My pal Tim Kane over at Growthology offers up a way at comparing the U.S. and everybody else:
Some great stuff from the great John Carney:
The market has recovered from the initial panic over a possible default on debt issued by Dubai World, and many are assuming that the United Arab Emirates will stand behind the bonds.
But under Islamic financing rules, creditors may be required to take a haircut. Guarantees on debt are prohibited by the shariah, which requires investors to accept risk in exchange for profits. Indeed, there were already questions about the legality of Dubai World’s debt arising from the principal guarantee of the bonds.
In recent years, there has been something of a backlash against some of the more aggressive types of Islamic financing, many of which have been structured to mirror Western bonds to make them more attractive to Western investors. Abu Dhabi, the UAE state expected to bail out Dubai World, may be hesitant to do anything that would be seen as disrupting the profit and loss sharing required by shariah.
The Great One has little use for the zero-sum politics (and economics) of false choices:
Before getting into the currency question, let me say this: I think more saving (and investment) by U.S. citizens is a great idea. But this need not come at the expense of consumption. In a prosperous free economy, people should be able to save, invest, work, and spend as much as they like. More is better than less in each case. Grow the pie larger.
Of course, if the president and his team want more saving and investment, they should end the multiple taxation of saving and investment. Unfortunately, our system taxes saving as income, capital gains, dividends, and inheritance.
Team Obama also intends to tax wealth more by raising the top personal tax rate from 35 to 40 percent. And they apparently don’t object to Nancy Pelosi’s plan to slap another 5.4 percent tax on the incomes and capital-gains of successful earners in order to finance a government takeover of health care.
Wealth is a crucial form of saving. And the investment that comes from extra saving is used to finance the entrepreneurial start-ups that create the jobs and incomes that allow families to spend. However, by creating a zero-sum game between saving and spending, the Obama planners are falling into an austerity trap — one that would hand the American economy a second-place finish in the global race for capital and growth.
Thomas PM Barnett makes good sense, as usual:
Japan’s rise and decline should serve as a grim warning to China right now.
Japan got old, but China will get older faster. Japan kept its environment relatively clean, China is trashing its own. Japan built its manufacturing power on excellent goods, China is fly-by-night by comparison (reading a book on that now).
In sum, China has so many huge hidden deficits incurred during its rise, that I think it will suffer future stagnation that makes Japan’s seem tame, especially since China’s political system is so brittle and unimaginative.
I guess I’m just responding to all this China-will-rule-the-world vibe connected with the 60th b-day celebration. As soon as I read stuff like that, the Irish in me says you’re heading for a fall.
Good sense from Michael Auslin in The American:
Just like today with China, pundits, investors, and the media largely proclaimed that the Japanese party would go on forever. Today, the sophisticated management of the Chinese government is offered as proof that China will always experience growth (or if contraction, a soft landing). Back in the 1980s, Japanese companies were assumed to have discovered the secret to hyper-efficient production and thus endless profits, while the country’s bureaucrats were lauded as perfect macro-planners. Inefficiencies, protected industries, poor management, and a sclerotic bureaucracy were all ignored by those who wanted to believe the hype. Yet such weaknesses were exacerbated by a culture of excess that destroyed consumer reality. Once it took root in Japan, expectations changed permanently and traditional restraint was abandoned. The savings rate dropped, and people paid exorbitant amounts for new houses and cars. I remember watching as whole parties in Tokyo restaurants walked away from tables full of food that was ordered and then left to be thrown away. The economics fed and then followed the social disease. Eventually, the asset bubble burst and the whole edifice came crashing down.
Blogger Matthew Yglesias talks up Denmark and high taxes over at ThinkProgress:
The overwhelming fact about Danish public policy is that taxes in Denmark are really high. There’s a substantial VAT and also a substantial income tax. You pay taxes to buy a car, and you pay higher taxes for heavy cars. Gasoline taxes are high (gas costs almost $7.50 a gallon) as are taxes on electricity, which account for more than half the cost of electricity to consumers. In exchange for all this, the Danes have basically achieved all the stuff progressives say they want. The country is rich, clean, and highly egalitarian. The high taxes finance generous public services, and the high levels of expenditure allow the country to do without a lot of extraneous business regulation which helps keep the place economically dynamic. According to surveys, the people are all very happy, which is exactly what you would expect from a very rich, very egalitarian society. And as this trip has emphasized, they do it all while doing much less polluting than Americans do, despite a higher average material standard of living.
There’s more to that than taxes, of course, but the high taxes really are integral to the whole thing. And that includes the environmental piece. In part because there are directly pro-environment taxes. But also, I would say, in large part because it’s the egalitarian income distribution and robust redistributive state that makes the environmental policies tolerable. Cheap gas and electricity are, in part, what we do in the United States instead of real social policy.
All of which is just to emphasize a point I’ve been making a lot over the past few months: there’s no way to have a progressive renaissance in the United States unless progressives find some politically feasible way of directly making the case that higher taxes for better services can be a good trade. And it’s worth trying to be honest about this.
Me: Yes, that last point is a problem. A recent poll shows Americans think half of all government spending is wasted, while data from Gallup shows Americans fear Big Government more than Big Business by 55-32. That is narrower than the late 1990s, but higher than the early 1980s when Reagan successfully campaigned against Big Government. (The Cold War was probably also a factor.)
Justin Fox of Time echoes my thoughts on the dollar, that its currency dominance has enabled massive deficit spending by the United States:
The U.S. economy’s share of global economic output has been declining and will almost certainly continue to decline as formerly poor countries get richer. With that, the dollar’s role will need to change.
Such a change wouldn’t be unmitigated bad news for Americans. As I’ve written before, having the dollar as the world’s currency has been a mixed blessing. The dollar’s global role inflates its value, for example, which makes imports cheaper for consumers here but also makes U.S products less competitive globally. Dollar supremacy also allows the U.S. government (and until recently the private sector) to get away with wildly unbalanced budgets without paying an immediate penalty in higher interest rates, which can be nice for a while but tends to end in trouble. The global capital-flow imbalances that many economists now say were at the root of the financial crisis are in significant part a product of the dollar’s outsized role.
All of this means that it may well be in the long-run best interest of the U.S. to push for an orderly transition away from the current dollar-based global monetary system and toward one built around currency baskets, the International Monetary Fund’s special drawing rights, the bancor, gold or whatever other measure of value we can all agree on. In other words, it’s not the worst news in the world that the Persian Gulf countries are talking about moving away from the dollar. Even if they say they aren’t.
Me: Again, keep inflation low, productivity high and deficits narrow — and let the dollar worry about itself. How am I wrong on this? And Simon Johnson explains why the White House likes the current dollar decline — as long as inflation stays low:
This may, of course, turn out to be a miscalculation, but think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.
Lots of folks are in a tizzy about this report of an Arab-Russian-French-Chinese plot (sounds like a typical episode of 24) to stop using the dollar in oil trading. Add to this a) the already declining dollar, b) the rise in gold and c) the recent speech by Robert Zoellick where he warned about dollar threats and you have d) visions of a dollar apocalypse and the end of America as we know it.
But so what. The goal of American economic policy should be to produce an economy that is a) innovative and productive economy, b) where standards of living are rising, c) where is inflation is low and d) supports a fiscally sound government. Do that, I would think, and your currency will take care of itself, yes? And when you add to that the reality that dollar supremacy has enabled Uncle Sam to run massive budget deficits, a more multipolar currency world doesn’t sound half bad.
Does Ben Bernanke care about the dollar? Larry Kudlow doesn’t think so:
Today’s FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn’t care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month’s reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation. … The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today’s incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben. Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That’s gonna wait well into next year.
And guess what? The White House might not care much either, so says Tom Barnett:
The long-term slide of the dollar is certainly helping, as is the fact that Asia, Europe, and America all seem to be recovering at roughly the same pace. Ideally, the U.S. will use this ongoing “framework” dynamic to accelerate China’s movement toward de-pegging its currency from the dollar and making it fully convertible, thus accelerating the dollar’s own decline as the global reserve currency. Over the long term, a dollar that can be balanced by a combination of the Euro and Chinese yuan (or some “Asia” basket that combines the value of the yuan, Korea’s won, India’s rupee, and Japan’s yen) is a dollar that cannot get too out of whack from its true value — as in, too fiscally undisciplined back home.
Obama’s framework proposal does truly represent a tipping point in global affairs: a financially humbled America committing itself to abide by IMF counseling in order to keep the trade peace among the world’s biggest economies. His critics will undoubtedly cast this as a humiliating capitulation to “foreign interests,” and these politically potent charges will force the president into all manner of showy protectionist displays. But the larger point is this: By submitting to the collective judgment of globalization’s “board of directors,” America finally admits that its self-styled international liberal trade order has blossomed beyond our control.
Something to think about from Tom Barnett when contemplating globalization and the revolt against it:
Connectivity is a dangerous, destabilizing thing, creatively destructive in the worst way. The rap on me (Barnett thinks connectivity creates peace instantly) has always missed the point about it being the Pentagon’s new map: connectivity is revolution. It will almost always get scarier and more unstable before it settles down, and no, containment is a chimera. There is no containing globalization, our international liberal trade order unleashed upon the planet. There is only mitigation. The revolution is largely generational (young v. old) and gender-based (women against men). It offends custom on almost every level possible.