Trade

The One Thing That Will Help Restore U.S.-China Trade Balance

Dave Johnson — Thu, 19 Nov 2009 15:01:48 -0800

Have you heard of the U.S.-China Economic and Security Review Commission? Their job is to assess the national security implications of the trade and economic relationship between the United States and the People's Republic of China. Actually, that’s a big deal, especially now.

I joined a conference call today as the Commission today released its 2009 report to Congress. Here is a link to the audio of today's conference call.

Eric Lotke summarizes the report, in the post, Obama’s Home And The Report Is Out: China Takes Us To School

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. ...

[. . .] The report reads like an indictment of Chinese behavior and American compliance.

Eric continues with a summary of the report and lays out how the imbalances with China contributed to the economic collapse. Go to his post and read the rest.

One thing that came up in the call—featuring Carolyn Bartholomew, the chair of the U.S.-China Economic and Security Review Commission, and Clyde Prestowitz, the president of the Economic Strategy Institute—is that there is always an excuse not to do something about China's protectionism and the resulting trade imbalances. Today the excuse is that they loan us so much money (because of the Reagan/Bush debt and because we don't make things we used to make, and have to borrow money to buy them from China now) and if we make them mad they will stop loaning us money.

“This is sort of the elephant in the living room, the concern that the U.S. can’t do anything because the Chinese will stop buying our debt," said Bartholomew during the call. Before that, the argument was we couldn't upset the Chinese because then they won't help us with North Korea. At other times we couldn't do it because China had nukes. There is always an excuse for China's trade imbalance. But the fact is that China needs to sell into our market and this gives us a lot of leverage to use to improve the balance of trade.

"This fear that we can’t do anything to stick up for our own rights because if we do they will shop buying up our debt is just false. It’s just not going to happen.”

During the call I asked a question along the lines of, "If we can only do one thing, what’s the one thing we can do to get the greatest bang-for-buck?" The answer was:

1) Currency rates. Chinese manipulation of currency brings them an approximately 40 percent price advantage.
2) Industrial policy, which they prefer to call “innovation strategy.” Every other country has a strategic plan to help their own manufacturers and other businesses compete in the world. We don't.

(Yes, I know that's two things. Nothing is easy. "Nuanced" was the word they used.)

It is critical that we do something about Chinese deliberate undervaluation of their currency. It amounts to a 40 percent subsidy of Chinese goods by their government. That is just huge. and so when people look at where to buy something—consumer goods, steel, etc. they start out with a 40 percent price advantage. Changing China's currency to market rates would remove this price advantage and help bring manufacturing—and jobs—back to the U.S.

The idea that we need to develop a national policy or strategy or whatever you want to call it is essential to our future. And this is something that we aren't doing for ourselves, not something that someone else is doing to us. The first part of this is the language problem. If we try to call it an "industrial policy," the idea is immediately attacked as "the government shouldn't be picking winners and losers." This is, of course, just the usual anti-government nonsense, because by doing nothing the government is currently picking China as the winner and the people of the United States as the losers.

Unfortunately, name-calling seems to be an effective tactic for blocking government action. Some have suggested variations on the wording "economic strategy" or "innovation strategy." Whatever you want to call it, we need to do it. need to have some sort of national economic and innovation policy and strategy that helps Americans organize and helps us figure out how to respond to some of these things," Bartholomew said.

Listen to the call and read the report. We are losing manufacturing, and with it we are losing our ability to compete in the future! We are putting our national security at risk. By losing manufacturing we also lose the supply chain that supplies the manufacturers. And of course we lose the ability to make things which we then sell in order to obtain the money with which to buy things. If you don't make things to trade with you have to borrow.

The worst thing, though, that we lose is the research and development capability that drives the manufacturing. This is the very thing the right and the free-traders said we would keep if we let the outsourcers have their way. They said outsource what someone else does cheaper, and keep the intellectual property. But as Bartholomew points out, we are losing the research and development, and the high-tech, and the manufacturing processes -- the things that people with enough education and skill would be able to do, which are the drivers of the supposed information economy. Right.

"As China is moving up the value-added chain, it's luring r&d, so the research and development is following the manufacturing, and once you've lost your research and development capacity as well as your manufacturing capacity, you lose your innovation capability, you lose your innovative edge," Bartholomew said. "So I think how we talk about this issue moving forward is going to be very important."

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.

♦ ♦ ♦

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?

Obama's Asian Angst

Scott Paul — Wed, 18 Nov 2009 07:07:34 -0800

I like that President Obama accords his Asian peers with respect, bowing if tradition calls for it, even though it raises the hackles of some wingnuts. But bowing to the wishes of China is another matter altogether. I'm completely underwhelmed with the results of the President's trip to China, especially with so much at stake. And I write this as someone who has had very high hopes for this administration and its fresh approach to trade policy with China in particular.

U.S.-China relations are at "an all-time high" only if the administration is referring to the levels of our bilateral trade deficit and debt financing. On every issue—exchange rates, market access, and even the terms of the broadcast of the town hall meeting—the president was outmaneuvered by a Chinese government that is growing in confidence every day.

A CNN poll released this week revealed that more than 70 percent of Americans believe that China is a serious economic threat. I believe the administration understands what is at stake, but politely and deferentially asking China to make changes is not likely to result in much success.

Most media analysis of the U.S.-China economic relationship has focused on our dependence on China for debt financing. It's true, but we do have other options. China, on the other hand, doesn't have an alternative to America's rich consumer market for its goods. America has much more leverage than most pundits think. And we can wield it without igniting a tit-for-tat trade war.

China, I believe, wants to be treated with the dignity and respect of a rising economic power. The Obama administration should have made clear exactly how that could have been accomplished: playing by the rules of global trade, achieving balance in its current account, and taking steps to ensure that more Chinese are able to share in the country's prosperity.

American voters have a visceral response to jobs shipped overseas, a trend that Obama said he would address as a candidate. Less than a year out from the midterm elections, this looms as a major political problem, as well as an economic one.

The Washington Times Was Against Protectionism Before It Was For It

Dave Johnson — Mon, 16 Nov 2009 15:00:48 -0800

President Obama is visiting Asia, and is blasted over and over about America's supposedly "protectionist" policies.

"China on Monday accused the United States of increasing protectionism..."

Think about it, the country with the massive trade surplus accuses the country with the massive trade deficit of being "protectionist." Call it The Audacity Of Projection.

Our trade opponents have learned that all they have to do is shout the word “protectionist” and their American enablers will quickly run from doing anything that might help American companies and workers. But what happens later, when the consequences start hitting home? Do the "free trade" shouting, foreign-competition enablers take the blame and accept responsibility when Amercan dollars are spent overseas and American workers lose jobs and American factories close? Who could have known that they would point the finger at the President instead of themselves?

Here is what I am talking about:

On February 8, 2009, during the debate over the stimulus package, the conservative Washington Times joined the "free trade" chorus, denouncing the package's proposed "Buy American" requirements as the same kind of "protectionism" that conservative mythology says caused the Great Depression: EDITORIAL: How to cause a depression,

...Tucked within the economic stimulus bill the House passed last week was a clause requiring state and local public works agencies to buy American iron and steel for their reconstruction projects, and the Senate expanded it to all manufactured goods.

[. . .] The stimulus bill has a way to go before it reaches Mr. Obama's desk, but if strong "buy American" mandates are present at that time, he will have no choice but to veto the bill. Otherwise, he will be forever known as Barack H. (Hoover or Hawley) Obama.

Conservative free-traders got what they demanded. In response to these and other cries of “protectionism!” the Senate backed away from the Buy American clause, changing it to vague language requiring that the money be spent in ways consistent with existing treaties.

Since this wording gives the President some discretion in how the money is spent conservatives started demanding the President spend it ... outside of the country. For example, a Washington Times editorial on March 24, EDITORIAL: The Mexican-American War of 2009, ended by blasting President Obama for wanting American stimulus dollars to stimulate America's economy:

"Wasn't Mr. Obama going to be the "international" president who was going to get the rest of the world to love us? The path to improving relations does not involve destroying jobs in other countries as well as in our own."

So now it turns out that many stimulus dollars are being spent according to the wishes of the "free trade" conservatives, with money to purchase wind turbines creating jobs in Europe and China, and who could have known, the very same free-trade conservatives are JUST OUTRAGED that President Obama is sending American stimulus dollars out of the country! For example, a Washington Times editorial on November 13, EDITORIAL: Stimulus creates jobs in China, begins,

Of the $1 billion in clean-energy stimulus money spent since the beginning of September, $850 million has gone to foreign wind companies. It doesn't take a bunch of experts at a hastily planned "jobs summit" to discover this isn't the way to bolster employment in America.

Indeed, the 11 U.S. wind farms that received stimulus money from the Treasury have imported 695 of the 982 wind turbines to be installed, creating 4,500 jobs overseas. That's far more overseas work than the stimulus money has created in the United States.

Yes, how DARE they not require that American stimulus dollars be spent in America! This from the very same Washington Times editors who earlier in the year demanded exactly that.

Who could have known that conservatives would attack President Obama for the consequences of giving in to conservative demands??!! The Washington Times was against protectionism before they were for it. Call it The Audacity Of Hypocrisy.

The lesson to be learned here is to stop listening to these conservative, "free trade" clowns. They are only interested in making the rich richer at the expense of the rest of us and will say whatever advances that goal. We should start just doing what is right for the country, our workers, our factories, our companies and our jobs.

Back To Our Old Ways On Trade?

Dave Johnson — Fri, 13 Nov 2009 07:47:25 -0800

This just in from Reuters: U.S. trade deficit widened in September.

The U.S. trade deficit widened in September by an unexpectedly large 18.2 percent, the most in more than 10 years, as oil prices rose for the seventh straight month and imports from China bounded higher, a U.S. government report showed on Friday.

The gap in September was $36.4 billion.

In other words, we borrowed more money to buy things made elsewhere. We did that because a few decades ago we started exporting our manufacturing capacity. So now our trade profile looks like this: We export jobs and factories. Then we borrow money to buy more of the things we consume. Borrow, consume, borrow, consume.

How long with this unsustainable situation be able to continue this time? We know what happened last time. So our policy should not be it didn't work so we are doing more of it. We as a country should be capable of learning something.

And look what we exported:

The value of U.S. exports of industrial supplies, such as steelmaking material and gold, rose to $27.13 billion in September.

A big chunk of what we exported was materials for manufacturing things elsewhere!

President Obama is in Asia starting today, visiting Japan, Singapore,South Korea and China. China is the big one, of course, because of our balance of trade problem with that country. One subject of the discussions will be a word that is going to be heard a lot in coming months and years: rebalancing.

Yesterday in his post What Chinese Currency Manipulation Looks Like, Eric Lotke wrote about the problem of China keeping its currency artificially "pegged" to the U.S. dollar,

China’s deliberate policy of pegging the Yuan to the dollar makes American imports of Chinese goods artificially cheap and gives American companies opening factories in China an artificial subsidy. That’s good for China but bad for America, and helps explain our soaring trade imbalance with China. An extraordinary 83 percent of America’s non-oil trade deficit is with China. During the downturn, our trade deficit with other countries has been shrinking — but not with China.

So President Obama should insist that China stop this huge subsidy that is distorting trade across the world.

Here is another reason for China to stop this practice: it is keeping the Chinese people poor. Yes, on the one hand Chinese currency manipulation steals jobs from the rest of the world and brings them to China. But on the other hand, keeping their currency low keeps the people who get those jobs from being able to buy things made elsewhere. It keeps the prices on goods made outside of China much higher than market levels.

If China rebalances its currency to market levels the Chinese people's purchasing power would instantly increase. They would be able to buy the things we make, and this would stimulate manufacturing here. This rebalancing would be good for the Chinese people and for the rest of the world. It would help stimulate internal markets there as well as trade with the rest of the world. It would help us rebalance our debts and start earning the money to start paying backwhat we have borrowed.

So this is something China can do with the stroke of a pen to help rebalance the world economy, rebuild our manufacturing sector—providing good jobs here—and helping their own people to be able to enjoy the benefits of a world economy.

Trade and Creating Jobs

Dave Johnson — Mon, 09 Nov 2009 17:10:19 -0800

In the Wall Street Journal today, White House Hopes Trade Can Bolster Labor Market.

By increasing exports to rapidly growing countries like China and India, the U.S. could put a dent in joblessness and foster long-term economic growth without stressing the federal budget. But overhauling export policy is part of a White House approach that is in the early stages of execution.

Yes, there is a lot that can be done to improve our balance of trade and we finally, finally have an administration in charge that is interested in doing that. Under conservative policies we gave up so many of our exports, which cost so many jobs, and has put us in a disadvantaged bargaining position by borrowing so much from countries like China.

In the WSJ story two historical proponents of conservative policies unwittingly demonstrate just what I am talking about,

Some, including the U.S. Chamber of Commerce, complain that as long as a trio of stalled free trade agreements remain unratified, the administration is shunning the most direct way to quickly lift exports. ...

“We need these agreements to make these guys as open to us as we are to them,” said Frank Vargo, vice president of international economic affairs at the National Association of Manufacturers.

"We need to make them as open to use as we are to them." Right. Yes, we have trade policies now with these countries where our borders are open to their products but they are not open to ours. And just how did that happen?

The first part of fixing the jobs and trade deficit problem, while we wait to negotiate fair trade agreements that respect workers and the environment and boost standards of living on both sides of the border, is to send a message that we are not going to just hand our jobs and dollars out anymore. Let's make our borders exactly as open to their products as their are to ours while adjusting for wage and environmental differences. How hard is that to get?

New Unemployment, Old Solutions

Eric Lotke — Fri, 06 Nov 2009 09:09:34 -0800

Today’s unemployment data contain gloomy news. Gloomy, but expected. The interpretation of the data is even worse.

First, the data. Unemployment rose to 10.2 percent last month, breaking the double digit barrier. Most people expected it to happen, though the job loss (190,000) was a bit worse than most economic forecasts (175,000). We can maybe be happy that the October job loss wasn’t as high as September (263,000), but this modest deceleration doesn’t mean much to the 15.7 million people without work, the 9.3 million people working part-time but looking for full-time, or the 3.2 million people who are discouraged or marginally attached to the work force and barely even looking anymore. Nearly 20 percent of the workforce isn’t where it wants to be.

In other words, it’s bad. You don’t need me or the Bureau of Labor Statistics to tell you that.

The interesting part is where it’s bad and what to do about it.

The biggest job losses in October were in construction (62,000) and manufacturing (61,000). In the last year, these sectors have lost over 2.5 million jobs between them. Job losses in these sectors hurt worse than most other sectors. Manufacturing jobs have a bigger economic “multiplier” than other sectors, creating more jobs and more economic activity around them. Manufacturing creates jobs “downstream,” as production workers buy sandwiches from restaurants; and “upstream,” as steelworkers and coal miners work to provide raw material. The benefits of construction obviously count for more and last longer than just the construction itself. Anybody who doesn't live in a cave knows that.

But manufacturing and construction are losing more jobs than any other sector. Health care and temporary jobs are the only positive — if we can cheer sickness or a temp job.

Source: Bureau of Labor Statistics

This isn’t just a temporary blip. Construction is sinking from the burst of the housing bubble and general economic doldrums. Manufacturing is suffering from long term structural declines and a trade policy that favors imports over domestic production.

The solution leaps out from the data. These two sectors respond most clearly to public sector investment. During this downturn, we can build roads, rail lines and bridges. During this downturn, we can fix school roofs and turn temporary trailers for overcrowded schools into permanent classrooms for eager students. During this downturn, we can build the windmills and install the solar cells to move us towards energy independence. During this downturn we can rebuild a productive economy for the future.

Source: Bureau of Labor Statistics

Maybe a quarter of the 800 billion stimulus package pushed in this direction. We need more. First, we need more stimulus. Good old-fashioned Keynesian stimulus during the downturn. Put people to work laying those rail lines and fixing those school roofs.

Second, we need to make sure the money stays in our own economy. We can’t ask American taxpayers to foot the bill or expect American workers to cheer when the windmills of the new energy economy are imported from Spain. It’s no gift to our economy to fix the water main with pipes imported from China that were dumped in US markets at below market costs, driving our own domestic pipe industry out of business. We can do better. We need to do better.

I’ll close with the thing we don’t need, the interpretation I warned against in the beginning. The Associated Press story about today’s unemployment data put it this way: “A robust economic recovery won't be sustainable if consumers don't pick up their spending.”

Wrong wrong wrong. The debt-driven consumption economy was the problem. The solution is not for consumers without jobs to start spending again. The solution is to rebuild our economy. From the ground up. The old fashioned way.

Getting Serious With China -- New Pipe Tariff

Dave Johnson — Thu, 05 Nov 2009 21:03:52 -0800

The Obama administration is taking steps to begin rebalancing trade with China -- and creating JOBS. In this case it looks like China has been "dumping" steel pipes --selling at prices that are below market -- to capture business away from American companies, causing them to close factories and lay off workers. This is illegal, and the Obama administration just imposed a tariff designed to begin correcting this.

Just on the newswire, NY Times with a Bloomberg report,

The United States imposed duties of as much as 99 percent on steel pipes from China after American producers led by the U.S. Steel Corporation complained they were being dumped at below-market prices.

The duties on $2.6 billion in annual imports of the pipes, used in oil and gas wells, will be 36.5 percent for the 37 largest exporters, the Commerce Department said in a preliminary decision. The tariffs will be on top of separate duties announced in September averaging 21 percent to counter subsidies to Chinese producers.

From Financial Times, US slaps anti-dumping duties on steel pipe imports from China,

Anti-dumping duties are used when companies sell their products unfairly cheaply into foreign markets. Imports of the Chinese pipes, which are used in oil-drilling, surged 203 per cent between 2006 and 2008, according to the commerce department.

The duties range from 36.53 per cent for a select group of Chinese companies to 99.14 per cent for the rest. One manufacturer, Jiangsu Changbao Steel Tube Co, was exempted from the ruling.

. . . A final anti-dumping order will be issued if both the commerce department and the International Trade Commission decide that the imports "materially injure" the domestic industry, or at least threaten to do so.

In another sign of its muscular approach, the US this week asked for a World Trade Organisation disputes panel to investigate Chinese restrictions on exports of specialised raw materials used in industry. It was joined by the European Union and Mexico in claiming that China's restraints on some raw materials were driving up the cost of end products.

President Obama travels to China in ten days. It appears he is going there with a message that they are going to have to be a "fair and balanced" trade partner from now on.

We will post more information as it comes in.

P.S. The EU imposed tariffs on Chinese steel pipes in July for this reason.

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.

Fed Chief Says Trade Imbalance Helped Cause Crisis

Dave Johnson — Mon, 19 Oct 2009 11:51:01 -0700

Here is some news for you: Fed Chief Cites Trade Imbalances’ Role in Crisis,

Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday that global trade imbalances played a central role in the global economic crisis and warned that both the United States and fast-growing Asian nations needed to do more to prevent them from recurring.

[. . .] Asian countries needed to rely less on exports and more on their consumption at home for their economic growth. One way to increase Asian household consumption, he said, would be for countries like China to increase social insurance programs and reduce the uncertainty that currently hangs over many consumers.

In July I wrote a post asking, Did Free Trade Cause The Recession?,

For many years the world has suffered under a “free trade” regime that eliminates good paying jobs in every country, sending the work to countries that keep wages low and restrict workers' ability to organize for a better life. The profits went to an already-wealthy few and the inequities increased, wealth concentrating massively at the very top.

And now consumers around the world have run out of money. This is not a surprise. Did these trade policies cause the recession?

Bernanke's job is to see the issue in terms of money flows. Regular people see it as jobs. They can turn out to be the same thing, if the money flows are shared and reach the regular people. But when they don't and are concentrated among a few, be it a wealthy few corporate insiders or a country that is trying to take over all of the world's manufacturing for itself, regular people lose.

Bernanke is urging China to start consuming. This can mean jobs here - IF China adjusts its currency and starts to let their people buy things we make. Of course, that could also mean sucking up what is left of the planet's resources if it isn't managed in a thoughtful way.

He is also urging America to reduce our budget deficit. Of course, the huge budget deficit comes straight from the Reagan/Bush tax-cuts-for-the-rich. Is he endorsing a return to the 90% top tax rate that led to a stable economy in the past? If so this solves a lot of problems, reducing the incentive for executives to think short term, rebuilding the reliance of companies on local infrastructure. as well as funding that infrastructure again.

But if it is just more short-term thinking for short-term profits at the long-term expense of the rest of us, it will just be more of the same. And if the Wall Streeters remain in charge of the decision-making, this is what will happen. Sigh.