Posted on 12/21/2004 2:14:23 PM PST by Willie Green
For education and discussion only. Not for commercial use.
The White House Conference on the Economy was held December 15-16 to highlight domestic priorities for the second term of President George W. Bush. Areas of concern were clearly marked out: tax reform, lower health care costs, tort relief, job creation, and privatization of Social Security. Unfortunately, little of substance was discussed. Instead, the closed, invitation-only event was a celebration of the Bush administration's first term accomplishments (and the president's re-election) and a listing of principles that it wants to govern the wide range of changes that the White House hopes to push through the 109th Congress.
Vice President Dick Cheney opened the conference by touting the low unemployment, low inflation, and high growth rates of the last year. The economy was entering a recession in 2000, and took another hit from the 2001 terrorist attacks. The Bush response has been to pour huge amounts of stimulus into the economy. As Cheney noted, there have been four tax cuts in four years and the Federal Reserve took interest rates down to zero in real terms. There has also been an upsurge in Federal spending. The question is whether the economy has returned to self-sustained growth or is merely lurching forward under these stimulants.
The Bush Administration clearly believes that the business cycle is back on the upswing. But structural problems, such as the record trade deficits (estimated to hit $635 billion this year) that have pounded industry, do not appear on administration radar screens.
Martin Feldstein, who ran the Council of Economic Advisors under President Ronald Reagan, stated that weakness is now "all gone" from the economy. There is no need to worry about current conditions, so policy can now shift to long-term objectives. Feldstein's priorities are to boost domestic savings and "most important" to reform Social Security. The two are related. Allowing younger workers to invest part of their Social Security contributions into private investment funds would generate capital as opposed to the current "pay as you go" system where SS revenue gets "raided" to fund general government spending.
Feldstein made a very strange argument, however, relating capital formation to trade. He said that if the United States could generate more capital at home, it would be less dependent on foreign capital -- then it could cut the trade deficit. This is the backward reasoning often heard by those who see the problem of the trade imbalance but cannot bear to rethink their devotion to "free trade" theory. In their minds, it is the inflow of foreign capital that creates the trade deficit rather than the other way around. This makes the trade deficit a result, not a cause, and thus removes it from the scope of policy. Such newspeak defies logic. It is the trade deficit that has to be financed, and the trade deficit that sends hundreds of billions of dollars abroad that have to be recycled back to the U.S. economy. The trade deficit is the cause of the nation's looming financial difficulties and any solution must be aimed at eliminating it.
Later, Feldstein seemed to have righted himself when he argued that Europe and Japan needed to boost their domestic demand to replace their dependence on exports so as to reduce the U.S. deficit. But how does Washington convince foreign powers to change policies that have been so beneficial to them? Twenty years of pleading has accomplished nothing. American leaders need to enact policies that place the control of the nation's destiny in American hands. We cannot control what others do, but we can control what we do--and we had better start.
Brian Wesbury, a private sector economist who is also an adviser to the Federal Reserve Bank of Chicago, claimed that because U.S. exports have been rising, we are competitive in world markets. But he made no mention of imports or the trade balance. This is like saying we should be proud of the Washington Redskins football team because they scored 17 points last week--but without mentioning that the Philadelphia Eagles scored 20 points and won the game.
The October trade deficit set a one-month record of $55.5 billion. Exports were up $600 million, but imports were up $5.1 billion, or nearly nine times as much. With imports overall running more than 50% ahead of exports, the notion that the United States can export its way out of the trade deficit is unrealistic. Where are American producers going to find new, accessible markets worth $635 billion that they can capture in the face of foreign rivals? There is only one place -- the American market that has been lost to imports. But there was no policy discussion at the conference aimed at taking back lost markets, either at home or abroad.
Instead, whenever anything trade related came up, it was always an unintended consequence of other topics. Trade was not a designated topic at the conference, but the trade problem looms so large that even those who wish to ignore it can't. One tactic is to mislead the audience. Kevin B. Rollins, CEO and President of Dell, gave a stunning performance. He proclaimed that all the Dell computers sold in the United States were "made" in the United States. "We don't outsource our computers," he said, turning towards the audience and raising his voice. But Dell does outsource most everything that goes into its computers. Dell computers are assembled in Austin, Texas, but from some 4,500 parts sourced from hundreds of suppliers scattered around the world, from Malaysia to Korea but clustered especially in Taiwan and China.
Stephen Friedman, Director of the National Economic Council, made the mistake of asking a question without knowing the answer in advance. He asked Jack Stack, CEO and President of SRC Holding, how much of his production was exported. Friedman clearly expected a high number to confirm the administration's claim that small and medium sized manufacturers are heavily into world trade in a positive way. SRC Holding produces after-market auto, truck, and heavy equipment parts. Stack was been hailed by Fortune magazine as one of the ten best minds in small business. His reply to Friedman was that SRC exported only 2% of its output. He then volunteered that if SRC were to go into foreign markets, it would have to set up factories overseas rather than export from American factories. Friedman did not respond to Stack's comment, but quickly shifted to someone else on a different topic.
Treasury Secretary John Snow talked about providing American entrepreneurs with capital and a more business-friendly tax and regulatory system. He repeated the standard Bush administration line (also a favorite of President Bill Clinton) that Americans can compete with anyone in the world, as long as there is a level playing field. President Bush sounded this same theme in his closing remarks to the conference, saying the role of government was "to create an environment in which the entrepreneurial spirit is strong and vibrant."
But the proposals floated by the Bush administration at the conference, while positive as far as they went, fell short of what it will take to give American business what it needs to defeat foreign-based rivals. Snow might do well to acquaint himself with the work of the first U.S. Treasury Secretary, Alexander Hamilton. The eminent historian Richard B. Morris observed in his biography of Hamilton that his "brand of conservatism meant holding to the tried and proven values of the past, but not standing still....He could scarcely be expected to allow government to stand inert while the economy stagnated or was stifled by foreign competition." Instead, Hamilton strove to give American firms and entrepreneurs every advantage at home and abroad.
The Bush administration is still trying to play catch up, seeking ways to offset foreign advantages rather than create winning strategies for the United States. Near the close of his speech to the conference, President Bush noted that "great economies do not get weak all at once. They get slowly eaten away." This is absolutely true, but during his watch, and that of his predecessor, one sector of the American economy after another had been eaten away by foreign rivals, often in very large bites. And the foreign appetites are still not satisfied.
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This is the one statement that alwasy confuses the heck out of me. I understand the problem with long-term, recurring trade deficits in many sectors of the economy, but I've always contended that these numbers tend to be almost meaningless over the last few months because of the enormous impact that energy prices have on trade balance figures.
When it comes to the country's trade balance in commodities that are not end-products themselves but are only raw materials to be used elsewhere in the chain of production/consumption, I would make the case that a large trade deficit is a GOOD thing. If the U.S. maintains a trade deficit of $X in oil, for example, then this is a clear sign to me that oil is more readily obtained at lower cost outside the U.S. If we didn't have access to this foreign oil, we'd be spending $X plus more on the same oil.
Importation of raw materials is not necessarily "bad" if the materials are being further processed in value-added industries that create wealth. However, if those productive industries are themselves in decline, and utilization of the imported materials is increasingly used to sustain the consumptive service sectors, then wealth creation is in decline and is actually being dissipated. That WOULD be "bad".
Yet we have an $11 trillion economy and it's still growing. No other economy even comes close.
What's the national debt up to now? You have to at least subtract the debt ceiling from that total.
Hasn't the national debt been raised to something like $8 trillion --- which means the $11 trillion economy leaves only something like $3 trillion once the debt is taken into account.
In some sense, yes. However, GDP is an annual figure. The debt figure is cumulative. Still, we must compare apples to apples. Other countries also have debt.
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