James Pethokoukis

Politics and policy from inside Washington

Does America need a “tiger mother” economy?

Jan 20, 2011 14:41 UTC

Chinese President Hu Jintao’s visit to Washington has triggered debate about whether the United States should copy his country’s hands-on, interventionist economic model. But the Middle Kingdom’s feisty “tiger mothers” may provide a better guide for Washington policymakers than turning to Big Government, Chinese style. A new book extolling their tough-love approach could help America escape its debt trap and boost growth.

America is in a funk, beset by deep fear of decline and widespread worry that the economy is hopeless offtrack. This new Age of Anxiety started with the 2007-2009 financial meltdown. The crisis and subsequent government bailouts prompted some in the U.S. to wonder if their steadfast belief in minimal state intervention had run its course. To make matters worse, while America plunged into its worse downturn since the Great Depression, China kept right on growing and adding to its massive dollar hoard.

But the solutions to America’s long-term economic woes won’t be found by aping the mercantilist industrial policy coming out of Beijing. That’s how poor countries play catch-up, not the way rich countries lead and innovate. Even China understands at some point it will need to export less, consume more and loosen its financial system to more efficiently allocate capital.  Indeed, the U.S needs to push China much harder to open up its markets and dismantle its “Great Protectionist Wall.”

So rather than turn to Hu for answers, ask author Amy Chua. The child of ethnic Chinese immigrants, Chua is critical of the lax parenting style of many American parents. In “Battle Hymn of the Tiger Mother,” she says they’re too quick to praise mediocrity and too reluctant to enforce sacrifice for better academics. In short, Americans are not preparing their kids as well as the Chinese are to compete and succeed as adults.

Whether the thesis is true or not, Chua’s critique still manages inadvertently to capture the essence of what’s wrong with U.S. economic policy. Too much spending and consumption today, too little savings for investment tomorrow. A dysfunctional education system. A tax code that rewards lobbying over productivity.

Americans need to demand more of themselves and of government, even if that means some days of unpleasant sacrifice. Chinese mothers, according to Chua, set high expectations of their children because nothing helps confidence like achieving what didn’t seem possible. That spirit would serve the United States well about now.

COMMENT

neahkahnie, the only ones addicted to entitlements in the US are inner city blacks and corporations who think they need tax breaks to hire. Corporations are addicted to tax breaks, and when they don’t get their way, they leave the country. In fact, the US has the lowest corporate taxes in the developed world when you take into account the loopholes. People fail to realize this. Everyone else is still working their butts off, and considering the rise in US efficiency, they are working more than they have ever worked. People like you are buying into the corporate rhetoric that dominates news sources like reuters, fox, and CNN.

And if you think America’s youth are the McDonalds generation who wants everything now, i suggest you come and visit me in China. The youth here are so spoiled that I can’t see a good future for China at all. QQ anyone?

Posted by hujintaosson | Report as abusive

Growth only way to avoid U.S. economic collapse

Jun 30, 2010 20:43 UTC

Lucky this baby didn’t land during the G20 meeting! America’s fiscal judge, the Congressional Budget Office, has produced another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today’s level. The “good” news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth.

Of course, that’s the very debate dividing the U.S. and Europe right now. How deep should spending cuts be? How high should taxes go? Should the pain come sooner or a bit later? Even the Obama White House isn’t of one mind. Some top advisers, such as Larry Summers, see the weak recovery as an argument for more spending. Others, like exiting budget chief Peter Orszag, think it’s time to start slashing and hacking.

The CBO feigns agnosticism on such matters. Its job is to merely run the numbers, and let policymakers drawn their own conclusions. And the numbers are alarming. Under its most likely scenario – the one where politicians keep spending and otherwise acting like politicians — debt as a share of the total economy will reach 87 percent by 2020, 185 percent by 2035.

And the economy itself? Well, CBO computer models stark to get hinky at high debt levels. So director Douglas Elmendorf and staff just plug in an assumption that GDP keeps rolling along at a so-so 2 percent annually with 10-year Treasuries stuck at 3 percent. Both, the CBO admits, are highly unlikely.

But here’s the thing: To keep scary debt scenarios at bay, the more growth the better. If labor productivity, for instance, increased like it did in the 1960s — or 50 percent faster than CBO’s dreary forecasts — the debt load in a quarter century would be 25 percent less.  Or this: If the economy were to grow a bit faster than its 20th-century average, about 3.5 percent, a much wealthier America would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So growth helps a lot. Indeed, some 30 debt-plagued nations since 1980 have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

After all, it wasn’t just spending cuts that helped Canada — a favorite example of successful austerity — escape its 1990s debt trap. An export-led boom also helped grow the debt-GDP denominator. That would be a tough path for America to follow, but it can follow some other Canadian examples such as cutting taxes on companies and capital low. Spending cuts also seem to hurt growth less than tax hikes. There really is no other path.

COMMENT

Finally we are seeing Collapse in the mainstream media. What does this mean? It’s only being said in places like tiny Vermont, but Collapse is the breakdown of the unsustainable U.S. Empire: the largest, most brutal, most environmentally destructive empire of all time.

Vermont secessionists utterly reject the infinite growth paradigm as a key to the future, just as we led the opposition to the 1803 Louisiana Purchase, the national embargo of 1807, and the War of 1812. New England secessionists also expressed their opposition to a military draft at the Hartford Convention of 1814. Abolitionists in New England urged northern states to disengage from the Union.

What we have in common is a commitment to sustainable economic development, local food & energy production, to bring home the Vermont Guard troops from Afghanistan and Iraq, and to return Vermont to our status as an independent republic as we were until 1791.

Posted by RobertWagnerVT | Report as abusive

Dems push middle-class tax hike

Jun 23, 2010 16:05 UTC

The U.S. is pushing its G20 counterparts to focus  more on growth than deficits right now. Too bad America — or at least Congress — seems to be doing neither. Not only is Uncle Sam on pace to rack up another $10 trillion (at least) in debt over the next decade, but little is being down to boost growth and jobs. The latest: Democrats are now openly talking about extending the middle-class Bush tax for only a couple of years until, you know, when the economy is booming. Of course, we may still have unemployment at 8 percent then. I could see letting the Bush tax cuts expire and then replacing them with a more pro-growth tax policy.  But a $3 trillion tax hike? Nothing pro-growth about that.

How to grow the U.S. economy

Jun 21, 2010 15:11 UTC

Andrew Liveris, chairman and CEO of Dow Chemical, has some ideas, which he outlines in a USA Today op-ed. Here is an excerpt followed by my take:

1. New infrastructure that leverages private investment in plant and equipment, and modernizes our nation’s communication networks, electric grids and air, sea and land transportation systems. [Me: I am not sure we need $2 trillion in fixes like civil engineers contend, but this is a proper role for government.]

2. R&D that’s cutting edge. The experiences of competing countries demonstrate that R&D investment leads to greater economic growth, worker productivity and higher standards of living. [Me: Sure, businesses love tax credits and subsidies to do research, but there is very little economic evidence that government can do much to directly affect innovation beyond creating a fertile climate.]

3. Education that leads the world. The U.S. needs to enhance student skills in science, technology, engineering and mathematics, where we widely lag global competition. [Me: I certainly don't think this is a money issue. Here is a great article in the NYTimes about how better classroom management skills have a near-miraculous impact of student achievement.]

4. A “pro-trade” policy that creates a “level playing field” with limited tariffs and barriers to entry. The U.S. should adopt pending trade agreements such as Doha, which ensure that same treatment with key foreign partners — reciprocal market access to enable free and fair American participation.  [Me: Agreed. Subjecting your country to maximum competitive intensity will boost innovation and growth.]

5. An alternative energy strategy that will secure the abundant energy that industry needs to stay competitive. Energy is the lifeblood of U.S. manufacturing, but we have no comprehensive policy to support it. We should become far more efficient in its use, seek lower carbon alternatives and, with proper safeguards, expand traditional supply. [Me: Not sure what this mean in practice.]

•Regulatory reform is required for U.S. manufacturing, especially as concerns the environment. Regulation is necessary, but smart regulation isn’t always practiced. All too often, we see rules that bog down product innovation or that lack a solid scientific basis. [Me: Yes. If  America needs a czar, it should be someone to looks at bad regulations.]

6. U.S. tax policy should support manufacturing, not militate against it. Our corporate taxes rank second highest among countries that belong to the Organization for Economic Cooperation and Development, and are only going up. The House’s jobs bill will raise taxes $80 billion on U.S.-based corporations and small employers. Next year, taxes will rise on capital gains, dividends and small businesses. Also, the U.S., unlike every other major OECD economy, taxes on a worldwide, not territorial, basis. [Me: Agreed.]

7. Reform in civil justice is needed to support advanced manufacturing and end lawsuit abuse. In the U.S., unlike other OECD countries, plaintiffs’ lawyers unduly burden corporations with demands for compensation disproportionate to their client’s injuries, or even when there’s no injury. [Me: Agreed.]

Here’s what’s missing

Jun 17, 2010 18:09 UTC

How to lower the unemployment rate. How …  to … lower … the unemployement … rate. Lesse, I dunno …maybe growth the economy faster? Here is a bit from the UCLA Anderson Forecast:

Significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

Tepid growth leaves plenty of excess capacity, subdued pricing power and very little inflation. This will allow the Federal Reserve to postpone interest-rate increases that the Forecast expects to come late this year or early next, as the sustainability of a modest recovery becomes clear and as the need for preemptive action against future inflation begins to dominate monetary policy decisions.

Me:  I know it’s easier said than done. But everything government does from now on needs to be optimized for growth.

COMMENT

It’s apparent from the recent employment stats that companies are really cracking the whip on their current employees, rather than bringing on more help. Average workweek hours are up, overtime up, factory workweek up and so on. Companies aren’t hiring, I would guess, because of the endless uncertainty emanating from Washington. Obama and his minions keep threatening new regulations, new taxes, new this, new that without any regard for the legitimate concerns of business over how much all this will cost. More and more I believe industry wants to hire but will wait until the dust settles in Washington. That means November at the earliest before the employment stats start improving.

Posted by Gotthardbahn | Report as abusive

Washington vs. Wall Street … profits

Jun 1, 2010 17:22 UTC

The U.S. profits story has been a bright one for the American economy.  But it may be dimming, says Ed Yardeni:

The rebound in the NIPA measure of profits is likely to run into some headwinds. Financial firms have benefited from lots of government support and guarantees. Most importantly, in my opinion, have been the FDIC’s guarantees for bank debt and the Fed’s commitment to peg the federal funds rate near zero. These measures dramatically boosted the profitability of financial companies by widening their intermediation spreads. The Fed’s zero interest rate policy also provided them with sizable capital gains on their securities. The suspension of mark-to-market (MTM) accounting a little over a year ago was also a big profits booster. Now Washington has turned populist and seems intent on punishing the very same financial firms that were bailed out. Financial reform legislation includes several measures that could severely reduce the profitability and global competitive position of the U.S. financial industry. Oh, and FASB is back with an insane proposal to bring back MTM and apply it to bank loans.

Dealing with debt: America needs a growth experiment

May 10, 2010 15:20 UTC
Europe’s debt problems should inspire Americans to explore just how the U.S. will solve its own fiscal woes. I mean, no one is going to cut us a check like Germany and France just did for Greece. This is a topic I tackle in a piece I just wrote for The Weekly Standard. A few key points:
1) Cutting spending and raising taxes is a risky formula. It doesn’t have a great track record:
Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a new study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.
2) Trying to take more from rich people has its limits. Higher and higher income taxes or even wealth taxes create incentive to find tax havens and avoid productive work or capital allocation.
3) Cutting spending is better than raising taxes. Hey, I even have a study to prove it:
A 2009 study by Harvard University’s Alberto Alesina and Silvia Ardagna. It examined 40 years of debt reduction plans by advanced economies and found that “those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases.” They’re also associated with higher economic growth.
4) Less spending +more growth. This is my money graf from the piece:
But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent. Under those conditions, according a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish. … Indeed, that is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt. … Easier said than done, of course. … And there is no one policy to help make that happen. It will take a full-spectrum effort: lower taxes on companies and capital, pork-free spending on infrastructure and basic research (beyond health care), an education system that teaches students rather than feathering the nests of teachers’ unions. Every aspect of U.S. public policy will need to be optimized for economic growth.
COMMENT

Chinese firms are moving manufacturing plants to the US because land is cheaper here than in Beijing. THAT is growth

http://storyburn.com

Posted by STORYBURNcom2 | Report as abusive

Now here is a tax bill I like, mostly

May 4, 2010 20:31 UTC

The good folks at the Heritage Foundation alert me to a House bill proposed by Republicans Jim Jordan and Jason Chaffetz: Here is what H.R. 5209 would do: 1) Eliminate the tax on capital gains; 2) Reduce corporate income tax to 12.5 percent; 3) Kill the death tax; 4) Immediate expensing of business expenses; 5) Reduce payroll tax by half for 2010.

Me: The payroll tax cut would be a huge revenue loser, as would the death tax. But the rest seem smartly targeted for economic growth. Given the budget deficit, tax-cutters need to be really smart and pick reductions that optimize economic growth.

COMMENT

Concern for the long term budget deficit should be a priority over optimizing growth now. Any tax cut should be balanced by a tax increase somewhere else.

Posted by drewbie | Report as abusive

10 reasons to be cautious on economy

May 3, 2010 17:25 UTC

I will say this: As much as I press WH officials to take a victory lap on the economy, they want no part of that — especially not with unemployment at these high levels and the evolving EU debt crisis.  David Rosenberg of Gluskin Sheff gives some more reasons for caution:

1. Markets were unimpressed with the size of the just-announced $145 billion rescue package or the ability of Greece to meet the terms. A bailout of all Club Med countries would, according to estimates I’ve seen, approach $800 billion. This is bigger than LEH.

2. China raised reserve ratio requirements 50bps for the third time this year (to 17%). A decisive slowing in China and the U.S.A. is a crimp in the near-term commodity price outlook.

3. Australia just unveiled a massive new mining tax. This is weighing on material stocks overnight.

4. Possible criminal probe on Goldman weighing massively on the stock price; financials being re-rated by rising spectre of financial re-regulation. Shades of Sarbanes-Oxley. There has never been a financial crisis that was not met afterwards with regulatory reform — it’s how the SEC was created in the first place.

5. ECRI leading economic index just slipped to a 38-week low. With the restocking phase complete and fiscal stimulus waning, prospects of a second half slowdown loom large. Buy the recovery story when ISM is at 30 and policy stimulus in full swing (13 months ago); fade it when ISM approaches 60 and stimulus subsides. Market Vane sentiment is pushing towards 60% too — yikes! Too much priced in. As for the macro scene, the U.S. economy is barely growing at all, net of all the federal stimulus (+0.7% SAAR in Q1). And net of housing impacts, neither is Canada … should set us up for a fascinating second-half.

6. Attempted terrorist attack in Times Square a reminder that geopolitical risks have not gone away.

7. Treasury yields have collapsed nearly 35bps from the nearby highs and are not consistent with the recent move by equities to price in peak earnings in 2011. Junk bonds trading back to par for the first time in three years.

8. The U.S. implicit GDP price deflator receded to its slowest rate in 60 years in Q1 (+0.4% from +2% a year ago) in a sign that this profits recovery is still being underpinned by cost cuts, tax relief and accounting shifts than by anything exciting on the pricing front.

9. The latest Case-Shiller house price index confirmed that we are into a renewed leg down in home prices. Financials, retailers and homebuilders are not priced for this outcome.

10. Initial jobless claims, around 450k, are not consistent with sustained employment growth, notwithstanding what nonfarm payrolls tell us this Friday. A new peak in the unemployment rate and a new trough in home prices stand as the most pronounced downside surprises for the second half of the year

COMMENT

Geez, what a sourpuss. Mr. Rosenberg must be short EVERYTHING. For now I’ll go with Larry Kudlow – way more credibility and he likes what he sees out there.

Posted by Gotthardbahn | Report as abusive

Growth is the key to US fiscal recovery

Apr 21, 2010 18:50 UTC

The Obama deficit commission has its first meeting next week. And when the panel  finally releases its report after the election, I am sure it will contain an unsurprising mix of tax increases and spending  cuts as a way of dealing with the deficit. But a new report from the  wealth management group at UBS  looking at public sector debt dismissed that policy prescription:

Although fiscal discipline is important, on its own it has rarely been enough to lower a country’s debt ratio. Fo example, since 1980 some 30 countries have undergone exercises in fiscal discipline and many of them have achieved significant reductions in their debt-to-GDP ratios.

However, the overall level of debt hardly ever diminished. At best, fiscal austerity helped to slow down the increase in debt, the actual reduction of the debt ratio was in practically all cases attributable to higher economic growth (often helped by falling interest rates and privatizations). Unfortunately, the growth outlook for the advanced economies is anything but encouraging over the medium to longer term, especially in comparison with the past two decades.

Now the UBS piece argues that the US will try to inflate its way out of its debt problems. Yet I think the report too easily dismisses the prospect for faster-than-expected economic growth. Remember that all those scary CBO deficit forecasts assume long-term growth of around 2 percent, less than two-thirds its historical average. That ability to generate high growth (or hinder it) is the lens though which every new government policy needs to be examined.

COMMENT

CDNrebel, good points, there are still dividend rates that can fall, it is called ‘ploughback’, another name for going on a financial diet.

Posted by Ghandiolfini | Report as abusive
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