China

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."

Beyond Obama's China Trip: Facing The Economic Dragon

OurFuture.org Staff — Thu, 19 Nov 2009 12:30:38 -0800

On the heels of President Obama's trip to China, Carolyn Bartholomew, the chair of the U.S.-China Economic and Security Review Commission, and Clyde Prestowitz, the president of the Economic Strategy Institute, discuss how the United States should respond to the Chinese economic juggernaut.

Bartholomew and Prestowitz agree that the United States needs to respond to the Chinese government's efforts to boost their economy with our own "innovation strategy" that supports the strengthening of industries key to our energy and technology future. That strategy would include national incentives to businesses that would supplement, if not replace, the piecemeal efforts by states to woo foreign companies or keep domestic companies from leaving. They suggest that, contrary to the insistence of some doctrinaire free-marketeers, there are some steps that China is taking to build up its economy that we should emulate, and our bilateral negotiations should reflect that truth.

They also explain the importance of Chinese currency policy in constraining our own ability to grow our economy.

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.

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.

What Chinese Currency Manipulation Looks Like

Eric Lotke — Thu, 12 Nov 2009 11:15:28 -0800

As President Obama packs for China, I thought I’d show him a picture of how China is manipulating its currency.

Source: Federal Reserve: Yuan, Broad dollar index.
Graphic idea compliments of AAM.

The dollar stays flat against the Chinese Yuan, even as it loses value against other major currencies. The dollar is down to $1.50 per Euro, compared to $1.27 at this time last year (sorry to folks daydreaming about summer in Italy). It's down against the Canadian dollar, the Japanese yen and the entire "broad dollar index" tracked by the Federal Reserve. But the dollar is unchanged against the Chinese Yuan (unless one considers 6.836 to 6.827 a drop).

Everyone knows this is happening. Treasury Secretary Timothy Geithner even used the word “manipulating” with the Senate Finance Committee mere hours before it voted to recommend his confirmation.

The dollar exchange with China “defies the laws of monetary physics.” During this U.S.-led global recession, dollars aren’t worth as much as they once were. The natural physics of exchange makes U.S. goods relatively less expensive for others to buy, but makes foreign goods more expensive for Americans to buy. In a free market for currency, that would help bring accounts back into balance.

But China treats those laws as optional. 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.

The wheels of change are starting to turn. The Obama administration stood up to China when it imposed tariffs on Chinese tires and pipes dumped in the U.S. markets. The chattering class called it a trade war, but it’s not. It’s just applying the same rules of free trade that other countries respect, and that China agreed to when it entered the G-20 and was granted permanent normal trade relations with the US. Obama just blew the whistle.

The G-20 summit in Pittsburgh in September concluded with a joint statement to seek “more balanced growth as part of the global economic reconstruction.” The entire G-20 signed on — including China — but China’s name was in bold in the quest for “balance,” and everyone knew it.

Now America’s high level trip to Asia opens with a joint op-ed written by our own Timothy Geithner along with the finance ministers of Indonesia and Singapore. They repeat the goal of “strong and balanced growth” and expressly state that “Market-oriented exchange rates in line with economic fundamentals will be essential.”

China seems to be paying attention. In its third-quarter monetary policy report, the People's Bank of China suggested that it might consider other major currencies, not just the dollar, in guiding the exchange rate. That's not quite a free market float, but it's better than the dollar peg.

In the American heartland the issue isn’t exchange rates, of course. The issue is jobs. American workers can compete dollar for dollar against Chinese workers. They can’t compete dollars against manipulated Yuans.

America's economic future is intimately tied to China's. Let’s hope Barack Obama remembers who he’s working for.

Tripping in China: Barack Obama's Challenge

Robert Borosage — Thu, 12 Nov 2009 08:23:53 -0800

This week, Barack Obama trips to China as part of an eight-day trip to Asia. The White House paints a full agenda: Afghanistan, human rights, North Korean nukes, climate change, trade relations, and the economy. But it's really just the economy, stupid.

For decades during the Cold War, the U.S. gave security concerns priority over economic issues. Now the economy is our central security concern. It will simply be another measure of the administration's gathering calamity in Afghanistan if that is allowed to distract from the essential discussions about the economy.

On economic issues, Asian leaders, particularly the Chinese, are in the mood to deliver lectures, not receive them. It was the excesses of Wall Street that brought the world to its knees. And Asian nations, not burdened zombie banks or purblind conservative politicians, are enjoying a rapid recovery, after boosting demand with large-scale government spending.

But the president has a vital message to deliver. We can't go back to the old bubble-bust economy. That requires more than just financial reform. Central to that old economy was our relationship to the mercantilist nations of Asia, particularly China. For years, the U.S. consumed more than it made, running up record trade deficits. The Asian nations, particularly China, financed our consumption to increase their exports and market share. The Chinese kept their currency undervalued, hoarded dollars and bought up treasury bills, enabling the U.S. to borrow more and more without suffering rising interest rates. That helped inflate the housing bubble that finally blew up in our faces.

Correcting this imbalance—even as we move to meet the challenge of catastrophic climate change—is essential. Thus far, President Obama has forwarded this discussion carefully. He got the G-20 nations (including China) to establish a mandate for more balanced growth as part of the global economic reconstruction. The IMF has been tasked with monitoring— and pressuring—surplus as well as deficit nations to change their ways.

And the president has shown some teeth. He signed off on slapping temporary tariffs on cheap tires flooding in from China. Punitive tariffs have just been imposed on steel pipe dumped on the market by the Chinese. Serendipitously, the World Trade Organization ruled in August that Chinese restrictions on foreign publications, film and music imports are illegal.

The Chinese haven't gotten the message yet. They did a far better job than the administration in boosting their economy with a bold stimulus package, but much of the spending went to new infrastructure designed to boost exports. They continue to manipulate their currency while denying it. They decry protectionism while practicing it. They've now made a commitment to new energy, but significantly as an export industry, while continuing to open a coal-fired energy plant every week.

So what should the president do when he talks to our bankers in China? In public, for this president particularly, we can expect vision, not fireworks. We can hope for more candid discussions in private, with Secretary of State Hillary Clinton there to provide the needed grit. Here's what we should look for from Obama in public.

1. Forcefully State the New Reality

The President should forcefully state the new reality. We can't go back to the old imbalances. As recovery gains force, there must be adjustments in both surplus nations and deficit nations. This can be difficult and antagonistic or cooperative and mutually beneficial—but one way or the other, it must occur.

The U.S. has already begun. American consumers are tightening their belts, and have begun to save more and to pay down debts. The American government will invest more, and once the economy recovers, lower its deficits. The U.S. will export more and buy less from abroad. We will move to a more balanced trade posture.

Thus the surplus nations—whether Germany in Europe or China and Japan in Asia—must rely less on America as the source of demand. They should be consuming more of what they make. This can be immensely beneficial to their people. Workers should be empowered to gain better wages, and their societies can afford social supports from pensions to paid vacations. Service industries can expand. In emerging from the crisis, regional trade has already expanded faster than exports to the U.S.

2. Invoke the Vision of a New Age

The president should emphasize that the new economy will be built amid a new green industrial revolution. Catastrophic climate change, accelerating beyond scientific estimates, brooks no alternative. This, too, requires wrenching, massive transformation—but it also can be the source for growth and jobs as we balance the global economy.

Addressing catastrophic climate change will generate enormous demand—for new energy, for rebuilding old buildings, for new transportation systems. We will change the way we live, the way we travel, the way we work. This transition will generate new jobs, new inventions and new industries.

This transition can disintegrate into bitter disputes about who is to blame and who is to pay. Instead the president should focus on the challenges and the opportunities it presents. Mandating this transition can also help in the move to a more balanced global economy, fostering decentralized production closer to markets, just as the movement for slow food encourages local farming. Yes, we will need to assist poorer countries and poorer people within each country in the transition. Companies must not be allowed to undermine progress by playing off countries with weak environmental standards against those with stronger ones. But we should not let the costs and the disputes blind us to the opportunity.

3. Make Human Rights the Measure of Progress

The president should publicly reaffirm our commitment to human rights. The Declaration of Human Rights forged after World War II made protection of basic human rights, from freedom of speech to the right to organize to the right to a good job, the central charge of the peace. In the Cold War years, rivalry turned human rights into ideological weapons, with the U.S. championing free speech and property rights and the Soviet Union celebrating economic rights.

Now the president should reassert the reality that basic human rights are indivisible. And increasingly, we understand that they are also economic imperatives. A vibrant market cannot function without the rule of law. Free speech is essential to freedom of contract. To sustain growing economies over time, workers must have the right to organize so the blessings of growth can be widely shared. Basic protections like health care, education and old-age security make it possible for consumer societies to flourish.

4. Show Some Grit in Private

The private discussions will be and should be more contentious. The president needs to make it clear that the old days are over. The U.S. will move to more balanced trade. That means that we'll invest to make our own economy more productive. We'll slowly bring our budget deficits down as the economy recovers.

And we will enforce our trade laws. American states and localities will pass Buy America provisions. China should not be misled by corporate lobbies. It will find more and more resistance if it continues to play by a different set of rules.

The president should be clear about reality. China's currency is undervalued. This feeds the trade imbalances. It threatens China too, as investors will increasingly move to China, assuming that the currency must go up. The Chinese will risk a growing bubble in assets—housing, commercial property, stock markets—that could well expand and burst with destructive consequence. Abrupt unilateral moves could destabilize the dollar. We have a mutual interest in agreeing on currency adjustment.

The Chinese want the U.S. to recognize it as a market economy, to make it more difficult to penalize its trade malpractices. The president should be brutally candid about this. A mercantilist nation that doesn't play by the global rules will not be so recognized. A nation that doesn't enforce labor rights will get special scrutiny. A country that undervalues its currency for trade advantage doesn't qualify. Concessions on this will follow changes in practice, not promises of future reform.

Finally, the president should be frank about his human rights commitments. The U.S. will not seek to embarrass the Chinese generically. But the U.S. will remain an advocate of basic human rights. We will continue to report on violations, and condemn them when they are egregious. The president will meet with human rights champions, including the Dalai Lama.

Moreover, he should indicate that his administration will place increased emphasis on worker rights and decent work, as well as women's rights, both at home and abroad. We will seek to help countries move to empowering workers, to guaranteeing basic rights. We surely will reward those countries that are democracies that respect human rights over those that are not.

China and the U.S. have been in a long, intense relationship that is no longer functional. Renegotiating the terms won't be easy. Neither partner can afford a divorce. Both will find it difficult to change their own ways. Neither has exactly been straight with the other in the past. At best, this trip will lead both to agree that something must be done.

U.S. Stimulus Helping Chinese, Spanish Wind Energy Industries

Natasha Chart — Mon, 02 Nov 2009 23:53:57 -0800

Wind energy is supposed to be able to create thousands of manufacturing jobs, but unfortunately the early wind energy manufacturing jobs financed by U.S. stimulus money have all gone to overseas manufacturers. There are at least three reasons why this happens, some easier to fix than others.

The Easier Problem

First is the problem of U.S. wind-turbine manufacturing capacity. It's tiny.

This could be improved by the adoption of a well-designed feed-in tariff. Feed-in tariffs are where the government sets mandates for renewable energy and supports the purchase of the resulting electricity at a rate that pays for the initial market entry.

Feed-in tariffs are why Spain is one of the countries whose wind turbines are being purchased for installation in the U.S. Also, many countries have preferential purchasing policies at the local level, which don't violate World Trade Organization rules.

Both feed-in tariffs and state or local government 'buy American' policies could be implemented in full keeping with our international trade obligations and we should do so at once.

The U.S. needs to support its own industries, particularly those with significant environmental benefits, without apology.

The Somewhat Harder Problem

The U.S. government has a bad attitude towards manufacturing and has favored the making of money over the making of things for a long time, the more complicated the scheme, the better. And conventional wisdom from the Commerce Department to all the serious business press has held that offshoring and outsourcing US jobs would cause no net changes in the job picture overall, even if there might be an unfortunate backlash tendency among the public.

Indeed, the policy elite seem baffled when people get upset that their mill or factory job disappears and they had to take work stocking shelves at a store that sells the imported version of what they used to make. Politicians appear confused when workers with degrees in computer science react badly to being told to get an education. But their confusion is surely an act.

It's been clear for a while now that many industries leave and don't come back. Manufacturing capacity and know-how is shipped off first, then the high value research and development jobs follow after them.

Retraining, a solution that politicians like to promote along with stern bromides about 'personal responsibility', is only a solution that works if there are comparable jobs to train for. It only works if the finance industry is willing to invest in businesses that hire skilled Americans, and if the tax code stops advantaging companies who keep jobs and profits overseas.

The reality more Americans live with all the time is that their job prospects have gotten worse over the years, with employers and investors increasingly unwilling to share profits with them.

Obama recognized this when he was campaigning and newly elected, saying that he'd stop offshoring tax breaks all the way through the summer. As of the middle of October, business leaders had convinced the president to shelve those plans.

You might hear politicians, business leaders, news anchors and various policy wonks say that outsourcing creates jobs and increases real wages for Americans. This is a lie unless you're referring specifically to the top 10 percent of U.S. income earners, though wage inequality is a problem all around the globe.

Those offshoring tax breaks need to be rescinded, and more, policy makers need to connect start connecting the dots between an economy that makes useful things and one in which ordinary consumers can afford to buy them. One hedge fund manage making a million dollars off an overseas business deal isn't going to generate the same level of beneficial economic activity as twenty manufacturing workers making $50,000* per year, each.

The Very Challenging Problem

This problem is the real sticker, because unlike adjusting our own policies, economy, or leaders' attitudes, this one involves Chinese policy.

Wind turbines require rare earth elements for their manufacture, which make good permanent magnets, and this is also true of many other green technologies. As Keith Bradsher pointed out, "China currently accounts for 93 percent of production of so-called rare earth elements — and more than 99 percent of the output for two of these elements, dysprosium and terbium," and they've been both more tightly restricting exports every year, as well as securing controlling interests in overseas mines.

The Chinese government is well aware that most wealth is created farther down the value chain than simple extraction, that the real money is in processing and fabrication. They would like their people to earn that profit. Considering that I'd like my government to take the same attitude, I can hardly fault the Chinese on that count.

I even hope the Chinese do continue to grow their alternative energy manufacturing for their own domestic market in particular. At present, they're sending over 95 percent of their solar panels to be exported, while opening a new coal plant every 7-10 days.

Yet it significantly disadvantages manufacturing in other countries that the Chinese government won't allow the materials to be sold on the open market like other commodities.

The Obama administration, acting in concert with the European Union, filed a June complaint with the WTO about Chinese export restrictions of raw materials that have driven prices up for the steel industry. It might be a while before we know how that's going to turn out in the end. Perhaps rare earth mineral exports will be a target of future actions, or perhaps more clean, high grade deposits (rare earths are often found in low concentrations and contaminated with radioactive elements) will come to light that the Chinese don't control.

Either way, something's got to give.

A flourishing US wind industry that does more than installation and maintenance will require steady supplies of permanent magnets. Otherwise, they'll end up over the same barrel as Toyota, whose Prius hybrids use 12 kg of rare earth materials per battery and more for the motor, and whose component manufacture they're now under pressure to move to China.

These issues are solvable, but it'll take quite the fire getting lit underneath the US political establishment to get them sorted out.

* Speaking of which, the median US household income in 2007 was $50,740, and it dropped 3.6% in 2008.

Where Will the Jobs Come From?

Robert Borosage — Tue, 20 Oct 2009 23:35:35 -0700

They are popping the bubbly on Wall Street. Million-dollar bonuses, the Dow at 10,000, the casino is open again. Forget President Obama, who says we can't go back to an economy where finance pockets 40 percent of the profits. We're already headed there.

The current-account deficit is down as Americans have cut back spending. But the deficit with China is hitting new records; companies are still shipping manufacturing jobs over there. The dollar is down, but not against the Chinese currency. Forget about Federal Reserve Chair Ben Bernanke, who warns against going back to the unsustainable trade imbalances that led us over the cliff. The old patterns are coming back.

Key progressive leaders participating in the October 29, 2009 "Building the New Economy" conference in Washington address what it will take to ensure that the new economy that emerges from the wreckage of the old will provide Americans with good jobs.

Bernanke has announced that the recession is over, the recovery has begun. But to date, we are looking at a reversion, not a recovery. We've stopped the free fall, but we haven't changed direction. There can be no recovery to the old economy that crashed when the housing bubble burst. That economy depended on Americans spending more then they earned, borrowing ever greater amounts, treating their homes like at ATM machine, while the Chinese lent us the money to keep interest rates down so we could buy the goods our companies made with the jobs they shipped over there.

Now that old economy didn't work very well when it was growing. We lost high-wage manufacturing jobs during the supposed "recovery" under President Bush. Most Americans lost ground even while the economy was expanding. Household debts reached new highs. Inequality soared to Gilded Age extremes.

But now we can't even get back to that performance. Americans have lost some $13 trillion in assets. They are tightening belts and trying to pay down debts, terrified as jobs are lost, hours are cut and benefits are slashed. Consumers won't drive the U.S. economy, much less the world's. And businesses aren't investing because consumers are cutting back. They are increasing profits by laying off workers and cutting back expenses. States and localities are headed into severe layoffs of teachers and police. The economy isn't going to be buoyed by soaring exports to a world in recession. The only thing holding the economy up now is the deficit-financed stimulus plan and the automatic stabilizers like food stamps and unemployment benefits.

Where will the jobs come from? Wall Street can produce another bubble, but that won't put the 15 million without jobs to work, one-third of which have been out of work for at least six months.

Recovery requires fundamental reform of America's economic strategy. The old shibboleths of the conservative era—shrink government, cut top-end taxes, free multinationals to move jobs abroad, deregulate finance, wage war on labor unions, declare that trade deficits don't matter —have failed ignominiously. They must be discarded, like yesterday's rotted fruit.

Fundamental changes are needed. Trickle-down should be supplanted by public investment-led growth—large-scale public investments in areas vital to our future such as infrastructure, research and development, education and training. These investments should be deficit-funded until the economy actually starts putting people back to work, and then sustained and paid for through progressive tax reform. Tax speculative security transactions, generating $100 billion a year in revenue to invest in a 21st-century infrastructure that would put people to work and make the economy more productive. Raise top-end taxes, reduce inequality, and invest in making college affordable and exploring the green technologies of the future.

We've pursued tax cuts, promising private investments would flourish. But much of the productive investment and lavish consumption went abroad. In reality, public investment would be far more effective. We have a staggering public investment deficit that must be met for a world-efficient economy. Public investment is more likely to be invested, more likely to be spent here, more likely to create good jobs here, and far more likely to generate new technologies and productive private investments.

We need to complement this with a bold manufacturing strategy to make certain that we help lead the inevitable green industrial revolution, so the new technologies will be created and made in America. Shed the notion that we'll benefit by exporting windmills and solar cells and electric cars subsidized by China so that they are cheaper to us. We can't exchange dependence on foreign oil with dependence on foreign-made windmills. Make the public commitment to transition, and then use our purchasing power to invite the companies with the best technology to bid on contracts so long as they make it here in America. Not simply a timid-buy America policy satisfied with the final assembly of parts and technologies made elsewhere, but moving entire supply chains so that our workers and engineers and entrepreneurs are familiar with cutting-edge technologies that our inventors can soon surpass.

Complement this with a new global trade strategy. We can't go back to current account deficits over 6 percent of gross domestic product, financed by borrowing from abroad. China, now some three-quarters of our manufactured goods deficit, is by far the hub of the problem. The president has wisely called on the international community to adjust cooperatively, challenging the Chinese and other mercantilist nations to expand domestic demand and reduce their reliance on exports, while the U.S. exports more and buys less. But that isn't going to happen so long as the Chinese are free to manipulate their currency, subsidize their exports, savage their workers and environment, and mandate global corporations transfer jobs and technology to them. So we'll need to show some bite. A bold manufacturing policy around new energy will encourage companies, including Chinese companies, to make things here. But we should be debating putting a lid on our deficits, and announcing that we will move slowly to balance our trade. If all adjust, we can have more trade, not less, but we can't go back to the old imbalances no matter what they do.

These must be complemented by financial reform that curbs the gambling and forces banks to make loans to Main Street again, and by a high-wage policy—empowering workers, lifting the minimum wage, extending the public social contract. Finally, our economic policy, both monetary and fiscal, must be targeted at sustaining full employment as a priority, without letting inflation get completely out of control.

These ideas—heresies in the old conservative times—are but the beginning towards defining a new course. They will face fierce resistance from entrenched interests. But perhaps the biggest obstacle is the encrusted hold of old, bad ideas that should already have been discarded. You can see that in the calls for balancing the budget and cutting spending while unemployment is reaching new heights. Or the Republican chorus about cutting taxes, as if they had learned nothing. Or conservative Democrats railing against limited buy-American policies. Or the administration proclaiming its opposition to industrial policy. Or conservatives railing against excessive regulation.

Inertia and interest drive us to revert, not reform. Only it won't work. The old standards don't play anymore. Sure, Wall Street can generate another bubble or two. But there is no recovery on that old path—only stagnation, crushing long-term unemployment, growing inequality, a devastated middle class and a social tinderbox increasingly ready to explode. Eventually, we'll have to change our course; the only question is how much pain we have to endure before we actually learn our lessons.

Green Goods Tariffs Could Disappear Between OECD Nations, China

Natasha Chart — Tue, 13 Oct 2009 09:11:23 -0700

A deal being worked out to encourage China's agreement to steep emission cuts at the Copenhagen negotiations by eliminating tariffs on green goods among all the OECD countries and China may end up worsening the market for American made goods, but not inevitably.

Though the remark was retracted, a Chinese solar panel manufacturer admitted to dumping solar panels below the cost of production this year. Even the relatively robust German solar industry has been unable to entirely stave off the onslaught of lower cost products, though the German government does not intend to let them collapse. It's unclear that US manufacturers can expect that kind of support.

With an elimination of tariffs, will American solar panel manufacturers, and other manufacturers of green products be locked out of the market? Not necessarily.

As Rob Spiegel writes at EDN, manufacturing in China isn't a silver bullet for winning in the marketplace. There have been problems with quality controls, shipping costs have increased in the energy crunch, intellectual property theft is rampant and wage costs are going up thanks to unionization (one bright spot which is likely to create more of a consumer market there.)

In addition, a commitment to emission reductions may reduce China's pollution cost advantage. If they make an effort to clean up their act, and indications are that they've been pushing in that direction, Chinese cost savings based on ignoring pollution may gradually recede.

Labor advocates in the US have long been calling for a level playing field, where overseas industry had to compete under the same standards of labor and environmental protection as US industry. Though it sounds worrying to eliminate the tariffs, if China commits to serious pollution controls (and they need a lot of nudging on that score), that might mitigate the impact. If their homegrown trend towards unionization picks up steam, they may start pulling up the floor of the global race to the bottom and grow a middle class that can help boost global demand.

As worrying as short term happenings may be, there are encouraging long term trends that may develop beyond the lip service stage. Increases in wages and living standards, and presumably air quality, are going to have to be part of China's planning if they're to stave off further civil unrest.

While labor advocates should continue to push for a level playing field for US workers in any time scale, there are positive trends in this news that should be encouraged.

U.S. Debt Holders Looking to Abandon Dollar As Reserve Currency

Michael Kwiatkowski — Sun, 11 Oct 2009 14:05:34 -0700

Thanks to 'counterspin' at Open Left for posting this.

A number of countries, many if not most of them holders of U.S. debt, are seeking to create a "basket" of reserve currencies, thus severely weakening the U.S. dollar by taking away its status as the world sole reserve currency. The Independent reports:

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

Max Keiser, a former stockbroker and now activist, weighed in on the move on with RT

Robert Fisk, who also reported on this story, had some things to say.

Those doubting the credibility of this news story may do well to consider Robert Reich's article in The American Prospect a couple of years ago, back when the Second Great Depression began. Both foreign countries and American corporations have been unlinking their economies from the U.S. dollar, hoping to lessen the inevitable damage to themselves when they finally tell us, "buh-bye, and by the way, we want our money bitches!" That day is coming sooner than we care to think, and when it happens, be prepared for the worst.