The recession is a wake up call. Americans need to confront
some false gods -- free trade, gas guzzlers and Wall Street.
In the 1990s, the U.S. launched the World Trade Organization
and opened trade with China. Americans were to import more tee-shirts and TVs
and sell more software and sophisticated services to a world hungry for U.S.
know-how. That would move Americans into better paying jobs.
Unfortunately, the U.S. welcomed imports with more
enthusiasm than China and other developing countries, which kept high tariffs
and notorious regulatory barriers to purchases of Western products. America�s
CEOs and bankers learned how to outsource just about everyone�s job but their
own -- radiologists and computer engineers joined textile workers among
Since the last recession, imports have jumped nearly $1
trillion, while exports are up only about $650 billion, and the trade deficit
now exceeds $700 billion. For most Americans inflation-adjusted wages have
stagnated or fallen, while corporate CEOs and bankers get fat on bonuses and
can�t lose stock options.
China is the biggest problem. It subsidizes foreign
purchases of its currency, the yuan, more than $460 billion a year, making
Chinese products artificially cheap at Wal-Mart. The U.S. trade gap with the
Middle Kingdom has swelled to $250 billion.
Mercantilist growth in China and elsewhere in Asia has
pushed up global oil prices nearly five fold in six years, and the U.S. oil
deficit is now $350 billion and rising.
To raise our kids, finance a huge trade deficit and
generally live beyond our means, Americans borrowed from foreigners.
Essentially, the banks wrote ever-more creative mortgages
and extended excessive credit card and auto loans. The banks bundled those
markers into highly complex bonds, designed to generate fat paydays for loan
brokers and bank executives, and sold risk-laden securities to foreign
governments, insurance companies, pension funds, and wealthy investors.
When the worst of the bogus bonds collapsed, those backed by
risky adjustable rate mortgages, the banks got stuck with billions of yet
unsold bonds. Bear Stearns collapsed, and the Federal Reserve loaned the banks
and Wall Street securities dealers $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 ideas about free trade and
capitalism. If you are an autoworker and lose your job to Korean imports, as a
good economist, he tells you to go to school and find another job. If you are a
New York banker caught paying yourself too much and run short of foreign
investors to fleece, he makes you a big loan lets you hunt for other unwitting
Now foreign investors are nervous about all the money they
have lent Americans and the integrity of U.S. banks. They are fleeing dollar
investments for euro-denominated securities, gold, oil, and just about anything
sounder than the greenback.
Americans are forced to cut back, not just on purchases of
cheap Chinese coffee makers, but also products made in America. That pushes the
economy into recession.
Digging out requires us to cut the trade deficit and clean
up Wall Street. Simply, we need to burn less gas, balance commerce with China
and live within our means.
We can either let the price of gas double to force
conservation or accept tougher mileage standards. Fifty miles a gallon by 2020,
instead of the 35 currently planned, is achievable, but means more hybrids and
As long as China subsidizes the sale of yuan to Wal-Mart and
other U.S. importers, the U.S. Treasury should tax dollar-yuan conversions.
When China stops manipulating currency markets, the tax would stop. That would
reduce imports from and exports to China, create new jobs in the U.S., raise
U.S. productivity and workers' incomes, and reduce the federal deficit.
Ben Bernanke has given the banks a lot and received little
in return, except a lot of bad loans. He should condition the Fed�s largesse on
reforms at the big banks, even if that means lower pay for Wall Street bigwigs.
Let the bankers try earning their money. Just like the rest
Here are my forecasts for upcoming economic data:
Income � Feb 0.3% 0.3
Spending 0.2 0.4
Index 0.2 0.4
PCE Index 0.2 0.3
Personal Spending 0.0 0.0
Cons Sentiment - Mar (r) 70.0 70.5
of March 31
PMI � Mar 44.0 44.5
Spending � Feb -0.9% -1.7
Index � Mar 47.5 48.3
Prices 71.0 75.0
Sales - Mar 15.21m 15.38*
Sales 7.21 7.31*
Sales 8.00 8.06*
as published by Motor Intelligence
Employment � Mar -23k -23
Orders - Feb -0.7% -2.5
Goods Orders -1.7 -1.7
Goods Orders 0.4 0.3
Services � Mar 48.2 49.3
Payrolls � Mar -35k -63K
Payrolls -25k -52
Rate 5.0% 4.8
Work Week 33.7hrs 33.7
Earnings 0.3% 0.3%
of April 7
Credit � Feb 7.0$b $6.9
Inventories � Feb 0.4% 0.8
Home Sales � Feb 87.0 85.9
Balance - Feb -$56.7b -58.2
Budget � March -$85b -175.6
Prices � Mar 0.5% 0.9
Prices, ex agriculture 0.5
Prices - Mar 2.7 0.2
Prices, ex petroleum 0.4% 0.6
Prices, petroleum 11.5 -1.5
Morici is a professor at the University of Maryland School of Business and
former Chief Economist at the U.S. International Trade Commission.