Peter Morici writes a superb article –“It’s time to Cut the Trade Deficit”–in, of all places Forbes, fighting the enemy on its own turf. Among my partially written pieces is one entitled “Credit or Trade,” in which I argue that the root of most of our problems is that we have substituted credit for trade. But Morici makes the case superbly:
The entire article follows:
Americans need to knock down some false gods.
Globalization is not an unalloyed good. We don’t need 300-horsepower cars. And Wall Street is not a citadel of integrity.
The 1990s were the golden age of free trade. The U.S. sealed the North American Free Trade Agreement, launched the World Trade Organization and escorted China into that temple of global commerce.
The idea was simple: Americans would import more T-shirts and furniture and sell more industrial machinery and software to a world hungry for technology. Americans would move into higher-productivity export industries and earn higher incomes in the trade-off.
In the 2000s, America’s CEOs, bankers and management consultants learned how to outsource just about everyone’s job but their own. Radiologists who read MRIs, journalists who wrote copy for local papers and computer engineers joined the ranks of workers displaced by imports.
The average American worker’s income stagnated, and, for many, inflation-adjusted wages fell. U.S. productivity gains were hogged by executives at Wall Street banks, technology companies and multinationals through big bonuses and peculiar, can’t-lose stock options.
The rest of us sunk into debt to fill our gas tanks, feed our children and, admittedly, buy too many cheap imports at Wal-Mart.
Imports soared much more rapidly than exports, the annual trade deficit jumped to more than $700 billion and Americans borrowed more than $6 trillion from foreigners to pay for two decades of trade deficits. This math permitted Americans to consume much more than we produced and spend more than we earned.
China is perhaps the biggest renegade in the mugging of the American middle class. The U.S. has slashed tariffs on Chinese products from auto parts to TVs, while China maintains much higher tariffs and notorious regulatory restrictions for U.S. exports in its market.
Topping it all, China subsidizes foreign purchases of its currency, the yuan, to the tune of $460 billion a year, making its products cheap on U.S. store shelves. The U.S. annual trade deficit with China is about $250 billion.
Chinese growth has pushed up global petroleum prices nearly five fold in six years, and the U.S. oil deficit is now $350 billion and rising.
The banks came up with more creative and risky mortgage products that permitted Americans to live beyond their means. We went from 10% down to 5% down to nothing down, with banks lending home buyers closing costs through second trusts.
Some loans that required no payback for five years even let folks dig deeper in their pockets on the premise that home prices would always go up. The banks sold these risky loans, bundled as bonds, to foreign investors like the Chinese government and foreign pension funds, as well as to U.S. insurance companies and corporations with cash to park. The bank executives paid themselves like royalty for the privilege of bilking trusting clients.
When the worst of the bonds–those backed by risking adjustable rate mortgages– collapsed, the banks got stuck with billions of unsold bonds.
Most recently, Bear Stearns collapsed, and the U.S. Federal Reserve is lending the banks $600 billion against shaky bonds on a 90-day revolving basis. That essentially socializes the banks’ losses on bad bonds.
You have to love Ben Bernanke’s free trade capitalism. If you are an autoworker put out of work by Korean imports, he, as a good economist, tells you to go to school and find other work. If you are a New York banker caught paying yourself too much and run short of foreign investors to fleece, Ben will make you a loan and keep rolling until the bank finds a new game.
Now foreign investors are getting nervous about all the money they have loaned Americans and the integrity of U.S. banks. They are fleeing dollar investments for euro-denominated securities, gold, oil and just about anything more tangible than the shaky greenback.
Americans are forced to cut back, not just on purchases of cheap Chinese coffee makers, but also on automobiles and other products made in the U.S. Falling demand is casting the U.S. economy into recession, and we won’t be able to borrow enough to pull ourselves out.
Getting out of this mess is going to require Americans to live within their means–a.k.a. cut the trade deficit–and throw out the rascals on Wall Street.
Cutting the trade deficit requires burning less gasoline and balancing commerce with China.
Americans must either let the price of gas double to force conservation or accept cars with tougher mileage standards. Fifty miles per gallon by 2020, instead of the 35 required by current law, is achievable, but that means more hybrids and lighter vehicles.
The U.S. government should tax dollar-yuan conversions at a rate equal to China’s subsidies on yuan purchases until China stops manipulating currency markets. That would reduce imports from China, move a lot of production back home, raise U.S. productivity and workers incomes, and reduce the federal budget deficit.
Ben Bernanke has given the banks a lot and received little in return–except a lot of bad loans on the Fed’s books. It is high time he condition the Fed’s largesse on reforms at the big banks, even if that means lower salaries for the Brahmins on Wall Street.
After all, what makes them so special?