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.
Former GE Chairman and CEO Jack Welch was mightily upset last Friday when the latest job numbers from the Bureau of Labor Statistics (BLS) showed unemployment falling from 8.1 percent to 7.8 percent.
This was the first time it had fallen below 8 percent since 2009. Coming just in the wake of Wednesday's election campaign debate with Republican candidate Mitt Romney, this report would be helpful to President Obama's reelection bid by mitigating some of the political damage done by his poor debate performance. Apparently a Romney supporter, Welch dismayed by Obama's good luck. In fact, he wanted the public to believe that luck had had nothing to do with the numbers. So he turned to Twitter to arouse public suspicion.
I know it's hard to imagine a macho guy like Welch tweeting, but that was the fastest way for him to jump into the fray with the following message: "Unbelievable job numbers. These Chicago guys will do anything. Can't debate so change numbers."
I defy you to interpret that in any way except as a charge that the White House had intervened with the BLS and directed it to cook the numbers in such a way as to be favorable to the President's reelection bid. In other words, Jack was suggesting that Obama, the White House staff, and the BLS are all corrupt and conniving. If such a suggestion could be substantiated, it would be grounds for impeachment of the president and abolition of the BLS and perhaps of the whole Department of Labor.
But, of course, it couldn't be substantiated. I watched Jack dance around that problem in an interview with Chris Matthews on Friday night. Chris asked him if he had any evidence beyond his own suspicions and speculation of White House interference with the normal practice and procedures of the BLS or of any change in the normal methods and practices for calculating the unemployment statistics. "No" and "no" was the response. Chris further asked him if he was accusing anyone of improper interference and if so who. Jack squirmed and shifted his position. "No", he wasn't pointing the finger at any particular individual he said. Rather, he was just raising questions. Didn't it seem awfully coincidental that these favorable numbers would come out at just the right moment to help the president, he asked.
He added that the BLS methodology is based on myriad assumptions and that it actually uses two different methods for calculation that sometimes appear to produce contradictory results. So, how, he asked, can anyone really know what the true numbers are.
That the calculations are based on a variety of assumptions and that they are complex and that different survey techniques often produce different numbers is all true. But that's not really the issue. Everyone knows about these vicissitudes. The real question is whether or not the usual assumptions and techniques were changed in some way so as to influence the latest report in a pro Obama direction. When Chris again asked Jack if he had any evidence of such a change in technique, Jack danced and squirmed again. "No," , but I'm just raising questions" he said.
Maybe Jack's suspicions arise from his own experience with reporting good and bad numbers. His main claim to fame, after all, is that he produced a string of 80 quarters of uninterrupted increases in earnings for GE. This no doubt reflected his genius as a corporate manager, but it also reflected use of off balance sheet vehicles such as those used by Enron before its bankruptcy and other creative accounting techniques linked to GE Capital, the company's finance arm. So, maybe from this experience Jack thinks that happy coincidences just don't occur.
But this is where the difference between running a company and running the United States is so great. The employees at GE and GE Capital were all subject to Jack's whim. Not so the bureaucrats at BLS who as members of the Civil Service have job protection and cannot be fired by the President. They are in a position to defy any illegal directive from the White House and they don't take their thinking on methodology and practices from Presidential whims.
When Jack uses cynical innuendo to suggest conspiracy and corruption at the heart of our political system, he not only undermines a president whom he obviously doesn't like. He undermines public trust in the system itself.
If he has real evidence of such corruption, he should demonstrate it immediately. If he doesn't have such evidence, the not only owes the president an apology. He owes the American people one as well.
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Romney won the debate, but in addition to Obama, it was the country that lost.
Romney had more energy, spoke more fluently, had better zingers, was more focused, seemed to have a better understanding of the issues and a better grasp of facts, showed more empathy with the voters, and demonstrated a better sense of humor. Obama looked and acted as if he really wanted to be someplace else -- maybe celebrating his wedding anniversary. His delivery was hesitant and halting. He got bogged down in minutiae, never hit any of Romney's weak points, presented no compelling vision for a second term, and made claims that could easily be shown to be factually fuzzy.
But how could we have both presidential candidates spend an hour talking about the economy and job creation without mentioning the loss of U.S. international competitiveness, the continuing chronic U.S. trade deficit, the off-shoring of U.S. jobs and technology, the low rate of U.S. investment compared to countries like China and Germany, and the abysmal state of U.S. infrastructure compared to other leading countries?. How could there be a discussion of the economy without any questions about national priorities and without any comment on the impact of America's role as the international hegemon and provider of global security on its ability to keep delivering the American dream?
The statistics show very clearly that the United States has been suffering loss of competitiveness and stagnation and even decline of living standards for a very long time. Insanity has sometimes been defined as continuing to act in a particular way while expecting a different result. Neither of these candidates showed any awareness of the deep underlying currents that continue to erode the country's productive capabilities. Despite the sound and fury, the differences between the were very small. Romney said he wouldn't raise tax rates on the wealthy while Obama said he'd move the rate on the rich from 35 to 40 percent. Big deal. I can remember when it was 90 percent and the rich cheered when Ronald Reagan got their rate reduced to 50 percent. Neither candidate showed any signs of wanting to adopt a completely new game plan for America, of wanting, for example, to make economic competitiveness the nation's top priority in place of military dominance or of wanting to develop strategic economic policies in parallel with geo-political strategies.
In short, both are playing essentially the same old game while expecting and predicting that they will produce new and different results. They won't. Regardless of which one is eventually elected, there is unlikely to be any substantial change in policies or results. So the country will just continue on with its present insane and unsustainable priorities and policies.
Where is Ross Perot when we need him?
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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.
In his speech to the Democratic National Convention on Tuesday , former Ohio governor Ted Strickland contrasted what he called the economic patriotism of President Obama with what he described as Mitt Romney's predilection for vulture capitalism in his role as the founder and CEO of Bain Capital.
Noting that some of the companies Romney and Bain had invested in were named "outsourcing pioneers", Strickland emphasized that Obama had saved good American jobs during the recent Great Recession by rescuing the Detroit auto makers even as Romney was calling for them to go bankrupt. After referring to Romney's personal investments abroad, Strickland said Obama" is betting on the American worker" while Romney "is betting on a shell corporation in Bermuda".
This dichotomy does capture a significant element of the race. I know from conversations with the president in which I have been involved, that he does have an instinct for making it in America. I have heard him ask his top advisers: "why can't we make batteries, wind turbines, solar cells, and high speed trains in America?" His Middle Class Task Force focused a lot of attention on how to revitalize manufacturing in the Mid-West and his administration has provided financing and regulatory support for a variety of innovative alternative energy job creating efforts.
Both Governor Romney's career as a private equity business manager and his minimalist philosophy of government indicate that he is a true disciple of the modern shareholder value business doctrine widely taught to MBA students at places like Harvard Business School, of which Romney is a prominent graduate. For most of American history the ruling doctrine was stakeholder value. The idea being that the corporation is chartered by the state in order to provide benefits to the society as a whole as well as to the shareholders of the corporation. That being the case, it was thought that the corporation should be managed to assure the welfare of its various stakeholders such as workers, suppliers, customers, and local and national communities as well as shareholders.
Over the past thirty years, however, this view has been displaced by the doctrine of shareholder value which holds that the shareholders are the residual risk bearers of the corporation and that it should therefore be managed to maximize their earnings. In practice, because earnings are measured on a quarterly basis this tends to mean maximizing earnings on the short term. Not only is this the general doctrine of the business schools today, but it is quintessentially the doctrine of Wall Street and especially of the managers of private equity operations. Romney, of course, would argue that by maximizing earnings through outsourcing or layoffs in some areas he was creating jobs in other areas. This may well be true in some instances, but it is, of course, not the same thing as seeking to assure the welfare of workers and other stake holders as the CEOs of the 1960s-70s did.
But if Obama has economically patriotic instincts, he has often ignored them and listened to conflicting advice. For one thing, giving health care legislation priority over job creation efforts was a huge mistake of his first term. Yes, he rescued Detroit, but he waited a very long time before doing so, and, as a result, the cost was far higher than it needed to be. Another mistake has been the failure to counter the mercantilist globalization policies of many U.S. trading partners who subsidize their exports as well as direct investment in their countries by U.S. corporations while penalizing U.S. exports in a variety of ways. A huge failure to change in a meaningful way has been the president's easy adoption of then notion that geopolitics is more important than American economic competitiveness. During his first trip to China, Obama agreed that America would assist China in developing its own indigenous commercial jetliner. Why? Isn't America the prime producer of jetliners? Why would it want to teach China how to make them? Well, the State Department said it was because we needed China to help us in dealing with North Korea and Iran among other geopolitical issues.
Even as I write, another round of negotiations is set to begin tomorrow on the Trans-Pacific Partnership free trade agreement. If concluded ,this deal would almost surely cost American jobs. I say this because the deal doesn't cover currency manipulation, subsidies for direct foreign investment, or anti-trust issues. When I asked the White House why we are proceeding to try to conclude such a deal, I was told that it is to prove our commitment to our allies in Asia. That these allies may feel better about us will be cold comfort to middle class American workers whose jobs are uncertain and whose wages continue to stagnate.
Nor is the record of the Democratic Party terribly reassuring in this regard. Bill Clinton gave a highly-touted speech defending the administration's economic policies last night. Well, it was Clinton who brought China into the World Trade Organization on the basis of the argument that doing so would open China's markets and reduce the U.S. trade deficit. It was Clinton who gave us Bob Rubin (pure Wall Street and shareholder value) and the financial deregulation that resulted in the crisis and Great Recession of 2008-10.
So if Obama wants to convince workers and the middle class that he's on their side , he'll have to do more than have Ted Strickland talk about his economic patriotism.
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In a post last week, I asked why America's new strategy is to "pivot to Asia-Pacific" when America itself needs so much attention. Last night the president replied by making it clear that his real pivot is indeed going to be to America.
In a paraphrase of John F. Kennedy's famous "ask not what your country can do for you, but ask rather what you can do for your country," Barack Obama called on business leaders to reconsider the off-shoring of production and jobs and to "ask what you can do to bring the jobs back." What a beautiful response to the attitude recently expressed by an Apple executive who told the New York Times that Apple has no obligation to fix America's problems.
No, no. Not true, the president emphasized. "We're all in this together. There's nothing America can't accomplish if we all work together."
Sweet words. I've been waiting nearly 30years to hear a president say things like this. Perhaps sweetest of all were his comments on manufacturing.
In a White House meeting a year and a half ago, the president asked me why Americans can't make things like high speed trains, batteries, flat panel computer and television displays. I said we could if we imitated the policies and attitudes of trading partners like Japan, South Korea, Singapore, and China. But Larry Summers, who famously argued that America doesn't need a manufacturing sector, was then the president's top economic adviser and that year's State of the Union speech contained nothing on manufacturing or bringing jobs back from abroad.
Now that Larry is gone, it seems the president realizes not only that he was asking the right questions all along but that an "economy built to last" must have a robust manufacturing base. In that earlier White House meeting, I argued that as long as foreign tax holidays and U.S. tax provisions made the tax load lighter for American companies if they off-shored production, they would do so. I urged the president to reverse those incentives. His proposals on corporate taxes last night are a big step in the right direction. Especially important was his statement that production overseas should not be advantaged over U.S. based production by special financial provisions. His proposals to make it easy for foreign students to stay in the United States after finishing their degrees, to massively upgrade U.S. infrastructure, to enforce U.S. and international trade rules, to turn the unemployment system into a re-employment system, and to drive for energy independence, are all very welcome.
To be sure, the speech was not perfect. The president should not hold his breath until U.S.-made cars roll on the streets of Seoul, as he suggested they will as a result of the recently concluded U.S.-South Korea Free Trade Agreement. He failed completely to mention currency manipulation, one of the most important practices negatively impacting U.S. and global trade. And his goal of doubling exports may be met but will not matter in the face of the fact that U.S. imports are more than doubling, so that the trade deficit is growing larger.
But these concerns should not obscure the importance of the fundamental shift in U.S. economic thinking that the speech represents. Heretofore, the policy of Republican and Democratic administrations alike has been unilateral free trade, unconcern with the structure of the U.S. economy and what it produces and provides, disdain of industrial policy that supports specific economic sectors like the auto and green energy industries, and emphasis on services and financial industries as the future of the U.S. economy. This speech represents an about face.
Less clear, but implied, is the possibility that it also represents a major reordering of national priorities. In contrast to most previous state of the union speeches, this speech hardly mentioned foreign affairs, national security, war, or terrorism. Does this mean that Washington has shifted from a focus on the priority of geopolitics to the priority of rebuilding America's productive base and reclaiming the American dream? Let's hope so.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.