Wednesday, November 19, 2008

"The New New Deal"

NEW YORK, New York -- So, what country is going to get us out of the global slowdown/credit crunch/recession/financial crisis/depression/incomparable disaster? That's a question that a number of European and Asian executives, financiers and officials took up this week in Barcelona, with speakers apparently divided between the US and China as the potential savior of the global economy.

While some of the European participants in the Global China Business Meeting, sponsored by Horasis, a Swiss consultancy, reportedly said China and other "emerging" countries would pull the world out of recession, others noted the limitations of China as a global economic power and called on the US to do more:

“China cannot replace the U.S. economy as the engine of global growth,” said Chang Dae Whan, chairman of Maeil, a South Korean newspaper company. “We’re going to need a huge stimulus package from the United States, on the order of $2 trillion, to get the global economy out of the financial crisis. So far, we’ve only seen about $700 billion. As a result, next year I expect to see more pain and fear.”

As Mr Chang noted, the US government will need to do a lot more if it wants to be the country that leads the world from the recession. As
Clive Crook wrote a week ago, the stimulus package recently announced by the Chinese Communist Party, at approximately $600Bn, represents some 15% of China's GDP. When that package was announced, the US Congress was dithering about passing a stimulus thought to be $100Bn to $200Bn (0.75% to 1.5% of GDP).

And though nobody can really say what will end the global slump we're heading into, a (temporary) return to Keynesian economics seems to be the best solution I've heard. As Paul Krugman writes, we should recognize that we are in extenuating circumstances: The usual lever that policymakers have on the economy -- interest rates -- no longer seem to have any effect on, well, anything. When we fall into those sorts of troubled waters where the usual policy mechanisms have come asunder, an FDR-style shot in the arm is needed.

You start building roads and public transportation and magically people have productive (i.e., non-Wal-Mart/retail) jobs building real things; factories open up to build trains, trolleys, solar panels and turbines; and even if you don't have a silver bullet for the economy immediately, it's a step in the right direction -- more paychecks means fewer foreclosures and, eventually, rising consumer confidence. Of course, the physical end product, improved infrastructure, yields tangible and long-lasting economic benefits as well.

Obama's plans for the economy include a $60Bn National Infrastructure Bank that would coordinate targeted, intelligent funding of important infrastructure projects across the country and an renewables-based energy strategy. There are also worker-retraining and Broadband Internet accessibility plans. But perhaps the most interesting -- and certainly most overlooked -- aspect of his economic plans is a call to build up a 21st-century manufacturing sector based upon advanced technologies. You put federal funding toward researching robotics and advanced manufacturing techniques that eliminate much of the labor component in the production of goods and it suddenly becomes realistic to make things in the US for export. And that as a result of increased competitiveness, not protectionism. With that production comes new factory jobs and, more importantly, R&D, distribution and managerial jobs.

No, the old factory jobs making sneakers or textiles won't come back as they were. But if we can build new, roboticized techniques to produce those goods, we'll be able to do so at competitive costs by cutting way down on labor, and in doing so we won't be building up massive trade imbalances or eroding higher-margin jobs designing what factories make or managing what those factories do.

The US, then, needs to pass a larger stimulus package not only to prove it can throw more public money at a recession than China can or even because it needs to end the current recession. Done correctly, a stimulus package could pull the country out of its longer-term economic funk and create a sounder footing for the future.

For 8 years it's been quite clear that the direction of the US economy -- moving toward ever-greater levels of consumer spending and household debt and ever-less production of actual, exportable goods -- has been unsustainable and reckless in the long term. Median incomes are trapped in a long-term decline, and unemployment is soaring after 4.3 million manufacturing jobs were lost in 1998-2008.

It seems equally clear that embracing services (financial or otherwise) as a substitute for a full, diversified economy with a significant manufacturing sector leads to its own problems: From the producer countries' point of view, why should they sit by and make everything while "services" nations take the plum, high-paying jobs? From the employers' POV, why should you continue to pay bankers in NYC loads when you can pay bankers in Mumbai $10K per year? And from the POV of common sense, why have managers and consultants in London when everything you actually produce is in China? Why not have the managers and consultants where the action is actually happening and remove the difficulty of communication and coordination?

By using the opportunity presented by the current mess to begin to think about the long-term sustainability of the economy and change the fundamentals, we could end up doing more good than we're bargaining for. As a starting point, let's admit that the "Chimerica" team seems to have ended up with egg on its face: By keeping the yuan down and its exports hyper-competitive in the US, the Chinese government amassed a $2 trillion warchest in recent years through seizing $0.50 on every dollar US consumers send to China. Much of that money made its way back to the US in the form of purchases of US dollars and Treasury notes, as well as US mortgages and credit. China, in other words, invested in certain types of US bonds and securities that had the effect of keeping its own currency down and keeping credit cheap for US consumers. That cheap credit and devalued currency meant US consumers kept on buying Chinese products out of thin air -- our Castle-in-the-Sky Economy. And it ended ... not very ... well, you get the picture.

The massive current-account deficits the US built up from 1999 (when Bill Clinton allowed Permanent Normalized Trade Relations with China) and a reliance on credit propped up by China -- rather than production of real goods -- for consumer purchases were going to come crashing down sooner or later. It seems, oddly, like we got off easily as they crashed just 8 years after Clinton's PNTR took effect. Now is our time to pull out of this Faustian bargain before we resurrect it.

Obama and Congress need to pass a package big enough to make a fundamental difference, and Obama must continue to have the sense to invest in building up the US manufacturing sectors rather than think (wrongly) that the US can be a nation of consultants, bankers, lawyers ... and janitors and Wal-Mart salespeople ... and nobody in the middle, and still have a functioning economy.

Whether the US is able to get its act together and pull the world out of recession is obviously yet to be determined. However, it seems this crisis offers America a fairly interesting opportunity to put its long-term economic fundamentals on sounder footing.

A few relevant articles:

No comments:

Post a Comment