Fixing America

The problem:
For U.S., China, uneasiness about economic co-dependency
Both sides benefit from relationship but feel limited by mutual needs
By Keith B. Richburg
Washington Post, 2009-11-16


The U.S. and Chinese economies --
the world’s largest and the fastest-growing major economy, respectively --

have become inextricably intertwined,
locked in a kind of co-dependency
that neither side thinks is particularly healthy,

but which for the moment neither will move to break.

As President Obama begins his three-day visit to China on Monday,
he finds himself in a country that depends largely on the United States
as the most important market for its cheap goods.
America, with growing budget deficits and a huge national debt,
depends on China as the main holder of U.S. Treasury securities,
with Beijing’s stockpile officially estimated to be nearly $800 billion.

The arrangement has created what many have called
a modern economic version of
the old Cold War doctrine of mutual assured destruction:
Either side could wreak havoc on the other,
but would be guaranteed to scuttle its own economy in the process.

“We are in a fairly advanced stage of economic mutual interdependence,”
said Kenneth Lieberthal,
a China specialist with the Brookings Institution in Washington.
“I think the Chinese can pull the rug out from under our economy only if
they want to pull the rug out from under themselves.”

Some U.S. economists and members of Congress have expressed alarm
about a loss of economic sovereignty,
and about America’s being “in hock” to China.
Beijing could try to wreck the American economy
by dumping U.S. Treasury securities,
they warn,
or move to influence U.S. policy on sensitive political issues, like Taiwan,
with the threat of dumping securities.

But some of their Chinese counterparts fear that
the large holdings of U.S. debt amount to a financial tether,
making China “a prisoner” of the U.S. dollar.

“We are really put in a corner,”
said Yu Yongding, an economist with the Chinese Academy of Social Sciences.
“China will not take any irrational action.
We don’t want to hurt you -- because if we hurt you, we hurt ourselves first.
It’s a kind of synergy.”

Nicholas R. Lardy,
a China expert with the Peterson Institute for International Economics,
agreed that
the Chinese government has little incentive
to begin any large sell-off of U.S. securities,
and probably could not find a market to buy them even if it did.
“If it was known they were beginning to sell their holdings,
prices would come down and they’d take bigger losses.
They’d be shooting themselves in the foot,” he said.

[But what if they were more interested in harming the U.S.
than in profiting from their Treasury holdings?
What if they viewed harming the U.S. as providing its own profit?]

“They’re in the dollar trap,” Lardy said.
“There’s no easy way out of it.”

Lieberthal said the fact that China holds so much U.S. dollar debt
makes it “extremely cautious” of
any actions that might hurt the American economy --
and damage its own considerable investment.
But unlike the Cold War, he said,
the current economic version of a stalemate
is not necessarily antagonistic;
both sides benefit.

“I think it is neither of our interests to see that unravel,”
Lieberthal said.
“If we can find ways to manage our differences and cooperate where we can,
we both win. If not, we both lose.”

China’s dependence on the U.S. market for exports
is perhaps most strongly felt in Guangdong province in the south,
and particularly in the industrial city of Dongguan.
There factories churn out
shoes, clothing, machine parts and Christmas toys,
most destined for American cities and towns.

With the United States spiraling into recession last year,
thousands of factories in Guangdong closed or cut production,
and hundreds of thousands of migrant workers from other provinces went home.

The Q-Bay Cartoon & Animation Development Co., for example,
produces action figures of American sports heroes as well as Disney characters.
Sales dropped 20 percent last year as demand from the United States fell.
But after a dismal year, the factory is hiring more workers
to meet the rush demand for Christmas orders.

Also in Dongguan, the Huajian Group shoe factory
exports 90 percent of its shoes to the United States,
including name brands such as Kenneth Cole and Marc Fisher,
and some pink, blue and gold high-heeled strappy numbers
for the Paris Hilton brand.
Last year,
the factory’s orders dropped as much as 15 percent
compared with the year before,
and profit was cut in half.

This factory, like others in Guangdong province,
is seeing a slight uptick in orders --
a sign of the nascent economic recovery in the United States.
But factory officials said buyers are a lot more cautious,
placing smaller orders
and giving the factory much shorter -- one-month -- turnaround times.

Despite the interdependence and the mutual benefits,
many in both countries remain deeply suspicious of each other’s intentions.

“At this point, no one can say China and the United States are friends,”
said Yan Xuetong,
director of Tsinghua University’s Institute of International Studies.
“It’s better to say we are competitors,
like McDonald’s and Burger King are competitors,” Yan said.
“McDonald’s wants to open more shops,
not destroy Burger King and in the process destroy itself.
Why would we be so silly as to hurt ourselves?”

[?? Why would the loss of Burger King as a competitor harm McDonald’s?]

There are signs that the interdependence may ease slightly on its own,
without either side making any dramatic moves.
One consequence of the prolonged recession is that Americans are saving more --
and putting more money into mutual funds that buy U.S. Treasurys --
so the need for the U.S. government to sell securities externally
is gradually being reduced.

Similarly, China’s trade surplus is gradually coming down.
And while there has been no sell-off of Treasurys,
there were reports here over the summer that
China sold a small portion, about $25 billion worth,
and sought to diversify its foreign exchange reserves.

One concern voiced by critics in America,
and by human rights advocates in this country, is that
the growing economic links between the countries --
and the U.S. dependence on China financing its debt --
is causing the Obama administration
to mute its criticism of China on human rights issues.
U.S. officials dismiss the accusation.

“The Americans need to not just concentrate on economics,” said Mo Shaoping,
a Beijing lawyer specializing in human rights and press-freedom cases.
“Many dissidents are disappointed that since Obama entered office,
he only talks about economic and climate-change issues with China,
even though there are a lot of human rights problems. . . .
Obama is trying to avoid these issues.”

Yan Xuetong of Tsinghua University said much the same thing -- and gladly so.

“The Obama administration needs China’s money,” Yan said.
“When he wants to borrow Chinese money,
he will say something nice, and not talk about human rights.”

[End of Washington Post article.]

So let’s do a quick transaction analysis on the 2009 U.S./China trade relation:

The Chinese get jobs and money (U.S. dollars);
the U.S. gets finished goods and debt.

It seems to me that of those four items exchanged,
the only one that is favorable to the U.S. is finished goods.

Just as in the story of Jacob and Esau [Genesis 25:29–34],
the United States (Esau) is selling its future to the Chinese (Jacob)
to maximize current consumption.

[The following is a rough sketch, really just brain storming,
of one possible way to improve the above situation:]

Is it really to the United States’ advantage
to have the Chinese do the jobs that we could be doing?
At a time when political voices are calling for the creation of jobs?
And the concomitant ever rising debt we owe to foreigners
is taking America into potentially disastrous waters?

Can Americans do the jobs that Chinese are currently doing,
and if so, at what cost?
(Here is where the unions
have genuinely shot themselves and those they represent in the foot,
by getting wage scales for American workers
well above what foreign workers are willing to do the same job for.)
I am going to assume, for the sake of argument, that they can,
and the only question is at what cost.
How much does the American worker demand
vis-à-vis what a Chinese worker would.

I am not an economist, and have no expertise in the matters under discussion.
But at the remote distance from which I view these matters,
it seems that the right thing for America to do,
to do the most good for most Americans,
is the following:
  1. Using
    the border-adjusted VAT advocated by Patrick Buchanan
    or business transfer tax advocated by David A. Hartman,
    or some equivalent mechanism,
    make imported goods (at least those for which American manufacture
    is to be encouraged) more expensive,
    thereby reducing the price advantage they currently have.

  2. This will, of course, raise prices, perhaps significantly,
    for the American consumer,
    thereby lowering his or her standard of living.
    To make up for the increase in the cost of living for manufactured goods,
    reduce the amount that he or she is currently paying
    for some American-produced items
    whose cost has risen unconscionably over the years: to wit:
    health care and college expenses.

    To take health care, for example:
    Circa 1950 the U.S. spent less than five percent of GDP on health care.
    If (and there is no reason I can see why this can’t be done) we cap
    (yes, that will mean rationing of
    the part of health care furnished by the government)
    the nation’s total health care bill at five percent of GDP,
    compared to the current 16 percent of GDP on health care,
    that will mean about ten percent will be freed up
    to pay for the more expensive consumer goods.

    somebody responsible should conduct an audit on university spending,
    to see exactly why universities charge so much more now
    than they did in, say, the 1960s.
    One would hope that, with knowledge of where the extra money is flowing,
    it will be reasonable to ask if there may be less expensive ways
    of providing a quality education to their students.

  3. Summarizing, the idea is to
    flow more of the economy into
    sectors which will create jobs for Americans vice Asians and
    reduce the unbearable and unsustainable trade deficit
    and international borrowing binge.

Here are some other article and columns that, I believe,
make some positive suggestions.


How to get the country to solvency on entitlements
By George F. Will
Washington Post Op-Ed, 2010-02-07

In 2013, when President Mitch Daniels, former Indiana governor,
is counting his blessings,
at the top of his list will be the name of his vice president:
Paul Ryan (WP, Google).
The former congressman from Wisconsin will have come to office with
ideas for steering the federal government to solvency.

Not that Daniels has ever been bereft of ideas.
Under him, Indiana property taxes have been cut 30 percent,
and for the first time
Standard & Poor’s has raised the state’s credit rating to AAA.
But in January 2010, Ryan released an updated version of his
Roadmap for America’s Future,”
a cure for
the most completely predictable major problem that has ever afflicted America.


Some calamities -- the 1929 stock market crash, Pearl Harbor, Sept. 11 --
have come like summer lightning, as bolts from the blue.
The looming crisis of America’s Ponzi entitlement structure is different.
Driven by the demographics of an aging population,
its causes, timing and scope are known.

Funding entitlements --
especially medical care and pensions for the elderly --
requires reinvigorating the economy.
[I have a different perspective:
more than that, what is required is
cutting the entitlements down to an affordable level.]

Ryan’s map connects three destinations:
economic vitality, diminished public debt, and health and retirement security.

To make the economy -- on which all else hinges -- hum,
Ryan proposes tax reform.
Masochists would be permitted to
continue paying income taxes under the current system.
Others could use a radically simplified code,
filing a form that fits on a postcard.
It would have just two rates:
10 percent on incomes up to
$100,000 for joint filers and $50,000 for single filers;
25 percent on higher incomes.
There would be no deductions, credits or exclusions,
other than the health-care tax credit (see below).

Today’s tax system was shaped by sadists who were trying to be nice:
Every wrinkle in the code was put there to benefit this or that interest.
Since the 1986 tax simplification,
the code has been recomplicated more than 14,000 times --
more than once a day.

At the 2004 Republican convention,
thunderous applause greeted George W. Bush’s statement that
the code is “a complicated mess“ and a “drag on our economy”
and his promise to “reform and simplify” it.
But his next paragraphs proposed more complications to incentivize this and that behavior for the greater good.

Ryan would eliminate taxes on interest, capital gains, dividends and death.
The corporate income tax, the world’s second-highest,
would be replaced by an 8.5 percent business consumption tax.
Because this would be about half the average tax burden
that other nations place on corporations,
U.S. companies would instantly become more competitive --
and more able and eager to hire.

Medicare and Social Security would be preserved for
those currently receiving benefits
or becoming eligible in the next 10 years (those 55 and older today).
[I doubt very much that the budget can (and should) be balanced without
reducing benefits for those beneficiaries.]

Both programs would be made permanently solvent.

Universal access to affordable health care would be guaranteed by
refundable tax credits ($2,300 for individuals, $5,700 for families)
for purchasing portable coverage in any state.
As persons younger than 55 became Medicare-eligible,
they would receive payments averaging $11,000 a year,
indexed to inflation and pegged to income,
with low-income people receiving more support.

Ryan’s plan would fund medical savings accounts from which
low-income people would pay minor out-of-pocket expenses.
All Americans, regardless of income, would be allowed to establish MSAs --
tax-preferred accounts for paying such expenses.

Ryan’s plan would allow workers younger than 55 the choice of
investing more than one-third of their current Social Security taxes
in personal retirement accounts similar to the Thrift Savings Plan
long available to, and immensely popular with, federal employees.
This investment would be inheritable property,
guaranteeing that individuals will never lose the ability to dispose of
every dollar they put into these accounts.

Ryan would raise the retirement age.
If, when Congress created Social Security in 1935,
it had indexed the retirement age (then 65) to life expectancy,
today the age would be in the mid-70s.
The system was never intended to do what it is doing --
subsidizing retirements that extend from
one-third to one-half of retirees’ adult lives.

Compare Ryan’s lucid map to
the Democrats’ impenetrable labyrinth of health-care legislation.
Republicans are frequently criticized as “the party of no.”
But because most new ideas are injurious,
rejection is an important function in politics.
It is, however, insufficient.
Fortunately, Ryan, assisted by
Republican Reps. Devin Nunes of California and Jeb Hensarling of Texas,
has become a think tank,
refuting the idea that Republicans lack ideas.

For nations living the good life, the party's over, IMF says
By Howard Schneider
Washington Post, 2010-04-24

In the lingo of the International Monetary Fund,
the future of the world hinges on “rebalancing and consolidation,”
antiseptic words that would not seem to raise a fuss.

Who doesn’t want more balance in their life?

But the translation is a bit ruder, something on the order of:
“Suck it up. The party’s over.”


To keep the global economy on track,
people in the United States and the rest of the developed world
need to
work longer before retiring,
pay higher taxes and
expect less from government.
And the cheap imports lining the shelves
of mega-chains such as Wal-Mart and Target?
They need to be more expensive.

That’s the practical meaning of a series of policy papers and statements
issued in recent days by IMF officials,
who have a long history of stabilizing economies
and solving global financial problems,
as they plot a course to keep the world economy growing
and reduce the risk of another “great recession.”

That message has been delivered subtly,
woven into documents with titles such as
“Resolving the Crisis Legacy and Meeting New Challenges to Financial Stability,”
and justified by concepts such as
“raising retirement age in line with life expectancy,”
as IMF economic counselor Olivier Blanchard put it this week.

But fully deciphered, it means
a pretty serious reworking of expectations in the developed world:
changes in labor rules, product prices, currency values
and even the social contract between governments and an aging citizenry.

“It is not that living standards will lower,
but they will not increase as fast as they have been,”
said Domenico Lombardi, a former IMF executive director.
The ideas being discussed by world leaders “are coded words,” he said.
“They don’t like words like ‘imposing higher taxes’ and ‘cutting spending.’ ”


The IMF has long had a reputation as a bearer of bad news --
it dispatches well-educated and diplomatically deft teams
to tell economically troubled countries
how many people they have to fire
and which programs they have to cut to get financial assistance.
But the IMF now finds itself in the odd position of having that conversation
not with a single ailing sovereign
but with the developed countries at the core of the world system,
including the United States.

Its prescription is centered on two concepts.

“Rebalancing” is an idea that most everyone endorses --
including the technicians at the fund and President Obama
and the leaders of the G-20 group of economically powerful nations.
In broad strokes, it means
curbing what has been a massive transfer of capital
from nations that consume more than they produce, such as the United States,
to nations that produce more than they consume, such as China.

The imbalance has been key to China’s modernization:
The country buys U.S. government bonds by the tens of billions
to keep the dollar stronger than it would be
and to keep its domestic currency -- and its exports -- cheaper.
Looked at one way, the flow of U.S. debt to the People’s Bank of China
has acted like a giant, collective credit card,
underwriting consumers across the United States
and driving the business models of major retailers such as Wal-Mart.

The message from the IMF is that
the card is about maxed out and that
the imbalance in trade flows needs to be corrected.

How to do it? One way is for China -- or Asian exporters, more generally --
to let their currencies rise on world markets.
The other way, which IMF economist Blanchard raised this week,
would be to
devalue the dollar,
the euro and other developed-world currencies.

[Note that that would not require getting the Chinese to do anything
(which they seem quite willing to put off indefinitely).
The U.S., in particular, could do its part on its own.]

“The advanced economies as a whole may need to depreciate their currencies
so as to increase their net exports,” Blanchard said.

The less well-advertised side of the equation:
If the dollar is worth less,
then imports, regardless of their source, will cost more.
[That doesn’t exactly seem like news to me.]
U.S. exports will be proportionately cheaper --
a good thing for American businesses
trying to become more competitive in overseas markets --
but everything from iPods to jeans to the latest Barbie doll
would jump in price.

The ideas offered by the IMF
“could certainly reorder the balance of the international economy,
but not in a way that benefits the average person in the U.S.,”
said J. Craig Shearman,
vice president of government affairs for the National Retail Federation.

He continued:
“If a few factories have an increase in exports, that is good for them,
but it leaves the vast majority of people paying more for consumer goods.
Talking about consuming less and saving more is a nice, ivory tower approach.
But it is not real world economics.
People have to put clothes on their children’s backs and food on the table.”

[Yeah, yeah, yeah.
Of course the retailers like to get goods cheap
so they can increase their sales.
What do they care if
the wages paid to produce those goods are paid to foreigners?
How come the reporter didn’t get a balancing quote
from a representative for manufacturers?
By the way, that’s precisely the same stance as that of the WaPo:
lot’s of concern for consumers, but tough love for manufacturers.
Remember their advice to the automobile industry: “Just build better cars.”
Wonder if they would take the same line with respect to newspapers?

Also, it’s not just “good for the factories.”
If the amount of total debt the U.S. owes to foreigners is reduced,
that’s good for all of us.]

Wal-Mart declined to comment.


“Fiscal consolidation” is another idea promoted by IMF leaders.
Again, the aim seems unobjectionable:
The United States and other developed-world governments
ran record deficits during the crisis,
both to pay for stimulus programs
and because tax and other receipts cratered.
Across the developed world, the IMF says,
government debt will rise
from about 80 percent of economic output before the crisis
to roughly 115 percent of output in 2014.

That’s considered a dangerous trajectory,
and IMF officials say that by next year,
governments need to announce “credible” plans
to cut their annual deficits, turn them into surpluses
and start paying off what is owed.

The level of the correction needed is large,
perhaps 10 percent of gross domestic product.
In the United States, that would amount to roughly $1.4 trillion annually,
to be cut from government programs or raised through new taxes.

Better-than-expected growth would help, or increases in productivity,
or even surprises in the form of new technologies.
But what’s on the horizon is, more likely, a difficult reckoning --
one that Greece is facing
and that other developed nations know is in the offing,
French Finance Minister Christine Lagarde said in an interview Thursday.

“We’re all in the same boat,”
Lagarde said as she looked ahead to a tough debate in France
over changes in pension rules
that will make not just government workers but also many in the private sector
add years before their expected retirements.

The IMF is studying issues such as
which taxes should be raised and which programs should be cut
to make “consolidation” as painless as possible.
But it views a longer working life as an important tool --
one that would save large amounts of money in the future
without cutting spending and decreasing economic activity today.

In the United States, a new fiscal commission is beginning to study
how to bring U.S. government debt into line.

“You will see many headlines complaining and moaning and stirring the pot,”
Lagarde said, as issues such as pension reform are debated.
But ultimately, she said, “there is no way out.”

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