Entries for May 2007

Just how vulnerable is the U.S. economy to troubles in China? It's a question I really started pondering after watching the 6.5 percent drop overnight in Chinese stocks in response to a government tripling of a tax on stock trading. Now Wall Street is sure reacting much better to the decline than it did back in February when the Shanghai Composite index fell 9 percent, sparking a 400-point drop in the Dow Jones industrial average. This time, the Dow industrials were flattish in midday trading.

Despite rising gas prices and falling home prices, American consumers are actually becoming more upbeat. According to the Conference Board, its consumer confidence index rebounded to 108 from an upwardly revised 106.3 (previously 104.0) last month. Consumers' assessment of their present situation, including the job market, rose to 136.1 from 133.5, and the expectations index increased to 89.2 from 88.2.

As an old X-Files fan, I like almost nothing better than a good, old-fashioned conspiracy theory. And apparently so does Congress. Earlier this week, the House passed an anti-price-gouging bill in response to higher gasoline prices. The legislation would make it a crime to overcharge for fuel. Gas prices must not be "unusually excessive"—though if that standard applied to other consumer items, every Starbucks in America might be shuttered. But there is little evidence that conspiracies or collusion among gas stations or oil companies is what's behind the rise in gas prices to over $3 a gallon nationwide. (We're at record levels in inflation-adjusted term, but prices would need to be at least a dollar higher to take into account that the average American is richer now than during the last peak back in 1981.) A new piece of analysis from economics consulting firm Global Insight makes some good points on the issue:

"It's going to be the perfect storm" is how one knowledgeable Capitol Hill insider described the upcoming efforts by protectionists of both parties in Congress to pass trade legislation punishing China for running a $200 billion-plus trade surplus with the United States. This week's high-level "strategic dialogue" between a Chinese trade delegation and American officials from the White House and Congress did nothing to change that assessment. There's too much momentum behind the push, the insider told me, from members who worry about the economic impact of a weak Chinese currency and from those who fret about China as a potential military threat.

Time does not seem to be on the side of the controversial immigration reform bill. One reason proponents wanted a quick vote–now pushed back into June–was that they feared just the sort of storm from the left and the right they are now feeling.

Does the American economy really need low-skilled, low-wage Mexican immigrants? We sure do, according to the 2004 film A Day Without a Mexican. The satirical movie imagines what would happen to California if suddenly 14 million of its citizens of Mexican descent up and disappeared. As the film's website puts it:

One apparent result of the immigration deal between the White House and congressional Democrats is that there seems little chance that the flood of immigrants, legal or otherwise, into this country will slow anytime soon. One economic argument for more immigration is that all those new workers will help keep Social Security solvent. This rationale from the National Foundation for American Policy is typical:

Paul Wolfowitz's time as president of the World Bank can probably be measured in hours rather than days at this point. But if and when he departs, his replacement will face tremendous challenges.

Maybe it's a coincidence, but the stock market hasn't had a down day since that trade compromise between the White House and congressional Democrats–brokered by Treasury Secretary Hank Paulson–on adding labor and environmental standards to future trade agreements. But the winning streak shouldn't be surprising given how heavily trade issues and protectionism have been weighing on the mind of many on Wall Street. So any good news on that front is welcome. Here is economist Ed Yardeni's sigh of relief:

You've got to give John Edwards some credit. Unlike most of the presidential candidates of both parties, he's actually proposing some very specific economic policies--and even putting some price tags on them. (Hint to GOP candidates debating tonight in South Carolina.) Universal healthcare? Somewhere between $90 billion and $120 billion a year. Then there's his $20 billion spending program to end poverty. And his $13 billion spending program to revamp American energy use.

Treasury Secretary Hank Paulson might be one of the few Bush administration officials who'll leave D.C. with an enhanced reputation. Thursday's Paulson-brokered trade agreement between congressional Democrats and the White House—requiring U.S. trade accords to include enforceable, internationally recognized labor and environmental standards—paves the way for approval of pending pacts with Peru and Panama. It also makes more likely the passage of trade agreements with Colombia and South Korea, as well as congressional approval of new trade authority for President Bush.

What's makes this deal so significant is that it occurs just after the election of the most protectionist Congress in years and happens amid rising public skepticism over the benefits of trade. And don't doubt that many economic nationalists are wary of this deal. David Sirota, a liberal political strategist and popular blogger, just had this posting:

"The bottom line is clear: If this deal sells out the American middle class—as many longtime fair-trade Democrats in Congress seem to fear—it will require a massive grass-roots pressure campaign to demand Democrats respect the 2006 election's fair-trade mandate and back off."

Indeed, many like Sirota want not only a freeze on new trade deals but a reopening of some old ones like the North American Free Trade Agreement. Yet just as congressional Republicans are more sympathetic to immigration reform than the grassroots, the same goes for congressional Democrats and trade. Ultimately, it seems more likely that congressional Democratic leaders and the party's eventual presidential nominee will push for a new social contract with American workers in this age of increasing globalization—more education benefits, wage insurance, healthcare reform—instead of ripping up old trade agreements and slapping tariffs on China.

Part of what Paulson has been doing in his round of conversations with Chinese officials over the yuan and intellectual property rights is to get enough progress on these issues to keep the protectionist elements in Congress as subdued as possible. The same goes for the White House, which has instructed the U.S. trade representative to initiate three formal World Trade Organization complaints against China so far this year after launching just two in the previous five years.

What Paulson knows is that when it comes to China, the key to reducing the huge trade deficit lies with a more free-spending Chinese consumer as the driver of Chinese economic growth rather than a trade war that could cripple both economies. And the former solution will take time. In a way, Paulson reminds me of Gen. David Petraeus. Both are supersmart, capable guys who have to deal with an increasingly impatient American public—one on trade, the other on Iraq. And America could have used both of them four years ago.

What, do the GOP presidential candidates think that Democrats are going to make it easy on them? In a nonbinding vote, the Democratic-controlled House voted this week in favor of some of the Bush tax cuts–such as the 10 percent tax bracket, marriage penalty relief, and child tax credits–so that they don't expire at the end of 2010 as they are now scheduled to do. Other tax cuts, such as the 2003 investment tax cuts (capital gains and dividends) and the 2001 cuts in marginal tax rates, are still on the chopping block.

Is U.S. manufacturing being hollowed out as jobs flow overseas? A nice reality check comes from a recent analysis by trade expert Edward Gresser at the left-of-center Progressive Policy Institute. Gresser, a trade official in the Clinton administration, points out that as "measured by production, share of the U.S. and world economies, or investment and export trends, American factories are doing very well. "

Hey, it looks as if even the French don't believe in the French economic model, the one that has given them sluggish economic growth of 1 percent (2003), 0.5 percent (2004), 2.1 percent (2005), and 1.2 percent (2006) over the past four years and a current unemployment rate of over 8 percent. What other conclusion can be drawn, after all, from the crushing victory of Nicolas Sarkozy over Sègoléne Royal in last weekend's French presidential election?

Maybe they should have held last night's GOP presidential debate at the Gerald Ford library in Michigan instead of at Ronald Reagan's in California. On economic policy, at least, it sure seemed more like the 1970s, with Fordesque thinking on display rather than Reaganomics. Look at this answer by John McCain to moderator Chris Matthews's question on which taxes he would like to cut: