It is Still the Economy Stupid
English: President Obama had called on the two former Presidents to help. During their public remarks in the Rose Garden, President Clinton had said about President Bush, ‘I’ve already figured out how I can get him to do some things that he didn’t sign on for.’ Later, back in the Oval, President Bush is jokingly asking President Clinton what were those things he had in mind. (Photo credit: Wikipedia)
The phrase made famous by Bill Clinton’s political campaign has a habit of creeping back into the conversation. It happened again when the former President made two statements to the press that appeared to undermine the sitting President. Clinton first said that he thought the US was now back in recession given the falling economic data. And then to add injury to the insult, they said he thought the ‘Bush era tax cuts’ should all be extended ‘for a little while’.
The views are contrary to President Obama’s so they seem almost deliberately off-message if the goal is to help the president in his struggle to be re-elected. Yet, just as the phrase rang true in the 1992 campaign against George Bush the elder, they have the added advantage of being the truth twenty years later in this 2012 campaign.
To be fair to the President’s lament too often repeated—-‘we inherited this mess’ we will all concede that digging out of the hole created by the great recession has not been easy. But the President’s policies and the hard left partisan way he won them and is implementing them have not helped make things better faster. So now he is being tormented and the gum of a gummed up economy is sticking to his shoes.
There are many ironies in this evolution of events:
- How’s that Hopey Changey Thing Working out? The President we voted for in 2008 because as historic a figure as he was, we also wanted to believe badly in the ‘Hope and Change’ he championed. It was the right message at the right time from the right person. But after the election hope and change turned into a nasty ‘I won’ persona that was NOT what we voted for.
- The World Still Wants the US to Lead. The world’s leaders may not have liked George W Bush but they did not doubt his resolve. Four years later America’s resolve seems in retreat conveniently responding to our war weariness. But we have watched this movie before and it didn’t turn out well. A weaker America makes for a more dangerous world where the bad boys in every neighborhood take advantage of the vacuum to occupy the turf. The same is true in global economics, a weak America can lead to pneumonia elsewhere. It is tough to lead from the bottom of the debt hole we have dug for ourselves, but lead we must especially if first Europe, now China and maybe America is slipping back into recession.
- We Still Want Hope and Change! Having put away his hope and change super-cape, it is tough for the president to argue now he had it on all the time. We are not THAT stupid. So while we once believed, and we still want to believe—-we no longer truly believe that the guy who brought us to the hope and change dance will dance with us if we renew his lease for another four years. The President has squandered his best opportunity.
And then there is this irony.
George W. Bush whom the president has spent the last four years blaming and vilifying has kept his mouth shut and taken the President’s abuse true to his word not to speak ill of his successor. Meanwhile the former President of the president’s own party appears by his side, expresses support for him even while periodically stabbing him in the back with his statements to remind him who the big dog in the Democrat party is.
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Our Solyndra Epiphany
The piling on by the politicians and media over Solyndra’s bankruptcy after the Obama Administration guaranteed $535 million in loans to the company is as disgusting as the political correctness that got us in this mess. This is the current day equivalent of the madam professing shock that transactions were being made in the rooms upstairs.
In political terms, Washington is looking for someone to hang for this embarrassment. That Solyndra executives are now taking the 5th to avoid the perp walk before Congress does not mean they are guilty of anything illegal, but rather that they have the good political sense to hire lawyers who know the ways of Washington.
Solyndra failed because its tubular solar product was more costly to produce than alternative flat PV panels made in China. This is a recurring story around the world as feed-in-tariffs in Europe and US renewable portfolio standards, tax credits and loan guarantees were used by China to grow global market share for its exports of cheaper PV panels. China played the game, just like Solyndra did. It used the rules to devise a strategy to gain competitive advantage.
For China the game was simple, low prices, always lower prices to underbid the domestic solar panel producers and take their market share and the tax subsidies that went with each sale. For Solyndra the game was more challenging, it sought new capital to scale its production of more innovative technology faster to drive down the cost in hopes of competing with China. That strategy might have worked except by early 2011 the price of polysilicon had dropped from $300/kg to less than $60/kg making China’s PV panels so cheap to make thus flooding the market with excess supply and cratering higher priced producers worldwide. Falling prices took out not only Solyndra, but Evergreen Solar, SpectraWatt and PV panel producers in Spain, Germany and elsewhere in Europe.
EIA Share of Energy Subsidies by Fuel
Who’s to blame?
- Governments used tax subsidies, loan guarantees, and mandated purchase rules to promote renewable energy at home. Instead those policies were used by China to suction up cash from all the subsidies to scale market share for their PV exports.
- Politicians pandered by using social engineering and burdensome regulations to substitute industrial policies that favor renewable energy and punish fossil fuels for competitive market forces to achieve policy goals to reduce emissions and promote a transition to a clean energy economy.
- Renewable Energy Companies used tax subsidies to cover the above market cost of renewable energy. The quest for ever more tax subsidies became their core competency thus taking their eye off technology innovation that was their greatest advantage over commoditized Chinese first generation PV panels. Falling prices caused by the very tax subsidies they sought swamped them.
- China is an easy target to blame for this mess because the world tolerates a trading scheme that allows China access to world markets on level playing field competitive terms, but does not demand the same terms for doing business in China. Why? Trade with China has become too important in the uncertain, unstable global economy. The world depends upon China to keep producing cheap goods for export which it is glad to do. But the true cost of those cheap goods is growing Chinese hegemony in the global economy.
This political theater over Solyndra will play itself out in due course. The question is whether this will be a true turning point for the clean energy business model or for our foolish policy of industrial policy ‘earmarks’. We want a clean environment. We want a robust competitive global economy. But we are learning that there are unintended consequences for social engineering. Subsidies may be useful to jump start new technologies, but they are not sustainable and neither are the technologies that depend upon them.
There are inconvenient truths in the Solyndra example.
- Global market competition is ruthlessly Darwinian in weeding out inefficiency—-celebrate it!
- Industrial policy to pick winners and losers rarely succeeds, and is costly and counterproductive because it stifles the very innovation essential to sustainable success—stop doing it!
- Don’t blame competitors (China) for taking competitive advantage of your stupidity (Washington) when you fail to fix the strategic problems you face—–grow or die!
That Solyndra was a risky investment was known by the markets and the company itself detailed those risks in painful detail in its public S-1 filing at the S.E.C. in September 2009. If you are an investor, if one of your companies is going to fail you’d rather they fail fast and cut your losses. In this case, the political calculus was that despite the probability of Solyndra failure, the good press opportunity was worth the risk—-but, of course, politicians were risking YOUR money not their own.
Than then there is this—–the spectacular growth of unconventional natural gas E&P in the competitive US energy market has done more to undermine coal and reduce emissions, shift the US toward a ‘cleaner’ energy economy, and enhance America’s competitive advantage and energy security than the sum of all renewable energy installed and all energy regulations promulgated in a shorter time period all while driving down natural gas prices.
Related articles
- Solyndra as Icarus (insightadvisor.wordpress.com)
- Solyndra and the China Factor (forbes.com)
- Solyndra’s burnout burdens other solar upstarts (news.cnet.com)
- Tom Zeller Jr.: The Solyndra Scandal: Full Of Sound And Fury, Signifying Nothing (huffingtonpost.com)
- Solar Companies Face Headwinds (fool.com)
- Solyndra executives won’t testify before Congress (money.cnn.com)
- Parties Spar Over Loan Guarantees After Solyndra Fall (blogs.wsj.com)
- Lessons on Solyndra and clean energy development (sfgate.com)
I Still Think We Need a Grand Bargain
Image via Wikipedia
It has been an interesting few days in our political economy. I call it that because, as almost any economist will tell you there is a lot of politics in economic decisions. We have seen that on vivid display the past few weeks.
After watching the carnage like a slow motion train wreck before our eyes there are a few key take aways we should reflect upon as we wait for the Super Committee Congress created to act:
- Debt levels and deficits matter. Our politicians have evaded and pontificated but produced very little progress in slowing let alone reducing Federal spending. They have done nothing that will reduce the levels of debt which threaten our political and economic future.
- Downgrades are political statements not just economic ones. S&P is being pilloried by the political class and their media mouthpieces for the temerity to actually cut the US AAA credit rating one notch to AA+. I say BRAVO S&P! If business as usual is unhealthy, then standing idly by why we dig ourselves deeper in the hole by political business as usual is not prudent. S&P is stating the obvious. We should welcome their help.
- Warren Buffett says he’d give the US a AAAA rating. Buffett reminds us that credit ratings are relative. While getting cut from AAA to AA+ is political punishment for ignoring the debt and spending issue. The dirty little secret of the past two weeks is that when it got ugly, the world fled NOT to China or the EU but into the arms of US Treasuries. Even at AA+ the world still sees the US as the most secure place on earth. This is instructive and it should be confidence building. While we have problems to fix, serious problems. We still would not trade our position with any other country would we? Buffett is right that America is still exceptional and we should both celebrate that reality and work even harder to protect it from deadbeat politicians.
- China lectures us on debt. This really is irritating and motivating at the same time. While there is much to admire in China’s meteoric growth and they have every right to celebrate it, let’s be clear about something. We are in a co-dependent relationship with China where we buy their exports and they buy our debt. Neither of us can stop that right now because it would crater both our economies. But America’s economy while weakened by debt is still fundamentally strong. China’s economy is growing but not yet sustainable without enormous continuing export growth because domestic consumption is not sufficient to support its production. Which nation has the bigger risk?
- What goes down will come back up—don’t panic! The stock market is in full correction mode because the government’s economic policies are not working to restore confidence, reduce uncertainty and stimulate growth. The president is in both political and economic denial. The Democrats are looking for anyone else to blame. The Republicans keep negotiating with themselves. The TEA Party movement is screaming the emperor has no clothes and being called terrorists as a result. The Fed tells us what we already know—the economy is weakening again. The market is down because it reflects our lack of confidence in our political leadership not because our economic fundamentals are bad. When common sense and leadership appears again the stock market will go back up.
- When will we get some common sense solutions we can believe in? Soon we hope, but the President says he will make recommendations soon! What? Is he in a malaise or something? The president’s recommendation to date has been to spend more, stimulate more and invest more—that’s code for raise taxes. Maybe he is just waiting for the economy to go back into recession so he has a legitimate excuse to spend more.
So what should the Super Committee do?
They are expected to produce spending cuts totaling $1.5 trillion over the next ten years. Anything less than that will be considered ‘wimping out’, but given the downgrade and stock market reaction that $1.5 seems more like a down payment than end result. The super committee has an opportunity for a grand bargain that has enough WOW effect to turn around our confidence and set a new course toward growth and recovery. It’s not a time to be timid. What should they do?
SPENDING REDUCTION
- Freeze Spending at 2008 levels. Let’s start with freezing Federal spending at 2008 levels. This has the effect of stripping out of the base budget all the stimulus increases that got larded into Federal agencies over the past two years. Rolling back to the base budget to 2008 spending levels provides a sizable down payment on reduced spending. Some will worry that that much spending reduction up front will hurt the economy, but we want to push spending into the private sector so just do it.
- Reduce Federal spending 1% per year from the 2008 base until it reaches 18.5% of GDP. That should be our goal and we should modify our tax structure to produce that 18.5 % level of Federal revenue and no more by taking the following tax simplification actions.
TAX REFORM
- Eliminate corporate income taxes and the tax on repatriated earnings permanently. We want American business to bring both jobs and earning home. We want business to quit spending millions to hire lobbyists to lobby for more tax breaks so just eliminate all the breaks and the tax too. Shifting income to individuals is cleaner, fairer and less evadable.
- Eliminate capital gains taxes, estate taxes and taxes on interest and dividends. We want people to save money, invest money in America and keep it here. This will do it.
- Replace the current individual income tax system with a fair, flat tax system with few deductions and reduce the rates. We want to end the complexity of the tax code, make the tax system fairer and broaden the base of tax payers with EVERYONE over the poverty level in income paying something.
- Impose a broad base national consumption tax. We want every American to pay something and have a vested interest in the fairness of the system. Splitting federal revenue raising between income and consumption taxes that are easy to administer is the way to restore growth and confidence.
- Revenue Cap and Refund. The goal of the tax system should be to produce 18.5% of GDP in total tax revenue. If growth creates more revenue than that in any given year, the government must use it to pay down debt first. If it does not pay down debt it must refund the excess revenue to income tax payers as a credit on the next year taxes.
ENTITLEMENT REFORM
- Means Test Social Security and Medicare. Citizens should be able to recover in benefits the amounts they contributed to the systems over the years. Benefits paid out in excess of contributions should be means tested to reduce benefits to those with incomes able to replace the benefit levels.
- Adjust Inflation rates. Change the inflation rates used for benefits from income to CPI to reduce the hockey stick effect.
- Raise Retirement and Entitlement Eligibility Ages. As we live longer the eligibility dates for full benefits should be adjusted each year to reflect the increase. Start making that adjustment now for those 50 and below.
- Repeal ObamaCare and authorize competitive bidding by Medicare and all Federal health programs for benefits, prescription drugs and other services to use competition to drive down cost. Allow interstate competition for individual health care plans not subject to state regulation, with no Federal mandates on coverage so that individuals and insurers can fashion plans that flexibly meet the health needs and affordability for consumers.
- Ban Cost Shifting. Hospitals, insurance companies and other health providers should be prohibited from cost shifting so they cannot allocate someone else’s costs to captive ratepayers.
- Employer payments for health care insurance benefits should be taxable. We must create a level playing field where individuals have a competitive opportunity to buy insurance from a market for services and progressively shift more personal responsibility back where it belongs to each of us to manage our health care coverage, cost and service providers. Make employer paid health insurance premiums paid taxable and then allow every taxpayer to deduct a set amount or % of income for health costs or make none of it tax deductible and reduce tax rates further.
POLICY REFORM
- Domestic Energy Production. It should be the policy of the US to encourage the maximum feasible domestic energy production. Congress should assign to FERC the responsibility and regulatory authority over all offshore, onshore domestic energy production and control of siting, permitting and leasing of energy production on Federal lands. Existing regulations or laws in conflict should give way to FERC jurisdiction and the authority of EPA, Interior, and all other federal agencies over energy regulation, energy production and land use be subject to FERC.
- Environmental Regulation. Congress should require that all existing and proposed environmental regulations must balance their environmental objectives and actions reasonably against the economic and competitive impacts they cause. Environmental rules must be reasonable and business has the same right as environmental groups to intervene or go to court to enforce an equitable balancing of interests.
- Education is a State and Local Responsibility. The Federal government should turn over to the states and local governments all its responsibilities for education and make no federal rules concerning education that supersede those of any state.
- Dodd-Frank and Sarbanes Oxley are repealed; Fannie Mae and Freddie Mac are eliminated. These laws have driven up the cost without appreciable benefits and created a government intrusion into business not warranted or needed. Fannie Mae and Freddie Mac should be eliminated with their assets sold to private companies. Liabilities should be written off by the Federal Government as part of the process of reducing the Federal debt.
There ends the rant!
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- Debt-Reduction On Grand Scale Is Within Reach – Investors.com (mbcalyn.wordpress.com)
- Putting a price on political stability (flipchartfairytales.wordpress.com)
- Transcript of Obama’s Remarks on S&P Downgrade (blogs.wsj.com)
- On S&P’s Chutzpah (andrewsullivan.thedailybeast.com)
- S&P Debt Downgrade Leads To Same Old Washington Blame Game (outsidethebeltway.com)
Is China a Bubble about to Burst?
“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor. We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”-– Harold L. Sirkin, a BCG senior partner
That is the conclusion of none other than The Boston Consulting Group after a recent comparative study of China and American relative competitive positions. It’s good news for America since a combination of forces have virtually stripped our country of its strategic manufacturing capacity while demographics drain our craft and mechanical skills as a generation of workers retire with few replacements being trained.
My wife is a high school teacher. At her school there has been a steady series of budget cuts over the past few years with nothing left of arts or music or any “industrial arts” as shop and woodworking were called when I went to high school. Gone! We only seem to want college prep classes and every kid is expected to go to college.
But there is a place in our country and every country for electricians, plumbers, welders, mechanics and a hundred other skilled craft careers. We are losing our sense of pride in such craftsmanship even though we need those skills more than ever.
One of the great fears of my utility clients is the tsunami of retirements washing over them over the next five years where as many as 40% of skilled craftsman will retire.
What does this have to do with China and its bubble?
China is not immune from demographic change. In fact, it has a worse problem than we do in the US because its one child policy is setting up a profound change in China’s productive work force for the future. But before that crisis hits China faces a bigger economic threat in the erosion of its export base as rising costs and rising expectations reduce its competitive position. That is the basis for BCG thinking and it seems right on the money.
Will American manufacturing prowess roar back to life?
Hey, Happy Days was cancelled and Richie Cunningham went off to college too. This isn’t the 1950’s all over again, but America’s competitive advantage future is to produce more of the products from our own advanced technology R&D here at home rather than risk a bleeding of intellectual property and risk of piracy offshore.
China has built its export powerhouse out of low cost manufacturing of products invented elsewhere. Commoditizing old technology to drive down the cost is good for business, but China must now focus on R&D and domestic consumption of the goods it produces in order to offset the drain of its manufacturing cost advantage as China takes its place in the Darwinian cycle of having market share taken off-shore by lower cost producers.
Producing more of our own products at home is a good thing. That it can again be done competitively with offshore competitors like China is delicious irony.
Will Chinese Yuan Flee to America Market Safety?
You remember all the hand-wringing about the implications of china’s rapid growth overtaking the US dollar to become the reserve currency of the world?
McKinsey is out with an article by Gordon Orr, their man in Shanghai—well at least until the Chinese read his article in the McKinsey Quarterly—with a provocative list of possibilities for the Chinese economy in 2011. It makes for good food for thought as you digest President Obama’s state of the union speech about “we do big things here in America” bravado.
SOURCE: HSBC
Mr Orr lists the following problems facing China:
1. Inflation in food prices will take longer than expected to control. The food supply chain is maxxing out as wealthier Chinese eat more and could lead to further food quality crises. Even small distribution problems can exacerbate supplies and raise prices.
2. Middle-class bankruptcies will expand dramatically if inflation drives up interest rates and drives down real estate values in a bursting bubble of speculation. Buyers have aggressively bought multiple properties with every penny of free cash flow. Sound familiar?
3. Minimum wages will rise, but productivity gains will outstrip labor costs. The government fearing labor unrest will raise minimum wages, Orr says, by 15 to 20 percent. Complaints about employers not paying overtime or demanding longer hours will likely grow.
4. Chinese cities could see demonstrations over food price rises, unemployment, or both. The government will quickly try to respond but fears protests will spread to other cities. The combination of food price inflation, the real estate bubble, demands for more worker productivity even with higher wages piles up into public dissatisfaction
5. China’s economic growth will be lower than expected. To fight inflation subsidies to consumers will be reduced and discretionary spending will fall with it. The cumulative impact could be slower economic growth and all the consequences a cooling economy brings. The Wall Street Journal reports that China’s economic and market data may be under-reporting its true situation meaning economic growth might actually be higher than China reports but so could inflation which makes the risk of bursting bubbles even higher.
6. China will accelerate its “invest out” program in the new five-year plan. Mr. Orr suggests China could easily double its cumulative outbound investment in other countries within the next five years. In so doing China sees diversifying its income potential across markets as a way to reduce its own volatility and put its treasury of reserves to work profitably while expanding its role in other markets to keep exports growing. Orr predicts this will lead to major problems with some countries resisting China’s attempt to ‘buy the country’s strategic assets’ before its money runs out.
7. China will try to reduce its ownership role in domestic business. Reducing the government’s stake in Chinese companies will reduce liquidity and ease speculative pressures encouraging a buy and hold strategy for investors wanting a place in the Chinese markets. Share prices could be expected to fall making China more a buyers’ market for outside investors even while China itself uses the cash to buy foreign companies and assets outside China.
So Let’s Think About This for a Moment.
China’s overheated economy is having trouble managing a soft landing so China might unload assets to foreign investors thus reducing the government’s stake in China’s markets. There are plenty of risks for foreign direct investment in China but the Chinese government pitch book will say this is your best opportunity to get into the ground floor for China’s next boom—if you survive the looming bust.
Meanwhile, instead of buying US Treasuries China will use its currency reserves and proceeds from asset sales at home to buy up better quality assets around the world to assure its access to strategic markets and acquire the best technologies, resources, expertise and intellectual property to fuel its next boom. In consolidating, capital starved markets there will be no shortage of sellers.
Back home in China, inflation, housing bubbles, and low wages are making the aspiring middle class angry that the Government is running their economy in the ditch. The government will use both carrots and sticks to keep the lid on and preserve its control fearing domestic unrest more than anything.
This seems a far different story than President Hu Jintao was telling us just last week when he predicted that China’s Yuan will be the world’s reserve currency within twenty years. But then again, maybe that side trip to Chicago was to check out the price of penthouse apartments on Michigan Avenue after he retires in 2012.
Welcome to America—-we know a lot about short sales!
PS: Pssst, Hu Jintao have we got a deal for you—ever hear of Fannie Mae and Freddie Mac?
The Gift of the Chinese Visitor
The state visit of Chinese President Hu Jintao was much anticipated and much studied for clues about the relative power of the two countries. The press has been full of speculation about whether President Obama would bow to the foreign leader as he has to so many others. But doing so this time would be more profound not only because this was “home” and because it would symbolize the truth to the Chinese view oft expressed that America’s time has passed and we should reconcile ourselves to China’s ascendance to global leadership.
It would only be a matter of time before the yuan replaced he dollar at the world’s reserve currency the Chinese keep telling the world as if to presage a realignment of the geopolitical stars and planets.
None of these things came to pass in the visit which was cordial but distant, intentional but not pretentious, honest but not acrimonious. Thus the objectives of both China and the US were achieved by the state visit. No bad things happened, but neither did much good happen either.
Yet as the world press tried to read every smile and smirk to detect the tenor of the meetings there were comparisons galore between the two countries. This entire news binge was useful and to some degree clarifying.
Here’s my take:
- It was good to welcome Hu Jintao to America and congratulate China on its many accomplishments. They deserve much praise for what they have succeeded in doing to transform Red China into Gold China with their phenomenal economic growth.
- China should also be praised because it has chosen a path of mercantilism instead of militarism for its ‘great leap forward’ and the world is a safer and better place because of it.
- Global trade works to lift all boats when nations work together collaboratively, and while there are risks to be sure from trade imbalances the opportunities far outweigh the detriments. America’s relationship today with China is tribute to capitalism and trade more profound than could have been hoped when Nixon went to China the first time.
- America has nothing to fear from an ascendant China. In truth the risks to America are more serious from a China unable to manage a soft landing for its unsustainable growth, its risk of runaway inflation, and the social unrest that might result from the end of the dream of every Chinese citizen that he too will someday, somehow climb out of poverty to join China’s growing middle class. For much of China poverty remains a reality.
- China is self absorbed and that is good because its problems are greater than its many strengths. It poses no imminent threat to America’s strategic interests and we should not change our global strategies because of China. China is a proud nation still shamed from past invasions and insults, but America is not responsible for those sins nor should we change our strategic priorities because the Chinese might take offense.
- America’s economic problems are real but America is resilient. Our near meltdown experience may even prove providential if it constrains our spending and adjusts our politicians’ aspirations as appears to be in the works. The genius of America is the capacity to reinvent itself, renew itself, and unleash the creative power of its citizens—and that is exactly what we must do to dig ourselves out of the hole we are in today. America has learned that it cannot out-source its strategic manufacturing even to a friendly China without adverse effects at home. America must restore its productive capacity to make things because it is a condition precedent to a stronger America not because we fear or resent China’s growth.
- World trade is good for China and good for America but China cannot live by two rules—access to the world’s markets while restricting access to domestic markets. America should insist that China plays ‘fair’.
- America is pushing back on cap and trade legislation because Americans realize that killing off the rest of our industrial capacity to reduce greenhouse gas emissions when China, India and other developing countries refuse to play the game does neither the environment for our economy any good. But allowing China to misappropriate our intellectual property, reverse engineering our technology and export it back to us at lower prices to gain market share for their export growth isn’t going to cut it any more.
- China may not be our friend but it is not our enemy. While some would like to see us become rivals the truth is China and America need each other more than ever to face the challenges ahead. By pursuing our own strategic global interests, cooperating where we can, competing where we must both nations can have a brighter future.
So it was good for Hu Jintao to come to America to remind us how fortunate we are to live in this great nation so full of potential—and to put into perspective that while China may be growing fast today it faces far greater risks than the US before it can replace us as the world’s reserve currency or the world’s leader.
China and US: Two Peas in the Same Soup
President Obama will soon welcome his Chinese counterpart, President Hu Jintao, to the White House and there is a lot at stake in the meetings for both sides. The press is full of speculation about what they will discuss and the symbolism of the visit. After months of tension and banter clearly the relationship needs work and the fact that the White House visit is happening signals recognition that the relationship is important to both sides.
As the meeting takes place among the issues under discussion will be North Korea and the equally looming nuclear threat from Iran. Chinese willingness to bring pressure on one or both of these states is a major objective of the US. But what is China’s objective?
The truth is China probably wants most for nothing bad to happen on the rest of President Hu Jintao’s watch as it prepares for a major change of leadership in 2012. Conflict with North Korea or an oil crisis sparked by conflict with Iran could hurt China’s delicate economic condition and threaten its continued growth. A big trade spat or conflicts over the value of the Yuan or trade imbalances cause uncertainty and risk neither party wants nor needs.
President Obama actually might have the same objective since the last thing he wants is a conflict with China over trade issues, deficits and China’s purchase of American bonds and debt allowing time for President Obama to reduce unemployment, increase economic growth and position Americans to feel more confident about their future by 2012.
There are also unspoken issues and undercurrent at stake too. The huge American deficits and the President’s spending on health care, stimulus and other Democrat aspirations cost his party their majority in the US House of Representatives and may threaten his own reelection if he cannot get it under control and off the front page. For that President Obama needs jobs growth and tax revenue growth. Just this week, Moody’s and S&P announced that they were putting US debt under credit review because of the looming deficit. A group of noted economists gathered in Cambridge, Massachusetts this week and one, MIT’s Simon Johnson said bluntly that the damage from the financial crisis and its aftermath have dealt U.S. prominence a permanent blow and he expected the Chinese Yuan would be the world’s reserve currency within two decades.
But before we starting paying Professor Johnson’s salary in Yuan let’s not forget the Chinese have their own problems and like everything in China these days they are huge. Washington may have huge deficits to work down, but China has an economic miracle that must continue to be miraculous or else, if I may paraphrase STRATFOR. And while we all know that economic growth can go down as well as up, the Chinese just cannot afford for it to go down too much or too fast without creating an existential risk to the Communist Party and to China’s economic transformation from third world to first world country. No pressure, right. Frankly, I’ll take our US problems any day over the fractious political, ethnic and economic problems facing China.
And if the Chinese bubbles start bursting too much or too fast they have consequences for America and the rest of the world no one really wants to face.
China has another strategic issue it has tried to avoid in the balancing of its aspirations for regional and global leadership and the fears that causes among its neighbors Japan, South Korea and the Southeast Asian “Tigers.” If China becomes a bigger military as well as economic threat to its neighbors it risks setbacks for its exports everywhere in the world with unpleasant consequences at home. So far China has pushed forward and tacked back just enough to maintain a prudent course but China’s export-based economic model is vulnerable since it depends upon good relationships with the major economies of the world to make a welcome home for its exports and continue to send their money to Beijing. Government investment drives the Chinese economy, but Beijing is walking a very difficult path must continually balance the risk of run-away inflation and rapid economic decline. Hu Jintao does not want a big screw-up to happen on his watch in advance of the 2012 leadership changes planned.
The problems China faces are ironically the same ones faced by American leaders. How do we deal with these pressing structural and economic issues without creating political problems for our parties and protests from our citizens? Procrastination makes the problems worse, potentially, for both the US and China. Hu Jintao still has control of his party but not necessarily the geo-political or economic events that could cause ‘bad things’ to happen. President Obama faces a divided Congress and Republican opponents eager to upset him for re-election so like it or not he will be forced to accept actions to cut spending and reduce the intrusive influence of government over the next two years.
My view longer term is this:
America is not as weakened or humbled at Professor Johnson states, and the genius of our country has been its resilience and ability to adapt to change. Don’t count America out. Besides, while the nations of the world love to complain about America we are still the safe haven for their investments, the world’s best markets for their products, and the only country capable of projecting military power anywhere in the world in the defense of our strategic interests and our allies.
China is not as strong as its current growth rates suggest nor does it have the staying power to be either the world’s reserve currency or its global leader. This is not a slight to the miraculous growth of China or of its potential. But a global super power must be confident at home before it can be taken seriously abroad. China may well get there but it will require more than export growth and a big pile of cash to spend. It requires much more than that. If China can create a soft landing from its miracle and a sustainable pattern of reasonable growth long term that will be a singular achievement worthy of a great nation, but it is not sufficient to overtake the US.
The good news is both China and the US benefit from their relationship, share major strategic goals, and working together have the power and strength to secure their long term economic interests without disadvantaging the other.
Turning the Tables on North Korea
The actions of North Korea in sinking a South Korean ship and shelling a remote South Korean island primarily because it was beyond the armistice line are clear violations of the 1953 armistice agreement. North Korea has been lead to believe by the lack of consequences for its bad behavior that it can do largely as it pleases in attempts to further extort financial assistance from a cowering West which seeks to avoid conflict above all else.
There are worse fates than conflict as we know from our history and bullies left unchecked do not generally improve their behavior.
Our hopes that China would see the craziness of North Korea’s behavior and do something—anything—to bring the regime in line has proved not well founded. China wants to be respected as a great nation and superpower but shrinks from stepping up to the plate to take a proportionate share of responsibility when the world needs it. While we clearly want to cooperate with China in finding a solution to this problem, we cannot subordinate our own strategic interests to China’s indecision.
Leaving North Korea unchecked is also dangerous because of its export of weapons and mischief to Iran and other bad behaving players around the world proliferating some of the worst weapons to some of the worst threats to global peace and security.
As we have learned before and the Wikileaks remind us again, often it is only the United States that has the capacity to change the game and provide the leadership to solve the world’s biggest problems.
That is what we need to do now.
Gordon Chang writing in the New Asia blog published on Forbes suggests a way to do just that. He proposes that since North Korea has already asserted that it does not plan to respect the 1953 armistice that the United States should follow suit and declare that it no longer is obligated to the armistice either and is free to take appropriate retaliatory action against North Korea for any violations. Chang suggests three specific steps that would tilt the playing field back to balance:
1. Order Financial Freeze on North Korean Assets. The US Treasury once before punished North Korea by ordering targeted banks used by North Koreas who hope to do business with or in the US to freeze assets and refrain from any transactions involving the North. This truly ticked off Kim Jong-Il and would do the same today especially if expanded much more broadly.
2. South Korea could close the Kaesong Industrial Complex. This industrial zone shared between the Korea’s was established as a bridge builder for future cooperation. We see how well that worked. Closing it would, according to Gordon Chang deprive the North of as much as $600 million in hard currency each year. Surely the manufactured goods could be relocated to other facilities inside South Korea.
3. Interdiction of North Korean Exports. Without the armistice, the US and other nations would be free to board, search and seize cargo shipped from North Korea that represented a violation of any UN resolutions, a proliferation of unauthorized weapons sale or a threat to global security.
To be sure these are acts of war and the North will wail it most belligerent epithets at even the suggestion of such actions. But mice do not generally pick fights with tigers especially when the tiger is hungry or angry.
A willingness of the United States to say ENOUGH!—and mean it would make possible a fresh start by all parties in resolving this problem once and for all. To back up this change in approach the US would need to demonstrate its resolve by:
1. Deliver a clear and unambiguous message to North Korea it will defend any attack against South Korea or any US interest will a full and appropriate military response.
2. Reaffirm US support for unified Korea and a willingness to work with China and others in Asia to facilitate such reunification when the North Korean regime collapses.
3. Announce that the US was engaging in discussions with South Korea, Japan and others within range of North Korea’s missiles for the deployment of US weapons including tactical nuclear weapons to back up the strategy.
Such a no nonsense strategy for trapping the errant mouse is the only thing a mouse as wily as Kim Jong-Il understands.
How China is Winning the Renewable Energy Race
“Green jobs are key to our future, right now, China is taking every possible step – many of them illegal under international trade laws – to ensure that it will control that sector. America can’t afford to cede more of its manufacturing base to China.” — Leo W. Gerard, International President of the United Steel Workers
That was the press message from the United Steel Workers as they asked the US Government to file an unfair trade complaint against China at the World Trade Organization (WTO) as permitted by Section 301 of the treaty. The focus of the union complaint is China’s push into the clean and renewable energy sector of wind turbines and solar panels. The union says China is taking clean American manufacturing jobs by heavily subsidizing the production of cheaper wind and solar equipment and exporting it to the US at prices that make American made alternatives uncompetitive.
In fairness, this is not a new position for the USW or other unions. They have alleged that world trading regimes have caused the decline of America’s manufacturing base. European unions and manufacturers have made similar arguments. This same argument over solar panel prices hit the fan in Spain and then Germany where their own feed-in-tariffs (paying above market prices for solar and wind energy to attract producers) backfired because they attracted Chinese producers who offered lower prices for their equipment than Spanish or German firms and thus slurped up the lion’s share of the feed-in-tariff subsidy money and sent it back to China.
The EU was outraged that the Chinese would intrude in their efforts to subsidize their own manufacturers and undercut the locals to win the bidding on solar projects and wind turbines. Remember this happened just as Greece was melting down and thus was used, in part, as an excuse to reduce or eliminate the unsustainable feed-in-tariff subsidies blaming the Chinese.
Capitol Hill Meets Main Street
Here in the US the story is similar. The renewable portfolio standards adopted by the states and the pressure from Washington to do more to reduce emissions and grow market share for renewable energy has utilities scrambling to procure energy to meet those goals. Many utilities are near achieving those existing RPS targets so pressure is building to raise the RPS goals much as California is trying to do with its 33% target.
Meanwhile, the Bakersfield Effect of angry ratepayers waving their utility bills and demanding answers from regulators and politicians about why these policies are driving their rates through the roof. California even has Proposition 23 on the November 2010 ballot to suspend its AB32 Global Warming Solutions Act implementation until unemployment falls below 5.5% for four consecutive quarters. Bills to enshrine the 33% RPS goal into California law failed to pass this legislative session just ended. So 20% is the legally mandated goal and pushing beyond it is much tougher.
Utilities are under a regulatory obligation to add renewable energy to their power supply portfolio to meet these RPS goals but also satisfy a prudency test of ‘least cost, best fit’ standard of procurement care. Tough to do when the costs are going up. So along comes China with a growing manufacturing base for wind turbines and solar panels to compete against GE and other manufacturers who have sought to dominate the markets in renewable energy just as they did for gas-fired combustion turbine power plants.
Main Street Loves Low Prices
The Chinese offer low prices, almost always lower prices than American or European manufacturers and begin winning more of the deals. The Chinese also are investing in building American market share by buying the energy management and services firms needed to install and maintain all this equipment further irritating local vendors.
Are the Chinese subsidizing this manufacturing of wind and solar panels—absolutely.
The EU and US virtually demanded it remember in the aftermath of the Kyoto Protocol and the build up to Copenhagen by accusing China and other developing countries of failing to do enough to control greenhouse gas emissions. China responded that it was poor and just building its economy and could not slow its economic growth to clean up its environment UNLESS the US and EU were willing to pay it to do so faster by imposing restrictions on our greenhouse gas emissions while letting China off the hook.
This was the essence of the Kyoto Protocol and you know how well that worked. COP15 failed utterly because the world has wised up to the inconvenient truth about the game being played by the developing world to use the treaties and the political correctness of global climate change to enact the mother of all income redistribution regimes. But I digress. . .
The USW object to growing Chinese market share in the US for clean energy business seeing that as a threat to the growth of manufacturing here. The problem with that argument is that battle is already lost. China is driving down the cost of solar panels and wind turbines to grid parity prices and that is a wonderful thing. It means that soon utilities will be able to install this clean energy equipment without the necessity of subsidies from our own government.
The union believes in the promise of millions of clean energy jobs resulting from this shift to a clean energy policy subsidized into the mainstream by the Federal Government and ordered by the states in their RPS targets. These jobs are neither real nor promising. Roofing companies across America are adding solar panels to their inventory and using their existing work forces to install them in order to stay in business during the recession. American manufacturers like Dow are working overtime to design and build new roofing shingle systems with embedded thin film solar technologies to reduce the installation cost and thus compete head to head with older PV panel installation by offering a better product.
So what?
The trade complaint may be useful politics but it is wasted time and bad economics. Regaining America’s competitive advantage does indeed involve rebuilding our manufacturing prowess in strategic areas important to the nation. The unions can play a vital role in making that happen and in so doing probably win new members. But the prescription is not tariffs and trade restrictions it is reforming the tax structures, overhead and other costs which chip away at America’s ability to compete by building the newest technologies the world needs while commoditizing the old.
The real fight with China worth having is over access to Chinese markets on level playing field terms so that American manufacturers of new technologies can enter those markets and compete just as the Chinese do in American markets. The measure of that level playing field is a better balance of payments relationship that enables both sides to win through fair trade.
