Deficit

Obama’s Home And The Report Is Out: China Takes Us To School

Eric Lotke — Thu, 19 Nov 2009 08:04:38 -0800

President Obama is home from China and the U.S.-China Economic and Security Review Commission today releases its 2009 report to Congress. What have we learned? That we need to pay attention because we’re getting schooled.

While Obama posed for photos on the Great Wall and talked about a relationship “at an all-time high," China continues to take our lunch money. Hopefully, there were serious back-room negotiations over currency manipulation and illegal subsidies … because if not, we’re in trouble.

Don’t take my word for it. The official, bipartisan China commission held hearings, traveled to China and received closed briefings on classified information. They reported back about expansion of the Chinese navy, China’s stepped-up espionage and cyber-warfare capabilities, and the world’s most sophisticated web filtering and Internet control systems.

But the economy is behind it all. China is quite literally eating our lunch. Since 1980, the U.S. has accumulated a trade deficit with China of nearly $2 trillion. The biggest piece of this trade deficit is in manufactured goods, once the wellspring of American prosperity. And a big piece of that comes from China subsidizing industries and manipulating currency in a way that gives their exports a competitive edge. China then takes our money and lends it back to us, creating both national indebtedness and a destabilizing excess of liquidity that helped fuel our asset bubbles.

This year's report reflects the commission's concern that despite its accomplishments and growing sense of confidence, China may be moving in the wrong direction and that this affects the U.S.-China relationship. China has yet to embrace the challenge first issued in 2005 by the United States that it become a "responsible stakeholder" in world affairs (p. 15).

The report reads like an indictment of Chinese behavior and American compliance. The most glaring problem is the subsidies.

China continues to employ a wide range of subsidies to favored companies and industries within China and to control the value of its currency and provide massive loans from state-owned banks to industries producing over capacity. This approach gives Chinese exporters a substantial price advantage in international markets and disadvantages U.S. companies hoping to export to China.(p. 15).

The report itemizes subsidies in the form of land grants, discounted electricity, and loans from state banks at below market interest rates or “without expectation of repayment” (p. 59). As a whole, the commission concludes that the subsidies and special treatment of Chinese-owned companies “violate China’s obligations as a member of the World Trade Organization” (p. 59).

The report goes on to describe export restrictions (p. 62), currency manipulation (p. 68), double-standards on domestic content (p. 52, 64) and China’s failure to enforce its laws on forced labor, child labor and environmental standards (p. 67) that were key to gaining international investment and foreign government support. The findings go far to explain why products made in China are so much cheaper than products made in America, and the incentives behind our gargantuan and growing imbalance in trade.

The report also explains how the imbalance goes beyond the trade in goods, and helped bring the whole system down. The commission places responsibility for the global economic meltdown “partially on the United States as the world's biggest spender and borrower and partially on China as the world's biggest saver and lender.” But it’s not because Chinese are inherently parsimonious or frugal. “China pursues policies that have the effect of increasing Chinese savings, restraining consumption, and keeping the RMB (renminbi) undervalued” (p. 3). The saving was as out of balance as the spending.

The imbalance extends all the way to the banks. China had hundreds of billions of American dollars, and needed something to do with them all, so they lent them back to us. “The policies that China adopted generated a huge flow of liquidity —or money that can be easily lent to borrowers — into U.S. markets. This excess liquidity created perverse incentives in the United States that encouraged banks to make risky loans to U.S. households, which in turn grew ever more indebted. High U.S. demand for imports allowed China to save even more, creating a vicious cycle and laying the foundation for the current crisis” (p. 4).

So it collapsed. The unstable structure tumbled down.

In the aftermath, the U.S. passed its own Recovery Act and led efforts for international collaboration. But what did China do? More of the same. The commission reports that China stimulated its economy by raising rebates to exporters and offering other advantages to see manufacturers through the downturn (p. 40). In the words of the Commission:

The fact that the government in Beijing is still pursuing an export-led strategy based on a wide variety of subsidies to export industries, including an RMB that remains substantially undervalued, is a cause for concern. If China continues to pursue huge trade and investment surpluses and to accumulate vast financial claims, it will hinder the necessary global economic adjustment, create excess manufacturing capacity, and lay the groundwork for the next crisis.” (p. 2)

We don’t need to watch it fall apart all over again. Cheap Chinese exports to distressed U.S. consumers are not the answer. The report advances 42 specific recommendations, from responding to currency manipulation to increasing our defenses against cyber-espionage. A crucial minimum is aggressive use of World Trade Organization trade remedies. We’ve started moving in that direction with cases on tires and steel pipes. The Commission recommends that the U.S. government preserve and use existing remedy laws “to respond to China's unfair or predatory trade activities” (p. 12).

Obviously, nobody wants to start a trade war and nobody thinks we can unwind the global economy. This isn't about protectionism or going backwards. It’s about building a global economy with agreed-upon rules of free trade that every country follows. From rugby to poker, rules make systems work. Following rules is what China agreed to when it entered the G-20 and was granted permanent normal trade relations with the U.S.

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There’s a purely domestic angle, too. Between the lines of criticism is a hidden story, implicit advice about fixing our own economy. Parts were illegal and parts were unfair, but China’s success shows how deliberate industrial policy helped it accomplish strategic goals. Indeed, a summary of China’s misdeeds reads almost like a “how-to” list for industrial policy: Subsidize strategic industries, especially energy (p. 57, 65). Enhance innovation by creating “industrial commons,” clusters of producers, suppliers and researchers in close proximity who support each other in uncovering problems and discovering solutions (p. 87). Build an infrastructure, especially on transportation, with domestically produced parts (p. 64).

Now the U.S. can’t be like China in every regard, and we wouldn’t want to be. But we might as well learn some lessons while we’re in school. As the Commission observes, “A widely shared goal in China is to make the country rich and powerful and to regain the nation’s former status as a great power that controls its own fate” (p. 56).

That’s their goal and they made a plan to achieve it. What’s our goal? How are we going to get there?

Bernanke Solves The Wrong Deficit

Eric Lotke — Mon, 19 Oct 2009 18:55:54 -0700

Federal Reserve chairman Ben Bernanke recognized today that America’s trade deficit played a central role in the global economic crisis. Then after he recognized the problem, he went on to solve a different one.

Start with the real problem, America’s trade deficit. America is spending more than it earns, and buying more than it’s selling. Our trade deficit in 2008 was $706 billion.

We know we’re addicted to oil. We’re also addicted to cheap stuff imported from China (made cheap by devalued currency and near-zero workplace or environmental protections). America’s problem is a huge efflux of dollars, as our wealth departs for foreign lands.

The Asian export tigers have a smaller problem, but they have one too – an excessive reliance on excessive American consumption. The danger is, in Bernanke’s own words, “ever-increasing and unsustainable imbalances in trade and capital flows.”

So America has a trade deficit. The world has an unsustainable imbalance. That’s ungood.

Bernake’s solution to this trade deficit? Reduce the federal budget deficit.

If you listen quickly, it may sound like reducing a deficit to reduce the deficit. But listen carefully. Bernanke wants to reduce a different deficit.

Sure, the federal budget deficit is high. It may be a problem (though not as bad as it seems) but it’s a different problem.

The ultimate underlying problem is this trade deficit. And we need to solve it. We need to solve it the good old fashioned way. By making things, building things and selling things. Fundamentally, we need to sell more than we buy. That’s what Bernanke said the problem was.

And to solve that problem – the trade deficit – government spending may be needed in the short term. We may need to stimulate the economy by building roads, train tracks and windmills – investments that increase our productivity over time. We may need to invest in research and development of ideas whose commercial application will come later (think internet). In short, we may need to eat some federal budget deficit in the short run to solve the problem of both deficits in the long run.

Ironically, the recession has been good for our trade deficit. We can’t buy as much and don’t have as much money to spend. But it can’t last and we don’t want it to. We want to rebuild our economy, though differently this time. The current crisis must plant the seeds for the economy of the future. That’s the conclusion Bernanke flirted with, but didn’t say.

The American People: Smarter Than They Look On TV

Eric Lotke — Tue, 13 Oct 2009 08:51:21 -0700

New public opinion research by the Economic Policy Institute contains reassuring findings. The American people are smarter than they sometimes look on TV.

The survey of 802 registered voters in September 2009, revealed a clear sense of who’s winning and who’s losing in the economy and politics. People were asked who “the government's policies to deal with the economic recession have helped.” The frontrunner was “large banks” (62 percent) followed by “Wall Street investment companies” (54 percent). Trailing way behind were “people who have lost their jobs or had their hours cut back” (15 percent) and the “average working person” (13 percent). “Me and my family” came in last place at ten percent.

Joe the teabagger might be getting hoodwinked about who he should march against -- but he knows who (still) calls the shots in Washington. He’s right to be angry.

Source: Economic Policy Institute

The EPI survey contains findings ratified elsewhere about economic pessimism. 85 percent of registered voters think the country is “still in recession” and 73 percent rate economic conditions as “not so good” or “poor.” 83 percent consider unemployment a “big problem.” Lack of jobs is the biggest problem in the economy, followed closely by the federal deficit and the cost of health care.

But EPI probes deeper than most surveys, and reveals profound insights about American long range thinking. Specifically focusing on the deficit, EPI asks whether it is better resolved by investing in “job creation, education and energy” or by “cutting government spending.” More than three times as many Americans preferred investment to cuts (73 v. 24 percent).

Source: Economic Policy Institute

This mirrors findings from our own poll, taken at this time last year, just before the election. We asked, “Which should be a higher priority for Congress: Expanding public investments that create jobs, even if that means increasing the budget deficit, OR reducing the budget deficit, even if that means not making new investments to create jobs.”

Source: Campaign for America's Future

Expanding public investments solidly outscored reducing the deficit (48 percent vs. 37 percent). The finding was consistent in both red states (by a 12-point margin) and blue states (by a 10-point margin).

The preference held even when we asked the question in political terms: "Democrats in Congress favor passing new economic recovery legislation designed to boost the economy and create jobs by increasing investments in areas such as transportation, energy, health care, and education, and by helping families struggling with high food and energy prices. President Bush and Republicans in Congress oppose the legislation, which they say is just more wasteful, pork-barrel spending and earmarks that will not help our economy and will lead to tax increases in the future.”

Again, people favored long-term investments: 52 percent of likely voters sided with investing Democrats. Only 36 percent sided with tax-cutting Republicans.

What does this mean? It means the noisy teabaggers and the mainstream media worried about high deficits and government spending are the start but not the end of the story. There’s much more. We need to look beyond the urgency and the noise.

If we ask the right questions or push in the right direction, the American people might come with us. Long range investments. Spending on infrastructure or education. A whole raft of progressive goals that cost money in the short term but will grow the economy and reduce the deficit in the long run.

It’s work but we can get there. The American people are smarter than they sometimes look on TV. They're capable of understanding long range investments, and they're willing to look ahead.

The Misplaced Tough-Mindedness of National-Debt Hawks

OurFuture.org Staff — Tue, 13 Oct 2009 06:33:53 -0700

Deficit reduction: DOs and DON’Ts

Eric Lotke — Wed, 30 Sep 2009 18:02:51 -0700

The forum on American debt and deficit had it right. First, don’t panic. Don’t stop the stimulus spending or raise taxes with the economy still near the bottom.

The Center for American Progress and Center on Budget and Policy Priorities convened the forum. Guests included Paul Krugman (NYT), Robert Reischauer (Urban Institute, OMB), Senator Mark Warner (D-VA), and some all star academics.

I won’t attempt a blow-by-blow but some main themes emerged. First, a strong consensus on what NOT to do:

-- DON’T panic at the size of the deficit or worship at the feet of debt reduction.

-- DON’T stop the stimulus spending or raise taxes in the short term. We’re still in the depths of recession. Consumers aren’t spending and neither is business. The government needs to drive demand in the short run. If we quit now, we’ll likely tip back over the wrong side of the precipice.

These charts aren’t from the forum, but can help reduce the panic. America’s debt is high, but well within historical and international norms.

Source: OMB history, 1930-2008; CBO projections, 2009-11

Source: CIA

Those are DON’Ts from the forum. There were DOs as well:

-- DO worry about debt in the long term. Our progressive goals – education, health care, high speed rail, help for the needy – cost money. Negative budget numbers make it hard to reach our goals.

-- DO talk about more than just cuts.

Conservatives discuss the budget in terms of spending, and demand cuts. But there are other ways to shrink the deficit. Most obvious is to grow the economy, even if it takes stimulus or infrastructure spending to get there. That’s a different way to shrink the deficit as a percent of GDP.

-- DO go ahead and talk about raising revenues. “Raising revenues” is better language than “tax hikes,” and it opens more doors. Closing loopholes and corporate exemptions are also ways to raise revenue. We might give those Bush tax cuts some extra years during the recession, but ultimately we need to raise revenue. Don’t fall for the conservative framework of a one-side ledger, with spending-cuts as the only path to balance. The ledger has a revenue side as well; we can also level up.

-- DO link what we get with what it costs and where the money comes from. Nobody likes taxes. But people realize that schools and roads cost money. Package them all together.

Behind all of this lurk some political cautions. The ghost of Peter Orszag was often heard, reminding us that the budget problem is a health care problem. We need to fix health care (Medicare and Medicaid, not Social Security) to fix the budget.

Senator Warner recommended that Democrats find some spending cuts or new efficiencies to show good faith effort to control costs. They need to earn the taxpayers’ trust with their money.

Charlie Cook (Cook Political Report) warned that Democrats are likely to lose seats in the 2010 midterm elections, and will have more Senate seats than Republicans open or at risk in 2012. The American people are always suspicious of government, and nowadays they’re angry. They don’t trust government with their money.

Maybe the frustration comes from Republican failures after Hurricane Katrina, Bush bungling in Iraq or the current recession … but it’s the Democrats’ government now, and distrust is the Democrats’ problem. The current distrust jeopardizes long term progressive goals.

The conclusion: DON’T quit the stimulus yet; it’s too soon. But DO attend to the debt in the long run. It’s important both politically and financially to the progressive mission.

The G-20: Lessons from Pittsburgh

Eric Lotke — Mon, 21 Sep 2009 03:11:01 -0700

The G-20 Summit is in Pittsburgh later this week. Leaders from the 20 countries that collectively represent two-thirds of the world’s population, 80 percent of world trade and 90 percent of global gross national product, will meet to discuss the global economy and terms of trade.

It is fitting that they meet in Pittsburgh. Steel City is renowned for the slump in its dominant industry, followed by what President Obama called a “world-class” transition to a diversified economy, including higher education, bio-tech and clean energy. The good news is true enough — credit where due — but the praise misses half the story.

Yes, some manufacturing jobs in Pittsburgh were replaced by high-end jobs in education or medicine. But many were replaced by jobs in hotels and food services — jobs that never paid as well and proved even more vulnerable in the recent downturn. Some manufacturing jobs were never replaced at all. That helps explain why the city’s population is declining, especially among youth, who seek opportunity elsewhere.

Two lessons from Pittsburgh are important for the United States and the G-20 Summit. We discuss them in our new report, Pittsburgh, G-20, and the New Economy — Lessons to Learn, Choices to Make.

The first lesson is the importance of the real economy. America grew up as an industrial superpower, from mass-produced automobiles to the Arsenal of Democracy. But our once-robust system of economic production — the invention, design and manufacture of products — has been steadily eroded. In its place has come an economy based on asset bubbles and foreign borrowing. That economy was never sustainable and is no longer available.

We need to dispel the notion that America has moved beyond the production of goods. From cars to computers to refrigerators, a country needs things. If we don’t make those things here, then someone else gets our money.

Too many modern Americans associate manufacturing with horse carts and buggy whips. We think of dirty old industries that economic evolution will naturally replace with high-end services in America and low-wage workers in other countries. We don’t appreciate that manufacturing still constitutes 12 percent of U.S. gross domestic product, 60 percent of U.S. exports and 70 percent of private sector research and development. If we hope to move beyond the production of goods, we need to think what would replace it.

We tried over the past thirty years to replace goods-producing jobs (down 54 percent) with service-providing jobs (up 34 percent). It hasn’t worked so well. First, because our deficit in goods far exceeds our surplus in services -- $840 billion versus $160 billion-- so our accounts are out of balance. Second, service jobs don’t pay as well. Even in the broad category of “services” — which includes high-end professionals like doctors, lawyers and investment brokers — service-providing jobs have an average weekly wage of $610 compared with $810 in the goods-producing sector. Service jobs pay 75 cents for every dollar paid a production job. Retail jobs pay 50 cents.

Source: BEA and Campaign for America's Future.

This change helps explain the “lost decade” in the latest Census Bureau data. Median household income dropped a thousand dollars in the ten years before 2008, the only ten year period in census records in which incomes failed to rise. It’s easy to predict that 2009 will be even worse.

The second lesson from Pittsburgh is the connection between the production of goods and their sale. Trade, that is.

Many countries find it appropriate to enact protectionist and mercantilist polices to their individual advantage. The U.S. generally does not, however, citing its ideological commitment to free trade.

As a result, steel manufactured in Pittsburgh is competing against steel manufactured in China with devalued currency, government subsidies, deeply suppressed labor rights, and lower (cheaper) environmental and safety standards. Many products imported into America violate safety standards that U.S. manufacturers are required to obey, like lead-based paint in toys and pesticides in foods. American producers bear the cost of higher standards for the benefit of American citizens. Other countries avoid these costs with minimal consequences in the U.S. market.

The G-20 Summit in Pittsburgh provides an opportunity for Americans to look at what’s happening, and ask hard questions. It provides opportunity to move beyond shibboleths of free trade and protectionism, and to question the true functioning of the market. Obama’s decision to apply tariffs to remedy the “market disruption” of tires from China is a first step in this new direction.

The Summit also provides an opportunity to examine American patterns of production and consumption. Even when the economy was growing, America ran a current account deficit in excess of $700 billion every year. We borrowed $2 billion every day to cover the difference. That might have worked well for the countries we bought and borrowed from — but it worked less well for America. It was never sustainable, anyway.

As the G-20 leaders plan a recovery from the global downturn, they should not assume that the United States will remain the world’s consumer— spending more than we earn, and paying for it with personal and national debt. The G-20 must chart the process by which the global economy that emerges from the crisis is more balanced, and less dependent on U.S. consumption. Growth must be sustainable in Pittsburgh as well as Beijing.

Obama Plans to Reform Economy, Not Just Health Insurance

Leo Gerard — Wed, 16 Sep 2009 11:51:43 -0700

Let's go back, just for a minute, to a time before screaming teabaggers, before Republicans decided to kill health insurance reform as a means to politically destroy this country's first African-American president.

Try and remember what it was like before discussion of health insurance reform raised voices, a time when instead it raised concern. Recollect Aug. 7, 2007, during the Democratic primaries, when then-60-year-old retired and disabled steelworker Steve Skvara stood at a microphone during a political debate and told his story with tears in his eyes and a catch in his throat.

He'd worked more than 30 years at LTV Steel in East Chicago, Ind., and assumed like many who earned pensions and retiree health coverage that those benefits were guaranteed. But then LTV went bankrupt and ditched its obligations. Skvara told the candidates:

"Every day of my life, I sit at the kitchen table across from the woman who devoted 36 years of her life to my family and I can't afford her health care. What's wrong with America, and what will you do to change it?"
Skvara asked that question two years ago when 45 million Americans lacked health insurance. Now 46.3 million are without it.

And yet, teabaggers and Republicans are bent on preventing reform. They want to ensure only one thing - that another million Americans suffer no health coverage two years from now.
President Obama invoked Skvara's name at the AFL-CIO convention in Pittsburgh on Sept. 15 in a speech about the middle class.

Mostly Skvara is a symbol of health insurance failure. But to Obama, he's an emblem of something much bigger. It is a struggle of economic philosophies. For the past 20 years, the winning view has been that government should give breaks to big corporations and rich individuals. Obama told the AFL-CIO he believes in something different -- an economy built on a vibrant and wide middle class.

Here's what he said:

"For over half a century, the success of America has been built on the success of our middle class. It was the creation of the middle class that lifted this nation up in the wake of a great depression. It was the expansion of the middle class that opened the doors of opportunity to millions more. It was a strong middle class that powered American industries, propelled America's economy, and made the 20th Century the first American Century.
And the fundamental test of our time is whether we will heed this lesson; whether we will let America become a nation of the very rich and the very poor, of the haves and the have nots; or whether we will remain true to the promise of this country and build a future where the success of all of us is build on the success of each of us."

Because of the extraordinary cost of health care in this country, insurance is a middle class issue. Health insurance can make or break a family - place it firmly in the middle class if an employer provides a good plan or bankrupt it if a family loses coverage during a serious illness.

Obama said as much to the AFL-CIO: "We'll grow our middle class by finally providing quality, affordable health insurance in this country."

Just this week, the Kaiser Family Foundation released a report showing premiums for family coverage rose 130 percent over the past decade. They now average $13,375, which is about the same as the entire annual take-home pay of a minimum wage worker.

Coverage is not affordable. The price of it is pushing families down the economic ladder. Look what it did to Skvara. He had been a middle class steelworker and remained in the middle class after retirement. But he moved toward poverty after the LTV bankruptcy cost his wife her health insurance coverage. Loss of health insurance and the ensuing medical bills robs families of their life savings, their homes, everything until they're bankrupt.
Skvara asked the candidates what was wrong with America and what would they do to fix it. Obama's plan for fixing health insurance would forbid dropping or denying coverage because a person is sick or has a pre-existing condition.

He wants the public option to provide competition so that rates are affordable. That public option would cover Skvara's wife - at a reasonable cost. So he could remain in the middle class and not find himself asking heartbreaking questions at public meetings.

The teabaggers are apoplectic because this isn't just about health care. This is about the values of a government.
The Obama administration fails to fawn over the affluent.

Instead, Obama talked of downtrodden workers in the former Jones & Laughlin Steel mill in Aliquippa. Bosses there fired a dozen workers shortly after the National Labor Relations Act passed in 1935. The workers, mostly union organizers, challenged the dismissals all the way the U.S. Supreme Court, securing a landmark win that not only got them their jobs back, but also affirmed the constitutionality of the labor law that led to the burgeoning of union organizing, and the growth of America's large, stable middle class.

To win that case, Obama told the AFL-CIO convention, workers of different ethnicities and faiths had to work together and stick together. That will be necessary to win this struggle to reform health insurance as well. But that reform is only the first part of Obama's plan for the middle class:

"We will make possible the dreams of middle class families and make real the promise of the United States of America."

That's worth fighting for.

Obama Shows Encouraging Signs on China, But Is It A Smokescreen?

Mike Elk — Fri, 11 Sep 2009 12:02:54 -0700

In recent days, the Administration has made encouraging signs that it plans to enforce U.S. trade law, but is it smoke screen for advancing a free trade agenda?.

Today, it came that Senator Harry Reid and the Office of U.S. Trade Representative are in support of putting safeguards on illegal, surging Chinese tire imports.

In a letter to the President on September 2, Harry Reid said:

In order to help move U.S. trade policy forward, we must restore the confidence in our farmers, workers and domestic producers that when they work hard and play by the rules, their government will move aggressively to enforce U.S rights under trade agreements, to implement our trade remedy laws, and to fight for their interests.

The recommendation by Senate leadership and the United States Trade Representative seems to indicate that President Obama is going to follow through on his campaign promise to enforce U.S. trade laws. It also comes on the heels of encouraging news yesterday that United States Department of Commerce has decided to place tariffs on illegal pipe imports from China.

However the devil remains in the details.

On a press call this week, Steelworkers President Leo Gerard was critical of a compromise tariff remedy being floated by some. U.S. tire importers have suggested a tariff of 7 to 15 percent, which Gerard characterized as being ineffective. The International Trade Commission determined that the proper remedy is a 55 percent tariff that would decrease by 10 percent annually and expire after three years, which is what the Steelworkers are advocating.

Additionally, some remain skeptical if Obama intends to enforce U.S. trade law in these instances in order to gain support for upcoming trade deals with Columbia and Panama.

Columbia has a notorious record of killing trade unionists. Since 1991, over 2,200 trade unionists have been assassinated in Columbia by corporate run gangs. Panama is considered the second biggest tax haven in the world behind Hong Kong.

As a result, both deals have been unable to get through Congress, so far. However, some feel if the Administration shows its support for fair trade in these instances involving China, that it will curry favor with members of Congress that have concerns about both of these trade deals. Even Senator Reid in his letter said that enforcing U.S. trade in the China tire case is vital for winning support for future trade deals.

While the Administration is making some initially encouraging signs on trade, only over time will we know whether the Administration truly intends to pursue a policy of fair trade that leads to prosperity in all nations. Until then we must remain vigilant that they remain true to their commitment to workers right and trade that works for everybody not just Wall Street and fat cat CEO's.

"China Tire Case": Obama Trade Policy Decision Nears

Dave Johnson — Wed, 09 Sep 2009 10:04:02 -0700

President Obama faces a tough decision soon that will signal how his administration will tackle the problem of balancing our trade policies. This is the upcoming "Section 421 Tire Case" decision. Summary: American has been importing more and more tires from China while closing tire plants here. The surge in imports violates an agreement known as "Section 421" that we made with China when they entered the World Trade Organization. The US International Trade Commission has ruled that China is violating Section 421 and recommended tariffs on tire imports. Obama has until September 17 to choose to implement this remedy, ignore it or do something in between. (Click through to a post with a number of links to background information on this decisions.)

When these trade issues came up in the past President Bush always decided against American manufacturers, allowing China and others to capture one industry after another, forcing more and more American factories to close and building up the huge trade deficit that forces us to borrow ... from China. The resulting trade deficit meant that we had to borrow more and more money to buy things that we used to just make for ourselves.

And this meant fewer and fewer well-paying jobs for our citizens. This also meant that the American consumer, the “engine” of the world economy, finally ran out of shopping power. The economic collapse shows that trade policies that make the American people poorer just make everyone else poorer, too.

So this case is part of a bigger picture. The real issue goes beyond trade. The real issue is getting America's economy back in balance for the long term with real jobs that are not dependent on financial or housing or stock market bubbles. The issue is the larger economic paradigm, not the resulting slowdown. To get there America needs a real industrial policy that takes a national view of the importance of manufacturing and supports it through: investment, education, R&D, etc. as well as trade policy.

One trade ruling doesn't do that, but it will signal whether President Obama is ready to take on a tough fight and tackle this problem. The appointment of Ron Bloom as Senior Counselor for Manufacturing Policy is a solid beginning in the right direction. According to the White House Bloom will assist with “the President’s agenda to revitalize the manufacturing sector.” Just having an agenda to revitalize the manufacturing sector is an important and and promising step!

Of course, at the same time, this is a tough challenge. Obama's predecessor dug the country into a deep hole. Thanks to the "free trade" policies that got us where we are today, China is our banker and it is very difficult to go against your banker's wishes. However, our trade partners would do well to recognize that the American consumer is the engine of economic growth, and well-paying jobs are the engine of that consumption. Trade policies based on raising living standards on both sides of the border solves this problem.

Bob Borosage writes today, in Obama's Next Speech: Telling Our Banker We Want Out of Debt,

Next week, the president will address the convention of the labor federation, the AFLCIO ... That same week, he must decide what to do about the ruling of the International Trade Commission recommending that he slap tariffs of up to 55% on rubber tires being dumped in the U.S. market by the Chinese.

[. . .] We can't recover the old economy -- and shouldn't want to. … We were shipping jobs, not goods abroad, losing three million manufacturing jobs under Bush before the crash while the economy was growing. Not surprisingly, wages stagnated, family incomes lost ground, debts soared. And that was in the good times.

[. . .] [China] lends us the money to buy the goods that American companies make with jobs and technology they sent there. It does so because it pursues what has been a remarkably successful mercantilist policy designed to make it the dominant global center of manufacturing, a 21st century version of what the U.S. did in the late 1800s and early part of the 20th century.

. . . China has to be weaned of its export addiction, just as America has to revive its ability to make things in America. This is best done cooperatively, with a grand bargain revaluing the Chinese currency, while both nations join others in creating a more balanced global economy. But at the end of the day, it won't happen unless the U.S. is ready to stand up and act to protect its interests.

Some predict Obama will take the middle ground. From The Hill today,

“The deadline for his decision comes on the eve of the G-20 heads-of-state meeting in the Steel City on Sept. 24-25. G-20 leaders have pledged to avoid protectionism, and just last week Treasury Secretary Timothy Geithner joined other finance ministers in the group to reaffirm the U.S. commitment to fight all forms of protectionism.

[. . .] The best option for Obama might be to find middle ground. He can go along with the ITC’s recommendation, and he may also reject it completely. He can also impose tariffs somewhat smaller that those proposed by the commission, which might make both sides unhappy but allow the president to say he has found a middle ground.”

From U.S. Steel Pushes Obama to Choose Workers Over Trade,

“The one thing that is on the line here is the president’s credibility,” said Scott Paul, executive director of the Alliance for American Manufacturing, a coalition of steel companies such as Pittsburgh, Pennsylvania-based U.S. Steel and the steelworkers union. “If they want to pursue an activist trade agenda, they need to pursue an active enforcement agenda, and this is the first thing on their plate.”

On April 14, 2008, candidate Obama spoke to the United Steelworkers in Pittsburgh, a week before the contested Democratic primary in Pennsylvania.

“I have consistently supported in the Senate going after China,” Obama said then, after embracing union President Leo Gerard. “Here’s the thing that people don’t understand: China needs our market. Their economy is dependent on exports to the United States. We have bargaining power.”

Keep an eye on this. It is not just about tire imports, it will signal the direction that the Obama administration will take.

The Deficit: More Perspective, Less Hysteria, Please.

Eric Lotke — Wed, 26 Aug 2009 13:30:23 -0700

The Congressional Budget Office published revised estimates about the deficit, and people are hyperventilating. “[B]urying our children and grandchildren under a mountain of unsustainable debt,” declared House minority leader John Boehner (R-Ohio).

Leave aside for a moment the cause of the deficit. The Economic Policy Institute shows that the biggest cause was the Bush tax cuts, followed by the war in Iraq. Even the stimulus bill and the bank bailout shrink by comparison. And the CBO’s revision upwards is more about the shrinking economy (and declining tax revenue) than new government spending.

What’s most important is perspective. Our deficit is high, but it is not extraordinary by historical or international norms. Seen as dollars, the deficit is frighteningly large (trillions, yikes!). But America has a gigantic economy. To gain perspective, economists usually measure deficits as a percent of GDP. Viewed that way, the deficit seems more manageable.

The CBO estimates a deficit this year of $1.6 trillion. It measures our economy as $14.1 trillion, making the deficit 11.2% of our GDP. It’s a lot. But it can be managed. It is like a person who earns $30,000 and ends the year with a $3,400 deficit. Irresponsible if it bought a plasma TV. A strategic investment if it bought education or a new set of tools. America ran a budget deficit for most of our stunning post-war boom.

Source: OMB history, 1930-2008; CBO projections, 2009-11

Even if we look at the accumulated debt, not the annual deficit, the U.S. level of debt is lower than most advanced industrial countries’ – and during the current crisis, many other countries are, like the U.S., raising their deficits to meet current needs. In 2008, France’s public debt was 64 percent of its GDP; Germany’s was 63 percent. Japan sets the scale at 170 percent.

Source: CIA

This perspective may help us to calm down. It may help us to see why former Labor Secretary Robert Reich wants the deficit to be even bigger. “With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.”

Build the roads. Build the bridges. Borrow the money. Put people to work. The best way to shrink the deficit as a percent of GDP is to grow the economy.