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Forbes.com
Commentary
Ensuring America's Growth
Peter Morici 05.28.08, 12:00 PM ET
It's not news that sinking
housing prices, rising foreclosures and rocketing gas prices are
stalling growth. Energy and commodity prices are causing the Federal
Reserve real pause about broader inflation.
But how the Bush administration and Congress respond to the root cause
of these happenings will define the Fed's outlook. If they get it
wrong, Americans are headed for a sustained bout with stagflation. If
they get it right, the U.S. could enjoy another period of economic
expansion.
Since 2005, U.S. imports have exceeded exports by more than $700
billion. The principal causes for this imbalance are oil imports,
lopsided trade with China and other Asian developing countries, and our
reliance on Japan and Korea for affordable automobiles. To finance the
trade gap, Americans sell bonds and other securities to foreigners, and
until recently Wall Street banks, like Citigroup and Merrill Lynch,
recycled those funds to American consumers.
Essentially, homeowners borrowed ever larger sums to live beyond
their means. Mortgage companies were aided by real estate appraisers,
who juiced estimated home values, and Wall Street bankers, who
transformed dodgy debts into seemingly low-risk securities for sale to
insurance companies, pension funds and foreign investors.
But now the ruse has been exposed. Americans can't borrow to live
beyond their means anymore, sales at Wal-Mart and even Saks are falling
and demand for U.S.-made goods and growth are sinking.
The consequences of this grand deleveraging are compounded by festering
longer-term global problems. Rising gas prices divert what money
Americans still have to spend to oil-rich nations, further draining
demand for U.S. goods.
Global oil supply is not keeping step with demand, because several
important exporters, including Venezuela, Russia, Nigeria and Mexico,
have shunned the investment and know how Western oil companies can
offer to sustain their production.
As the dollar plummeted against the euro by some 80% since May 2001,
governments in China and elsewhere maintain weak currencies by buying
dollars on foreign exchange markets. This subsidizes their exports to
the U.S. and Europe, stokes steroidal Asian growth and artificially
boosts Asian oil consumption. Significantly, China and others use some
of those dollars to subsidize fuel prices, further exacerbating
international oil shortages.
The housing bubble and credit meltdown created more unwitting victims
than greedy malefactors. Federal efforts to route capable but currently
distressed homeowners into sustainable mortgages, the tax-rebate
stimulus package and even the Federal Reserve's generous lending to the
more culpable New York banks will help avoid economic Armageddon.
However, achieving a sustainable economic expansion requires strong new
disciplines, from loan officers on the ground to the executive suites
at those New York banks, as well as real initiatives to cut U.S. oil
imports and help Americans better compete internationally.
Higher oil prices are here to stay, but the technologies to reduce U.S.
oil imports dramatically are at hand. Hybrids, plug-in electric and
even hydrogen-powered vehicles are longer fanciful proposals. Coal
gasification is viable at $55 dollars a barrel for oil, and more
efficient building designs, appliances and heating systems are all
possible at affordable costs.
Economists assert the market will provide, but they fail to reckon with
the fact that most epic transformations in transportation
technology--canals, turnpikes and national highways, railroads and
airplanes--got boosts from the government to overcome the barriers
created by habits and switching costs. For example, the biggest problem
getting into hydrogen cars will be the initial investment in fueling
stations and quickly achieving a critical mass of vehicles on the road
to sustain them.
Japan, Korea, India and China have promoted their domestic vehicle
industry by limiting imports and exploiting the open U.S. market, and
now Japan, the most mature producer, boasts Toyota and Honda as the
leaders in hybrids and greener vehicles.
The U.S. should not turn to protectionism, but rather, it should use
its large market to its advantage. It should require much higher
mileage standards for automobiles, and offer substantial product
development assistance to U.S.-based automakers and suppliers--that
includes Toyota and Honda, as well as the Detroit Three, battery makers
and other suppliers--to accelerate the buildout of high-mileage
innovative cars.
The condition for assistance would be that beneficiaries do their
R&D and first large production runs in the U.S., and share their
patents at reasonable cost with one another. The huge U.S. market would
attract producers from around the world and rejuvenate the U.S. auto
supply chain.
Similarly, accelerating clean coal gasification, nuclear power and the
hydrogen transformation, as well as mandating much more efficient
buildings and home heating systems and appliances, would propagate
exciting new technologies Americans could sell around the world.
These innovations are going to happen. Will Americans do the innovating
or end up buying other countries' cars and energy-saving technologies,
trading oil dependence for technology servitude?
Ending the huge trade deficit and ruinous foreign borrowing will
require more. It is essential to secure fairer terms of competition
abroad for U.S. businesses and workers through tangible steps, which
would in turn counter Chinese and other Asian currency manipulation and
change trade agreements that open U.S. markets to foreign products but
not foreign markets to U.S. products. Regarding the latter, U.S.
exporters of cars and other durable goods face tariffs in excess of 25%
in China, India, Brazil and elsewhere, while U.S. duties are less than
one-fifth those levels. U.S. firms must often establish production and
research facilities abroad to get protection for their intellectual
property.
Neither the Clinton nor Bush administrations have adequately addressed
these issues. The likely nominees, Sens. John McCain and Barack Obama,
so far seem more inclined to generalize about markets and green jobs
than propose substantive policies to wean Americans from the oil
addiction, fire up innovation and get U.S. products fair terms in
global markets.
Sustainable prosperity requires it.
Peter Morici is a professor at the University of Maryland School of
Business and former chief economist at the U.S. International Trade
Commission.
Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
cell 703 618 4338
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http://www.smith.umd.edu/lbpp/faculty/morici.html
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