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Geithner and Summers Make Their Economic Mistakes Transparent
In a joint op-ed in the Wall Street Journal (6-23-10) entitled “Our Agenda for the G-20”, Secretary of the Treasury Timothy Geithner and Lawrence Summers, Director of the National Economic Council revealed the administration’s economic agenda for economic recovery. The recovery, they write, depends on an expanding global economy: “Stronger growth with solid job creation here in the U.S. depends on an expanding global economy.” One has to ask since when has the economy of the U.S. depended on a expanding global economy? Recent historical evidence suggests that the contrary is true; the growth of the world economy has depended on an expanding U.S. economy and U.S. trade deficits. What the U.S. needs is reasonably balanced trade with the rest of the world. A growing world economy would be helpful so long as it is not one that grows at the expense of the American worker.
World trade and U.S. trade declined substantially as a result of the recession. As the downward plunge ended and trade began to increase, recovering only a portion of their pre-recession level, U.S. exports and imports increased but the latter unfortunately grew faster than exports. In the most recent period for which data is available, January to April, 2010, our trade deficit increased compared to the same period in 2009 from $-118.9 billion to $-155.5 billion. Under World Trade Organization rules, the U.S. has the right impose trade barriers to bring its trade into reasonable balance. We have not exercised this power. Geithner and Summers want the G-20 to do it.
They write the G-20 “must continue to work together to secure the global recovery it did so much to bring about.” They are kidding, right? Except for the Asian countries, where is the global recovery they observed. With 17 million still unemployed or underemployed, the U.S. recovery cannot be said to have been secured. What country are they living in? What are they smoking? At the G-20 meetings in London and Pittsburgh, the members talked a lot but accomplished little or nothing. They did nothing to “ ensure that global demand is both strong and balanced.”
They write, “While the U.S. was the major source of demand for the world economic growth before the crisis, global demand must rest on many pillars going forward.” What they meant but did not say was that the U.S. through its trade deficits with China, Japan, Germany, and many others helped them grow while the trade deficits caused U.S. wages to stagnate. In our view, our trade deficits caused the loss of industry and contributed to U.S. unemployment and industrial stagnation.
The Germans this week tossed cold water on the notion that it must import more from us and from the depressed eurozone countries, the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain). Tony Czuczka, in a report for Bloomberg News from Germany dated June 22, 2010, writes:
Clearly Germany and the U.S. have vastly different views of the economics of recovery and aid. The U.S. economists are Keynesians and globalists. The Germans are not economic ideologues and they are nationalists, not globalists
Geithner and Summers mention the Recovery Act of 2009, “which increased demand by cutting taxes for families, helping unemployed workers, and investing in public infrastructure.” Recovery Act expenditures totalled $410 billion as of June 11, 2010, of which $163 billion consisted of tax benefits, $132 billion of entitlements, and $115 billion of loans, grants and contracts. These benefits were and continue to be temporary and unsustainable. Their cost will be shifted to taxpayers if, as, and when we stop borrowing to finance the recovery and balance the budget by raising taxes or cutting expenditures. They undoubtedly created and saved some jobs, but those jobs will end when the spending stops. This raises the question of what contribution to recovery did the Recovery Act make to date.
In our view, the Recovery Act has contributed nothing to a sustainable recovery. If so, this makes nonsense of their statement that the G-20 “must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth.” This reflects faith in the Recovery Act’s Keynesian multiplier effects which we do not share. Like the rebates and tax credits of the “klunkers” program, subsidizing energy saving appliances, providing tax credits for energy-saving remodeling and purchasing one’s first home, the benefits only lasted as long as the programs were in effect. The drop in housing sales reported this week shows how temporary the housing stimulus was, clear evidence that none of the foregoing is producing sustainable jobs.
The same with their wish – that is all it is – that the G-20 take action to achieve global balance. The U.S. pressed the G-20 at Pittsburgh to take steps to achieve a global balance. They adopted a resolution in favor of global balance but nothing except plans for future meetings on achieving global balance materialized.
They emphasize the need for the G-20 “to accelerate efforts to establish a global framework for financial regulation. Here at home, we are on the verge of completing the most sweeping financial reform in more than 70 years.”
They failed to mention that the last major intervention in bank regulation caused this recession. Beginning in 1977 with the Community Reinvestment Act, every administration pressured the banks to make loans on easy terms, turning their eyes away from the housing bubble they were causing and the dangerous lack of collateral backing most mortgages. Government created two Government Sponsored Enterprises, Fannie Mae and Freddie Mac to create a secondary market for such ill-fated loans. Wall Street got into the act and created derivatives which brokers sold all over the world. When the housing bubble burst, the U.S. and Europe’s largest banks and insurance companies faced bankruptcy, and stock markets round the world collapsed. The U.S. does not need new bank regulations; it needs to keep the politicians from making decisions that should be left to the shareholders of private firms who have the major stake in the firm’s success. This is the lesson that should be learned around the world.
Our do-gooders are not through. They want the G-20 to raise living standards in poor countries, to phase out inefficient fossil fuel subsidies, and to reduce the consumption of fossil fuels. We “must renew the sense of common purpose and collective urgency that has served the world so well over the past year and a half.” The past year and a half has seen unemployment grow in the U.S. to double digits, factories disappear, witnessed a worsening in the distribution of income, saw soaring government budget deficits, saw the U.S. dollar, the world’s standard, lose more than a third of its value in foreign exchange.
Prospects have never been worse. And all of these are the product of government intervention in the private economy. This is the lesson the G-20 ought to learn, government intervention in the economy usually does more harm than good. That would include intervention in the economy by the G-20, should it become an institution that makes and enforces decisions.
Comment by Loan Officer in The Deep South, 6/26/2010:
I wish I could have stated this better, but this article hits at the heart of the matter(s) in the USA very well. The regulations that ARE in place were not enforced on a level playing field, nor were they much of a deterrent to such financial blasphemy as derivatives. Those responsible for these debacles should man up and admit they made mistakes. Instead "they" make excuses and point fingers at everyone else, or they blame administrations. News media should run the videos of these wiseacres every time the economy OR the war in Iraq is discussed and, again, blamed on one particular administration.
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