dealing with its own problems let alone providing hegemonic leadership for the world.
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All my life I've been a Europhile. My dad worked for a Belgian company. I was a high school exchange student to Switzerland in 1958. My first posting as a Foreign Service officer was as vice consul to Rotterdam. I lived in Brussels for five years in the 1970s as head of Scott Paper Company's European marketing operations. I take my family to Europe frequently and maintain a wide range of work and other activities there.
Through all the vicissitudes of mid-night negotiations, I admired the dedication and vision of the negotiators who were building the European Union. I believed in the vision of a united Europe and welcomed the advent of the Euro as a major step along the way. When the recent crisis first broke three years ago, I welcomed it, thinking that surely it would be a catalyst for Europe to move to full financial integration and to greater political integration on the way toward realizing the vision of a truly united Europe.
I was wrong, and I have come to realize that my dream of a united Europe a la the United States, is not the European dream. Indeed, with great disappointment I have at last concluded that there is no European dream because a las those whom we on the outside call Europeans are not and don't want to be Europeans.
I spent part of last weekend with a group of leading intellectuals from various European countries. The Germans were firm in their conviction that the primary cause of the EU crisis is the laziness, profligacy, free rider attitude, and mendacity of the so called Peripheral Countries ( Spain, Portugal, Ireland, Italy, Greece, and even maybe France), especially Greece, Portugal, and Spain. They emphasized that Germans believe in paying their way, in spending prudently, saving, investing, producing, and maintaining sound money and strong currencies. They attributed Germany's economic success of the past decade wholly to the dedicated pursuit of these virtues. Conversely the problems of the others were blamed largely on their failure adequately to observe the German virtues. Did they realize that Spain's government budget deficit and debt as a percent of GDP had been less than Germany's? Yes, in some cerebral way in their heads they did, but not in their gut. Did they realize that the German banks had been major lenders to and facilitators of the peripheral real estate bubbles whose collapse precipitated the crisis? Again, yes, but only in a kind of theoretical way. There was clearly no conviction that that was a primary cause of the problem or that keeping the German banks whole might have been an on-going drag on the recovery of the peripheral countries. Was there any understanding that for Germany the Euro is actually undervalued (compared to what a free standing Deutsch Mark would be valued at) and that much of Germany's export success is due to that? Absolutely not. No, Germany's success was seen as entirely due to hard work and financial virtue.
My companions saw the solution very much in terms of continued enforcement of strict austerity and achievement by the peripheral countries of fiscal and trade surpluses by dint of reducing wages, employment, and costs. None of them were interested in achieving a European banking union or any other kind of arrangement that would result in German money being used to support Europe-wide obligations.
That, of course, is the way Chancellor Angela Merkel played it over the weekend with regard to the provision of assistance for Greece in order to enable it to avoid default. The Greek situation is truly a vicious circle. Austerity has led to dramatic shrinkage of the Greek economy which means that the debt as a percent of GDP is actually climbing rapidly despite the loans and other measures that have been taken in an effort to relieve and re-generate the Greek economy. The Greek situation is getting worse, not better. Everyone at the weekend meeting which included International Monetary Fund head Christine LaGarde knew and knows that the half measures agreed upon will not be enough. Everyone knows that there will have to be debt relief for Greece somewhere along the way. But German politics don't allow Merkel to face that reality right now, and she is not the kind of leader (one thinks of Helmut Kohl) who tries to shape and guide public opinion as opposed to following it.
Nor is it only a matter of German attitudes. The UK has always run hot and cold on Europe. At the present moment, it is running perhaps colder than ever in the past. Prime Minister David Cameron and his ruling coalition only want to be part of the EU as long as it leaves the UK more or less completely autonomous without having to pay any costs or having to accept any regulations. The betting among my sources is that the UK will be out of the EU within a couple of years.
As for the French, along with the Germans the main historical drivers of the EU, they now seem bent on doing everything possible to turn France into a true Peripheral country. The new President, Francois Hollande, spent the weekend telling Arcelor-Mittal Steel Company CEO, Lakshmi Mittal that if he didn't renege on plans to close two old, inefficient blast furnaces that are part of a steel complex in Florange and thereby lay off 600 French workers, the French government would nationalize the whole complex and attempt to sell it to someone else. Somehow, this didn't seem at all in the spirit of the recent French government sponsored advertising program to attract investment to France with a lyric that runs: "say yes to France."
I guess that Lakshmi Mittal is going to say "no" to France.
But what I really regret is the fact that the giants who built the EU are now gone, and the pygmies who have taken their places are all saying "No" to Europe.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.