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November 4, 2009

Economist's View - 4 new articles

"Death by Renminbi"

Thomas Palley says China's currency policy must change:

Death by Renminbi, by Thomas I. Palley, Commentary, Project Syndicate: Over the last several weeks, the dollar's depreciation against the euro and yen has grabbed global attention. In a normal world, the dollar's weakening would be welcome, as it would help the United States come to grips with its unsustainable trade deficit. But, in a world where China links its currency to the dollar at an undervalued parity, the dollar's depreciation risks major global economic damage that will further complicate recovery from the current worldwide recession. A realignment of the dollar is long overdue. Its overvaluation began with the Mexican peso crisis of 1994, and was officially enshrined by the "strong dollar" policy... That policy produced short-term consumption gains for America,... but it has inflicted major long-term damage ... and contributed to the current crisis. The overvalued dollar caused the U.S. economy to hemorrhage spending on imports, jobs via off-shoring, and investment to countries with undervalued currencies. In today's era of globalization, marked by flexible and mobile production networks, exchange rates affect more than exports and imports. They also affect the location of production and investment. China has been a major beneficiary of America's strong-dollar policy, to which it wedded its own "weak renminbi" policy. As a result, China's trade surplus with the U.S. rose... The undervalued renminbi has also made China a major recipient of foreign direct investment, even leading the world in 2002 ― a staggering achievement for a developing country. The scale of recent U.S. trade deficits was always unsustainable... But China retains its undervalued exchange rate policy... When combined with China's rapid growth in manufacturing capacity, this pattern promises to create a new round of global imbalances. China's policy creates adversarial currency competition with the rest of the world. ... Furthermore, the problem is not only America's. China's currency policy gives it a competitive advantage relative to other countries, allowing it to displace their exports to the U.S. ... Yet a mix of political factors has led to stunning refusal by policymakers to confront China. On the U.S. side, a lingering Cold War mentality, combined with the presumption of U.S. economic superiority, has meant that economic issues are still deemed subservient to geo-political concerns. That explains the neglect of U.S.-China economic relations, a neglect that is now dangerous to the U.S., given its weakened economic condition. With regard to the rest of the world, many find it easy to blame the U.S., often owing to resentment at its perceived arrogance. Moreover, there is an old mentality among Southern countries that they can do no wrong in their relationships with the North... Finally, all countries likely have been shortsighted, imagining that silence will gain them commercial favors from China. But that silence merely allows China to exploit the community of nations. The world economy has paid dearly for complicity with and silence about the economic policies of the last 15 years... It will pay still more if policymakers remain passive about China's destructive currency policy.

Our problems are not China's fault.


"Stiglitz: U.S. Paying for Not Nationalizing Banks"

Barry Ritholtz:

Stiglitz: U.S. Paying for Not Nationalizing Banks, by Barry Ritholtz:
"We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse. What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future." -- Joseph Stiglitz
Any time Joseph Stiglitz calls out the government on their bad decision making, its worth reading:
"Nobel Prize-winning economist Joseph Stiglitz said the world's biggest economy is suffering because of the U.S. government's failure to nationalize banks during the financial crisis.
"If we had done the right thing, we would be able to have more influence over the banks," Stiglitz told reporters at an economic conference in Shanghai Oct 31. "They would be lending and the economy would be stronger."
Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks' share prices climbed this year…
The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system."
Why are we constantly governed by fools?

What I've said is that there is more than one route to get to the same destination, some of which are faster than others. Nationalization would have, I believe, led to a faster recovery. But even if that's not the case, even if the recovery would have gone at the same speed (I don't think it would have been slower), nationalization would have also allowed us to reach the same outcome with a different distribution of the bailout money, a distribution that would have been at least somewhat more acceptable to the public because it wouldn't have required giving so much of the bailout money to those who caused the problems.


"Help Wanted" Needs Help

Mark Zandi joins those calling for the government to do something to help to stimulate employment:

Help Small Businesses Hire Again, by Mark Zandi, Commentary, NY Times: ...It is no accident that the recession ended just as Washington's fiscal stimulus program began providing its maximum impetus to the economy. ...
Still, the recovery remains fragile. ... In order to ensure that today's tentative recovery becomes a lasting expansion, the government must now make it a priority to deal with employment — particularly among small businesses.
Small businesses are especially vital to job growth. ... In their recent efforts to recharge the economy, policy makers have all but forgotten small business, finding it both easier and more visible to help large multinational firms. Unfortunately, though, big business can't provide the jobs needed to power the economy forward.
Businesses ... still aren't hiring. Unless they start doing so soon, consumers won't have the wherewithal to keep spending, and the economy could slip back into recession. ...
Employment growth historically lags a pickup in gross domestic product. But firms typically increase production by first increasing workers' hours and adding temporary help. Neither has happened so far: working hours remain stuck at a record low of 33 hours a week, and the number of temporary jobs is still in decline...
Small firms are now struggling to obtain credit; their principal lenders, small banks, are under intense pressure... Credit card lenders, another key source of loans to small business, have aggressively raised their underwriting standards. Policy makers could offer quick relief by empowering the Small Business Administration to provide more credit. ...
To help small companies with cash flow, policy makers should also extend provisions in the current stimulus bill that allow money-losing firms to receive refunds of taxes paid on profits earned in previous years. (In return, they agree to pay higher taxes in the future.) ...
Finally, the government could help minimize the number of new job losses by promoting work-share programs. Nothing damages morale ... more than layoffs... Layoffs are also costly... Seventeen states offer effective work-share programs. Under these arrangements, employers cut workers' hours — not their jobs — and states make up a portion of workers' lost wages with unemployment insurance payments. Congress should provide financing to expand such programs nationwide.
These policy steps would not be free, but they could be surprisingly economical. ... This kind of help from Washington could help sustain the new signs of recovery and firmly put the recession behind us.

It's a start, but more than that is needed (and not all of the help should go to business, e.g. extending unemployment benefits would help households having trouble finding employment and stimulate aggregate demand at the same time).


links for 2009-11-02

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