Raymond L. Richman
The G-8 has taken steps to make the G-20 an effective international governing agency with power to make policies that are obligatory on its members. The Leaders’ Statement at the conclusion of the Pittsburgh Summit on September 24 -25, 2009 makes this abundantly clear.
1. Banks in all the G-20 countries are to be regulated to prevent the excesses that led to the Crisis. The measures include raising reserve requirements, restricting bonuses that “lead to excessive risk-taking”, and regulating the “over-the-counter derivatives market”.
2. G-20 to be the principal “forum”, i.e., legislative body!
3. Other structural changes in world government include increasing the participation of emerging markets and developing countries in the governance of the IMF. The G-20 (G-8?) made a contribution of over $500 billion to an IMF fund to lend to needy poor countries.
4. Giving voting power in the governance of the World Bank to “developing and transition countries, to the benefit of under-represented countries.
5. Gave the World Bank a leading role in “responding to problems whose nature requires globally coordinated action, such as climate change and food security.”
6. Steps to “increase access to food, fuel and finance among the world’s poorest while clamping down on illicit outflows.”
7. Calls on the World Bank to support a new Food Security Initiative for low-income countries.
8. The G-20 (G-8?) “will increase, on a voluntary basis, funding for programs to bring clean affordable energy to the poorest, such as the Scaling Up Renewable Energy Program.”
9. Phase out “inefficient fossil fuel subsidies” that encourage wasteful consumption and “impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.”
10. “We will fight protectionism. We are committed to bringing the Doha Round to a successful conclusion in 2010. We will spare no effort to reach agreement in Copenhagen through the United Nations Framework Convention on Climate Change (UNFCCC) negotiations.
As Nicolas Sarkozy, President of France, stated in a press conference at the close of the G-20 meeting, “we have begun the task of radically reforming global governance.” He reported agreement on regulating banks, on limiting bank bonuses, on sanctions against tax havens to force them to reveal depositors’ identities, on requiring banks which market derivatives to keep a certain proportion themselves, banks engaging in risky speculation will be compelled to maintain higher reserves. Every one of these is already being discussed in the Congress. Which came first? The lead is from the European Union.
He also said that “In the next few weeks, Gordon Brown and I will take initiatives to get the ILO’s eight fundamental standards ratified by all the G20 members so as to affirm the G20’s social dimension.
Apparently, none of the leaders has any doubt that global warming is man-made. One member of the European Union, the Czech Republic, has through its President expressed doubts that global warming is man-made. Presumably, he does not count as much as Pres. Sarkozy. He is not alone. Hundreds of scientists have expressed similar doubt. It ought to have been mentioned at least at the G-20 meeting and hopefully, at the Copenhagen summit.
(More on the G-20 is a subsequent blog.)
Thursday, November 12, 2009
Wednesday, November 11, 2009
The G-20, an Exercise in World Government
Raymond L. Richman
The G-20 meeting in Pittsburgh on September 25th of this year is an indicator that the world’s leaders have learned little from this recession. They appear to have no idea of what caused it and no idea of what to do about it except a resurgence of Keynesian orthodoxy which Keynes himself would no longer support. The communiqué at the end of the conference is filled with good intentions, political correctness, and foolish ideology. As a result, the planning the members plan to do for the world will promote world instability and increase poverty with the likelihood that one or more of the G-8 countries will concede power to a totalitarian leader, who will war for world domination as Hitler did. They are planning world stagnation, not world recovery.
The real agenda of the meetings appears to be world government. It is designed to give the member countries the impression that they are participating in the decision-making. But the reality is that the G-8 powers call the tune. and they created this downturn which is best named as the Great Recession. If they reach an agreement that is wrong, as the Great Recession shows, the whole world suffers the consequences. The less powerful members of the G-20 may participate in debates and in committees, but the real power belongs to the G-8. Briefly after WWII, the U.S. was the only power; then it had to share power as the USSR, Europe and Japan prospered at America’s expense and, more recently, it was China and the environmentalists that broke the back of American power.
As the communiqué makes clear, the real purpose is to do world-wide planning, using national agencies under tutelage from the IMF to execute G-8 policies in their countries. The G-20 at an earlier meeting in London in April, 2009 created a new bureaucracy, the Financial Stability Board (FSB). There is before the U.S. Congress a proposal to create an agency with the same name whose purpose is to subordinate the Federal Reserve System, existing agencies like the FDIC, and the entire U.S. banking system to its directives. It is the beginning of World Government that began with the creation of the UN and was strengthened by subsequent treaties and conventions, sponsored by non-governmental agencies.The Kyoto treaty is an example of the promotion of environmental groups which by-passed their own governments where they were impotent but succeeded in installing their agenda at the U.N. Fortunately, the U.S. Senate refused to approve the treaty.
Over the years, a number of international agencies were established, most of them under foolish U.S. leadership with the U.S. supplying most of the money and bureaucrats from the rest of the world spending the money. We created such institutions as the International Monetary Fund, the World Bank, regional development banks, the ILO, the WTO and UN agencies. All of these institutions have outlived their usefulness. It is almost certain that the benefits they claim to have contributed to the post WWII world were a fraction of their costs.
The G-20 communique takes credit for the recovery of the world economy to date.
It worked for China and for OPEC, not the U.S. World trade is about half of what it was in 2008, jobs have continued to disappear, and we are still on the edge of a depression. The financial system has been stabilized but the credit goes to George Bush’s Toxic Assets Recovery Program (TARP)not the G-8 or G-20.
It makes no mention of the U.S. trade deficits and the fall of the dollar, no mention of the causes of the world-wide recession. Surely, the causes have to be dealt with to prevent a recurrence and to have a recovery. The U.S. trade deficits and the mercantilist policies of China and others fed the real estate bubble and when the bubble burst, it revealed that the U.S.Government policy of forcing the banks and government sponsored enterprises (Fannie Mae, et al.) to lend money for mortgages requiring little or no equity caused the financial crisis. The mortgage crisis is not over yet. And the law that began the process of subprime lending, the Community Reinvestment Act, is still on the books!
The communiqué accepts without question that man’s activities are creating global warming, ignoring all the recent evidence that global warming and cooling is solar in origin, and it ignores the fact that we have experienced global cooling during the past decade.
The G-20 appears to be a society of lemmings. A rational approach would be to let free markets decide when alternative sources of energy are economically feasible, thus requiring no government subsidies. The huge subsidies will be at the expense of working people and will instead spread poverty throughout the globe.
(This is the first of a series on the G-20. The next will follow in a day or two.)
The G-20 meeting in Pittsburgh on September 25th of this year is an indicator that the world’s leaders have learned little from this recession. They appear to have no idea of what caused it and no idea of what to do about it except a resurgence of Keynesian orthodoxy which Keynes himself would no longer support. The communiqué at the end of the conference is filled with good intentions, political correctness, and foolish ideology. As a result, the planning the members plan to do for the world will promote world instability and increase poverty with the likelihood that one or more of the G-8 countries will concede power to a totalitarian leader, who will war for world domination as Hitler did. They are planning world stagnation, not world recovery.
The real agenda of the meetings appears to be world government. It is designed to give the member countries the impression that they are participating in the decision-making. But the reality is that the G-8 powers call the tune. and they created this downturn which is best named as the Great Recession. If they reach an agreement that is wrong, as the Great Recession shows, the whole world suffers the consequences. The less powerful members of the G-20 may participate in debates and in committees, but the real power belongs to the G-8. Briefly after WWII, the U.S. was the only power; then it had to share power as the USSR, Europe and Japan prospered at America’s expense and, more recently, it was China and the environmentalists that broke the back of American power.
As the communiqué makes clear, the real purpose is to do world-wide planning, using national agencies under tutelage from the IMF to execute G-8 policies in their countries. The G-20 at an earlier meeting in London in April, 2009 created a new bureaucracy, the Financial Stability Board (FSB). There is before the U.S. Congress a proposal to create an agency with the same name whose purpose is to subordinate the Federal Reserve System, existing agencies like the FDIC, and the entire U.S. banking system to its directives. It is the beginning of World Government that began with the creation of the UN and was strengthened by subsequent treaties and conventions, sponsored by non-governmental agencies.The Kyoto treaty is an example of the promotion of environmental groups which by-passed their own governments where they were impotent but succeeded in installing their agenda at the U.N. Fortunately, the U.S. Senate refused to approve the treaty.
Over the years, a number of international agencies were established, most of them under foolish U.S. leadership with the U.S. supplying most of the money and bureaucrats from the rest of the world spending the money. We created such institutions as the International Monetary Fund, the World Bank, regional development banks, the ILO, the WTO and UN agencies. All of these institutions have outlived their usefulness. It is almost certain that the benefits they claim to have contributed to the post WWII world were a fraction of their costs.
The G-20 communique takes credit for the recovery of the world economy to date.
When we last gathered in April .. (g)lobal output was contracting at a pace not seen since the 1930s. Trade was plummeting. Jobs were disappearing rapidly. Our people worried that the world was on the edge of a depression. At that time, our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital. It worked.
It worked for China and for OPEC, not the U.S. World trade is about half of what it was in 2008, jobs have continued to disappear, and we are still on the edge of a depression. The financial system has been stabilized but the credit goes to George Bush’s Toxic Assets Recovery Program (TARP)not the G-8 or G-20.
It makes no mention of the U.S. trade deficits and the fall of the dollar, no mention of the causes of the world-wide recession. Surely, the causes have to be dealt with to prevent a recurrence and to have a recovery. The U.S. trade deficits and the mercantilist policies of China and others fed the real estate bubble and when the bubble burst, it revealed that the U.S.Government policy of forcing the banks and government sponsored enterprises (Fannie Mae, et al.) to lend money for mortgages requiring little or no equity caused the financial crisis. The mortgage crisis is not over yet. And the law that began the process of subprime lending, the Community Reinvestment Act, is still on the books!
The communiqué accepts without question that man’s activities are creating global warming, ignoring all the recent evidence that global warming and cooling is solar in origin, and it ignores the fact that we have experienced global cooling during the past decade.
As leaders of the world’s major economies, we are working for a resilient, sustainable, and green recovery. We underscore anew our resolve to take strong action to address the threat of dangerous climate change. We reaffirm the objective, provisions, and principles of the United Nations Framework Convention on Climate Change (UNFCCC), including common but differentiated responsibilities.” Nice words but based on fantasy. Note that it follows the environmentalist line and fails to mention nuclear energy as an alternative clean energy source. Unlike wind turbines and solar panels, nuclear energy requires no subsidies.
The G-20 appears to be a society of lemmings. A rational approach would be to let free markets decide when alternative sources of energy are economically feasible, thus requiring no government subsidies. The huge subsidies will be at the expense of working people and will instead spread poverty throughout the globe.
(This is the first of a series on the G-20. The next will follow in a day or two.)
Tuesday, November 10, 2009
A Chat about Balanced Trade and Mercantilism
Howard Richman
[The following is based upon an online chat that I had with one of my students on November 9. I'm publishing it to help others who are trying to understand the trade philosophies known as "balanced trade" and "mercantilism."]
[The following is based upon an online chat that I had with one of my students on November 9. I'm publishing it to help others who are trying to understand the trade philosophies known as "balanced trade" and "mercantilism."]
Student: Could you describe "balanced trade"?
Me: In a nutshell it means imports approximately equal to exports.
Student: ok
Student: How is that different from "fair trade"?
Me: The longer definition is that it's one of the five trade philosophies:
- 1. Free Trade
- 2. Fair Trade
- 3. Mercantilism
- 4. Balanced Trade
- 5. No Trade
Me: Free trade and Fair Trade are opposites
Me: Mercantilism and Balanced Trade are opposites.
Student: ok
Student: What does Fair Trade look like?
Me: The way it usually works is that a country protects its industries that compete with imports.
Student: Could a country espouse both mercantilism and Fair Trade?
Me: Well, mercantilism is the philosophy of running a trade surplus on purpose.
Me: Mercantilists do two things: (1) maximize exports and (2) minimize imports
Student: That sounds like Fair Trade would come in on (2)
Me: Close.
Me: Though usually Fair Trade picks certain sectors to protect.
Student: ok
Me: For example, the US protected its manufacturing sector throughout the 19th Century, a policy that was very unpopular with farmers and with the South
Student: ok
Student: So why would a country want balanced trade for itself if it could achieve a mercantilist situation? Is it a case of the prisoner's dilemma here?
Me: Yes. All countries can practice balanced trade, but mercantilism requires victims.
Student: I suppose foreign savings would help investment so a country would not want too few imports
Me: Well, foreign savings is actually what causes trade deficits. When a country gets foreign savings, those savings do reduce interest rates which can indeed help investment.
Me: But modern mercantilists don't need foreign savings. They suppress their people's consumption so that they get plenty of domestic savings.
Student: ok
Student: So even though domestic savings can drive an economy, consumption should not be ignored then?
Me: Well, domestic savings does not drive an economy. Keep in mind that there are two different supply-and-demand graphs here. The one that has savings is the investment savings graph which shows that the supply of savings equals the amount of investment at a point which determines the long-term interest rate:
Student: ok ok
Me: The other is the Aggregate-Supply Aggregate-Demand graph which shows that the two curves meet at a point which determines the price level and the Real GDP:
Student: So the Agregate Demand graph is still important for a savings-oriented economy?
Me: Yes, and the way that mercantilists get enough AD while they suppress consumption, is by getting a surplus of exports over imports.
Me: Aggregate Demand = Consumption + Investment + Government Purchases + Trade Surplus.
Student: ok - So, in effect, other countries take up the slack.
Me: That's it exactly. If they keep Consumption low and the Trade Surplus high, they have no problem.
Student: America would constitute a large part of China's AD then
Me: Yes
Student: wow
Student: I wonder how much?
Student: Enough so that America's import level is crucial to the Chinese economy, I suppose
Me: I could tell you exactly; the statistics are on the BEA website.
Student: I'll look it up
Me: Great! I love that.
Me: Go to bea.gov, then look for the "interactive data tables". Then "international transactions", then "China"
Student: ok
Student: So what I'm looking at is America's imports and exports, right?
Student: With China, that is.
Me: Right. And there's a place near the bottom that gives you the balance.
Me: Yes
Student: "Statistical discrepancy?"
Me: no. That's the fudge factor.
Student: ok
Me: That's because they couldn't get everything to add up.
Student: lol
Me: You want the line that says exports of goods and services and the line that says imports of goods and services. The difference is the trade balance.
Student: On average it looks like a deficit of 60 billion or so
Me: That's per quarter.
Student: ok
Me: Look at the annual data and you'll get the per year data.
Me: Or you can add up four quarters.
Student: Wow, that's about 240 billion!
Me: That's more like it.
Me: By the way, I'm proud of you for looking up the data yourself. That's what real economists do.
Student: And the Chinese GDP is only 939 billion or so!
Me: Where'd you find that gem?
Student: I just looked up 'China GDP 2009" it's an article from the "China daily". http://www.chinadaily.com.cn/china/2009-04/16/content_7683625.htm
Me: Well, multiply that by four. That was just their GDP for a quarter.
Student: So the U.S. deficit makes up about a sixteenth of its GDP?
Me: Yes. And the Chinese also get higher Investment from their practice of mercantilism. They are so effective at suppressing consumption, that their people only spend about half of their GDP on consumption. They're like the "small" countries in Guns or Butter. [Note: This is an economics simulation game that we play in my class. The "small" countries in the game have a lower consumption requirement and are thus able to grow faster than the other size countries.]
Student: Wow
Student: Is this done by state planning, propaganda, managing imports, protecting industries, etc?
Me: Well, it's done through a wide variety of methods including suppressing wages, fixing the currency exchange rate at a low level so that foreign-made goods are expensive, and ordering banks not to make loans for consumption.
Student: very interesting
Me: The average citizen in China has to pay a whopping interest rate if he wants to borrow money. Meanwhile, the Chinese government earns less than 1% lending to the United States.
Student: What does the government stand to gain from reducing its domestic demand so much?
Me: Rapid economic growth.
Student: ok
Me: The mercantilist country manipulates the exchange rate and trade so that investments in its country are profitable and investments in the victim country are not.
Me: As a result, they get investment and the victim country doesn't.
Me: Investment drives long-term growth.
Student: You mean foreign investment?
Student: I'm a little muddled up here.
Me: Don't confuse the term "foreign investment" with what I am talking about, which is "Fixed Investment".
Student: ok
Me: "Foreign Investment" is another term for "foreign savings".
Student: Right
Me: "Fixed Investment" is the "Investment" in the equation for Aggregate Demand.
Student: Ok
Me: It means new factories, retooling of factories, research into new products, that sort of thing
Me: It is part of Aggregate Demand in the short run, but it is more important as the driver of long-term growth.
Student: Right.
Student: The exchange rate gives a higher rate of return on investment in China?
Me: Well, yes. That and the mercantilist country's other manipulations insure that investments in their country are more profitable and investments in the victim country are less profitable.
Me: For example, take windmills.
Me: Currently both China and the US have windmill producing factories.
Me: The market for windmills is growing rapidly.
Me: All the businesses that want to build new windmill factories will probably do so outside the United States because they know that if they built them in the United States, Chinese windmills would steal their business and make them unprofitable.
Student: ok
Student: Wow!
Me: So eventually China will dominate the market for windmills. The world's corporations think that, so it will come true.
Me: They don't think that the United States will change its policy.
Student: Thanks so much - I have to go now, but this was really informative.
Monday, November 9, 2009
G-20 finance ministers approve "a timetable for agreeing on policies to help rebalance the global economy."
The above quote comes from the Wall Street Journal article about the summit last weekend in St. Andrews Scotland. Once I learn the details of the timetable, I will let you know.
What's wrong with trade deficits?
Howard Richman
One of my students read somewhere that trade deficits are a sign of economic health. Indeed, when trade deficits are caused by an inflow of investment because a country is a good place to invest, as the United States was during the 19th Century, then trade deficits are a sign of economic health. Any negative effects are overcome by increasing GDP due to the investment.
However, when trade deficits are caused by foreign governments forcing in their countries' savings as part of their trade manipulations in order to make their goods more competive and that country's goods less competitive, the trade deficits have three negative results:
Thus trade deficits have differing long-term effects upon an economy depending upon their cause. If they result from increased investment, they can be a sign of economic health. If they cause reduced investment they are inevitably bad for an economy.
One of my students read somewhere that trade deficits are a sign of economic health. Indeed, when trade deficits are caused by an inflow of investment because a country is a good place to invest, as the United States was during the 19th Century, then trade deficits are a sign of economic health. Any negative effects are overcome by increasing GDP due to the investment.
However, when trade deficits are caused by foreign governments forcing in their countries' savings as part of their trade manipulations in order to make their goods more competive and that country's goods less competitive, the trade deficits have three negative results:
- 1. Persistent Depression. As John Maynard Keynes noted, they can cause a state of persistent economic depression, mainly because they decrease aggregate demand for a country's products. The United States may be experiencing this symptom at present.
- 2. Reduced Investment. They make a county's products less competitive in its own markets and in foreign markets. Net American manufacturing investment has been extremely low in recent years as a result of our foreign-government produced trade deficits, as shown in the following graph:
- 3. Foreign Debt. Just as accumulated government budget deficits can add into a large government debt, accumulating trade deficits can result in a large foreign debt, meaning that the country has to pay more and more interest and dividends to foreigners and the country's currency eventually crashes. The following graph shows America's foreign debt that has resulted from our accumulating trade deficits:
Thus trade deficits have differing long-term effects upon an economy depending upon their cause. If they result from increased investment, they can be a sign of economic health. If they cause reduced investment they are inevitably bad for an economy.
Sunday, November 8, 2009
Green Jobs that Can Be Outsourced
Howard Richman
President Barack Obama has frequently claimed that his energy policies will create "millions of new American jobs that pay well and cannot be outsourced." But as United Steel Workers President Leo Gerard warned in a commentary Friday, they can and probably will be outsourced. He began with a recently proposed project, being considered in Washington, to buy Chinese windmills with US taxpayer money:
Meanwhile, the Chinese government prevents American-made parts from contaminating Chinese-made windmills. According to a Financial Times story, American parts will continue to be excluded despite an agreement that was recently negotiated:
And American made solar panels and solar panel parts are also being excluded from China as noted by University of Maryland economist Peter Morici in a recent Business Week interview:
If companies locate their factories in China, they can sell to both the United States and to China, while if they locate in the United States, they can't sell to China. In a September 16 New York Times column, Thomas L. Friedman, noted that Applied Materials, the American company that is the world’s leader in producing the machines that produce solar panels, has built all of their factories abroad. He wrote:
Later in the article, he pointed out that it is even worse that that. Applied's inventing won't be done here for long, perhaps so that their research can be close to their factories:
According to the theory of "comparative advantage," each country produces what it produces relatively efficiently while trading with the other countries for what they produce relatively efficiently. But "comparative advantage" requires balanced trade to work. For every $1 we import from China, the Chinese government only allows its people to import about 25¢ from us.
Our trade with China operates on the "mercantilist" principle. China produces what it produces relatively efficiently as well as what we produce relatively efficiently. They trade goods with us and get our assets, IOUs and industries in return. China grows, we shrink, and eventually Chinese communism dominates the world while American democracy is buried.
We don't have to keep taking this. We could demand that China's government start balancing trade, else we would balance it through auctioned Import Certificates that would limit the value of our imports from China to the value of their imports from us. Such import limitations would be in perfect accordance with a special WTO rule for trade deficit countries which states:
If we were to implement this policy, China would be forced to take down their many barriers to American products. Not only would U.S. manufacturing employment immediately turn around, but the new business investment that we would get in our manufacturing sector would pull the U.S. economy right out of the Great Recession.
Unless President Obama requires balanced trade, his energy policies could produce lots of green jobs in China and very few in the United States.
President Barack Obama has frequently claimed that his energy policies will create "millions of new American jobs that pay well and cannot be outsourced." But as United Steel Workers President Leo Gerard warned in a commentary Friday, they can and probably will be outsourced. He began with a recently proposed project, being considered in Washington, to buy Chinese windmills with US taxpayer money:
Taking candy from a baby: A consortium of Chinese and American companies goes to Washington and announces plans to build a $1.5 billion windmill farm in West Texas using $450 million in U.S. Stimulus funds, which will create 2,330 jobs – 2,000 of them in China.
Meanwhile, the Chinese government prevents American-made parts from contaminating Chinese-made windmills. According to a Financial Times story, American parts will continue to be excluded despite an agreement that was recently negotiated:
At the [US-China meeting in Hangzhou] last week, China agreed ... to relax restrictions on importing wind power components. However, Paulo Soares, head of the Chinese operations of Suzlon, the Indian wind power group, said the new rules would make little difference. “The big companies already have installed manufacturing operations and established supply chains, so it is not going to change anything,” he said.
And American made solar panels and solar panel parts are also being excluded from China as noted by University of Maryland economist Peter Morici in a recent Business Week interview:
China does a lot of things that make it difficult for companies to export into the country. Take, for example, solar panels. The two big markets for solar panels going forward are China and the U.S. But China requires that 75% of the contents of solar panels sold in China be made domestically. We don't.
If companies locate their factories in China, they can sell to both the United States and to China, while if they locate in the United States, they can't sell to China. In a September 16 New York Times column, Thomas L. Friedman, noted that Applied Materials, the American company that is the world’s leader in producing the machines that produce solar panels, has built all of their factories abroad. He wrote:
The other day, [Applied Materials’ CEO Mike] Splinter gave me a tour of the company’s Silicon Valley facility, culminating with a visit to its “war room,” where Applied maintains a real-time global interaction with all 14 solar panel factories it’s built around the world in the last two years. I could only laugh because crying would have been too embarrassing.Not a single one is in America.Let’s see: five are in Germany, four are in China, one is in Spain, one is in India, one is in Italy, one is in Taiwan and one is even in Abu Dhabi….
Later in the article, he pointed out that it is even worse that that. Applied's inventing won't be done here for long, perhaps so that their research can be close to their factories:
In October, Applied will be opening the world’s largest solar research center — in Xian, China….
According to the theory of "comparative advantage," each country produces what it produces relatively efficiently while trading with the other countries for what they produce relatively efficiently. But "comparative advantage" requires balanced trade to work. For every $1 we import from China, the Chinese government only allows its people to import about 25¢ from us.
Our trade with China operates on the "mercantilist" principle. China produces what it produces relatively efficiently as well as what we produce relatively efficiently. They trade goods with us and get our assets, IOUs and industries in return. China grows, we shrink, and eventually Chinese communism dominates the world while American democracy is buried.
We don't have to keep taking this. We could demand that China's government start balancing trade, else we would balance it through auctioned Import Certificates that would limit the value of our imports from China to the value of their imports from us. Such import limitations would be in perfect accordance with a special WTO rule for trade deficit countries which states:
(A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.
If we were to implement this policy, China would be forced to take down their many barriers to American products. Not only would U.S. manufacturing employment immediately turn around, but the new business investment that we would get in our manufacturing sector would pull the U.S. economy right out of the Great Recession.
Unless President Obama requires balanced trade, his energy policies could produce lots of green jobs in China and very few in the United States.
Friday, November 6, 2009
Obama's Plan A has failed, But Plan B looks promising
Howard Richman
President Obama's Plan A tested the proposition that you can fix an economic crisis caused by too much borrowing from abroad for consumption, by borrowing more money from abroad for consumption. So far it hasn't worked.
The latest unemployment numbers are out, showing that the jobs created by his Recovery Act are largely imaginary. The blue line shows the projected unemployment rate at the inception of the plan. The red squares show the actual unemployment rate which just rose from 9.8% in September to 10.2% in October.
If we were to implement this policy, not only would U.S. manufacturing employment immediately turn around, but the new business investment that we would get in our manufacturing sector would pull the U.S. economy right out of the Great Recession.
Not only that, the Asian countries would be forced to stop suppressing their people's consumption, including their consumption of imports. The result would be a much higher standard of living for the people of Asia.
President Obama's Plan A tested the proposition that you can fix an economic crisis caused by too much borrowing from abroad for consumption, by borrowing more money from abroad for consumption. So far it hasn't worked.
The latest unemployment numbers are out, showing that the jobs created by his Recovery Act are largely imaginary. The blue line shows the projected unemployment rate at the inception of the plan. The red squares show the actual unemployment rate which just rose from 9.8% in September to 10.2% in October.
The employment numbers in the manufacturing sector continued their steady decline, as manufacturing shed 61,000 more jobs in October as shown in the graph below:
These falling manufacturing employment numbers come despite the fall of the dollar vs. the European and Japanese currencies, perhaps because China continues to peg its currency to the dollar, and many Asian countries have resumed their currency manipulations so as not to lose market share to China.
Plan B is Balanced Trade
Meanwhile, there is hope on the horizon. Balanced trade is precisely the remedy required for a trade deficit economy whose consumers are too deeply in debt to keep spending beyond their incomes.
The G-20 leaders are finally addressing the trade imbalances that are preventing recovery from the Great Recession. This weekend, the G-20 finance ministers will meet in St. Andrews, Scotland. According to Reuters they are "expected to focus on a framework to foster future balanced trade."
This is an excellent development. I am a little bit worried about the word "future," though, in the above statement. It may take lots of time for the world to negotiate the framework that could lead to balanced trade. And the question remains whether or not the Asian countries will cooperate and whether the West will have the fortitude to take coordinated actions against the Asian countries if they refuse.
Treasury Secretary Geithner could show that he means business. He could begin to balance trade now, without waiting for a framework for balanced trade to be negotiated. All he would have to do is tell the Asian countries that they had better start balancing trade with us by taking down their barriers to our exports and ending their currency manipulations, or we will start limiting our imports from them to the level of their imports from us. Such a policy would be in perfect accordance with WTO rules which state:
(A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.
If we were to implement this policy, not only would U.S. manufacturing employment immediately turn around, but the new business investment that we would get in our manufacturing sector would pull the U.S. economy right out of the Great Recession.
Not only that, the Asian countries would be forced to stop suppressing their people's consumption, including their consumption of imports. The result would be a much higher standard of living for the people of Asia.
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