Posted on February 8th, 2010
One Simple Way to Create Jobs, Wall Street Journal
FEBRUARY 5, 2010
America needs more jobs. To get them, we need business to increase capital investment. This is especially true for well-paying industrial jobs in capital-intensive industries. The best way to do that is to let all businesses, large and small, significantly accelerate depreciation of their capital purchases.
Some of the current proposals such as public infrastructure investment, tax credits to firms hiring new workers, and increased loans to small business have merit. But if President Obama and Congress are serious about creating more, good jobs in America, they should come together in support of an economic tool that has proven its success dating back more than half a century to the Eisenhower administration. Increasing business investment at a time when the economy is still uncertain should be a key element of the jobs program.
Over the past 60 years, there’s been an exceedingly strong correlation between domestic job growth and business investment. History is clear: If we want to create jobs, we need businesses—large and small—to increase capital investment.
Last year the president and Congress included a one-year extension of accelerated depreciation provisions in the American Reinvestment and Recovery Act. That doubled the amount of capital equipment purchases that small businesses can expense and allowed larger businesses to deduct 50% in the first year. Two months ago, the president asked Congress to extend those provisions for another year, through the end of 2010. At a minimum, he should ask for a seamless extension of the current provisions for two or three years to allow appropriate planning by businesses.
Economists have rated accelerated depreciation one of the most productive economic stimulus initiatives of our time. In a 2001 analysis, the Institute for Policy Innovation estimated that every $1 of tax cuts devoted to accelerated depreciation generates about $9 of GDP growth.
In the longer term, U.S. tax reform is imperative. A materially lower corporate income tax rate and a provision for full, permanent expensing of capital expenditures are essential for the reindustrialization of America. But those are topics for another day. For now, if the president and Congress are serious about creating jobs, they must ensure accelerated depreciation provisions are extended.
Mr. Smith is chairman, president and CEO of FedEx Corp.
Posted on October 23rd, 2009
The road to prosperity,
Dan DiMicco,Peter Navarro
Monday, October 19, 2009
For the second time, President Obama and his Treasury secretary, Timothy Geithner, have refused to brand China a currency manipulator. This is not just a shattered campaign promise. It is a critical missed opportunity to get the U.S. economy back on a growth track.
China’s undervalued currency, and more broadly its unfair trade practices, are gutting U.S. manufacturing.
Manufacturing jobs are critical for U.S. economic growth because manufacturing jobs pay more than service-sector jobs. Such jobs are essential to build the purchasing power needed to fuel the economy – with consumption accounting for fully two-thirds of the U.S. economy.
Also, a manufacturing job creates more jobs downstream than a new service-sector job. With the national unemployment rate forecast to remain high for months and perhaps years to come, only an infusion of new manufacturing jobs can reverse this Second Great Depression trend.
The loss of millions of American manufacturing jobs may be directly traced to China’s 2001 entry into the World Trade Organization, which gave China unprecedented access to U.S. markets. Since joining the WTO, China has undermined or destroyed many key U.S. industries – e.g., cookware, furniture, textiles, paper, tires and steel.
China’s primary “weapon of mass production” in its assault on U.S. manufacturing is not just cheap sweatshop labor. If that were so, the United States would be inundated with products from other dollar-a-day nations from Guatemala and Nicaragua to Bangladesh and Cambodia.
China’s major weapon has been its grossly undervalued currency. This is how the Chinese government manipulates its currency: China first sterilizes the dollars that flood into China and then recycles them by buying U.S. Treasury securities, thereby undervaluing its currency by 30 percent or more. This subsidizes its exports and taxes U.S. exports to China.
As a result, China accounts for more than half of the U.S. trade deficit after excluding oil imports.
Here’s what every American citizen must understand: Only after the U.S. brands China a currency manipulator can this country firmly address the root cause of its chronic trade imbalances. Such a branding would allow the Treasury Department to apply countervailing tariffs and duties that would offset China’s currency advantage and start America down the path of constructive trade reform with China.
The dirty little secret here is that the Obama administration refuses to make such a currency manipulation finding because it wants China – a.k.a., America’s mortgage banker – to keep financing its enormous budget deficits. Indeed, the economic recovery now fueled by federal stimulus and the Fed’s “ultra-cheap money” policies must necessarily be short-lived because once spent, America will lack the manufacturing base to generate the jobs and income necessary to propel our economy forward.
America will go from being up to its waist in debt to China to being up to its neck – and maybe even over its head. That heavy debt burden will mean a loss of both economic control and political sovereignty. This is not the world we want our children to be left with.
Dan DiMicco is the CEO of Nucor Steel. Peter Navarro is a professor at the Merage School of Business, UC Irvine and author of “The Coming China Wars.” www.peternavarro.com.
Posted on August 20th, 2009
America cannot resolve global imbalances on its own
By Fred Bergsten and Arvind Subramanian
Published: August 19 2009 22:29 | Last updated: August 19 2009 22:29
The Obama administration is increasingly signalling that the US will not continue to be the world’s consumer and importer of last resort. The clearest statements came last month from Larry Summers , White House economics director, in a speech at the Peterson Institute for International Economics and in an interview with the Financial Times. The US, he said, must become an export-oriented rather than a consumption-based economy and must rely on real engineering rather than financial wizardry. Tim Geithner, the US Treasury secretary, and other top officials have spoken similarly of rebalancing US growth.
The logic of this new US position is not just economic. It is also strategic. Mr Summers has previously remarked on the tension between superpower status and net foreign indebtedness. US influence can be compromised if it is dependent on foreign investors to bail out its financial sector (as in the early part of this crisis) or to finance its fiscal profligacy (as China and other surplus countries have been doing for a long time). The US undoubtedly also recognises that it might not be able to finance large external deficits in the future at an acceptable price so to some extent it is making a virtue of necessity.
This long-run vision for US growth entails greater exports and probably a smaller current account deficit than where it is now (about 3 per cent of gross domestic product). Although Mr Summers did not and could not say so, the vision will require an end to the remaining overvaluation of the dollar. Studies by William Cline and John Williamson at the Peterson Institute suggest that holding the US current account deficit to something close to these objectives will probably entail a further real depreciation of the dollar, mainly against the Chinese renminbi and other Asian currencies.
In the short run, US recovery from the recession requires that the fiscal and monetary stimulus programmes be effective. In turn, that calls for domestic and foreign investors to absorb smoothly and trustingly the voluminous amounts of IOUs being offered by the US government. Hence it is essential to avoid perceptions that the dollar is about to fall, at least by very much, and that the US authorities are pushing it down.
But Mr Summers’ long-run structural targets will come into play once the economy is out of the woods. Redirecting resources away from finance and consumption towards exports and investment will require relative price shifts, for which the dollar has to move down. So a stronger rate for the dollar now and a more sustainable rate once the recovery has taken hold can reconcile the short-run imperative and the medium-term goal.
What are the implications of this vision for America’s trading partners? To the extent it is credible, it is a warning shot to the rest of the world. If the US will not run large and persistent current account deficits, countries such as China, and probably Germany and Japan, will not be able to run large and persistent current account surpluses. They will not be able to rely on export-led growth. They will have to find ways to expand domestic demand on a lasting and substantial basis.
Progress is already being made in reducing global imbalances. The US current account deficit has come down from a peak of more than 6 per cent of GDP to about 3 per cent. China’s current account surplus has declined from 11 per cent of GDP to about 9.8 per cent and is expected to decline much further this year.
But there is no guarantee that this process will continue. Mr Cline predicts that the US current account deficit will rise back above 5 per cent by 2012 and soar into unprecedented terrain thereafter unless the budget deficit is cut sharply and the dollar depreciates substantially. China has again been preventing the renminbi from strengthening and the jury is still out on whether the country intends to depart from its mercantilist growth strategy.
When the Group of 20 leaders meet in Pittsburgh in September, the question of how to achieve balanced as well as higher world growth must be at the top of the agenda. The US strategy on this issue is not, at least for the moment, consistent with strategies elsewhere. Put starkly, Mr Summers has stated that China can no longer behave like China because the US intends to behave much more like China. The world economy cannot have two, or even one-and-a-half, Chinese growth strategies from its two most important economies. Which will prevail?
The writers are director and senior fellow of the Peterson Institute for International Economics
China, Dollar, Foreign Exchange Reserves, Global Economic Imbalance, Saving & Consumption, US Economy
China, Competitiveness, Dollar, Economic imbalance, Exchange Rates, US Economy
Posted on July 22nd, 2009
Obama’s Strategy to Reverse Manufacturing’s Fall, New York Times
By Louis Uchitelle
Published: July 20, 2009
If the Obama administration has a strategy for reviving manufacturing, Douglas Bartlett would like to know what it is.
Buffeted by foreign competition, Mr. Bartlett recently closed his printed circuit board factory, founded 57 years ago by his father, and laid off the remaining 87 workers. Last week, he auctioned off the machinery, and soon he will raze the factory itself in Cary, Ill.
“The property taxes are no longer affordable,” Mr. Bartlett said glumly, “so I am going to tear down the building and sit on the land, and hopefully sell it after the recession when land prices hopefully rise.”
Though manufacturing has long been in decline, the loss of factory jobs has been especially brutal of late, with nearly two million disappearing since the recession began in December 2007. Even a few chief executives, heading companies that have shifted plenty of production abroad, are beginning to express alarm.
“We must make a serious commitment to manufacturing and exports. This is a national imperative,” Jeffrey R. Immelt, chairman and chief executive of General Electric, said in a speech last month, while acknowledging that G.E. was enriched by its overseas operations too.
President Obama, agreeing in effect, has declared, “The fight for American manufacturing is the fight for America’s future.”
The United States ranks behind every industrial nation except France in the percentage of overall economic activity devoted to manufacturing — 13.9 percent, the World Bank reports, down 4 percentage points in a decade. The 19-month-old recession has contributed noticeably to this decline. Industrial production has fallen 17.3 percent, the sharpest drop during a recession since the 1930s.
So far, however, Mr. Obama’s administration has not come up with a formal plan to address the rapid decline. Instead, it has pursued ad hoc initiatives — bailing out General Motors and Chrysler, for example, and pushing green energy by supporting the manufacture of items like wind turbines and solar panels.
“We want to make sure that we grow a manufacturing base for renewable energy,” said Matthew Rogers, a senior adviser in the Energy Department, explaining that this is being accomplished in part by “accelerating loan guarantees from zero” in the Bush years.
Xunming Deng, a physicist and the chairman of the Xunlight Corporation, sees himself as a beneficiary of what he describes as the Obama administration’s more flexible loan guarantees. His factory in Toledo, Ohio, with 100 employees, is in the early stages of making solar panels, and Dr. Deng is already planning to quadruple the plant’s size. He has applied to the Energy Department for a $120 million loan guarantee. If he gets it, he will not have to pay the hefty fees charged for loan guarantees before Mr. Obama took office.
“Getting rid of that fee makes the loan guarantee very attractive and very helpful,” Dr. Deng said. “We can’t grow as fast without it.”
Beyond energy, the administration’s approach gradually outlines the elements of a manufacturing policy — what Lawrence H. Summers, director of the National Economic Council, described as “a number of things to support manufacturing.”
The auto bailout, for all its improvisations, served notice that the administration would probably rescue any giant manufacturer it deemed too big (or too iconic) to fail, and would help the suppliers of failing giants transition to other industries.
The Buy America clause in the stimulus package pointedly favors the purchase of American-made goods for infrastructure projects. The Commerce Department is adding $100 million, more than double the current outlay, to a program that helps American manufacturers operate more effectively. And trade agreements negotiated by the Bush administration — agreements that would make the United States more open to imported manufactured goods — have been allowed to languish in Congress.
“The administration’s policy is evolving in the right direction,” said Representative Sander M. Levin, Democrat of Michigan, who is particularly concerned about auto imports. “I think they have essentially shed the political chains that prevented government from having a role in manufacturing. They are working their way toward what makes sense.”
Not everyone agrees.
“Bush and Obama,” Mr. Bartlett said scornfully, “one is as bad as the other in terms of manufacturing policy.”
He acknowledged that the recession was the immediate reason for the demise of his family’s business. But what really did it in, he said in an interview, was the competition from less expensive Chinese circuit boards — less expensive, he argued, because the Chinese undervalue their currency and this administration, like the ones before it, lets them get away with it.
“Our orders went from $8 million at an annual rate to $4 million, which was not enough to make money,” he said.
Mr. Bartlett, who is co-chairman of an organization called the Fair Currency Coalition, said that Chinese competitors charged only $1 for each printed circuit board sold in this country, while he charged $1.40. Like many economists and government officials, he says he believes the Chinese currency is artificially undervalued. As a countermeasure, he said the Obama administration should impose a 40 percent tariff on imported Chinese goods.
“I can compete against Chinese entrepreneurs, and Chinese labor cost is not that big a factor,” he said, “but I cannot compete against the Chinese government’s manufacturing policies.”
Manufacturing has long been viewed as an essential pillar of a powerful economy. It generates millions of well-paid jobs for those with only a high school education, a huge segment of the population. No other sector contributes more to the nation’s overall productivity, economists say. And as manufacturing weakens, the country becomes ever more dependent on imports of merchandise, computers, machinery and the like — running up a trade deficit that in time could undermine the dollar and the nation’s capacity to sustain so many imports.
One tactic for strengthening the manufacturing sector, in the administration’s view, would be a shift in tax policy. The research and development tax credit, which is now subject to renewal by Congress, would be made permanent, encouraging much more R.& D. among manufacturers, a senior Commerce Department official argued. And foreign taxes paid on profits earned overseas would not be deductible in this country until the profits were repatriated, a restriction that might discourage locating factories abroad.
The goal is to arrest manufacturing’s dizzying decline. It “was the pillar on which we built the middle class,” said Thea Lee, policy director for the A.F.L.-C.I.O., “and it is hard to see how you rebuild the middle class without reviving manufacturing.”
Posted on July 20th, 2009
The US-China Ponzi Scheme, MSN Money
By Jon Markman
Imagine becoming so successful at your job that you stack up $2 trillion in income, which you conservatively place in short-term U.S. Treasury bonds for safekeeping.
Now imagine that when you try to cash in those bonds to buy a few things for your kids, the clerk at the bank abruptly shuts her window and tells you to go away.
That is essentially the situation faced by China these days as it wonders whether its plan to manufacture goods for U.S. consumers over the past two decades in exchange for a pile of credit slips was really such a hot idea.
The answer is coming up as a big, fat “uh-oh” as the U.S. deficit and debt obligations balloon to levels never before contemplated, and Beijing is denied requests to buy U.S. and Australian mines and oil properties. And as Beijing leaders talk openly, if obliquely, about their angst, they are unsettling world credit, currency and stock markets, which don’t know what to make of the idea that the world’s largest Ponzi scheme might be coming to an abrupt end.
This is a good time to assess the chilling possibilities, as the resolution of this pending crisis will afflict investors, workers and business owners alike.
What’s so Ponzi about the Chinese-U.S. relationship? Basically everything. Look at it this way:
After a currency debacle in 1998 left its economy in tatters, Beijing decided to radically restructure its financial relationship with the West. Policymakers pegged the value of China’s currency to the dollar, which had the effect of keeping it artificially low.
The cheap renminbi made it irresistibly inexpensive for U.S. companies to manufacture goods in China, even after shipping costs. As more companies shifted their operations to China, the U.S. manufacturing base was hollowed out in the name of globalization and profitability. Americans who once enjoyed high-paying factory jobs moved on to lower-paying service jobs.
China didn’t need much of anything made in America, so instead of buying cars from Detroit and furniture from North Carolina with its factory profits, it bought Treasury bills. The purchase of all those bills drove down U.S. interest rates. So as middle-class and blue-collar Americans saw their wages stagnate or decline, they discovered they could still keep their old lifestyles by borrowing.
Over the past decade, Americans were able to outspend their incomes by easily rolling their debts forward through serial home refinancing. The situation was never ideal, but it worked as long as the value of their collateral — their homes — kept rising.
As long as China kept buying Fannie Mae, Freddie Mac and Treasury credits, the scheme worked in a strange and beautiful way: Our driveways filled up with cars and boats, shopping malls spread out across the suburban landscape, and the retailer with the closest ties to China, Wal-Mart, became the United States’ largest company.
Was that so bad? Well, now think about this in the context of a Ponzi scheme such as the one perpetrated by disgraced financier Bernie Madoff.
Madoff’s clients for years thought they were rich because he sent them brokerage statements that said so. But that scheme worked only as long as new money kept coming in. When international money flows seized up last year and too many people wanted to redeem their accounts at once, Madoff’s $50 billion game fell apart. Then his victims suddenly discovered that their brokerage statements were worthless pieces of paper. Madoff clients’ households crashed, and now one-time millionaires are broke. The reality is that they were always broke; they just didn’t know it yet.
The credit that has kept American families afloat for the past 10 years is similar to those Madoff-produced brokerage statements. The credit is good only so long as China keeps recycling funds through the Ponzi scheme. But if Beijing leaders ever decide that it’s just too risky to own U.S. dollars and debt, then the system is going to come crashing down.
Of course, it is not really in China’s interest to stop the scheme, even if it wanted to, because its own economy would likewise blow up. Satyajit Das, a credit derivatives expert in Australia, likens this to stepping on one of those land mines that are activated by the weight of a victim’s body. As soon as the weight is lifted, the mine explodes, and the person’s leg is blown off.
China is thus frozen in place, damned if it does and damned if it doesn’t. It’s a classic Catch-22. China’s cache of U.S. bonds isn’t worth anything unless the bonds are sold. But selling them on any kind of scale will gut their value.
“People need to realize that China doesn’t actually have any real U.S. money,” Das says. “Unless they can turn in their bonds and exchange them for something else, they’re only paper assets. Yet if they try to exit the position, they’ll destabilize the dollar, and the value of the rest of their assets will plunge. And that’s not even their biggest problem. It’s that they also need to keep buying Treasurys, or interest rates will go up and their capital losses will be terrible.”
In short, Das says, Beijing thought it had discovered the perfect scheme for establishing independence from the West, yet it has instead made its dependence worse than ever. And he observes that one unspoken reason that China has gone whole-hog on its massive, $650 billion fiscal stimulus program — creating more factory capacity in a country that is already reeling from overcapacity — is that the effort gives it cover to stockpile copper, oil, iron ore and other hard assets that it considers to be better stores of value than dollars.
The long, unwinding road
Now here’s why this affects all of us: China and the U.S. together built the most monstrous liquidity bubble in world history as each pursued what it believed to be logical self-interest without any regulator, such as a stern global central banker, telling them that they were on a path of mutually assured destruction.
Now it’s reached the point where global capital markets will impose their own discipline. Because most money generated over the past decade was spent on consumption rather than investment — it’s as if Madoff’s clients blew their fake money on chartering jets rather than buying real property as a store of wealth — there are few new buyers of goods. This has killed U.S. retail sales, crushed employment, lifted the foreclosure rate, stymied homebuilders and undercut loan demand.
There are no good solutions. The Chinese need to open their markets and let their currency float on the open market, but they won’t for political reasons. And the U.S. needs to either halt its runaway deficit spending so that the world is not even more flooded with our debt, or swallow its pride and issue Treasurys denominated in Chinese currency. That probably won’t happen either. Which means there is only one solution left: a long, slow, boring, lonely, soul-crushing process of digging out from under the piles of debt that got us into this mess.
You might even say that the bursting of the credit Ponzi scheme has left us all in jail now with Madoff. Let’s hope that our sentence is shorter than his.
At the time of publication, Jon Markman did not own or control shares of any company mentioned in this column.
Posted on July 9th, 2009
Innovation can give America back its greatness, Financial Times
Published: July 8 2009 18:31 | Last updated: July 8 2009 18:31
Over the past few decades, many in business and government bet that the US could transform itself from an innovative, export-orientated powerhouse to an economy based on services and consumption – and that we could still expect to prosper. For a time, it looked like a can’t-miss bet.
Then we missed – badly. Trillions of dollars vanished, along with America’s competitive edge. An economic hurricane shook our financial system to its foundation, leaving our middle class hurt, bewildered and looking for cover. General Electric was not perfect through all of this but, throughout our 130-year history, we have adapted and remained competitive.
The challenge ahead is not impossible. The first step is recognising that we cannot simply go back to the way things were. This downturn is not simply another turning of the wheel but a fundamental transformation. We are, essentially, resetting the US economy.
An American renewal must be built on technology. We must make a serious national commitment to improve our manufacturing infrastructure and increase exports. We need to dispel the myth that American consumer spending can lead our recovery. Instead, we need to draw on 230 years of ingenuity to renew the country’s dedication to innovation, new technologies and productivity.
GE plans to help lead this effort. We have restructured during the downturn, adjusting to market realities, and have continued to increase our investment in research and development. We are reinvesting in American jobs in places such as Michigan and upstate New York. We plan to launch more new products than at any time in our history.
One place where GE is reaping the benefits of this strategy is our plant in Greenville, South Carolina, where we make turbines for gas and wind power generation. We are now selling their products around the world. In fact, their biggest customer is Saudi Electric Corporation.
Some people subscribe to a Darwinian theory of economic evolution – that America has naturally evolved from farming to manufacturing to services. We should pay attention to the example of countries that are growing rapidly by emphasising technology and manufacturing, especially China. They know where the money is and where the opportunities reside and they aim to get there first.
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