James Pethokoukis

Politics and policy from inside Washington

A Chimerica stimulus policy?

Jul 13, 2009 19:02 UTC

David Goldman of the great Inner Workings blog loves the Chimerica concept, a furthering of the economic relationship between China and America. He even thinks it would make a great stimulus and long-term economic recovery program:

We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets. The demographic problem that creates a Japan-style deflationary bias in the US would disappear, because the demographics of China would be open to the American capital market. … In effect, the world’s two largest economies would establish a full partnership. … The :trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s.  … If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade.

COMMENT

The Inner Workings piece is completely backwards. It is China that has a much greater economic risk because of it’s demographics. Between 2008 and 2040 China’s old age dependency ratio skyrockets from 16% to 50%. Also, China’s gender skews are out of whack having 107 males for every 100 women. The problem worsens when you look at the skews in the younger age demos — for under 20 yr. olds it’s 116.5 boys for each (1) girl !!! At the least, this ratio will impede China’s ability to correct it’s ageing pop. skew.

By comparison, the US has the most enviable demographics in the entire world. Along with a demographic advantage we have unparalleled agricutural production & technology. Could wave the flag with a number of other important things. That’s not to say that we don’t have issues — aside from the economic meltdown, rocketing deficits, fragile employment outlook — unfunded liabilities like Medicare & Social Security loom large. But some issues are reversing on the ground floor level — the decade long consumption binge is now being unwound — savings are increasing dramatically.

The US partnership with China is already on a good footing. The best thing the US can do for itself & it’s partners is to exercise fiscal restraint & prudence and seek sensible solutions to our issues.

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North Korea collapse could cost $1 trillion

Jul 13, 2009 16:43 UTC

This from my Reuters colleague Dean Yates:

South Korean estimates have said it would cost $1 trillion or more to absorb the North. Financial markets in Seoul would plunge given how expensive and messy such a transition could be.

My spin: I am sure the South has watched the German example closely and shuddered.

COMMENT

James is correct about the South drawing grim lessons from the German reunification experience. I recently viewed a documentary on NK in which a SK government adviser said precisely that.

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The bull case for the economy and Democrats

Jul 13, 2009 16:33 UTC
Brian Wesbury and Bob Stein of First Trust Advisers give the bull case for the economy. If these smart guys are right, 2010 might well be the third consecutive wipeout for Republicans. Some excerpts (bold is mine):
To be more precise, we are forecasting that real GDP grows at a 3.5% rate in the second half of 2009 and 4.5% next year. But, in all truth, we are much more confident about the overall 4%+ figure for the full 18-month period then about the exact growth rate for any particular quarter. …
First, we project business inventories are going to end 2010 about $25 billionlower than they are right now. (But with businesses no longer reducing stockpiles as forcefully as they have been in recent months, inventories will contribute 1.3 points to the real GDP growth rate.)
Second, we expect continued declines in the trade deficit, although not as quickly as in the last two years. The trade deficit was 5.4% of GDP in early 2007 and is now only about 2.2% of GDP. If the trade gap declines to 1.1% by the end of 2010, net exports can contribute 0.9 points to the real GDP growth rate.
Third, we expect home building to bottom later this year and rise in 2010, contributing 0.4 points to the real GDP growth rate. Housing starts are now only one-third of the long-term trend, justifiably so due to excess home inventories. But excess inventories have already dropped from about 4.5 million a few years ago to 2 million today. We think, realistically, it will take another three or four years to fully eliminate the excess.
Fourth, for government, we assume government spending contributes its long-term average of 0.4 points to real GDP growth, despite massive stimulus spending.
Fifth, despite our gut instinct that business investment in plant and equipment is going to turn around much faster, we assume an annualized rate of decline of 3.2%, which subtracts 0.3 points from the real GDP growth rate.
And last, we expect real consumer spending to rise at a relatively modest 2.1% annual pace, adding 1.5 points to the real GDP growth rate. To put this in perspective, we are forecasting that real consumption will be up at only a 0.6% annual rate from the end of 2007 through the end of 2010, the slowest three-year period for real consumer spending since World War II, including the early 1980s, when the jobless rate went up to almost 11%. It also means consumer spending drops to the lowest share of GDP since 2001.

About that terrible Consumer Financial Protection Agency …

Jul 13, 2009 16:25 UTC

I just debated the CFPA on CNBC with Conn. Attorney General Richard Blumenthal (who also said he was not going to challenge incumbent  Chris Dodd for US Senate in that state). A few things about the CFPA:

1) The financial crisis was not caused by duped mortgage borrowers, so this is an answer to the wrong question.

2) This bill is not just about clearer disclosure for credit card and mortgage debt. If a person gets a mortgage or credit card that he can prove was not suitable for him — or didn’t get something he should have — then it won’t matter how exhaustive or clear the disclosure of risk. There will be loads of litigation here, driving up credit costs. And determining suitability will also drive up costs.

3)  You will see a two-tiered financial system with most people having access to vanilla products only. The wealthy or supereducated will get access to financial boutiques and more personalized products. It is the hedge fund-ization of consumer finance.

Two good articles on this topic, one from my pal Stephen Spruiell; the other from Peter Wallison.

Why is the healthcare reform effort failing?

Jul 13, 2009 16:11 UTC

Healthcare reform enthusiast Ezra Klein (WaPo) seems very worried about the troubled healthcare reform effort:

To put it another way, every wonk in Washington — conservative or liberal — will tell you that health-care costs threaten to bankrupt the nation. But it is proving virtually impossible to get serious health-care reform through a Senate that requires 60 votes to overcome the filibuster.

My spin: Any why is that, Ezra? Because wonky Washington hasn’t made the case why higher taxes in a recession and more spending in a time of huge budget deficits are good ideas. The “It costs money because it will save you money” apporach is failing …

COMMENT

Health care reform is being tackled by congress as a problem of who pays what, and that approach though politically correct is no reform at all. Wake up America! your health system is one of the worst of the world, corrupt , overregulated , it is failing to serve the needs of the people, and it is bad system even for the wealthy, in any other place in the world Michael Jackson would had been able to get a non life threatening sleeping aid, my 4 year old niece would have received emergency attention in less then 4 hours screaming with othitis in an emergency room, it would be more important for an squizophrenic to take his meds than to go to the doctor just to get the prescription refilled.

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