Thanks to Republicans, U.S. Leadership Is Eroding

China continues to make smart economic moves while the U.S., even with a Democratic president, continues to dither. In other posts I have discussed some of China's problems, including human rights failings, corruption, pollution and its growing nationalism. But, for twenty years, China has been making savvy economic moves that go beyond the cheap labor it supplies for the production of many products that once were produced elsewhere, including in the United States.

No one can argue that China's acquisition of oil has been one of its top priorities. The rise of China's economy is one of the reasons oil went up to $147/barrel in the summer of 2008. But China is also focusing on alternative energy, so much so that it is leading in areas where the U.S., by all rights, should be dominant. We are the inventor nation but we are no longer the industrial superpower we once were. For pennies on the dollar, we have been selling our ingenuity to the Chinese and others.

And it continues. The price of alternative energy is falling while the cost of producing fossil fuels is getting more expensive. Include the cost of pollution and climate change and the real cost of fossil fuels has been prohibitive for the last three decades. But facts hardly get in the way of know-nothing Republicans. Here's a story from Arizona:

Arizona was one of the healthy energy states, with a requirement for 15% renewable energy by 2025. But now a Republican state representative in the Arizona state legislature is challenging the right of the Arizona Corporation Commission to set a requirement that utilities add more renewable energy, with a bill that would strip them of the responsibility.

(snip)

The legislation the state lawmaker Carl Seel introduced is the next step in an anti-renewable energy campaign mounted by the conservative think tank; the Goldwater Institute, on behalf of several customers of the state’s largest utility, and is aimed at overturning the ruling on renewable energy.

Keep in mind that Republican policies have little to do with free enterprise. They love their no-bid contracts, monopolies, cartels and cronyism too much to practice what they preach. In reality, neither the Chinese nor Americans are practicing anything like true free markets. But there is thinking behind the moves the Chinese are making as opposed to the bizarre notions of Republicans and, unfortunately, a few Democrats. Although the Chinese will have to install conventional power plants for some time to come, they clearly have a long-term vision of not only using alternative energy but being the leading builder of such equipment:

Renewable energy industries in China are adding jobs rapidly, reaching 1.12 million in 2008 and climbing by 100,000 a year, according to the government-backed Chinese Renewable Energy Industries Association.

Yet renewable energy may be doing more for China's economy than for the environment. China is on track to pass the United States in total power generation in 2012 — and most of the added capacity will be from coal, which is forecast to represent two-thirds of China's capacity in 2020.

As China seeks to dominate energy-equipment exports, it has the advantage of being the world's largest market for power equipment. The government spends heavily to upgrade the electricity grid, committing

$45 billion in 2009 alone. China's top leaders are focused on energy policy: On Jan. 27, the government announced the creation of a National Energy Commission composed of Cabinet ministers as a "superministry" led by Prime Minister Wen Jiabao.

Regulators have set mandates for power generation companies to use more renewable energy. Generous subsidies for consumers to install their own solar panels or solar water heaters have produced flurries of activity on rooftops across China.

China's biggest advantage might be its domestic demand for electricity, which is rising 15 percent a year. To meet demand in the coming decade, according to statistics from the International Energy Agency, China will need to add nearly nine times as much electricity generation capacity as the United States will. As a result, Chinese producers of generating equipment enjoy enormous efficiencies from large-scale production.

There's no guarantee that China's economic growth will continue at its current pace or that China can avoid a number of pitfalls in the next 20 years related to other problems it has. But given the behavior of politicians in Washington and our increasing reliance on China's products as well as its loans, I wouldn't bet against Beijing.

In category after category, U.S. leadership has been eroding for some thirty years. It's ridiculous that some 40% of our economy now depends on financial services that in turn largely depend on little more than our good name. Financing the purchase of fossils fuels from oil producing countries or financing alternative energy equipment built elsewhere only succeeds in killing American jobs. That pattern cannot be sustained.

A Dose of Economic Reallity from James K. Galbraith

The is the weekend of the Mad Hatter Tea Baggers who started off their weekend with Tom Tancredo who gave a racist speech which he proceeded to explain wasn't racist but anti-immigration. Perhaps it was Tancredo's attempt to kill two birds with one stone. Something like that. What Tancredo has to do with the original revolution is beyond me.

Saturday night, Sarah Palin spoke as a member in good standing of the know-nothing club. At one point she may have been looking at her left hand to read crib notes. Maybe that was an accurate perception of her and maybe it wasn't but it is utterly consistent with what we know of the way she operates. In the meantime, when the tea baggers are almost coherent they advocate many of the very same policies that caused the economy to fall off the cliff in the first place.

The problem with the presidency of George W. Bush was obvious 15 months before he took office. In 1999 Republican candidates were dropping out of the race for one simple reason: George W. had the big conservative money as well as corporate money locked up before the first primary. Have the Tea Baggers forgotten so quickly that one of Bush's biggest boosters was Kenny Lay of Enron? Lay drove Enron over a cliff. George W. Bush drove the nation over a cliff. What did Kenneth Lay do that Bush didn't do for eight years?

We have had corporate presidents before—a handful have been Democrats—but Republican presidential candidates have always been the favorite candidate of big business and big favors. For some reason, the Mad Hatter Tea Baggers don't want to notice. Admitting failure, I suppose, is a hard thing to do even for a political party, a.k.a., the Gilded Age Party (GAP), that once prided itself on pragmatism. Far right Republicans are no longer able to recognize when their own ideas don't work. (I wish that Obama would keep that in mind; if you're a pragmatist, stop turning to a Republican leadership bought and owned by businesses always looking for a favor to give them an edge over their American competitors; how many soldiers, for example, have to be electrocuted by Halliburton's incompetence before a better contractor can be found?)

I may be overdoing it but I want to quote extensively from a German interview with James K. Galbraith, an American economist who actually ties economics to the real world and not to some ideological fantasy about pie-in-the-sky market forces philosophy. It's easy, by the way, to spot people with reactionary pie-in-the-sky notions: explain to them just one of the growing problems the world is facing and they'll tell you that at any moment rising prices will encourage someone to invent a magic bullet. Often the magic bullet is some new form of energy or maybe some huge new oil discovery in Dreamistan. Mind you, I've been hearing this stuff for decades, and that was before India and China started demanding their share of the world's energy supply.

Anyway, here's part of the interview with Galbraith:

In a recent interview for MMNews, Hans-Olaf Henkel, who was once the head of the Federation of German Industries as well as IBM Europe, said two things that I would like to confront you with because Mr. Henkel is an influential opinion-maker here in Germany.[v] The first thing he said was that basically no one saw this crisis coming and that he laughs himself to death whenever someone says that this crisis was foreseen. Can you give Mr. Henkel some names in this respect? How about Dean Baker for example?

I’ve written a long article on not just the individual economists, but groups of economists who saw the crisis coming very clearly.[vi] Dean is one certainly with a strong claim. Dean follows a very simple method. He looks at critical ratios, such as the ratio of house prices to rental rates. When these deviated very far from their historical norms, that generates an expectation that they would revert. People should have been looking at that evidence and taking Dean’s predictions far more seriously than they did. But on the other hand, what Dean is pursuing is a very simple method and couldn’t be described as a school of economic analysis.

There are at least three traditions in economics that were warning about what was coming in ways which were very coherently related to a formal analytical program.

There is a group associated with the Levy Economics Institute and led by Wynne Godley, former senior advisor to the British Treasury. This group was working with national balance sheets -- with the national income accounts -- and warning very emphatically that the debt-burden of the household sector was unsustainable..

There are people working in the tradition of Hyman Minsky, who of course were trained to expect financial instability. They were making similar points from a substantially different conceptual basis.

And then there are people working broadly in the tradition of my father, who look at the structures of economic power, and who were warning that the supervision of the banking system was going to cause an epidemic of fraud. There was a group of what we call “white-collar criminologists”, who were examining these issues, and they are developing a new political economy of crime.

This group had the experience of what happened in the Savings and Loan crisis of the 1980’s, when certain patterns of behaviour, which are relatively standard in criminal financial activity, were very clearly present. These patterns re-emerged in the early 2000’s in the Enron, Worldcom, and Tyco scandals, and they were re-emerging again in the housing sector. To these people it was entirely obvious that a massive problem was developing.

So, Mr. Henkel needs to read a little bit more, He needs to broaden his definition of what constitutes economic analysis, and needs to recognize that the problem is precisely a group of people who insist that nobody outside of their very narrow circle has any insight worth paying attention to. That’s a preposterous position. It’s a completely indefensible position. It reflects fundamental narrowed-mindedness and, as I may say, incompetence which is really on display for anybody to see. So I do not need to hammer the point too hard.

The other thing that I want to know with regard to Mr. Henkel’s statements is this: He said that this crisis was caused by a certain type of “do-goodism” among American politicians who wanted to make sure that every American citizen would have a home of her/his own. What do you think when you hear such a thing?

It is an amusing interpretation of the motives of someone like George W. Bush, who represented one of the most aggressively predatory tendencies in American politics ever to reach the White House. This was a president who turned over regulation -- not just in finance but in everything he got his hands on -- to the most reactionary elements of the business community, to the most anti-regulation elements, so that regulatory structures were run down everywhere. They were run down in consumer protection, they were run down in worker protection, they were run down in trade, they were run down in ways which have significantly degraded the quality of life in the United States.

So, to suggest that this was some naïve altruism on the part of that extraordinarily reactionary Republican administration is, I must say, a view that no one who has actually lived through this period in the United States would recognize.

Now, Mr. Henkel is probably thinking about institutions like Fannie Mae and Freddie Mac which were, in fact, private firms. Fannie Mae had been privatized for forty years, and it had, indeed, become a bastion of Washington cronyism. I think that’s fair to say. Those institutions were drastically mismanaged by the overpaid appointees who were running them, no doubt about that. Ginnie Mae, the Government National Mortgage Association, which was not privatized, did not have the same problems.

But the truth is: this crisis emerged largely first of all in the private-label mortgage sector, that is to say in purely private entities like Countrywide, Washington Mutual, or IndyMac. The loans were securitized through private banks, vetted by private ratings agencies. The point here was not to put people in homes. It was clear to the lenders that the people that they were putting in homes would not be able to stay there.

The point was obviously to do two things. One was to create an enormous stream of revenue for these financial firms -- who were in many cases friends and political supporters of the administration. Second, it was to create a temporary burst of economic activity that would be to the political benefit of the Bush administration. So, to the extent that you had political forces that were explicitly driving the process, those were the motivations. It was certainly not some broad altruism toward a part of the population in which the political leadership of the country at the time never had any interest whatever.

(snip)

And what do you think about the plan of the Securities and Exchange Commission (SEC) to abolish the legal right to redeem money market accounts?[ix]

Do I have a comment on it? I’m not on top of that one.

At the end of “The Predator State” you are explaining the consequences of the breakdown of the Bretton Woods agreement by Richard Nixon in 1971. May I summarize my reading of it?

Sure.

Well, in the chapter “Paying For It” you explain that according to the system established in 1944, the U.S. current account deficit – and by extension its public budget deficit – was limited by an obligation to exchange foreign-held dollars for gold. Richard Nixon abolished that arrangement. You are arguing now that since the early 1980s, the world has held the T-bonds that the U.S. chose to issue. You acknowledge that the system is neither robust nor just, but you insist that so long as it lasts, it doesn't discipline the U.S. budget and therefore doesn't constrain U.S. government spending in any way. Is this right so far?

Correct, sure.

I mention this because this is basically, at least as far as I understand it, the financial backbone of the stimulus package you want to see taken place? And if this is the case how would then a stimulus package look like if you could have it your way?

First of all, it’s very clear that the United States government is not constrained externally, and it’s clear that quite apart from the stimulus package, the automatic stabilizers and the financial rescue, which greatly ballooned the public debt of the United States, have had no effect on the ability of the United States government to fund itself and no effect on the interest rates that the government pays. So, it, I think, follows from that logically and straight-forwardly that we have nothing to fear from additional efforts as long as they are necessary. And they’re obviously very clearly necessary. So the question is: what should be the structure of those efforts?

I’ve always taken exception to the constant reference to “stimulus” as the policy objective, because implied in that word is the idea that all one needs to do is to undertake one or more relatively short term spending sprees, on whatever happens to be available at the moment, and that this will somehow return the economy to its pre-crisis state, putting it on a path of what economists like to call “self-sustaining growth.” I maintain that in the present environment there is no such thing as a return to self-sustaining growth. There will be no return to the supposedly normal conditions, which were in fact, from a historical point of view, highly abnormal, of the 1990s and 2000s.

What one needs is to set a strategic direction for renewal of economic activity. We need to create the institutions that will support that direction. Those institutions are public institutions, which create a framework for private activity. This is the way it is done. It is the way countries have always developed in the past and, to the extent that they are successful, they will always do so in the future or they won’t succeed. Seventy years ago when we were in the Great Depression, they built a national infrastructure: roads, airfields, schools, power-grids – this kind of thing was the priority. In the post-war period, the creation and maintenance of a large middle class with social security, with medical care, with housing programs, universities – these were the priorities of the post-war period.

Now we clearly face an enormous challenge with energy and climate. It’s a challenge that requires us to think in very creative ways, in very ambitious ways about how to change how we live, so as to make life on the planet tolerable a century or two centuries hence. This is a huge challenge. It requires design, planning, implementation, something with enormous potential for providing employment because things have to be done, enormous potential for guiding new public and private investment because one has to provide people with the means of making it realistic for individual activity to support this larger objective. And that is the way to move toward a renewed economic expansion. This strikes me very far from being a stimulus proposal. It is a proposal for setting a new strategic direction for the economy and doing so over a relatively long time horizon with a view that you’re sustaining effort for 15, 20, 30 years. That’s the way I think you need to think about this.

Just to wrap up a long answer to a short question: Why can’t we go back to the pre-crisis period? The answer is that restructuring of the private household debts is an enormous task which necessarily takes a very long period of time. During that time, the pre-crisis pattern of increasing debt will not resume. The asset against which the American household sector collateralized its debt for 15 to 20 years, its housing, has radically fallen in financial value. The houses are still there but you can’t sell them for nearly as much as you could have three years ago. And that is a structural impediment to returning to the previous pattern of economic expansion. And that impediment isn’t going to be removed in any short period of time for the simple reason that the houses remain there as an excess supply on the market and they remain therefore as a drag on housing prices.

Our country has an army of Mr. Henkels who memorize their right wing talking points but who otherwise cannot see the blunders of the last thirty years. The rank and file Tea Baggers are unable to see that they do not represent solutions but only business as usual, the same stuff that has been undermining our economy and the middle class since Reagan became president. As a result of the policies of George W. Bush, the middle class is at its lowest point in decades.



Update: Multiple sources and photos have confirmed that Sarah Palin was using her palm as a high school crib sheet. In a bizarre twist, Fox News says Palin was trying to draw attention to Obama's use of a teleprompter, of course ignoring Obama's masterful non-teleprompter handling of issues in the GOP lion's den. In the meantime, Europe is in a tailspin, we have no real energy policy, joblessness remains high, health care is stalled and the obstructionist GOP has no solutions, no understanding of today's rapidly changing world and no desire to let the Democrats get some real work done. For some time, it has been perfectly clear to anyone paying attention that the Republicans are actively seeking the failure of the Obama presidency. This is unprecedented in American politics.

Meanwhile, Democrats in Congress have forgotten how to lead and are shadows of the Democratic giants who once led the House and Senate. Leadership will have to come from the Oval office. While I appreciate Obama's efforts to seize the initiative, more may be required, including staff changes at the White House.

At the same time, the reality-based community has its work cut out for it. One election will not change this country and it was foolish to think it ever would. But reform has come before and it can come again. But only with persistence.