A spate of recent books and articles has brought the long running debate over whether it's morning or dusk in America back to the front burner of public debate.

Writers like Robert Kagan and Walter Russell Mead argue that American fears of being surpassed by the Soviet Union and Japan proved groundless in the 1980s and 1990s and that similar fears of being overtaken by China and the other BRICS today will prove similarly unfounded. America they say is not in decline but is rather in the process of re-ordering a global structure weakened by the decline of Japan and Europe. Acute observers like Edward Luce of the Financial Times say it's Time (for America) to Start Thinking -- the title of Luce's just published book.

While I respect all three writers and consider them friends and colleagues, it will surprise no one who has read my own 2010 book -- The Betrayal of American Prosperity -- that I line up with Luce on this one.

Writing about The Myth of America's Decline in Monday's Wall Street Journal, Mead argues that the post World War II tri-lateral global system based on the U.S., Europe, and Japan is in decline because Japan and Europe have stagnated demographically and economically. So while the United States is faced with the necessity of constituting a new international system, it is not faced with any threat of its own decline.

But wait a minute. This line of argument presumes that the U.S. economic performance has been vastly better than Japan's over the past twenty years since the bursting of the Japanese asset bubble in 1992. This presumption is certainly in line with the generally accepted conventional wisdom. I mean, how many times have you read or heard about Japan's "lost decade" or "lost two decades?" The popular line of the media, professional economists, and conservative writers is that over that time poor, little, old Japan has languished while America has galloped ahead to ever new economic triumphs. The only problem with this view is that it's not true. What looked like high U.S. growth in the late 1990s and between 2002 and 2008, was actually two highly destructive bubbles from which we are still recovering. Once you account for differences in population growth, inflation, and differences in counting productivity, the rates of GDP and productivity growth of Japan and the United States over the past twenty years are not terribly different. So if Japan has stagnated, so has America.

But you don't need to compare to Japan to see that. Just compare to America. Except for the top one percent of the income distribution, Americans today have not seen much of an increase in real income since 1975. You'd have to be blind not to see the deterioration of our infra-structure. We used to have trade surpluses. Now we have chronic deficits. We used to tell ourselves that didn't matter because we had surpluses in high tech items. But now we have deficits there too. We used to be the world's biggest creditor. Now we are its biggest debtor. The dollar used to buy 360 yen and 4 German Marks. Now it buys only 80 yen and about .7 euros.  How can anybody claim we're not suffering decline?

Of course, we're in decline. That's obvious to everyone outside the United States and to most inside except for firm believers in American exceptionalism for whom eternal American ascent and economic dominance must be articles of faith.

But the fact of decline is not the main issue. The real question is whether the evident decline is inevitable, stoppable, or reversible. Here I am much more positive. I say reversible.

Look at it like a round of bridge. Each country has a hand of cards. Ask yourself whose cards you'd prefer to play  given a choice. I say America's. America's cards today are not as good as those of ten or twenty years ago. But they're still the best, the best universities, the most stable large market, the leading position in many technologies, the easiest place to take risks, and so forth. But, of course, in bridge as in life, you can lose with a good hand if you play the cards badly.

Here's America's real problem and one that Luce really puts his finger on. The United States is playing its cards just about as badly as it is possible to play them.

So what needs to be done. Nothing too complicated really. Just watch Singapore, China, Germany, and Brazil and do what they do. Do they offer substantial financial incentives to induce off-shoring of production to their shores? Fine. Study their programs and copy them. Do they target key industries for development? Fine, do the same. Do they coordinate closely between government, labor, and management. Great. Do the same.

Anything they can do we should be able to do as well, sometimes maybe even better.   

My last post on America's incoherent and internally contradictory de facto industrial policy elicited a number of comments (published and un-published) that suggest I have inadvertently confused a lot of readers. So let me take another stab.

Some seemed to conclude from my listing of farm, housing, medical, and other subsidies that I was calling for similar subsidies for industrial R&D and manufacturing. Some of these readers pointedly raised the question of whether such subsidies have done the nation any good. Let me hasten to emphasize that I believe the bulk of the farm, housing , and other subsidies have done more harm than good to the economy, and I in no way am calling for imitating them in the industrial/manufacturing realm.

The main point I have long tried to make is that industrial policy is not really about subsidies. Perhaps the term industrial policy is inadequate. What I believe to be really important might better be called an economic strategy. What I see in the United States is a situation in which analysts, commentators, and economists hold strongly to the view that we don't want any industrial policy or economic strategy (so called picking of winners and losers) on the grounds that such actions distort and harm the economy. Yet, our politics, geo-political and military policies and practices, humanitarian instincts, and policy fads drive us to make vast interventions without regard to any overall criteria of productive health and competitiveness. So the absence of a policy or of guiding criteria does not lead to absence of interventionist policies. It only exacerbates more incoherent and counter-productive intervention.

Some readers have commented that much evidence demonstrates that moving away from European-style planned systems greatly improves economic performance. This seems to me to be true only to a certain extent. In other words, moving away from communist style central planning and white elephant national champions is certainly beneficial. On the other hand, the German and Scandinavian style of government-labor-management cooperation and coordination and competitiveness planning seems to be working better than Anglo-American laissez faire. Even more significant is the out- performance of the Asian economies like Singapore, China, Korea, and Taiwan that engage in extensive development of five year planning to create criteria for judging and guiding appropriate policy interventions, subsidies, and investments. Of course, none of this is perfect. But the existence of an overall strategy with guiding criteria tends to make the inevitable intervention more coherent and sensible than the free for all system of the United States.

So my plea for the United States is for an Office of Competitive Assessment that benchmarks U.S. performance against that of other leading economies on a systematic basis and that develops alternative scenarios of U.S. development with guidelines on how to optimize performance. Of course, this kind of indicative thinking wouldn't always carry the day, but it would be extremely useful to have.

A final point is the issue of intervention in response to the policies of others. In principle I believe the U.S. market is big enough and robust enough to support virtually any industry on a competitive basis without special government support. However, a problem arises when foreign governments decide to target those industries for special assistance as part of a "catch-up" effort. We have seen this for the past forty years in the cases of the European Airbus, the Japanese steel, semiconductor, auto, and machine tool industries, the Korean semiconductor and electronic industries, the German solar panel industry, and many, many more. The question always is whether to respond to the foreign subsidy or trade or regulatory barrier in kind or not. Of course, it would be ideal if everyone could just sit around the conference table at WTO headquarters in Geneva and agree on free trade. But history has demonstrated that that just doesn't work, and it doesn't work because countries know from experience that by intervening they can become competitive and obtain substantial spillover and scale benefits. The Airbus is perhaps the best example.

But these situations are always zero-sum games. The win of the Airbus is the loss of the U.S. aircraft industry, for example. Or the win of the Japanese semiconductor industry was the loss of the U.S. semiconductor industry. In these circumstances, game theory tells us that tit for tat is the optimum strategy. Thus the United States (or any other country) needs an industrial policy at least to the extent of offsetting the interventions of other governments and that offsetting needs to be automatic and instant rather than at the end of a long period of drawn out complaint filing and negotiation during which the effect of the original intervention increasingly takes hold.

Ideally, this kind of response would lead to trade negotiations and disciplines within the WTO and/or other bodies to govern the interventions and responses as has been the case in the past with regard to direct export subsidies. But, if not, the target industry would not be left to wither on the vine.  

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.

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.

If you want to understand the truly upside-down nature of the thinking of Washington's foreign policy elite on Asia, take a look at the just released report and press commentary by the U.S.-ASEAN Strategy Commission of the Center for Strategic and International Studies (CSIS).

Like all of these think tank commissions, this one is studded with former high ranking officials now consulting for a variety of global corporations both American  and foreign. Particularly prominent in their remarks were former U.S. Trade Representative Carla Hills and former Defense Secretary William Cohen. Hills urged negotiation of that philosopher's stone of modern international relations, a free trade agreement, in this case between the United States and ASEAN. Breaking down barriers to trade and capital flows would encourage further investment in the region by U.S. corporations, she said.

In light of the fact that the ASEAN region is drowning in investment while the United States is starving for it, it's not clear why Washington should want to encourage further investment in ASEAN, but maybe Hills thinks the deal would encourage a two way flow of investment that would also be beneficial to the United States.

If that is the case, however, the commission's proposals do not include any recommendations on exchange rate manipulation, reciprocity on investment incentives, or other tax and regulatory tools often employed by the ASEAN countries in ways that tend to promote their trade surpluses and the U.S. trade deficit with its consequent impact on U.S. unemployment.

Read on

America's Asia policy is internally contradictory and makes no sense. Four recent events make the point.

In Darwin yesterday, President Obama formally concluded an agreement for greatly enhanced U.S. use of northern Australian military bases. This will give the United States a quasi-permanent presence in waters of Australia, Indonesia, Southeast Asia, and India. At about the same time, Secretary of State Hillary Clinton was standing on the deck of a guided missile cruiser in Manila Bay and assuring the Philippines that the United States would keep its commitments to maintaining Philippine security.

Just before the president's departure from Washington for his current swing around the Pacific the Chairman of his Council on Jobs and Competitiveness, GE Chairman and CEO Jeff Immelt, announced a new joint venture between GE and one of China's state owned aviation companies. Under the deal, GE will transfer its leading edge avionics technology and move the production of its avionics products and many of the related jobs from the United States to China. This arrangement was cleared by the U.S. Departents of Defense and Commerce and presumably is in keeping with President Obama's statement in his last joint press conference with Chinese President Hu Jintao that America would help China with the development of its own indigenous commercial jet liner.

Last summer, a New York Times story noted that the main spans for the new Oakland Bay Bridge are being readied for shipment from China, where they were fabricated, to the San Fancisco Bay area where they will be bolted in place. The bridge has been built in China because Chinese steel was quoted at a lower price than U.S. steel largely as a result of the undervaluation of the Chinese yuan arising from China's currency manipulation - a manipulation that violates China's IMF and WTO commitments and that the Obama administration has so far refrained from formally admitting (even though the president recently said at the APEC meeting in Honolulu that China is purposely undervaluing the yuan) and from taking any counter action.

Now the military agreements and statements in Australia and Manila are part of a much ballyhooed campaign by the Obama administration to demonstrate that it is pivoting in its foreign policy away from Iraq and Afghanistan and toward Asia where it is loudly telling everyone that it is "back." This all comes in the wake of China's unexpected unveiling of its new stealth fighter during a visit by then Secretary of Defense Robert Gates and statements by senior U.S. military officers that China's new missiles will soon, if they have not already done so, begin to deny the U.S. navy its absolute dominance of the western Pacific. It also comes in the wake of growing disputes between China and its southeast asian neighbors over islands and oil reserves in the South China Sea and their expressions of fear of Chinese aggression.

The U.S. statements and actions have been welcomed by the Southeast Asians with Singapore Prime Minister Lee Hsien Loong declaring the U.S. presence welcome and Indonesian President Yudhoyono saying he has no concerns about the U.S. movements.

So clearly the U.S. "pivot" is aimed at China and is based on the assessment that China poses an actual or potential threat to the interests of the United States and its allies.

But if that is the case, why is the United States pursuing trade and globalization policies that tend to undermine its own economic competitiveness while feeding the Chinese dragon? If he thinks the threat of China is sufficient to justify increasing U.S. military deployments in the Pacific, why does the president (who also presumably is interested in creating new American jobs) not call his friend Jeff Immelt out on moving avionics production to China?

The president said in Honolulu that China is purposely undervaluing its currency in ways that are incompatible with free trade. He knows that China is manipulating its currency in violation of its IMF and WTO commitments. Why doesn't he direct his officials to file formal complaints and seek redress?

Or for that matter, why is he "back" in Asia with more military deployments? These deployments serve primarily to dampen conflicts between the various Asian countries, to calm region wide fears, and to make Asia safe for investment by global companies engaging in labor arbitrage by off-shoring their production to the Pacific. In effect, the U.S. military makes Asia safe for off-shoring and out-sourcing of production and jobs. One of America's great competitive advantages is that it operates under a rule of law with strong property protection and is a safe place to invest. Why do U.S. policy makers want actively to negate that advantage?

It would be one thing if there were a real threat to America in the Asia-Pacific region. But there isn't. Whatever it does in the South China Sea, China is not going to invade the United States. Nor is it going to stop selling to the United States nor is it going to stop buying things it can't make itself from the United States. U.S. oil does not come through the Straits of Malacca or the South China Sea.

In short, the threat China poses to America is not a military or national security threat. Indeed, it is not clear that China even poses a threat to America so much as America poses a threat to itself.

By insisting on adhering to a simplistic, outmoded policy of laissez faire globalization and refusing to adopt comprehensive competitiveness policies to respond to the mercantilism of China and most of the rest of East and Southeast Asia (along with Germany, Brazil, and others) the United States is acting as its own worst enemy.

The use of military deployments to compensate for lack of economic competitiveness is an obvious instance of the adage that to a man with a hammer every problem looks like a nail. But over dependence on the U.S. military hammer only exacerbates the lack of U.S. competitiveness rather than compensating for it.

Of course, the United States cannot and should not withdraw from the Asia-Pacific region. It needs an appropriate mix of geo-political and geo-economic policies. But most of all what it needs right now is just some coherent thinking.

Amid all the usual speeches about the wonders of free trade and America's future being determined in Asia that marked last week's kickoff of the APEC  Leaders Meeting in Honolulu, two sets of remarks were especially noteworthy and thought provoking.

Because he is inevitably over-shadowed by his famous father -- Lee Kuan Yew -- and is the prime minister only of a medium sized city-state of four million inhabitants, Singapore's Lee Hsien Loong is not widely known and often ignored. But his is one of the quickest, most insightful, and balanced minds at work on the world stage today. I always find him both entertaining and well worth listening to.

For example, during Friday's gathering, he was asked if he believes Secretary of State Hillary Clinton's insistent comments that America is going to focus like a laser on Asia and make stronger relations there its top priority. Lee responded that he believes she intends to do so, but then also noted that the United States is a hyperpower with interests everywhere that may distract it from time to time. YES. Of course. Is Asia really more important to the United States right now than the crisis of the euro and the EU? Of course, Lee didn't say that, but the fact that this quintessentially Asia-Pacific meeting spent most of its time talking about Europe made the point obvious. That shows you how discerning and diplomatic Lee can be all at the same time.

But the comments that really caught my attention dealt with the respective roles in the region of China and the United States. Lee noted that China has had great success in achieving a sustained high rate of economic growth. But then he said, that with the unbalanced global economic situation requiring rebalancing and major shifts away from traditional policies and practices, it is unclear if China knows how to move forward from here. In particular, he made the intriguing comment that if China's leaders lose control, they will be in deep trouble.

Think about that for a moment. It implicitly suggests the real possibility of China's leaders actually losing control. It would have been understandable if he had spoken of the risk of Greek or Italian leaders losing control. But he didn't nor did anyone else. Indeed, it was assumed that even in their present dire straits, the Italians and Greeks would find new leaders and form new governments that would remain in control of their countries. So the suggestion by a knowledgeable observer of a risk of Chinese leaders losing control, should attract attention. Maybe China is not as safe a bet as many investors and economic analysts have been thinking.

Lee continued that the Chinese have studied carefully how Japan became unstuck in the 1930s and chose a path that led to war. They know, he said, that they shouldn't go in that direction. But, he added, whether the new generation (of Chinese) understands that is still to be seen.

Then in an interesting sleight of tongue, he noted that the United States has learned how to be both present and welcome in many regions of the world over long periods of time. "If China can do the same, it will be well," he concluded.

Do you think Singapore is a bit nervous about China?

Well, the second set of remarks by Hillary Clinton was directed at calming any frayed Asian nerves. America, she emphasized again and again, is not going to abandon the region. Indeed, she stressed that "what will happen in Asia in the years ahead will have an enormous impact on our nation's future, and we cannot afford to sit on the sidelines and leave it to others to determine our future for us."

"We have to remove (economic) barriers, both at borders and behind borders, barriers like corruption, theft of intellectual property, and practices that distort fair competition."

So there was Clinton's response to Lee's not so subtle call for support. I only wonder if Lee will want to be more careful in the future about what he wishes for. I know from long experience in the trenches of the free trade and globalization battles that what Clinton is really saying is that China and the rest of Asia have to become more like the U.S. This is a hard sell. In fact, it hasn't sold yet anywhere in Asia. Trying to make China into a copy of the United States not only isn't going to work, it's going to give rise to additional conflict that might force leaders like Lee into the uncomfortable position of having to choose sides.

I first came here to Honolulu almost exactly forty eight years ago to study Asia at the East-West Center, an institution dedicated to bridging the chasm between Asia and America. Based on what I've heard so far at this APEC meeting, I'd say the Center still has a lot of work to do.

"It's on me. It's on me," GE CEO Jeff Immelt recently told the Wall Street Journal's John Bussey in response to a question about the wisdom of transferring technology and production to his new avionics joint venture with China's state-owned Aviation Industry Corp. (AVIC), a company that supplies both China's commercial and military aircraft industries.

Presumably, this was Immelt's way of saying that he would man up and take responsibility if anything went wrong as a result of the deal. That is, of course, an admirable sentiment, but the problem is that it's not a responsibility Immelt can take because he will never be in a position to actually have to pay for any damage resulting from the deal.

Three points have gotten mixed up in the ongoing discussion of this deal, and it is important to unscramble them. First is the issue of access to the Chinese avionics market being conditioned by Beijing on the transfer of technology and production to China. GE spokespeople keep saying that it was never told it had to make such transfers in order to get the business. This is disingenuous, and Immelt ought to tell his people shut up in order to save his own credibility. Sure, no Chinese official ever made such a direct statement to GE. But it is insulting to trade and industry experts for GE to keep denying what everyone knows to be true. Beijing's five-year plans and its Buy China policies along with its Buy Indigenous Technology policies have made it abundantly clear to all observers of the scene that China intends to develop its own cutting-edge aviation and avionics industries and that it intends to do so by insisting that production and technology development for the Chinese market be done to the maximum possible extent in China. GE is doing this joint venture because it knows it has no chance of getting the business without technology and production transfer, and every China and trade expert in the world knows this to be the case.

The second issue is whether the technology GE is planning to transfer could leak into China's military aircraft programs and thereby endanger U.S. national security at some future date. Related to this question is also that of whether the technology could leak out and be used by other Chinese companies to take business away from other U.S. aerospace companies like Boeing. GE says it has devised strict procedures that have been approved by the U.S. Departments of Defense and Commerce to prevent such leakage. Further, GE insists that technology is the heart of the company and asks rhetorically, "Why would we give away our future?"

When Immelt insists that "it's on me," this is what he means. In other words, he'll take responsibility if somehow the technology gets away from GE into places where it could come back to hurt GE or the United States.

Historical experience strongly suggests that leakage of technology in these kinds of circumstances is virtually impossible to prevent. Look, we couldn't prevent the North Koreans from getting nuclear weapons technology even though we made every effort to stop them and certainly were not doing joint ventures with North Korean state-owned companies. And while it's admirable for Immelt to be willing to take responsibility if something bad happens, as a practical matter, what price exactly is Immelt likely to have to pay? By the time it happens he and his top managers are likely to be long gone from the scene with bonuses and retirement packages in hand. And even if something bad happens sooner, what will "it's on me" really mean to the companies or the U.S. forces that have to face the consequences?

But let's assume for sake of the argument that nothing leaks out of the joint venture. So GE is cool. It continues to control the technology, and its joint venture gets the business. Earnings soar. The stock price skyrockets, and Immelt and his team and the shareholders all collect big bonuses and dividends. The deal will thus prove to have been good for GE. But what about the United States? This avionics technology is something in which U.S.-based production and workers are the world leaders. The United States has a competitive advantage in this stuff. These are jobs that Americans can claim a better right to than anyone else. Under normal market conditions, without the necessity of technology transfer in return for market access, there would be no need of a joint venture. All the technology development and production would be done in America and would be exported in exchange for something that is better done in China or elsewhere. So under circumstances of no leakage, GE may come out looking golden, but the United States would still take a hit.

Oh sure, you can argue, as GE does, that by getting the China business and doing part of the work in the United States, GE is creating new U.S. jobs as well as jobs in China. And there is some truth to this argument. But it ignores the fact that the United States is getting less than the full value of its competitive advantage while at the same time that national advantage is being whittled away with the full support of multinational GE. In other words, GE can and would benefit at America's expense. So nothing would be "on" Immelt. The cost would be on the American worker, researcher, and U.S.-based producer.

That leads to the final point. The real problem here is not GE or Immelt. They are doing what is logical and best for them in the prevailing circumstances. As former Commerce Department official James Lewis told Bussey, "U.S. companies are making the right decision from a business point of view, but it might not be the right decision for the country. We've been passive (as a country) in deciding how to deal with China's aggressive industrial policies."

The real problem is the U.S. government or, rather, its absence from the discussion. China is conditioning access to its markets on technology and production transfer. There is no back pressure from the U.S. government. The CEOs are in a situation in which if they don't accede to China's pressures, they'll lose the business and they get no help from Washington in dealing with the pressures. So the rational thing to do under the circumstances is to play China's game. What is desperately needed is an American game in response. Washington needs to change the circumstances, level the playing field, give GE and Immelt a new set of incentives. The White House has to articulate an American economic interest, and that is not the same thing as the interest of GE or of any other particular company or set of companies.

So why focus so much on Immelt, you may ask. Well, it's true that in most respects he is acting no differently from any other global CEO and, let me make clear, no differently from how he should as the head of a global enterprise like GE. But there is one respect in which he is quite different. He is the chairman of the President's Commission on Jobs and Competitiveness and as such is the chief outside economic advisor to the president. He should be thinking of the American interest as well as the GE interest. He should recognize that the costs to the American economy and the American worker can't be "on" him, and he should be telling the president to change the game.

CNN's Fareed Zakaria did a show on Sunday featuring GE CEO and Obama adviser Jeff Immelt, focused on reversing American economic decline and "Restoring the American Dream." The existence of this show was itself a surprise. Zakaria has long been one of globalization's most ardent cheerleaders, arguing that free trade is always and everywhere a win-win proposition and that even as globalization enriches China and other developing countries it is also only further enriching the United States and the rest of the developed world.

Indeed, just a couple of months ago he opened his new book -- The Post American World 2.0 -- (which is a revision of the original The Post American World) with the words: "This is not a book about American decline." So the implicit admission in today's TV shows of American decline and of a need to restore the American Dream is a big step forward. It would have been nice if Zakaria had listened to earlier warnings about the erosion of U.S. competitiveness, but better late than never.

What I found most interesting, however, was the comments of Jeff Immelt who in addition to being the Chairman and CEO of GE is also the Chairman of President Obama's Commission on Jobs and Competitiveness. In this position he serves as the chief outside economic adviser to the president. I should explain that I found his comments particularly interesting in the context of my recent columns on GE's avionics joint venture with China's state owned AVIC and Immelt's plans to transfer critical avionics technology and production from the U.S. to China.

Readers may recall that I argued that this production and these jobs should never go to China because the United States is the most competitive place to do them. I emphasized that the only reason they are going to China is because the Chinese government has made transfer of the technology and production a condition of access to the Chinese aircraft and avionics market. Readers may further recall that in a comment on my blog, GE executive Gary Sheffer denied this and called my comments misleading while maintaining that the deal is just a natural combination of AVIC's avionic hardware virtuosity with GE's outstanding software and avionics technology capabilities.

In responding to Zakaria's questions , Immelt said some really important things. First, he emphasized that for supplying the U.S. market, U.S. based production can be competitive with imports from low labor cost countries like China in the vast majority of industries. This is so, he explained, because U.S. labor is far more productive than that of China and other developing countries and because the hidden costs of far flung supply chains and intellectual property theft can be enormous. He further talked about the desirability of making things where you sell them and of the great potential for on-shoring -- bringing production of goods sold in the United States back to the United States. This is all correct and very important because it is contrary to conventional economic wisdom.

Immelt further emphasized the role the U.S. government has played throughout its history in making American industry the world leader. He noted that the Internet originated as a government project, that the National Institute of Health has been a primary driver of U.S. leadership in bio-tech and health care industries, and that U.S. leadership in many areas has been the result of government/industry cooperation. He sounded like he was speaking in favor of industrial policy. Again - so right.

Then Zakaria asked him how we should be dealing with China. Amazingly, Immelt said the Chinese have a different system and a different strategy. He said he gets the Chinese five-year plans and makes sure his people read them because the Chinese government is driving the Chinese economy and really means what it says in the five year plans. And so to be successful in China, GE and other companies have to be aware of the five year plans and have to develop their strategies and make their deals accordingly. So right again.

But here's where it gets a bit difficult. You can't read those five year plans without understanding that China is fully committed to developing its own indigenous aircraft and avionics industries and that it intends to insist on transfer of foreign technology and production as a condition of granting foreign firms access to its markets. Indeed, this issue has gotten a great deal of attention from the American Chamber of Commerce in Shanghai which has issued a report on it and raised it with the U.S. government. Clearly Immelt is fully aware of the situation which is what leads him so say (rightly) that China has a different system. 

In view of this, it is not clear to me why Sheffer is trying to deny what Immelt obviously knows and is saying to Zakaria. Of course, technically, maybe Sheffer didn't get a direct order from someone in China to transfer technology as a condition for market access. But it is clear that Immelt and GE have studied the game carefully  (what else would you expect from one of the world's leading companies) and know how it must be played. By denying this, Sheffer is only undercutting his own and GE's credibility. How can anybody believe that GE's deal with AVIC is just the result of good old capitalist market forces. If you do, I have a bridge in Brooklyn I'd like to show to you. But clearly, Immelt doesn't believe it for a minute. Neither should Sheffer.

Finally, however, Zakaria was left with what I call the Immelt problem. Fareed asked him what the U.S. should do to deal with the China and recovery of the American Dream problems. Here, Immelt hedged again. He called for changes in the tax system, for federal matching of foreign investment incentives, and for much more collaboration between business and government. This is all good stuff and I want to give Immelt high marks for it. But he failed to call for any action to counter the mercantilism, currency manipulation, and conditional market access of China and other countries that pursue the export led growth strategy.

I understand why he doesn't do that. As head of GE, he faces retaliation against GE if he does call for such measures. And that is why he should stop being the head of GE. There is an inherent conflict between his role as head of GE and his role as a key economic adviser to the President. He should resolve that conflict be letting someone else run GE.

Again, I say, that getting America back on track, recovering the American dream is infinitely more important and would be infinitely more rewarding than achieving  higher dividends and bonuses for GE. Come on Jeff. Be a mensch.

As I predicted, last night the president offered a lot of good job creation suggestions that should be adopted but won't be and wouldn't be enough fundamentally to solve the stagnant growth/unemployment problem if they were.

Look, the $447 billion headline number for new stimulus isn't real because much of it will simply renew spending that otherwise was slated to stop. So the actual amount of new spending will be about $200 billion if the plan is adopted by the congress as Obama presented it. Okay, that's better than nothing, but in a $15 trillion economy it's not really very much -- only a bit over  1 percent of GDP.  And as I noted  in my last post, much of that leaks out of the U.S. economy because of the enormous U.S. trade deficit. In any case, the plan isn't going to pass the Congress as proposed. So the final amount of actual new stimulus could be much, much less even than this.

What I don't understand is why Obama went ahead with this. He knows as well as or better than I that much of what he is proposing will not be voted through by the Congress. So, is this set of proposals just a political maneuver to put the Republicans on the defensive or does the president really want jobs? With the just-proposed plan, it will be months before any of it is adopted and months after that before much of the money starts to flow. All the while, the political infighting and critique of the White House will be fierce and unrelenting.

Why, instead of proposing things to the Congress for its disposal, did Obama not announce the unilateral executive measures he was going to take starting tomorrow?

I have said before and I'll say it again, there will be no effective job creation program that does not in some way substantially reduce the U.S. trade deficit. This will be true even if by some miracle the Congress passes the new plan immediately. It will be true because of the points I made yesterday. Stimulus spending that leaks abroad and that involves net new long term borrowing without creation of sufficient new investment to make it self-financing will not significantly reduce long term unemployment.

He could have gone straight for the trade deficit by simply stating that the fastest way to create about 3 million new jobs is to halve it. He could then have announced his plans to countervail foreign export subsidies, to take measures such as intervention in global currency markets that would offset the policies that many governments use to subsidize their exports with under-valued currencies, to create an aggressive Invest In America program to match the Invest in China or Invest in Ireland, or Invest In Singapore, or other well known and successful Invest In programs, to refrain from proposing ratification of any trade agreements that the International Trade Commission says will cost U.S. jobs, and to establish an Invest In America task force that would identify all the economic sectors that could be competitive in supplying the U.S. market from a U.S. production base and then ,working together with the various state economic development offices, create plans and packages of whatever it takes to move this production to a U.S. base.

I think he just doesn't understand the significance of trade and the trade deficit for the outbreak of the crisis and for the failure of any kind of serious recovery to get launched. This was his golden opportunity and he missed it. Maybe he'll get another chance, but time is running out.

In the 1990s, the doctrine of globalization was wholeheartedly and unquestioningly embraced by the vast majority of the American elite. Globalization was seen as a kind of Americanization that would make the rest of the world rich, democratic, and peaceful while further enriching and empowering the United States. And this faith became the guiding force both of domestic economic policy and of geo-political strategy.

Now, however, in a shift of seismic proportions, the faith is beginning to flag. As the off-shoring of first low tech and then high-tech American manufacturing production and jobs accelerated in the 1980s and 1990s, the concerns of trade negotiators and producers were dismissed by the economics/foreign policy elite and the majority of media commentators. Not to worry, they said, because America was moving into a post-industrial age in which its future wealth and high standard of living would be based on services and ultra high tech R&D. Americans, they said, would do the skill and knowledge intensive work while leaving the dirty, sweaty stuff to developing countries like China, India, and Brazil. All would produce what could do best and trade for the rest and everyone would become richer and happier.

Over the past few months, several statements by leading economists and commentators have brought a dark cloud over this rosy picture. In June, the McKinsey Global Institute (long an enthusiastic promoter of globalization and off-shoring) issued a report demonstrating that over the past twenty years the U.S. economy has had ever increasing difficulty in reaching previous employment levels during recovery from recessions, let alone generating additional jobs. In the July/August edition of the establishment journal Foreign Affairs, Nobel prize winning economist Michael Spence pointed out that since 1990, U.S. job creation in the tradable sectors, be they goods or services, has been virtually nil. Rather, 40 percent of the new jobs during that period were in the government and health care sectors and there was also substantial job creation in the construction industries. So apparently, what Americans do best is anything that is not tradable. In other words, Americans can't compete in global markets. Worse, however, is the fact that it is now obvious that because of fiscal constraints the government and health care sectors simply can't continue growing as in the past. Indeed, they will have to shrink relative to the rest of the economy. Spence, thus, concludes that America's only hope for generating future jobs and wealth is to somehow again become competitive in the tradable sectors.

In a similar vein, Columbia University economist Jeffrey Sachs argues in today's Financial Times that Europe and the United States are being "whipsawed" by globalization. Says he, "new investments in large swaths of industry have been lost to international competition." He further notes that employment in the past ten years was only maintained in the United States and much of Europe by a construction bubble stoked by abnormally low interest rates and reckless deregulation. Thus, as presently structured and operated, globalization is not working at all as predicted. Like Spence, Sachs calls for less consumption oriented stimulus and more emphasis on export oriented strategies.

Finally, in today's Washington Post, long time apostle of globalization and columnist Fareed Zakaria, who has long argued that free trade and globalization are win-win propositions and good for America, now argues that while globalization has been good for American companies, the way it has been operating has not been so good for American workers and job creation. Astoundingly, Zakaria says this is because the U.S. work force is not well enough educated. He quotes Pimco bond fund founder Bill Gross as saying that: "Our labor force is too expensive and poorly educated for today's market place."

It's not at all clear that this is the case. After all, of the world's major countries, the United States, on average, still has the best educated work force with more college graduates per capita than anywhere else. But if the U.S. educational level has declined, it is not something that happened just in the past few years. Surely it was in process while our leading economists and commentators were endlessly repeating the mantra of the U.S. moving to a services and high tech economy on "higher ground."  Be that as it may, Zakaria, like the others, calls for more exports. In this case, he specifically focuses on tourism as a key to America's economic future. Beyond that, however, he rightly argues that every U.S. policy must now be crafted with an eye on the jobs impact.

These conclusions and recommendations are all things that writers like Pat Choate, James Fallows, Chalmers Johnson, Michael Lind, and myself have been saying for years. So it is gratifying to see the establishment finally recognizing the reality we have been describing.

Yet, there is still one major hurdle to be cleared. As President Obama works on a new jobs policy, a focus on exports would certainly be a good thing. But he and the economics elite and the commentators must face the fact that the biggest immediate potential market for U.S. based producers and service providers is not the foreign market. It is the U.S. market. Bringing some of the off-shored production and provision of services back and discouraging further off-shoring as new industries expand is where the big opportunity for renewed job and wealth creation lies.

This discussion always gives rise to the dread cry of the danger of protectionism. It should not for two reasons. First, much of the off-shoring that has taken place has not been due to lower labor or other production costs abroad. Rather it has been due to investment subsidies, policies that make transfer of production a condition of market access, currency manipulation, formal and informal buy national policies, and U.S. tax and regulatory disincentives. In other words, mercantilism combined with inappropriate U.S. trade and tax policies are often the cause and not poorly educated U.S. workers or high U.S. labor costs. Responding to offset the impact of mercantilism and to change stupid U.S. policies is not protectionism. Second, matching overseas investment and tax incentives and otherwise encouraging production in the United States does not mean in any way reducing truly market forces based trade.

Our economists, foreign policy experts, business leaders, politicians, and commentators must begin to face these issues squarely if the United States is to achieve the economic renewal it needs both to keep the American promise at home and American commitments abroad.    

It seems bus tours are the new in thing for politicians. Michelle Bachmann did a bus tour of Iowa as a prelude to winning the straw poll in Ames. Sarah Palin's bus shows up anywhere it appears that political news might be made, and now President Obama is doing his own bus tour of Minnesota and the mid-west.

The problem is that he appears to be singing the wrong tune. So far his theme some has been an ode to job creation through lower payroll taxes, an infrastructure bank, and the conclusion of free trade agreements with Colombia, Panama, and South Korea. Of course the payroll tax cut will exacerbate the debt level and the debt ceiling debate, but if it's only temporary it may be more of a plus than a minus. An infrastructure bank is, in principle, a very good idea, but it will require capital funding that may well increase the federal debt level.

The real problem, however, is the free trade agreements. It is good that the president has finally noticed trade and its potential for helping him with job creation. But he has false understanding of how trade might be able to help him. In pushing these bilateral free trade agreements, he is actually more likely to increase the U.S. trade deficit and to suffer further job losses than to create jobs by reducing the U.S. trade deficit. The reason for this is that the Panamanian and Colombian economies are too small to have much impact one way or the other on the United States. At the same time, according to the International Trade Commission, the free trade deal with Korea is likely to increase the U.S. trade deficit and thus to result in net job loss for Americans.

The road to the job creation the president so badly needs is not through bilateral free trade deals, but through a variety of policies aimed at reducing America's enormous and chronic trade deficit. Once considered radical, this notion is no longer taboo.  For instance, in the most recent edition of the quintessentially establishment journal Foreign Affairs, Nobel prize winning economist Michael Spence emphasizes that America will have to dramatically improve its performance in the traded sectors of the economy. In this he is only echoing the International Monetary Fund's call for global "rebalancing". Not to be outdone, Peterson Institute Director and perennial free trader Fred Bergsten in a recent op-ed. for Bloomberg called China perhaps the world's most protectionist nation and suggested U.S. counter actions such as Treasury buying of China's yuan in retaliation for Chinese intervention in currency markets to buy dollars.

Bergsten's scenario is difficult to imagine because the yuan is not a freely traded currency and it is not clear what the United States would do with a pile of yuan. But measures to countervail the mercantilist trade, currency, and investment policies of a number of major trading countries should be the focus of Obama's economic strategy rather than the conclusion of free trade, technological assistance, and joint venture deals with these very same countries.

Obama's economic advisers are all completely conventional  and orthodox neo-classical economists who have made a veritable religion out of free trade. But the President might do well to recall the experience of Great Britain during the late 1920s and early 1930s at the time of the Great Crash and Depression. Britain also had a large trade deficit and embraced the religion of free trade.  But with unemployment soaring in the early 1930s, it devalued the pound sterling and largely abandoned its unilateral free trade regime. As things turned out,  Britain weathered the Great Depression better than the United States.

Unable to introduce meaningful new stimulus and macro economic policies, the president will eventually have no choice but to seek to create jobs through use of trade , investment,  and industry oriented measures otherwise known as industrial policies.

You have to love the Chinese. No sooner had Standard and Poors downgraded U.S. debt  than Beijing let loose with a huge scold about how Ameica has to get its debt under control.

Normally I'd be lambasting Uncle Sam right along with the Chinese. For more than thirty years I have been urging that U.S. incentives to save and spend be reversed in an effort to weaken the dollar, reduce the U.S. trade deficit, and increase domestic investment, production, and jobs. But in this case, I just can't allow the Chinese gall to go unremarked even though their criticism is technically valid.

I mean, let's get real. Even as they were scolding, the Chinese authorities were in the market buying billions of dollars worth of U.S. Treasury debt. And why are they doing this? Well, there are complex reasons, but a main one is to keep their own currency undervalued as a kind of export subsidy. By buying U.S. Treasuries, China's leaders are pushing up the value of the dollar versus the yuan and thereby making U.S. exports more costly and U.S. imports of Chinese goods and services less expensive. In effect, they are devaluing their own currency.

This behavior by China has tended to depress U.S. interest rates, subsidize U.S. consumption, and remove any disadvantage to the United States of its over-consumption. In short, China has done everything it can to encourage and induce just the behavior it is now urging Washington to halt.

No one is forcing the Chinese to buy dollars and treasuries, and a sure way to force Washington to become more serious about prudent fiscal behavior would be for China to halt its buying. But it doesn't and it won't. Not only does China constantly accumulate dollars as a result of the trade surpluses its weak yuan policies induce, but, unlike most countries, China's dollars all wind up being held by the government because Beijing does not allow private citizens and corporations to hold the dollars they earn. Rather they have to turn them over to the government in return for yuan. Thus, just as the United States, over-consumes, China chronically under-consumes as an essential element of its long term, export led economic growth strategy.

Indeed, China's consumption is not only abnormally low as a percent of GDP, but  the rate has been falling as China rushes to invest ever more as the tried and true way of maintaining economic growth rates.

The rest of the world, including the G-20, the International Monetary Fund, the World Bank, and most of the world's leading economists have urged China to let the value of the yuan rise and to shift toward more domestic consumption led growth patterns. But China has refused, preferring instead to continue playing the mercantilist game.

China must know that if it insists on running chronic and enormous trade surpluses, the value of its dollar holdings must fall. In effect , what China is doing is suppressing consumption which is transformed into dollar holdings in the hands of the Chinese government. Beijing is transferring funds from the household sector to the investment and government sectors.

Thus, if China really wants to assure the value of its dollar holdings, it should reverse this policy. In short, it should let the people eat some of its accumulated dollars. Hence, I, at least, say "let them (the Chinese) eat dollars."

As I soak up the rays here in Maui, I'm mellowing out and becoming more aware of the humor behind the headlines. Here are just a few recent examples.

Driving back from the beach yesterday, I was listening to NPR when I happened to recognize the dulcet Irish tones of none other than Tom Donohue, the CEO of the U.S. Chamber of Commerce. He was talking about the truly awful jobs -- or perhaps I should say "no Jobs" -- numbers released by the Labor Department last week and offering his and the Chamber's views on what the government ought to be doing to help create jobs. His top item was for Congress to pass and the president to sign the proposed Free Trade Agreement (FTA) with South Korea.

Never mind that the deal opens the U.S. market far more than the South Korean market, that the U.S. trade deficit with South Korea is soaring,  that even if U.S. exports to South Korea doubled with absolutely no increase in U.S. imports from South Korea, the U.S. unemployment rate would still be about 9 percent, and that the International Trade Commission has estimated that the FTA with Korea would increase the U.S. trade deficit. As I thought about that I wondered if maybe Tom had swapped jobs while I was away and had become CEO of the Korean Chamber of Commerce.

Speaking of trade, the numbers announced yesterday showed that the U.S. deficit jumped over 15 percent in May to $50.2 billion. This, mind you, is at a time when the U.S. economic recovery is stalling badly and virtually no jobs are being created in the U.S. economy. Can you imagine what that number would be if we really had a recovery. I mean, when your trade deficit is growing at 15 percent in the midst of an economic stagnation you have to understand that you are in trouble on the jobs/standard of living front. But here's the really interesting twist. The Wall Street Journal reported that one "bright spot" in the trade report was imports of capital goods such as computers, semiconductors, and industrial machines which were up over 13 percent from last year. Keep in mind that these are the high tech kinds of equipment at the production of which the United State is supposed to have a comparative advantage, yet imports are soaring. But the good news, said the Journal, is that "companies may not be hiring much but they're willing to make commitments when it comes to capital equipment." So three cheers for no hiring and big commitments to capital equipment imports?  This tells us a lot about why the jobs numbers were so crummy.

One of the funniest analyses came from the National Association of Manufacturers (NAM). According to NAM Vice President Frank Vargo, manufactured goods exports slipped by one percent in May, but still tied the  record $95.8 billion set in March, seasonally adjusted.

So I guess down really means up or at least level. Of course, imports of manufactured goods rose by three percent. So record or no record for exports, the trade deficit in manufactured goods increased to $42 billion.

Then Vargo added the piece de resistance:

"Those who are concerned about the US trade deficit need to recognize that our trade problem is with countries that have not entered into agreements which will allow US exports to them to increase faster. This highlights the need for more trade agreements to lower barriers to US exports to more countries."

Hmm. Frank, you really think a nice FTA with Japan or China would turn those numbers around?

Oh yeah, let me not forget the letter released by 470 executives including the CEOs of Alcoa, DuPont, Citigroup, and Proctor and Gamble. It called on the president and the Congress to raise the debt ceiling. Of course, the president and the Congress have both already committed to raising the debt ceiling. The issue is how. The executives didn't seem to have anything to offer in that regard.

I guess it would have been too much to expect them to offer to actually pay some corporate taxes.

The interesting thing is that out here in Maui I can see very concretely where that tax loophole money goes. The Kahului airport is full of fancy corporate jets this time of year.