Thomas Palley: The Fed and America’s Distorted Expansion

Thomas Palley and I have different views on globalization:

The Fed and America’s Distorted Expansion, by Thomas I. Palley: The U.S. economy has been in expansion mode since November 2001. Though of reasonable duration, the expansion has been persistently fragile and unbalanced. That is now coming home to roost in the form of the sub-prime mortgage crisis and the bursting house price bubble.

As part of the fallout, the Federal Reserve is being criticized for keeping interest rates too low for too long, thereby promoting credit and housing market excess. However, the reality is low rates were needed to sustain the expansion. Instead, the root problem is a distorted expansion caused by record trade deficits and manufacturing’s failure to fully participate in the expansion.

If the Fed deserves criticism it is for endorsing the policy paradigm that has made for this pattern. That paradigm rests on disregard of manufacturing and neglect of the adverse real consequences of trade deficits.

By almost every measure the current expansion has been fragile and shallow compared to previous business cycles. Beginning with an extended period of jobless recovery, private sector job growth has been below par through most of the expansion. Though the headline unemployment rate has fallen significantly, the percentage of the working age population that is employed remains far below its previous peak. Meanwhile, inflation-adjusted wages have barely changed despite rising productivity.

This gloomy picture justified the Fed keeping interest rates low. However, it begs the question of why the economic weakness despite historically low interest rates, massive tax cuts in 2001 and huge increases in military and security spending triggered by 9/11 and the Iraq war?

The answer is the over-valued dollar and the trade deficit, which more than doubled between 2001 and 2006 to $838 billion, equaling 6.5 percent of GDP. Increased imports have shifted spending away from domestic manufacturers, which explains manufacturing’s weak participation in the expansion. Some firms have closed permanently, while others have grown less than they would have otherwise. Additionally, many have reduced investment owing to weak demand or have moved their investment to China and elsewhere. These effects have then multiplied through the economy, with lost manufacturing jobs and reduced investment causing lost incomes that have further weakened job creation.

The evidence is clear. Manufacturing has lost 1.8 million jobs during the expansion, which is unprecedented. Before 1980 manufacturing employment hit new peaks every expansion. Since 1980 it has trended down, but it at least recovered somewhat during expansions. This business cycle it has fallen during the expansion. The business investment numbers tell a similar dismal story, with spending being much weaker than in previous cycles.

These conditions compelled the Fed to keep interest rates low to maintain the expansion. That policy worked, but by stimulating loose credit and a house price bubble that triggered a construction boom. Thus, residential investment never fell during the recession and has been stronger than normal during the expansion. Construction, which accounted for 5 percent of total employment, has provided over twelve percent of job growth. Meanwhile, higher house prices have fueled a borrowing boom that has enabled consumption spending to grow despite stagnant wages. This explains both increased imports and job growth in the service sector.

The overall picture is one of a distorted expansion in which manufacturing continued shriveling while imports and services expanded. This pattern was carried by an unsustainable house price bubble and rising consumer debt burdens, and that contradiction has surfaced with the implosion of the sub-prime mortgage market and deflation of the house price bubble.

The Fed is now trying to assuage markets to keep credit flowing, and it will likely soon lower interest rates. On one level that is the right response and it may even work again – though it does increasingly seem like sticking fingers in the dyke to prevent the flood. However, the deeper problem is the policy paradigm behind the distorted expansion, which is where the Fed is at fault and where it deserves criticism.

The ideological and partisan Alan Greenspan wholeheartedly endorsed corporate globalization and promoted the White House and Treasury’s unbalanced expansion policies. The Fed’s professional economics staff also seems to have dismissed domestic manufacturing’s significance and endorsed corporate globalization in the name of free trade. Consequently, the Fed has tacitly supported the underlying policy paradigm that has given rise to America’s distorted expansion. Despite talk about reducing global financial imbalances, the Bernanke Fed still seems locked in to this paradigm and that is where constructive criticism should now be directed.

Ben Bernanke gave a speech yesterday called "Global Imbalances: Recent Developments and Prospects," and while I suspect Thomas might disagree with the reasons Bernanke gives for the imbalances, the Fed is thinking about this issue.

Comments

[John]

tricky, tricky tricky.

Economics is so easy to make what you want of it for your agenda.

All you have to do is take the true part of half truths and use them to make the false part of another related half truths seem valid.

There's so much truth in economics but so much of it can be can be used to make and bolster false arguments...and that's the danger....

then we wind up with agenda driven assessments like this one by Palley who takes truth and uses it to distort.

[gordon]

"The Fed’s professional economics staff also seems to have dismissed domestic manufacturing’s significance and endorsed corporate globalization in the name of free trade".

So I suppose all the old supporters of free trade at any price will one more climb out of their coffins and start shambling around again groaning "brains, brains!" Where is Buffy when we need her?

[Steve]

Seems like a pretty accurate account of the last six years to me.

[PeterRabid]

"The answer is the over-valued dollar and the trade deficit, which more than doubled between 2001 and 2006 to $838 billion, equaling 6.5 percent of GDP."

A number of regular commenters on this blog have strongly favored devaluing the Dollar. But how to devalue the Dollar, when China and the various Asian tigers keep pegging to it? The Euro is obliged to bear the brunt of revaluation, which seems unfair for Europe and doesn't help the USA that much.

It now seems clear that international imbalances are approaching a state of impending emergency. These imbalances are essentially due to currency manipulation by China. Other countries are involved, but if China moved to faster revaluation, the others would surely follow. In any case, the US can make a good case for declaring a state of emergency and imposing temporary tariffs or quotas, which I believe are permitted by ITO treaty in case of emergency, or currency manipulation by a trading partner.

Perhaps even the threat of such action would be sufficient to get the Chinese to ease their manipulation.

Or should we wait and hope that the growing inflation and other imbalances inside the Chinese economy will prompt them to move on their own?

Some economists think that a Dollar devaluation won't help that much, but I prefer to rely on Brad Setser, who seems to be the most informed of bloggers on the international economy, and who believes that exchange rates do matter.

Mark and informed commenters, let us know what you think !

[groucho]

The problem with globalization is/was not loss of manufacturing. The problem was/is the "inflation miscalculation".

To bring on board the ex-commies is a wonderful thing for world development, peace and a nice buffer against the Islamic movement.

Once out-sourcing started in earnst, the west needed to stop depreciating their currencies. A beautiful virtuous "deflationary" cycle would have been the result. US i-rates would have been somewhat higher. Citizens would have saved some of their "profit" and a true "goldilocks" economy would have developed.

But, alas, the greed of wall st with FED backing wanted to turbo-charge their "profits" and instead we have back to back bubbles(ponzi schemes) and their is little hope for a majority of citizens for any increase in their standard of living in their lifetime.

What a disaster!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[Winslow R.]

"while I suspect Thomas might disagree with the reasons Bernanke gives for the imbalances, the Fed is thinking about this issue."

How so?

From reading both essays I can find little reason that they would disagree with each other.

They all come up short as to what is the best way to 'adjust'?

Forget about the 'best' way and just propose a way. Tricky stuff this tiptoeing around. Is it really the thought of a cush job as a political hack that keeps economists quiet?

My suggestion is to find an economist willing to sacrifice his dream of political appointment and have him write up the consensus view. All other economists post this view on their blogs with various negative introductions. This way the heat is concentrated on one poor hapless martyr.

My guess is this is the way the banking crisis will be resolved. One bank will be chosen martyr and will proceed to purchase all the bad debts of every other bank and then be allowed to go belly up.

[S Brennan]

I thought Thomas make some valid points, many of his detractors above post refutations which are lacking in facts.

As an engineer who owns a company that produces product in Canada and the US which we sell in Europe, I can tell you first hand the long steady decline of US industrial capacity.

There are many reasons for the decline of US manufacturing, but none them point to a failing in the inventiveness or lack of industry of the ordinary North American people. All of the reasons I could cite relate to a inherent lack of interest by the ruling oligarchs in the need for industrial capability, both for short and long term security.

On many occasions the US military has tried to point out that having our industrial capacity lie in the hands of our potential rivals is insanity. Any prolonged large scale war...and Iraq is not...would see the US helpless to project power six months into the conflict. For those who want historical precedent for my conjecture I suggest you get some background on the relationship of Belgium, Krupp and 1914.

We are a world power, we need an industrial policy that commits to robust capacity, for both short and long term security. Having just spent 7 years coercing enemies all over the world form alliances in opposition to our hegemony, perhaps we need to stop fighting shadows and address the problems facing us as a nation. Surely our opponents will note our lack of industrial capacity and develop strategies that will exploit our weakness. Having the best fighter in the world matters little if it is grounded because it lacks spare parts. Last time I checked steel production, which involves minute amounts of labor.

China 394.9 Mton
Japan 112.5 Mton
United States 94.9 Mton
Russia 66.1 Mton
South Korea 47.8 Mton
Germany 44.5 Mton
Ukraine 38.6 Mton
India 38.1 Mton
Brazil 31.6 Mton
Italy 29.3 Mton

I include this link because it describes with eerie detail maladies that plague almost all of US manufacturer groups.

http://www.rand.org/pubs/research_briefs/RB1500/index1.html

[dissent]

The decline of manufacturing reflects the political dominance of Wall Street combined with corporations committed to offshoring productive capacity. It is essentially a political deal: the voters have been left out. What is important to note is that profit for multi-nationals and financiers has been allowed to trump the interests of yes, workers, but also the national interest more generally.

This political equilibrium will only be altered by severe failure, followed by a breakdown of equilibrium, followed by a search for a new balance between interests. We are nowhere near the turning point yet.

It will be interesting to see if Wall Street loses any political credibility as a result of the failures of its financial innovations.

[MT57]

"The answer is the over-valued dollar and the trade deficit..." I am not sure that is "the answer" as much as it may be a concurrent symptom of some deeper cause.

I would also conjecture that one reason the private sector growth is so shallow is the same reason, I believe recessions have become less severe: the public sector has grown so large. I saw a remarkable statistic in Reason magazine, attributed to A Gary Shilling, that 52.6% of all Americans now depend on a federal, state or local government for their income, either for services (military, police, governor, teacher, etc.) or as pure transfer payment. As a result, I believe, recessions are dampened by that massive amount of stable income (stable in the short and medium term, that is), but also I suspect it limits the productive power of the economy and thus the upside, and it appears to me to clearly affect our trade deficit - their output is mostly services and is not very exportable, yet they by and large live a middle-class lifestyle and demand imports like anyone from the private sector. So far, the minority of the population that works in the private sector has depended on productivity and innovation in certain fields to keep the public sector employed. But we are becoming slowly more and more like slow-growth Europe than the more robustly growing economies of the world.

I note a number of the replies above treat this as a distributive issue within the US and I respectfully suggest those replies are a) wrong and b) examples of the problem.

[PeterRabid]

Palley and Bernanke may be closer to agreement than Mark suspects. According to Setser's blog today -

"Dr. Bernanke certainly understands China's role in this process. Last fall, he correctly called Chinese reserve accumulation a de facto subsidy for Chinese exports. He also recognizes that the world’s large deficits (and surplus) are ultimately unsustainable, and that a rather large change in the global pattern of economic activity is required to bring the world back into balance"

Bernanke says the sooner we start rebalancing, the better. His position probably precludes advocating retaliation publicly,but I wonder what he might be whispering to Schumer or the guys over at Treasury.

[gordon]

S.Brennan's link was interesting. It took me down memory lane to the 1980s when there was a lot of work on manufacturing decline similar to the RAND study to which he linked. I wonder if I still have a copy of Michael Porter's "The Competitive Advantage of Nations"?

[Winslow R.]

MT57 wrote:"I saw a remarkable statistic in Reason magazine, attributed to A Gary Shilling, that 52.6% of all Americans now depend on a federal, state or local government for their income, either for services (military, police, governor, teacher, etc.) or as pure transfer payment."

My guess is the other 47.4% are tied to finance or rather transfer payments from the debt growth industry.

The stability of China's government is intimately tied to the stability of the American consumer who is intimately tied to nonbank intermediation which is intimately tied to bank intermediation which is intimately tied to Fed policy.

Shaking China loose, even if needed, by swinging around the American consumer seems to be bad mechanics and Bernanke knows this.

He also knows his inversion of the Fed funds rate is currently affecting nonbank profits in this chain of intimacy.

How to get Fed policy to directly impact the American consumer spending while removing the distortions of the 'financial sector' on the market?

The financial sector is 'the other' source of market distortion.

[gordon]

I guess the item in Reason magazine referring to Shilling is this one. Back in the 1980s (and for many people, the 1970s and 1960s too), such a statistic would have provoked a lot of rage against welfare bums. Perhaps nowadays there are too many dependent on welfare of one sort or another for that sort of reaction to be politically possible.

In my experience, most people prefer to support themselves through working if they can. S.Brennan's comment above is a valuable reminder that to road to making that again possible for many people may not go via either blaming other countries (like China) or financial manipulations of the exchange rate or interest rates. More substantial "rebalancing" is likely to be required.

says...

This guy sounds like Schaeffer minus immigration.

[Winslow R.]

The idea of a nation on the dole is accurate for any economy, just the degrees of freedom its citizens reside from the spigot changes from country to country.

Too few understand the origin of new 'money' - even economists. To comprehend that the system is no longer liquidity constrained one needs to take a large leap in understanding. Not that banks don't re-lend deposits, its just deposits are no longer the sole source of funds as the Fed stands ready to lend at a publicly declared rate.

Bend your mind around the fact that banks don't really need deposits and the flows begin to make sense.

Too few understand that without the need for deposits for new lending, taxes can be reduced and savings increased, and the accumulation of wealth has no set limit that will cause the system to collapse. People putting money under their mattresses rather than in banks has no effect except to reduce bank profits as they increase the funds borrowed from the Fed rather than depositors. The amount of money in mattresses can be infinite as it draws no interest and is eaten by inflation. As long as money remains under mattresses in doesn't need to be taxed as it is not demanding goods and services.

Next, as some one's savings requires another person's debt, debt has no limit. To support this infinitely inflatable debt structure requires sufficient money flows to the individuals making payments on that debt.

If the flows are insufficient, bankruptcy and collapse of parts of the debt structure result. The Fed can attempt to adjust its rates, as well as temporarily inject liquidity into the system through the repo market to try and keep the price level constant while keeping the debt structure intact.

At some point the Fed reaches the lower bound of zero and then must resort to targeted purchases of various assets classes, crossing over into the political realm. As it approaches the zero bound, it starts to berate savers in the hope they will increase spending sufficiently to support the debt structure.

Wealth consolidation has then reached a 'monetary' maximum. To consolidate further requires government intervention. The 'fiscal' maximum is only reached once politically it is no longer possible to increase deficit spending. Otherwise there is no limit of the government to support of a debt structure.

To decrease the amount of government spending and to increase the number of transactions generated by a broad spectrum of the private sector requires the private sector must become the main money generator, the fountain that spews forth liquidity, guided by the invisible hand of capitalism.

Human labor becomes the leveraged asset upon which loans are made.

Minimum job for everyone that wants to work for an employer.

Minimum loan for everyone that wants to be an entrepreneur instead.

[Winslow R.]

The idea of a nation on the dole is accurate for any economy, just the degrees of freedom its citizens reside from the spigot changes from country to country.

Too few understand the origin of new 'money' - even economists. To comprehend that the system is no longer liquidity constrained one needs to take a large leap in understanding. Not that banks don't re-lend deposits, its just deposits are no longer the sole source of funds as the Fed stands ready to lend at a publicly declared rate.

Bend your mind around the fact that banks don't really need deposits and the flows begin to make sense.

Too few understand that without the need for deposits for new lending, taxes can be reduced and savings increased, and the accumulation of wealth has no set limit that will cause the system to collapse. People putting money under their mattresses rather than in banks has no effect except to reduce bank profits as they increase the funds borrowed from the Fed rather than depositors. The amount of money in mattresses can be infinite as it draws no interest and is eaten by inflation. As long as money remains under mattresses in doesn't need to be taxed as it is not demanding goods and services.

Next, as some one's savings requires another person's debt, debt has no limit. To support this infinitely inflatable debt structure requires sufficient money flows to the individuals making payments on that debt.

If the flows are insufficient, bankruptcy and collapse of parts of the debt structure result. The Fed can attempt to adjust its rates, as well as temporarily inject liquidity into the system through the repo market to try and keep the price level constant while keeping the debt structure intact.

At some point the Fed reaches the lower bound of zero and then must resort to targeted purchases of various assets classes, crossing over into the political realm. As it approaches the zero bound, it starts to berate savers in the hope they will increase spending sufficiently to support the debt structure.

Wealth consolidation has then reached a 'monetary' maximum. To consolidate wealth further (or further inflate the debt structure) requires government intervention. The 'fiscal' maximum is only reached once politically it is no longer possible to increase deficit spending. Otherwise there is no limit of the government to support a debt structure.

To decrease the amount of government spending and to increase the number of transactions generated by a broad spectrum of the private sector requires the private sector must become the main money generator, the fountain that spews forth liquidity, guided by the invisible hand of capitalism.

Human labor becomes the leveraged asset upon which loans are made.

Minimum job for everyone that wants to work for an employer.

Minimum loan for everyone that wants to be an entrepreneur instead.

[PeterRabid]

Gordon wrote:
"S.Brennan's comment above is a valuable reminder that to road to making that again possible for many people may not go via either blaming other countries (like China) or financial manipulations of the exchange rate or interest rates. More substantial "rebalancing" is likely to be required."

I agree entirely ! This, however, may take some time -and a new President.

In the short term, what about action to counter an impending emergency? China's currency manipulation, IMHO, is illegal, probably a violation of ITO accords. I understand their difficult situation internally, but they need to find solutions consistent with being good citizens of the international community.

As long as China can buy unlimited amounts of Dollars and Euros, while their exchange controls prevent any counterattack via the currency markets, exceptional measures are needed.

[wjd123]

What is the solution for getting our trade imbalance with China back into balance. It's nice that China and the United States recognize that there is a problem but what are they going to do about it?

China, meanwhile, has recognized the need to increase its domestic spending and scale back its reliance on exports, Bernanke said. Those and other measures will help global trade imbalances over time, he added....

This is a recurrent theme of those in charge. We just heard from Ambassador Crocker that Iraq's central government recognizes that steps toward reconciliation need to be taken. However, like China, the steps that are needed never seem to be taken.

How long do we wait for either country to do what is necessary? Like the "dollar auction" game when do we cut our loses and say enough, "We'll take our lumps rather than continue with the ruinous escalation." In Iraq it's a matter of removing our troops; in China it's a matter of imposing tariffs. In taking these actions, unlike the game, there are unknown consequences.

Are we going to hope against the odds and gradual ruination that a solution will be found, or are we going to act, see what happens, and deal with the consequences.

I vote for bringing the situations to a head. Start withdrawing our troops from Iraq, and start imposing tariffs on China.

Bernanki votes to hope.

"As best we can tell, the share of U.S. assets in foreign portfolios does not seem excessive relative to the importance of the United States in the global economy," Bernanke said.

[PeterRabid]

Hurrah wjd123

Let's have some more input on this !!!

[groucho]

"the private sector must become the main money generator, the fountain that spews forth liquidity, guided by the invisible hand of capitalism."

Hallelujah, finally, a man of reason and insight. The means to this end is electronic technology. Banking traditionally supplied liquidity through REAL BILLS. The FED was set up to help with making this liquidity more "flexible".

That Gov't has co-opted this mechanism is no surprise. Gov't wants a free lunch......gov't gets a free lunch.

To rectify the family standard of living "gap" drain that the current system has produced, requires a return to productive asset/labor information capture.

Today we have FICO scores and rating agencies which are truly creatures of ponzi. In the future we will have production scores that will provide information on the potential productive capacity of an individual or groups.

Corporate share prices should be telling that information today but govt interference in real i-rates distorts the information content of assets and fool large segments of the population to chase after the herd only to be run off the cliff like the buffalo.

[wjd123]

PeterRabid,

Dani Rodrik recommends "A (crazy?) solution to the US China trade problems." Only he doesn't think its as crazy as it sounds and he certainly believes that it's preferable to tariffs.

http:rodrik.typepad.com/dani_rodriks_weblog/2007/07/inc

Here is his solution in his own words:

Hence the current dilemma: Pushing China to revalue its currency is damaging to China's economic growth, and ultimately to its social and political stability. But doing nothing on the currency front risks dangerous unilateralism on the part of the U.S.

But there is a way to de-couple China's trade balance from its need to encourage exportable industries, and that is to allow China to subsidize its industries directly, instead of through the exchange rate. In fact, China can provide any and all inducements it wants to its modern industries through fiscal instruments and still run a balanced trade account. A subsidy on tradables in conjunction with currency appreciation enables precisely that, as it generates more imports alongside more exports.

(This might seem puzzling at first, because it appears that the appreciation would offset the effect of the subsidy on the profitability of tradables. But the offset is necessarily partial since an appreciation reduces the trade surplus through a second channel, namely by encouraging consumption of importables. To use a numerical example, a 20% subsidy would require, say, a 10% appreciation to offset its effect on the current account, still leaving a roughly 10% increase in the relative profitability of exportables. The actual numbers will depend on elasticities of demand and supply.)

Subsidies are of course costly to the budget, but China can easily afford them. In any case, it is not clear which is the more expensive strategy for China: outright subsidies or accumulating costly reserves to stem the appreciation of the currency?

WTO rules currently do not allow countries to subsidize their industries when these subsidies have an effect on export levels. This prohibition has little economic logic behind it in any case. So exempting China (or any other country for that matter) from these rules will hardly do any damage. And it would have the big advantage of creating the policy space to overcome one of the most important policy challenges of our time. The quid pro quo would be this: you can subsidize your industries as much as you like; but you cannot let the currency stray too far from where it needs to be to generate (rough) external balance. This will allow China to pursue its highly-successful growth strategy without imposing large current account deficits on other countries.

It's one way to try and get the Chinese to spend more and save less. Something Bernanke says is necessary to relieve pressure in the United States for tariffs. Will it work to loosen the purses of the Chinese and promote consumption. I don't know? It seems logical, but we are not dealing with some universal economic man but the Chinese people under their government.

I would be willing to give it a try but I suspect negotiations would just turn out to be another way both countries could stall from doing anything by easing the pressure for protectionism.

If the WTO wants to make a bargain let it be quick about it, we are the member with an $800 billion yearly trade deficit. Without the pressure for tariffs we will continue with the status quo: Doing nothing and hoping that fate intervenes to saves us form a trillion dollar imbalance. I'm not willing to decrease the pressure for tariffs while we jawbone for the next five years. Time for benchmarks.

[wjd123]

PeterRabid,

Here is the link on Bernenke's views. I forgot to include it in my first post.

http://money.aol.com/news/articles/_a/bernanke-urges-trade-imbalance-fix/20070911113809990002

[Frustrated aka Robert]

I apologize, for this moment of blurting, but comments here often frustrate me. The frequency with which many comments reduce the argument to the simplistic idea that some nameless faceless 'plutocrats' or 'oligarchy' are to blame for our economic turmoil is defeating. As if this secret group meets at the local Masonic lodge gives the secret handshake and decides lets not build any more factories. It is just absurd. For those who do wield a disproportionate influence over economic policy by either political or financial clout, it seems unreasonable that they make any decisions other than appropriate responses to the demands of the market (e.g. lower price goods vs. manufacturing jobs). These 'secret powers' would only be making these poor decisions by omission rather than logical conclusions. If they do exist, just like Bigfoot does, their failures would come about via the focus on short term gains traded off at the expense of long term growth.

To bring this back to the subject, the trade imbalance is a simple fact of international comparative advantage. I agree with the basis of your thoughts P. Rabbid, but I don't believe protectionism and/or predatory trade practices will bring long run balance to the equation. Obviously it may be necessary to stop the bleeding in the short run, but increased investment in our nation's comparatively advantageous forms of production (e.g. technological development, intellectual properties, etc.) is the my thoughts the only logical long-term way to rebalance trade.

[PeterRabid]

wjd123

Export subsidies seem like a great idea, but how to convince the Chinese?

Robert

Currency manipulation as practiced by China is objectively a "predatory trade practice". I am advocating unly temporary emergency measures, whether they be subsidies, tariffs, quotas, or casting voodoo spells. Whatever works.

[gordon]

The projection of the subsidy idea onto China made me smile. Obviously the US itself should subsidise its manufactured exports and depreciate its currency to raise import prices. This is the mirror image of what Prof. Rodrik proposes for China, and in line with Prof. Rodrik's advocacy of industrial policies over many years. I'm more than half convinced that he phrased the proposal the way he did because it's not politically possible to make such proposals in the US, but if they are projected onto a foreign country it's OK.

[S Brennan]

Frustrated aka Robert says above..."I apologize, for this moment of blurting, but comments here often frustrate me."

Frustrated aka Robert, I understand. Often times poorly socialized individuals have the same problem, they become frustrated when the real world does not meet the preconceived expectations. Often they lash out at those around them.

Take the words like 'plutocrats' or 'oligarchy' that seem to send you into apoplexy, they are Greek words in origin created to describe complex human behavior that the Greeks observed, the Romans thought their observations astute, as did the Holy Roman Empire, as did Charlemagne's court, as did the people of the Renaissance [you'd really hate Machiavelli ], then of course our nation was founded upon the age of reason and the founders greatly admired the Greco Roman world. But you...well...these terms don't fit your preconceived notions...so you throw a hissy fit because you think people shouldn't use those terms because...because, suddenly at your birth the world changed and those behaviors ceased to exist? Because, you say so?

Here's another one:

I say:

"All of the reasons I could cite relate to a inherent lack of interest by the ruling oligarchs in the need for industrial capability" - S Brennan

And you hear:

"As if this secret group meets at the local Masonic lodge gives the secret handshake and decides lets not build any more factories." - Frustrated aka Robert

So if I understand your "reasoning", lack of interest is the equivalent of conspiracy? Hmmm, most crimes do in fact involve conspiracies, but I've never heard of a perpetrators claiming they were involved, but were lacking any interest? Really Robert, you really must try harder when casting aspersions.

From your statements, I can see your frustration...but you need to look inward for relief. That's not to say you're not free to claim our society is free of stratification if you like, but you need to use more than personal innuendo to make your case.

Best,

S Brennan

[wjd123]

gordon,

I'm not sure what you mean by mirror image? Rodrik wants the Chinese to "appreciate" their currency and subsidize their industries. The idea is to get them to spend more on domestic and imported goods and save less. If the mirror image is the "depreciation" of the dollar wouldn't the mirror image for subsidies be the U.S. being WTO rule bound and China unbound? If not, where is the compromise?

[gordon]

WJD123, I'm a bit puzzled by your question. By "mirror image" I meant that Rodrik is making policy suggestions for the US, but projecting them onto China because, basically, he has to. So to say that China should directly subsidise exports but allow its currency to move to a trade-determined level means, in US terms, that the dollar should fall and that an exports subsidy should also be adopted (if needed) to rectify the US trade deficit.

Prof. Rodrik doesn't like the WTO prohibition on export subsidies. This attitude is part of his preference for larger "policy space" for industrial policies in developing nations. So we can, I think, read into "export subsidies" the more general concept of industrial policy and all its policy tools. If this is right, Rodrik is really making an argument for industrial policy in the US, with implied freedom for other countries (including China) to do the same. As far as multilateral trade is concerned, I think Rodrik would prefer to see a much less prescriptive environment, more like the old GATT.

I don't know whether Rodrik is right. But I do think that the US should come up with domestic and trade policies of its own to resolve the trade deficit, and not just blame China. Your own earlier comment "...I'm not willing to decrease the pressure for tariffs while we jawbone for the next five years. Time for benchmarks" gets a lot of sympathy from me, although (maybe because) I'm not an American.

One problem with the Rodrik prescription will be the actual mechanics of setting a trade-determined exchange rate. This should occur naturally as dollar payments for Chinese imports to the US are either spent on US products to be exported to China or are repatriated (exchanged into Yuan and spent at home). But at present neither mechanism operates - the Chinese simply accumulate huge dollar balances. Selling these off slowly will push the dollar down, but the process is risky and needs to be highly transparent. One obvious snag is the oil exporters ramping up the nominal price of crude to compensate themselves for the declining real value of the dollar. Maybe this is a good reason for US industrial policy to have a focus (among other things) on really carbon-efficient processes and infrastructure.

Another problem is that China will have to run a pretty substantial manufacturing trade surplus to finance raw material imports, technology transfer and domestic investment for a long time to come.

[PeterRabid]

An excellent article in today's links underscores the priority that must be given to ending China's currency manipulation (although the terminology is more diplomatic), while putting the whole question in longer term perspective from the Chinese point of view.

Don't miss it !!
China as an international investor - vox eu
http://www.voxeu.org/index.php?q=node/547

[wjd123]

gordon,

Thanks for your excellent clarification.

I read "mirror image" to mean the "reverse image" like you would get if you held a word written on a sheet of paper up to the mirror. I don't know why I didn't pick up on the idea of projecting. I see where I could have, but I didn't. I was looking at appreciation and depreciation as being opposites. Reading what you wrote with that idea in mind caused my confusion.

Thanks also for the link. I don't disagree with the abstract but I haven't read the paper. I get leery when government and business collaborate. I fear that business will undermine the functions of government. For instance independent public service commissions in time seem to lose sight of consumer concerns and focus more on business concerns. And then there is Bush who thinks of himself as the CEO of America. That's the type of mindset where stakeholder concerns can easily be lost sight of.

The right model for industrial policy is not that of an autonomous government applying Pigovian taxes or subsidies, but of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what type of interventions are most likely to remove them.--Rodrik

I can't disagree with this, yet as soon as I read it a little yellow caution light went off in my mind. I'll be looking for greater inpute into industrial policy than just business, that is, if business doesn't include all stakeholders. We have already seen what happens when "business" and government collaborate on trade agreements.

PS. How do you get your links to insert within you text? I've tried it a number of times and failed.

[gordon]

WJD123, I tried to give an example of a link but the software took me seriously and turned it into a link! Try this page and go to Example 2.

I’m perhaps a little less concerned about the negative possibilities of industrial policy because I saw it working quite well in Australia 1983-1996 under the Hawke and Keating Labor Governments. But maybe that sort of approach isn’t transferable to the US.

[Frustrated aka Robert]

Brennan

"So if I understand your "reasoning", lack of interest is the equivalent of conspiracy?"

Obviously you do not understand my reasoning.

"Frustrated aka Robert, I understand. Often times poorly socialized individuals have the same problem, they become frustrated when the real world does not meet the preconceived expectations. Often they lash out at those around them."

"Really Robert, you really must try harder when casting aspersions."

Yes, I guess I am the one at fault here.

I still find your use of the term oligarch not germane to the discussion here.

As much as I do not appreciate the condescending self-righteous tone of your lecture Brennan, I would suggest that rather than offer an obviously defensive tirade. You deal with your issues of self efficacy and stick to history or literature and the origin of words (although you may want to begin by brushing up on subject verb agreement). It's better to leave economics to those versed in the subject.

Though this makes a nice passive-aggressive closing
“Best,”
Robert

[Steven Capozzola]

Please share your lost manufacturing jobs stories.

We’re a national, non-partisan group dedicated to strengthening U.S. manufacturing. Our blog, ManufactureThis.org, covers issues related to trade policy and saving U.S. manufacturing jobs. As of today, we’ve begun compiling firsthand accounts of the carnage left behind when factories close and jobs leave the country.

We’re asking you to please sound off, and share your stories. You can either email me at scapozzola@aamfg.org to send a article or story (to be featured on the blog), or go directly to the blog and post a comment.

The launch of this new story feature is available at:
http://www.manufacturethis.org/2007/10/01/and-the-stories-start-rolling-in/

Thanks.