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
Locked at home and glued to the TV by the great storm, I've undergone a barrage of election campaign ads. Romney's emphasize slow growth and repeat again and again that "people are hurting in this country." Obama's keep talking about a plan to create more jobs.
I think they are both mistaken and are saying all the wrong things. They should be cheering the American way and calling for more.
Let's look at the facts. The U.S. economy is growing in excess of 2 percent at an annual rate. Okay, that's not the best it's ever done or even good by historical recovery standards. But it's growth and it's faster than six months ago. More importantly, it's better than anybody else. Yes, I have long been and still am worried about American competitiveness and I have warned and still do about our chronic trade deficit and about falling behind in key industries and technology. But let's take a quick world tour.
The EU, the world's largest economy ($19 trillion GDP compared to the U.S. $15 trillion), is on the way to division if not disintegration. The move to a Euro-zone banking union that has now been set in train will exclude the British banks and tend to shift the center of gravity of European finance from London to the continent. At the same time, the policies and politics of British Prime Minister David Cameron and his Tory Party all militate toward a Brixit (British exit from the EU). For example, there has been no official denial of a recent report that a senior cabinet minister wants Britain openly to threaten to leave the EU. Cameron himself was notably silent as other EU Prime Ministers welcomed the award of the Nobel Prize earlier this month to the EU. Indeed, he has been planning to exercise over 100 opt out provisions in connection with EU police and judicial cooperation agreements.
Beyond Brixit, however, there may well no longer be a United Kingdom as Scotland votes to secede, leaving Britain to consist of Northern Ireland, England, and an increasingly reluctant Wales. Well, I suppose it has truly been said that "there'll always be an England." But what of Spain? Catalonia (Barcelona) will soon take a vote that could lead to its exit from Spain, and if the Catalans leave can the Basques be far behind as Spain faces a likely fall of 15 percent in GDP. Nor does anyone think that Greece can remain in the Euro-zone as things presently stand. The preliminary report of the International Monetary Fund, European Commission, and European Central Bank clearly shows that Greece's debt is not sustainable. Then there is Portugal whose exit is only just a little less likely than that of Greece.
So, not only will the world's largest economy have no growth next year. It may well simply cease to exist.
There has been so much Schadenfreude about Japan's two "lost decades" over the past few years that I have often taken the contrary view by pointing out that actually Japan's growth adjusted for inflation and population growth over the past twenty years has been about the same as that of the U.S. while its productivity growth has been higher. Still, there is that population element. The Japanese people are aging rapidly and are fewer every year. It is very hard to build an economic success story on that kind of a foundation. And that holds for Germany, Italy, South Korea, Taiwan, Singapore, and China.
Of course, China is not Japan and advertises that although its growth rate has fallen below double digits it's still a very respectable 9.7 percent (although the last quarter was 9.5 percent). Accepting for the moment that this is true, it is nevertheless a fact that the Chinese growth rate is on the decline. Whether it is really 9.7 percent has been questioned by some who say that this figure for overall GDP doesn't accord with the amount of electric power being used, or with ship loadings, and other real production statistics. Whether it does or not, the more important point is that China's high investment growth strategy has hit the point of declining returns and faces the necessity of a shift to less investment led growth to household consumption led growth. But to get there, household income would have to rise faster than GDP. Some experts believe China's GDP growth will fall to the 3-4 percent level very soon. Interestingly, anyone who believes this asks not to be quoted publicly for fear of retribution by the authorities who want to maintain the 9.7 percent growth story.
This brings us to the other great growth story -- India. Except that it also is no longer so much a growth story as a declining growth story as rampant corruption, faltering infrastructure, and political chaos have merged to create a massive roadblock to growth.
Thus, for all its problems and weaknesses, it may well be that the United States is the last man standing. Maybe Americans should go to the polls happy.
As the U.S. Presidential election campaign enters its final stages, both candidates are being criticized in the media for "bashing" China.
This is in response to Obama administration filings of anti-subsidy complaints against China with the World Trade Organization (WTO) and to Governor Romney's strong criticism of Beijing's currency manipulation that undervalues its yuan (or RMB) as a way of subsidizing exports and acting as a tariff on imports.
The best example is the Chicago Tribune. Recently, it flatly said that both candidates are "bashing" China and noted that "attacking China's export-subsidy machine is guaranteed to win applause at campaign stops in Ohio and other Midwest industrial swing states, where resentment of Chinese competition in manufacturing runs deep."
Now, from the tone of this, you'd expect that China is completely innocent of any trade rule violations and that the candidates are unreasonably and cynically beating on it as a scapegoat for the off-shoring, layoffs, and unemployment that have all skyrocketed in the mid-west over the past five years. Indeed, you might even think the candidates are in some measure motivated in their critique by racism. After all, the terms "bash" and "bashing" imply anger, rage, violent emotion, and unreasonable hatred. If someone is a critic, he is legitimate, but a "basher" is emotional and unreasonable. The terms are usually applied to characterize criticism of Japan or China but are rarely if ever used with regard to non-Asian nations. When was the last time you read about "Germany bashing"? So the implied charge in the case of one labeled a "China basher" is that he/she is a racist.
Thus, the continuation of the Tribune's commentary was surprising. It acknowledged that "China's efforts to promote its export sector with cash grants, below-market loans, preferential tax treatment and free use of government-controlled property make a worthy target. " In other words, some of China's policies are indeed problematic. In fact, the Tribune went on to note that the sense of a need to create a "level playing field" with China "has a basis in reality." It added that subsidies and regulations in a number of areas along with the power of state owned enterprises has prevented U.S. and other foreign companies from taking the lead in a wide range of Chinese markets. It further noted that theft of intellectual property in China, and China's policy of keeping the yuan weak are enormously problematic.
So the Tribune appears largely to agree that China is doing all the things of which the two candidates have complained and against which the administration has filed complaints with the WTO. But if it agrees with them, why is the Tribune effectively pasting the racist label on the candidates?
In justification of its position, the Tribune makes four points that constitute the orthodox free trade case. First, it argues that even though it might help workers, any restriction or sanction on the free flow of Chinese goods into the U.S. market would be harmful to U.S. consumers. Second, it holds that the activities of getting imports from China unloaded, shipped, displayed, advertised, and sold create new U.S. jobs in place of the jobs that might be lost as a result of the displacement of U.S. produced goods by imports from China. Third, it asserts that any kind of trade sanction could lead to a ruinous trade war that could damage everyone, and fourth, it emphasizes that rather than trying to crack down on China's questionable policies and practices, the U.S. government should focus on persuading the Chinese fully to open their markets.
The difficulty with these points, often repeated by orthodox neo-classical economic commentators, is that they are superficial, internally inconsistent, and at odds with the realities of the trading world. Take the matter of possible harm to consumers arising from any increase in the prices of goods resulting from some restriction on imports. This ignores a couple of important facts. One is that most consumers are also workers. Cheap imports are of little consolation if they have lost their jobs and income. Lost jobs put downward pressure on all wages, not just those in the particular industries that suffer from import penetration. Of course, the exception to this is a situation of full employment which is assumed by the usual econometric models and writers like those of the Tribune. But full employment is not the normal circumstance for most economies. Certainly it is not now the circumstance of the U.S. economy and it is most certainly not true of the economy of the city where the Tribune resides -- Chicago. In situations of high unemployment, the loss of jobs and general downward pressure on wages may far exceed the savings to consumers of slightly lower import prices.
The notion that imports create unloading, shipping, and marketing jobs is also misleading. Think about it this way. Toyota makes a car in Japan and ships it in a Japanese vessel to San Francisco where it is unloaded by American longshoremen and driven by American truckers to a showroom in an American city where it is advertised, marketed, sold, and serviced by Americans. So there certainly are a number of American jobs associated with this import from Japan.
But now suppose that Toyota makes a car in Tennessee with parts made in America and with the assembly done by Americans. Then the car is driven by an American trucker to an American showroom where it is marketed, serviced, sold, and advertised by Americans. In this second case, more U.S. jobs are created than in the first case. Why? Because the vast bulk of the selling, overland shipping, marketing, and servicing has to be done in the United States whether the product is made there or imported. So the truth is that imports do not create net new U.S. jobs or jobs in any country unless they are products that cannot be made or made competitively in that country.
As for the dangers of trade wars, they are much exaggerated. The whole point of the WTO is to have a set of rules and adjudication of the rules. It is inevitable that there will be trade disputes. A main mission of the WTO is to deal with them so that they don't become trade wars. So far the record of the WTO is pretty good on this score.
With regard to prying open the Chinese market, the Tribune calls for that as an alternative to the trade actions called for by the two candidates. This is an old story and it seems to keep selling. I only wish that those who sell it would once in their lives have to serve as trade negotiators. One of the main reasons for complaining about and sanctioning violation of trade rules is to gain leverage precisely for the purposes of opening the market. These negotiations are not pit a pat. Important and powerful interests are involved and they don't give up easily unless faced with consequences as well as opportunities. Countries don't open their markets just because someone from Washington says that would be a good idea. A successful market opening negotiation requires sticks as well as carrots.
Neither Obama nor Romney is a "China basher". The Tribune owes them both an apology.
So the headlines said June jobs were up by about 80,000 and unemployment stayed at 8.2 percent. Not great, but not a disaster. At least things are not getting worse. Right?
Well, you could be forgiven if that was the meaning you drew from the headlines and the latest Labor Department releases on job creation. That was how it looked to me at first glance. But having been through this many times before, I took a second glance -- and quickly lost my appetite.
The headline unemployment numbers are the so called U-3 government numbers that count just current jobs held, gained, and lost. Because of seasonal factors it is easily subject to distortion that makes it more or less meaningless as was the case in June. A broader, more meaningful measure is U-6 which takes into consideration short term discouraged workers who have only recently stopped looking for work as well as those working part time who really want full time work. U-6 unemployment is 14.9 percent and up about two tenths of a percent in June. Then there are the numbers of the consulting firm Shadow Government Statistics (SGS) which hark back to 1994. Until that time, the U.S. government kept track of long term discouraged workers as well as short term discouraged workers. In 1994, the method of collecting and calculating the unemployment data was changed and the workers who said they would like to work but were so discouraged that they hadn't been looking for work for a long time were defined out of the calculation. But SGS still does the calculation, and it's a shocker -- 22.9 percent. Yes, that's the percent of Americans who say they would like to work but for one reason or another can't find work, are working only part time when they want to work full time, or have become so discouraged that they have given up looking for work. That number means that the U.S. full time work force ought to be a quarter larger than it currently is. Can you imagine what that would do to U.S. GDP growth, to local, state, and federal government tax collections and budget deficits, to savings and investment, and to long term retirement prospects?
The fact is that the U.S. economy is operating far below its potential productive capacity. Estimates of how far below vary, but a good guess is about 5-8 percent of GDP or close to $1 trillion. Remember when Senator Everett Dirksen used to say: "a billion here, a billion there, pretty soon you're talking about real money?" Well a trillion dollars is real money, and it's money America isn't making. Why is the big question.
A significant piece of the answer can be glimpsed in a recent report by U.S. Trade Representative Ron Kirk. In a recent press statement about the Global System of Preferences he said:
"GSP is a valuable tool for advancing the Administration's goals to boost trade and to advance international economic development. The GSP program helps developing countries to grow their economies while also helping U.S. businesses, workers, and consumers by lowering the costs of imported goods, including those used as inputs for U.S. manufacturing. The annual review allows the Administration to ensure that the program is working as intended."
Got that? The focus is on promoting cheap imports. Looking at the U.S. trade deficit, I'd say the program is working fully as intended. But if the U.S. government spent a fraction of the effort it spends on promoting cheap imports on promoting domestic American production, the U.S. unemployment numbers would look a lot better and the economy would be much closer to operating at its full potential capacity. For the United States to achieve growth without increasing debt, it must substantially cut its trade deficit.
Kevork Djansezian/Getty Images
Did you happen to read the story in Sunday's Financial Times headlined, in the print edition: Apple Listens to the Factory Floor in China?
The working hours survey said it all. Average working hours per week in the Foxconn/Hon Hai factories in China that make Apple products were put at 56.1 hours. Maximum hours worked in the last three months were 61.1 hours per week. And the longest consecutive work period without a rest day during the last three months was 11.6 days. These figures were released by the Fair Labor Association (FLA) as Apple Chief Tim Cook last week toured the factories where his company's products are made.
This Cook's tour was not for sightseeing purposes or for showing the flag. The FLA report had been commissioned to investigate complaints of inhuman work place treatment that were feeding a brush fire of charges that Apple is making enormous, obscene profits on the backs of poorly paid and badly treated assembly line workers in China. It was to put out this fire that the FLA report release was timed to coincide with Cook's visit.
Now, in case you didn't know, let me explain that China does not have the world's highest labor standards or most powerful labor unions. Indeed, indeed, it has among the lowest and the weakest. Nevertheless, the FLA found at least 50 "serious and pressing non-compliances" with China's cream puff workplace code of conduct and labor law. In addition, labor rights organizations from India, Indonesia, and Poland as well as from the United States wrote an open letter calling upon Apple to provide a living wage so that Chinese workers do not have to work excessive overtime and also calling for an end to use of involuntary labor.
Well, would you believe it? Apple and its factory operating contractor, Foxconn/Hon Hai, accepted each and every one of the FLA's recommendations. So now, working hours will actually be reduced to the legal limits while pay will be protected and conditions will be improved. FLA President Auret van Heerden said this would really improve the lives of more than 1.2 million Foxconn employees and set a new standard for Chinese factories. I mean, can you imagine. These factories will now be working no more than the legal maximum of working hours. That will be a new standard. I guess China's factories must have been working far above the legal limit until now. But now with this new standard they'll finally meet the old standard. If, that is, these commitments are implemented, van Heerden was careful to stipulate. Do you think maybe she's been here before? But how could she harbor any doubts that a class act like Apple wouldn't implement its commitments? Well, maybe the problem is not Apple but Foxconn. But would Foxconn really do things to which Apple objects? Well, you just never know about these kinds of things I guess. Shows you why these global supply chains are so tricky.
Course, this is going to cost Apple big time. I mean the manufacturing labor content of an iPhone or iPad is now about 5 percent of the total cost. By accepting every one of those recommendations, Apple might push this to 6 percent, meaning that its 30 percent operating profit margin might drop to 29.5 percent (if Foxconn shares part of the hit with Apple) or even to 29 percent.
Just think of the implications of that. Instead of $100 billion lying around the Apple headquarters in cash waiting to be invested, there might in the future only be $99.5 or $99 billion. But that's only if the deal is actually fully implemented. So I guess we'll have to wait and see.
All right, let me stop with the sarcasm and just ask straight forwardly, why does Apple have to do it this way? Making iPads is not war. Why does anyone have to work 60 hours a week? Why does anyone have to work eleven and a half days without a break day? Apple would be the world's most profitable company even it its gross profit margins dropped by a few percent.
I mean, here's Apple who's biggest problem is figuring out what to do with all the cash, and its executives take home really rich bundles of cash, stock grants, long term options, and all the rest of it which is taxed at only 14 or 15 percent while they agree to only make their Chinese workers work the legal maximum number of hours. Could you ask for a better more soulful bunch of guys and gals? I mean, really!
This is what's wrong with globalization. The big gains go to the one percent who need them the least. Developed world workers take a big hit, Chinese workers gain, but not nearly as much or as fast as they should, and First World consumers don't get very much of the benefit of the cheap Chinese labor because the bulk of the wage arbitrage between west and east is going into the coffers of the top executives and the middlemen between producers and consumers. It's not a sustainable way to run the world.
Daniel Berehulak/Getty Images
For a long time, the conventional wisdom on manufacturing and trade has held that American manufacturing is doomed to die and that it doesn't matter because the U.S. economy will move to the "higher ground" of services and high technology.
Indeed, this was the thrust of the argument of an article by former Wall Street operator and Obama auto industry adviser Steven Rattner in Sunday's New York Times. Lamenting the recent rapid increase in U.S. income inequality , free trade apostle Rattner admitted that the globalization-linked decline of U.S. manufacturing is significantly to blame and further insisted that it would continue because American wages are too high for U.S. manufacturers to be globally competitive except in a few specialised industries like aerospace and defense where U.S. producers retain strong advantages.
Rather than trying vainly to hold on to manufacturing, argued Rattner, America should concentrate on service industries like education, entertainment, digital media, and financial services which are the sources of its greatest strengths and highest paying jobs. Facebook, Google, and Mastercard, he indicated, are the companies of America's future.
While it may be that these companies will have a bright future, the rest of this mantra is as superficially wrong as the conventional wisdom always is. That, after all, is why it is the conventional wisdom.
For one thing, the reason that services like entertainment, digital media, and financial services have grown and paid so well is that they don't face the same kind of import-driven global competition as manufacturing. As Nobel Prize winning economist Michael Spence recently noted in Foreign Affairs, employment growth in the United States over the past thirty years has occurred entirely in non-traded sectors of the economy which tend to be the service sectors.
But it's not even true that U.S. services trade produces mostly high wage jobs. If you look at the actual data on U.S. services trade, it quickly becomes clear that a very large part of it is in transport and travel services that are relatively low payers. The so-called sophisticated consulting, accounting, design, and other business services that are always mentioned as the future drivers of U.S. trade and welfare, actually make up less than half of U.S. services exports and a large portion of these are the result of global intra-company activities that are no indication at all of international competitiveness.
Fortunately, like all conventional wisdom, this analysis is also mostly wrong.
The truth is that the U.S. economy cannot experience a significant, stable, and lasting recovery with out some kind of a manufacturing renaissance. It is generally agreed that the U.S. trade deficit is not sustainable over the long term and must be dramatically reduced as part of a major global rebalancing of trade surpluses and deficits. The U.S. deficit is overwhelmingly in goods with a roughly $800 billion goods deficit being reduced to an overall deficit of about $600 billion by a roughly $200 billion surplus in services. As the goods deficit continues to widen, the services trade base is simply too small to enable a growth in the services surplus rapid and large enough to overcome, even partially, the deficit in goods. So if a solid recovery is to come, it must come in goods, especially manufactured goods.
Fortunately , two recent and important studies indicate that it will. The conventional wisdom to the contrary notwithstanding, Booz & Company's report on the Future of American Manufacturing suggests that production from an American base can be quite competitive except in only a relatively small number of manufacturing industry sectors. It shows that in about half of such sectors, U.S. manufacturers are at present, fully competitive both in supplying the U.S. market and at supplying overseas markets. These are the areas such as aerospace, microprocessors, oil well drilling equipment, and medical instrumentation. In addition, however , it shows that in another 40 percent of industry sectors, U.S.-based producers are presently neck and neck with foreign producer for supplying the U.S. market and that with just a few tweaks, they could be dominant producers for their products in the U.S. market. That means that U.S. based manufacturing can compete in the U.S. market on a head to head basis with foreign producers in about 90 percent of industry sectors. Thus, instead of its present 10 percent of GDP, U.S. manufacturing should, like Germany's, account for around 20 percent of GDP.
A second recent report by the Boston Consulting Group (BCG) argues that, in fact, that is just the direction in which U.S. manufacturers are heading. It points out that more and more producers are realizing that the combination of rising wages in China and large hidden costs attached to producing in China is already leading a number of major U.S. companies to begin "re-shoring" some or all of their production back to the United States from Asia.
America needs an industrial renaissance and the good news from Booz and BCG is that it's going to get one.
The recent remembrances of 9/11 have reminded me, once again, that it was 9/12, not 9/11, that was the truly fateful day.
Of course, 9/11 was a day of heinous crimes that will live in infamy along with December 7, 1941, and many other days of similar atrocities. But 9/11 in no way determined America's future path. It presented challenges and options, but not decisions or foregone conclusions about how to respond.
In the years, months, and days immediately preceding 9/11, attitudes around the world toward the United States had been undergoing a gradual, subtle shift from the World War II legacy of admiration, gratitude, respect, and goodwill to increasing skepticism, alienation, and even hostility. A variety of factors underlay this shift, but the core element was a sense in much of the rest of the world that America increasingly no longer defined its interests, as it had long done, in terms of building a stable global order based on mutual consultation and a rough rule of law. Rather, it was increasingly seen as a whiner and sometimes even as a bully.
Yet, the immediate aftermath of the attacks of 9/11 revealed, as perhaps nothing else could have, the lingering depth of respect, gratitude, and affection for the United States even in the countries of greatest skepticism. Jacques Chirac, president of France, a country notorious for its anti-Americanism, immediately became the first foreign leader to visit New York and the site of the attack. Le Monde, the left-leaning and somewhat anti-American leading journal of France, proclaimed in banner headlines: "Nous sommes tous Americain" -- We are all Americans. The French flag was flown at half-mast.
For the first time in its history and without a request from the United States, NATO invoked Article 5, the provision under which an attack on one member is considered an attack on all and all undertake to defend the one. U.S. embassies from London to Moscow to Beijing to Tokyo to Singapore to virtually everywhere else in the world were buried in flowers and surrounded by sympathizers mourning America's losses. In one heinous moment, al Qaeda had managed to reverse the tide of alienation from America that had been rising.
The potential for a dramatic, positive reset of America's role and relations in the world was enormous. The atmosphere was pregnant with possibilities. Imagine what might have happened if President George W. Bush had taken the opportunity to do a global satellite television hookup. Using the time zones to his advantage, he could have rotated around the world expressing gratitude -- "Thank you London, thank you Paris, thank you Moscow, thank you Beijing. I'm going to invite your leaders, my good friends Tony, Jacques, Vladimir, Jintao (and others) to Camp … no, to the ranch this weekend. And we're all going to discuss this evil and develop a plan jointly to crush it and stamp it out."
At that moment, the president could have had anything he wanted.
That, of course, was the road not taken, and to quote Robert Frost, "that has made all the difference."
Dear Mr. President,
As you put the finishing touches on your forthcoming jobs speech, I am writing to remind you of the conversation we had about a year and a half ago when you invited me as part of a small group to discuss China and U.S. competitiveness with you and your key White House staff members.
You may recall that I then emphasized that creating good U.S. jobs was the key to a good relationship with China. So I am pleased to see that you are now making jobs your top issue. However, based on what has been leaked so far about your new program, I fear it will fail by being good but insufficient.
You are said to be preparing to propose extension of the payroll tax cut, creation of an Infrastructure Bank to enable extensive renewal of America's crumbling infrastructure, introduction of a new hire tax credit and partial wage subsidy program, extension of jobless benefits, job training for the long term unemployed, mortgage relief for home owners, aid to cities for hiring teachers and for school renovation, ratification of free trade agreements with Panama, Colombia, and South Korea, and passage of a patent inspection reform bill.
While these are mostly commendable suggestions (although it's not clear why you want the free trade deals which your own International Trade Commission says will cost U.S. jobs), they are not going to bring America back to anywhere near full employment. On one hand, they assume the greater demand to flow from these measures will automatically lead to greater U.S. output that will result in rehiring and new jobs creating investment. Second, they assume that the investment and new jobs will be in the United States. Neither of these assumptions is necessarily valid.
On one hand, the trade deficit transfers demand out of the U.S. economy. Take infrastructure for example. The major structural components of the new Oakland Bay Bridge in San Francisco are being made in China. So a new U.S. infrastructure bank will surely create jobs in China, but maybe not so many in the United States. On the other hand is the fact that, as Nobel prize-winning economist Michael Spence notes in a recent article, employment in large non-tradable sectors of the U.S. economy (construction, financial services, retail, medical and government services) that ballooned during the credit bubble of the past decade actually needs to shrink in favor of more sustainable output from tradable sectors. New demand that merely re-inflates the old bubble causing sectors will only lead to another crash and further unemployment.
Beyond this is the fact that even in sectors in which the United States is a world leader, the dynamics of globalization are presently such as to move new investment and production offshore. You may recall my mentioning that Intel was putting a new Pentium chip plant and its associated high skill, high paying jobs in China despite the fact that the United States has a comparative advantage in production of such chips and already produces the bulk of the world's supply. I explained that a major reason for this move was that Chinese investment subsidies would save Intel about $100 million annually over the ten year life of the plant. This is not to mention the impact of China's systematic undervaluation of its yuan against the dollar. By the rules of economics, those jobs could and should be in America. But Washington has long had no response to the investment and currency subsidies with the result that the jobs are moving despite America's comparative advantage.
Similarly GE recently announced that despite the fact of America being the leader in development and production of avionics systems it is transferring the technology and production capacity for its advanced avionics products to a joint venture with a state owned Chinese company. Although the associated jobs are precisely the high tech jobs economists say should be America's forte and could be done competitively in the United States, they are mostly moving to China. They are not moving there because your chief outside economic adviser and GE Chairman Jeff Immelt thinks the costs will be lower in China, but because China, contrary to all free trade doctrine, has made access to its avionics market conditional on transfer to China of the technology, production, and jobs.
Nothing you plan to propose is going to offset this mercantilism and keep those jobs in America or create new ones to replace them. Yet, if you cannot even keep jobs in which America is highly competitive, there will be no way to make a serious dent in unemployment.
Now is the time that you must think outside the box by recognizing the fact that you need big structural shifts and that only by counteracting mercantilism, slashing the trade deficit and focusing on a "make it/provide it in America" theme will you be able to create the jobs you need to save the country and yourself.
That is because some of the key assumptions of the conventional economic orthodoxy on which these proposals are based simply no longer hold true if they ever did.
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In 1979, Harvard professor and East Asia expert Ezra Vogel published Japan as Number One, a book that not only became an influential bestseller in the United States but also raced to the top of the all-time nonfiction bestseller list in Japan.
Appearing at a moment when Japan's economy was surging with a 10 percent annual growth rate and when Japanese auto, steel, textile, electronics, and semiconductor producers were decimating their U.S. competitors and garnering huge shares of the U.S. market, the book was a wake-up call for Americans. It demonstrated how the close cooperation between industry and government known as Japan, Inc. had many advantages over the more laissez-faire, adversarial U.S. economic system. Although the title was meant metaphorically rather than literally, Vogel did suggest that without significant changes in U.S. policies and practices, Japan would become the dominant leader in a wide range of key industries and technologies.
As the Japanese economy waxed in the 1980s and the Nikkei stock average soared while the value of the Imperial Palace in Tokyo was calculated to be more than that of the entire state of California, Vogel appeared to have been the most prescient of prophets. With the collapse of the Japanese asset bubble in the early 1990s, however, Japan entered what is now often described as two lost decades of stagnating economic growth and deflation. And over that time, a river of ink has been spilled in expressing the schadenfreude of triumphalist Western economic analysts who kept asking why anyone was ever concerned about competition from Japan.
Looking at the scene today, however, I have to wonder whether Vogel wasn't right after all. Over the weekend I discussed with some Japanese friends the idea of spending an extended stay in Japan for purposes of research on a new book. I was quite excited until we started talking prices and living expenses. When I lived in Japan in the 1960s and 1970s, the yen-dollar exchange rate varied from ¥360/$ to ¥270/$. At today's rate of ¥75/$, I can't even afford the bus ride from Narita airport to downtown Tokyo, let alone the monthly rent for a modest apartment and the prices of food, transportation, and other amenities. The yen has become, like the Swiss franc and gold, a safe haven for investors rushing to escape the risk of dollar devaluation.
Japan continues to accumulate substantial trade and current account surpluses and its rate of unemployment is about half that of the United States while its gap between rich and poor also remains much less. The dollar is in trouble in part because U.S. national debt is approaching the 100 percent of GDP level which is seen by economists as the point at which economic recovery becomes a painful, long term affair. Yet Japan's national debt is approaching 200 percent of GDP. A big difference, however, is that Japan's debt is almost entirely self-funded. Unlike the United States, Japan does not borrow from China or any other country. Japan has the longest average life expectancy of the major countries and the highest average household wealth. The recent nuclear power disaster has been a severe blow, but Japan has responded with its typical cooperative, can-do spirit. Moreover, it is moving decisively to abandon nuclear power and to focus on developing wind, solar, and other green energy sources. That will be costly in the short run, but Japan has never been a short run country, and in the long run it may well become the global leader in green energy technology.
Amazingly, in view of the weakness of the Japanese prime minister and the ineptness with which Japan's government has handled the recent tsunami and nuclear crises, Tokyo is apparently perceived by the world's investors to be more reliable and effective at governing than Washington.
This is, of course, not to say that Japan is without problems. It has plenty of those. But for the moment, the markets seem to be confirming Vogel's original view of Japan as Number One.
If you think the president's economic and technology advisers are confused, self-contradictory, and captives of a dying conventional wisdom, you are correct.
The latest and greatest evidence of this is the Report to the President on Ensuring American Leadership in Advanced Manufacturing just released by the President's Council of Advisers on Science and Technology (PCAST) and the President's Innovation and Technology Advisory Committee (PITAC). It is just a wonderful example of an elite group struggling to avoid the policy consequences of its own conclusions in order to conform to a deeply engrained conventional wisdom.
The first part of the report is straight forward, honest, and devastating in its analysis and conclusions. It states unequivocally that U.S. manufacturing, which has been the world leader for a century, is in serious decline compared to the manufacturing of other advanced countries like Germany, Japan, and Switzerland whose wages and social expenditures are far above those of the United States. This is a direct contradiction of the claims of the U.S. community of professional economists and, more importantly, of the National Association of Manufacturers that U.S. manufacturing is holding its own and has never been better. In this regard, the report emphasizes that the decline of U.S. manufacturing is not limited to low tech manufacturing, but is also dangerously advanced in high tech manufacturing. It further states that innovation is closely tied to manufacturing capability and concludes that the United States cannot remain the global engine of innovation without maintaining a leading position in manufacturing. This is a direct contradiction of conventional U.S. economic doctrine that holds manufacturing to be unimportant for the U.S. economy in what it posits as the post-industrial services and high technology age. In their conclusions, the PCAST and the PITAC say there can be no high technology age without leading edge manufacturing. These are bold and courageous conclusions.
But then we get to the solutions and recommendations where confusion and conformity creep in. The report calls for a "coherent Innovation Policy to ensure U.S. leadership in new technologies and approaches and high quality jobs for Americans in the manufacturing sector. " To achieve this it calls for an Advanced Manufacturing Initiative to support "applied research programs for promising new technologies, public-private partnerships around broadly-applicable and pre-competitive technologies, the creation and dissemination of design methodologies for manufacturing, and shared technology infrastructure to support advances in existing manufacturing industries.
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The jobs scene turned really ugly last week as the Labor Department reported that in June the economy had generated only 18,000 new jobs instead of the 250,000 it desperately needed to maintain some semblance of ongoing recovery.
For my money, however, even uglier than the jobs numbers were the reactions and analyses of leading economists. For starters, most of them expressed shock at the paucity of new jobs created. I was shocked that they were shocked. On which planet are they living? Of course economists tend to make a lot of assumptions. So maybe they can assume jobs. But here in Maui where I'm hanging out for the summer (yes, someone does have to do it) there are no jobs.
At church yesterday, one couple reported that he had lost his position on the police force and she had been laid off by her longtime insurance company employer. At least she's getting some unemployment pay, but he's getting none. A single mom told me she's making gluten-free coconut cream cakes in her kitchen and selling them to local grocery stores. To supplement that she also takes pianist gigs and hawks skin-care solutions at Costco. It sounded like she is working really hard but not really making ends meet. I think this is not just a Maui phenomenon, but that it is the experience of the vast majority of the American people who are not economists.
Even the economists who do have a better understanding of reality seem stuck in transition from the pre-crisis to the post-crisis world. Writing in last Friday's Financial Times, former White House economic advisor Laura Tyson urged more stimulus spending to prevent an even sharper falloff in jobs and job creation. Similarly, New York Times columnist Paul Krugman argued in his most recent piece, as he has in several others, that while debt reduction may be necessary in the long term, what is needed in the short term is more stimulus spending. The idea being that more debt in the short term will get the economy ticking over and thereby reduce debt in the long term.
Tyson and Krugman are surely correct to the extent that more demand for the output of American workers is desperately needed. Yet, I think even they are not fully recognizing a fundamental shift that has taken place and that is surely not incorporated in the standard models of most of the forecasters. There are two factors. One is that over the past 30 years, a succession of trade deficits and dot.com and real estate bubbles has reshaped the U.S. economy in ways that have decimated some trades and professions and their skills and that have fostered especially the U.S. construction and financial industries and their skills. In the wake of the crisis, it is now clear that construction and finance must shrink, and indeed they are shrinking.
The idea of stimulus incorporated in the standard economic models is that it will create demand for goods and services produced in America and thereby drive investment in new factories and jobs to produce more of those goods and services. The difficulty is that we do not want to stimulate a lot more construction or finance (those were the bubbles that collapsed after all), and greater stimulus to create demand for things we largely import does not drive new investment or creation of new jobs in America. It only increases our debt. What is needed is not just demand in the American economy, but demand that results in domestic production and that does not increase domestic or international debt.
Think about this in the wake of the recent New York Times article reporting on the new Oakland Bay Bridge being made in and imported from China. Building infrastructure like bridges is a time-honored way of creating demand in the economy that creates jobs. Indeed, just this past weekend President Obama called for creation of an Infrastructure Bank that would enable a dramatic ratcheting up of U.S. investment in critical infrastructure. It's a good idea and one that I, along with others, have long promoted. But if the decision of the state of California to have the main structural elements of the Oakland Bay Bridge made in China is a harbinger of things to come, then an Infrastructure Bank is likely to create more jobs in Asia than in the United States.
No doubt former Governor Arnold Schwarzenegger and his cabinet thought they would save about $400 million on steel by buying the bridge in China because Chinese steel production has been heavily subsidized and China's government manages its yuan to be artificially undervalued versus the dollar. But what they didn't consider was that those subsidies tend to make U.S.-based production uncompetitive and not only put American workers out of jobs but exert downward pressure on wages generally while eroding critical investments in equipment and human skills, reducing state, municipal, and federal tax revenues, and contributing to the shrinkage of the national educational base. No one in California took a look at even the whole state picture, let alone the national picture, to determine whether buying a bridge in China was really going to be a net gain for the state (as it turns out, in the past two years the price of Chinese steel has risen much faster than that of U.S. steel so that even the initially projected savings are unlikely to be realized). Even worse, no one at the federal level of the U.S. government has any responsibility for evaluating the net impact of these kinds of deals or for reducing the leakage of stimulus spending abroad and maximizing the domestic production impact of government spending.
Until our economists and officials begin to wrestle with the need for the United States not only to stimulate its economy but to do so in ways that will lay the basis for America to increase its wealth-producing capacity and pay its way, they are likely to find themselves in a continuous state of shock.
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In the wake of my recent blog post on the new Oakland Bay Bridge being made in China, a lively debate has erupted. I found the best comments to be those of Vikram Dalal of Iowa State University. I am passing them along here.
By Vikram Dalal
Professor of electrical and computer engineering, Iowa State University
The real problems are:
1. The destruction of American industrial infrastructure. As former Intel chief Andy Grove says, it is absolutely critical that we continue to manufacture "commodity" industrial items, like bridges and rivets and bearings and computer chips and tires and steel and aluminum and commodity chemicals. Once we lose that, we lose the workforce. It takes many, many years to build up an industrial workforce, but only 10 years to destroy it. When younger people see jobs being lost in manufacturing, they turn away from it, with the result that the workforce dies off. That is exactly what is happening today -- industries cannot find enough well-trained young people.
2. The second problem is that as the industrial workforce (the people who make things that we can export) is reduced and laid off, they (and their children) go into "service" businesses, particularly health care. But health care is a giant monopoly -- the doctors have an iron grip on it. There is no competition there. What it means is that the only way more jobs are created in "meaningful" health care -- jobs like technologist or lab tech (as opposed to those in bedpan health care) -- is by doctors prescribing more MRIs, CAT scans, PET scans, and so on. That increases medical costs, especially because Medicare requires no second opinion. You walk in and before you know it, the doctor has prescribed 10 tests, because no one is checking; and he, and the hospital, make more money from more tests. So increasing health-care employment is not a winning strategy from a national economic viewpoint.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.