Monday, March 31, 2008

It's Not Our Fault

I was surprised to find this editorial in Forbes, usually a bastion of free markets and free trade. Peter Morici, a professor at the University of Maryland School of Business (good lord I hope he's not an economics professor) and former Chief Economist at the US International Trade Commission during the Clinton Administration, fills his editorial with attacks on China for everything from high oil prices to the mortgage mess:

Americans need to knock down some false gods.

Globalization is not an unalloyed good. We don't need 300-horsepower cars. And Wall Street is not a citadel of integrity.

The 1990s were the golden age of free trade. The U.S. sealed the North American Free Trade Agreement, launched the World Trade Organization and escorted China into that temple of global commerce.

The idea was simple: Americans would import more T-shirts and furniture and sell more industrial machinery and software to a world hungry for technology. Americans would move into higher-productivity export industries and earn higher incomes in the trade-off.

I don't know of anyone who has said that globalization is an unalloyed good. All economist know that globalization, which is nothing more than a fancy way of saying free trade, produces winners and losers. Economists also know, unlike apparently Mr. Morici, that there are more of the former than the latter. He is right that we don't need 300 HP cars; for people like Mr. Morici that means that we shouldn't want them or be able to get them. As for Wall Street, well anyone who thought that Wall Street existed to look out for ordinary investors just doesn't understand Wall Street. And did Mr. Morici really think the Chinese would not advance beyond T shirts and furniture? Sounds a tad snobbish to me; who do these Chinese people think they are making complicated high tech stuff? They're only supposed to make the stuff we don't want to make.

Imports soared much more rapidly than exports, the annual trade deficit jumped to more than $700 billion and Americans borrowed more than $6 trillion from foreigners to pay for two decades of trade deficits. This math permitted Americans to consume much more than we produced and spend more than we earned.

The trade deficit did not produce the debt; our own monetary policy is more to blame than free trade. Besides if the Chinese want to sell us stuff and finance it too while taking pretty pieces of green paper in exchange, I say we should do that as long they will allow it.

China is perhaps the biggest renegade in the mugging of the American middle class. The U.S. has slashed tariffs on Chinese products from auto parts to TVs, while China maintains much higher tariffs and notorious regulatory restrictions for U.S. exports in its market.

Topping it all, China subsidizes foreign purchases of its currency, the yuan, to the tune of $460 billion a year, making its products cheap on U.S. store shelves. The U.S. annual trade deficit with China is about $250 billion.

So China maintains higher tariffs than we do which means they are punishing their own citizens with higher costs for those goods. Does that mean we should punish US citizens too? And if the Chinese want to subsidize those imports by maintaining a cheap currency, well that just makes Chinese citizens worse off, not us.

Chinese growth has pushed up global petroleum prices nearly five fold in six years, and the U.S. oil deficit is now $350 billion and rising.

I guess devaluing the dollar and starting a war in the Middle East had nothing to do with those high oil prices.

The banks came up with more creative and risky mortgage products that permitted Americans to live beyond their means. We went from 10% down to 5% down to nothing down, with banks lending home buyers closing costs through second trusts.

Some loans that required no payback for five years even let folks dig deeper in their pockets on the premise that home prices would always go up. The banks sold these risky loans, bundled as bonds, to foreign investors like the Chinese government and foreign pension funds, as well as to U.S. insurance companies and corporations with cash to park. The bank executives paid themselves like royalty for the privilege of bilking trusting clients.

When the worst of the bonds--those backed by risking adjustable rate mortgages-- collapsed, the banks got stuck with billions of unsold bonds.

Most recently, Bear Stearns collapsed, and the U.S. Federal Reserve is lending the banks $600 billion against shaky bonds on a 90-day revolving basis. That essentially socializes the banks' losses on bad bonds.

I'm not sure why Mr. Morici transitioned to this bit about bankers, sub prime and Bear Stearns, but apparently these problems were caused by China too. I guess if those dastardly Chinese hadn't bought the mortgages the problem would have been avoided. Again, the problem was created by the Fed by leaving monetary policy too loose for too long. As for Bear, well there aren't any losses yet; what will Mr. Morici say if the Fed actually turns a profit off the Bear bailout? I'm not a fan of these kind of bailouts either but in this case, I think the Fed faced a decision of bailing out Bear or watching the entire debt besotted system collapse.

Getting out of this mess is going to require Americans to live within their means--a.k.a. cut the trade deficit--and throw out the rascals on Wall Street.

Living within our means has nothing to do with the trade deficit. Living within our means will require that the Federal Reserve stop making credit so easy to obtain - and that is already happening. It may reduce the trade deficit if we have a recession but that is an effect not a cause. If we close the trade deficit by raising tariffs we will just get inflation. I guess in a weird way that would cause us to live within our means as interest rates would no doubt go a lot higher, but it would seem a drastic means of achieving the desired end.

Cutting the trade deficit requires burning less gasoline and balancing commerce with China.

Americans must either let the price of gas double to force conservation or accept cars with tougher mileage standards. Fifty miles per gallon by 2020, instead of the 35 required by current law, is achievable, but that means more hybrids and lighter vehicles.

Okay, this is just nonsense. Americans should let the price of gas double? Are Americans doing something to prevent that? I can only guess that he advocates higher gas taxes since the market would double the price if demand were sufficient.

The U.S. government should tax dollar-yuan conversions at a rate equal to China's subsidies on yuan purchases until China stops manipulating currency markets. That would reduce imports from China, move a lot of production back home, raise U.S. productivity and workers incomes, and reduce the federal budget deficit.

I guess he can't bring himself to say the word tariff but this is just a tariff in disguise. And boy is this a magical tariff! It reduces the trade deficit, increases US manufacturing, raises productivity and workers incomes and reduces the budget deficit. Wow! I guess he forgot about the part where everything from production to consumption costs more too. I guess that doesn't matter. And who gets to decide how much China is subsidizing the Yuan? Mr. Morici? What is the appropriate rate of exchange for the Yuan?

Mr. Morici seems to believe that everyone is to blame for our problems except ourselves. We are in this mess primarily because of lousy monetary and fiscal policy, over which we have complete control. It's just so much easier to blame China than actually do what's necessary to resolve these problems on our own. Shame on Mr. Morici and shame of Forbes for publishing this tripe.

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