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A World Without a China

Americans have some odd ideas about the strength of the Chinese economy:

In the poll, only one in five Americans said that the U.S. economy is the world’s strongest — nearly half picked China instead. Looking forward, Americans are somewhat more optimistic about regaining primacy, but still only about one in three expect the U.S. economy to be the world’s strongest in 20 years. Nearly three-fifths of those surveyed said that increasing competition from lower-paid workers around the world will keep living standards for average Americans from growing as fast as they did in the past. Ruben Owen, a retired Boeing engineer in Seattle who responded to the survey, spoke for many when he said, “We’re still in a reasonably good place … but it’s going to get harder because other places are growing stronger.”

Note that China is not only poorer than the USA, it’s poorer than Ecuador. It’s about half as rich as Uruguay or Belarus. Trinidad has about triple the per capita GDP of China. I think it’s probably true that average living standards in America are no longer the highest in the world, but we’re being beat by the likes of Norway, Switzerland, and the Netherlands not by China. But who knows? Maybe “stronger” just means “growing really fast” in which case China is, in fact, growing really fast.

The larger point is that, as Jamelle Bouie observes, “the world isn’t zero-sum, at least when it comes to the global economy.”

Just think about the impact on the United States if, for no clear reason, everyone in China died tonight. Would that decline in low-wage competition boost American living standards? It’s difficult to see how. Lots of stuff Americans buy is made by Chinese people. If the Chinese people die, we won’t have that stuff. Maybe Americans could make it instead. But then whoever’s making that stuff would need to stop producing whatever it is they’re producing now and start making made-in-China stuff. Either way, it adds up to less stuff being produced. Less stuff = lower, not higher, living standards.

But aha! you say. Currently we have about 9.8 percent of the population unemployed. They’re not producing anything. Absent China, maybe those people would be mobilized and we’d equalize the quantity of production. And there’s something to that. It does seem to be a shame that 9.8 percent of the people in America who want a job producing something are currently producing nothing. And, indeed, it is a shame. But it’s not the existence of China that’s got them in their current state of non-production. It’s poor macroeconomic policy in the United States. We have the ability right now to mobilize many unemployed people and have them do something. We just need to spend money to pay them to do something. Doesn’t “the money have to come from somewhere?” Not really. Money is just made up by the government. If we need more money, the government can create more money. What “has to come from somewhere” is actual productive capacity. But the existence of China doesn’t reduce our capacity to produce. On the contrary, it increases the world’s productive capacity. But America’s political leadership has failed to fully mobilize our productive capacity, leaving more and more people adrift and fantasizing about the notion that somehow doing away with “competition” from foreign producers is the best way to reduce idleness.

The voters are confused about this, but the political leaders are the ones who fundamentally deserve the blame for the sorry current state of affairs.

One of the most discouraging things about the last two years was seeing swing voters in focus groups, when asked what President Obama's economic strategy was, repeat different versions of "Well, I know he said we needed to save the banks. Beyond that, I'm not sure." When Obama in his first State of the Union gave a vigorous defense of bailing out the banks, saying he knew it about as popular as a root canal, and saying "I get it", it was very memorable to voters. But when his predictions about what would happen when the banks were stabilized -- they would start making loans to businesses, and businesses would start hiring -- didn't happen, and instead the banks gave themselves record breaking bonuses, voters turned on Obama fast. In exit polls on Nov. 2nd, when asked who was most to blame for the bad economy, voters by a wide margin said Wall St. was most to blame, and the voters who said that went Republican by a 14-point margin.

Obviously, saving the banks hasn't been the President's only economic strategy. The stimulus bill, while too small, was an important job creator/saver. Saving the American auto industry was an incredibly important thing to do. Health care reform was in part a long term economic strategy. The infrastructure bank idea is a great potential job creator. Extending unemployment insurance helps keep money in the economy. And all the tax cutting going on is clearly meant to have some stimulative effect, although how much is highly debatable.

However, there have certainly been times where Secretary Geithner, who has been the main driver of the economic strategy, seems to think and act as if helping the big banks and helping the economy amount to the same thing. The tepid reaction to the foreclosure crisis has sure felt that way -- apparently we can't freeze foreclosures or do much to help homeowners because it might "endanger" the banks. In fact, I would argue the exact opposite: that our number one economic strategy right now should be to shift money from the big banks to the real economy, to Main Street businesses and workers and consumers. The big banks are hoarding extraordinary amounts of money, and they are clearly not investing it in job creating businesses. They are speculating with it, they are trading with it, they are investing in complicated financial instruments that do nothing to create jobs- in fact, they are sucking capital out of the real economy that might actually create jobs. These massive financial conglomerates have way too much concentrated wealth and market power, and that is weakening the rest of the economy.

This is one reason why, as I wrote a couple of times last week, it is so important to write down the mortgages of homeowners who are underwater. Taking that money out of the bankers' hands and putting it in the hands of the hard pressed middle class would do more to stimulate the economy than any other thing the President could do right now. This is also why the Federal Reserve's new proposed rule, out last week, on swipe fees is so good. It would generally limit swipe fees to 12 cents per transaction. Right now the average is 44 cents, and with most small businesses it's quite a bit higher. If this rule is upheld, this is money that will go straight from the big banks' profit margins into the main street economy -- all told, probably a $15 billion boost going back to retailers, restaurant owners, taxi cab drivers, and hopefully consumers. $15 billion going from Wall Street, speculative economy into the real economy is a nice lift right now. This is why I have been working with retail business leaders and consumer groups to support this new regulation.

Unfortunately, not all Democrats see it this way. Tom Carper and Mark Warner tried to head off the amendment that made this regulation happen in the Senate, and have been lobbying the Federal Reserve against a strong regulation on the subject ever since they lost the legislative fight. And Barney Frank, who is a great liberal on social issues but spends way too much time with bank lobbyists, was whining on Friday how unfair the proposed rule was to the poor bankers.

Barney, you got this one wrong. Democrats should not be looking out for the bankers, we should be looking for every single opportunity we can to drain the Wall St. swamp. The big banks are hoarding money. They have way too much market power, and when their profits expand, they put that money into the speculative economy rather than the real economy that manufactures goods, sells products and services, and creates jobs. When we take a dollar away from them, and put it into the real economy, there is actually a multiplier effect as people on Main Street spend or invest the money in real products. When mortgages get written down, it helps the real economy. When swipe fees on credit or debit card transactions get lessened, it helps the real economy. If we instituted a transactions tax on every trade made on Wall St, and put that money into a jobs program, that would help the real economy.

The big banks are hoarding our money. Our best economic program right now is to shift money from the banks, and put it into the hands of consumers who might actually buy products and businesses who might actually hire more workers.

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Wednesday, December 22, 2010

Making Money Fast

A World Without a China

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