How do you get mercantilist countries to loosen their pegs to the dollar

Many countries peg their currencies to the dollar. When the dollar goes down versus the euro, their currencies go down as well. As a result a falling dollar does not much effect their trade balances with the United States. Despite the falling dollar, they are able to continue to keep down their imports from America and are able to continue to keep up their exports to America. In order to keep these pegs, their central banks buy increasing amounts of dollars whenever the dollar falls. In order to buy these increasing dollars, they sometimes print their own currency, causing inflation in their own countries. They also get inflation simply because the price of oil and other commodities is rising so fast versus the dollar. They could avoid inflation by letting their currencies rise against the dollar, and indeed the Asian countries have recently been letting their currencies rise a bit versus the dollar.

The US Treasury, the Wall Street Journal editorial page, and some American economists want the Federal Reserve to raise the US interest rate in order to make it easier for these countries to continue to peg their currencies to the dollar. They figure that higher interest rates will cause more private investors to buy dollars, so that the governments that are pegging their currencies to the dollar will not have to buy as many dollars.

In his June 27 blog entry ("Does the Fed’s mandate now extend to Beijing, Moscow and Riyahd?"), Brad Setser discussed the current debate regarding whether the Fed should raise the US interest rates in order to help these governments. He wrote:

The battle lines here are increasingly clear: some argue that the US needs to adjust, by changing its monetary policy to help out countries pegging to the dollar, others argue the rest of the world needs to adjust by letting their currencies appreciate. The US is calling for other countries to have more monetary policy autonomy, and others are calling for the US to, in effect, have a bit less.

There are some who want the United States to pursue a strong dollar policy in order to reduce inflation among the countries that are pegging their currency to the dollar. They hold the United States responsible for the fact that the countries that are exploiting us through their mercantilism are thereby suffering inflation.

Others, including Setser and myself want the pegging countries to loosen their pegs and instead let their currencies rise against the dollar. We realize that if they did so, then these countries would buy more US exports and would export less to the United States. Setser writes:

The challenge, in my view, is how to bring the world back toward a true equilibrium — one that requires less government intervention in the foreign exchange market — over time.

Missing from Setser's discussion is any realization that most of the countries that are pegging their currencies to the dollar are doing so as part of a mercantilist policy designed to steal market share from US industry. I posted two comments to him about this, but he ignored them both. First I wrote:

Brad,

I agree with so much of what you wrote in this posting. But you missed the disastrous effect of reserve accumulation upon the US production.

You pointed out, correctly, that the exporting sectors of the emerging countries have been helped by their reserve accumulations, but you failed to point out the flip side, that exporting sectors of the US economy have been hurt. This is evident in the rapid fall in employment in the US manufacturing sector and the near zero net investment in US manufacturing.

A graph that you posted on June 12 in “Can the debate over trade – or globalization – be separated from the debate over exchange rates?” (http://blogs.cfr.org/setser/2008/06/12/can-the-debate-over-trade-%e2%80%93-or-globalization-%e2%80%93-be-separated-from-the-debate-over-exchange-rates/#more-3583) shows the effect of these reserve accumulations. That graph showed that the emerging countries have been increasing their exports to the United States but not increasing their imports from us.

Later I wrote:

Brad,

I agree with three points that I heard you saying:

1. That over time the oil exporting countries will import more goods.

2. That China could encourage lending to the Chinese instead of using their funds to sterilize dollars.

3. That the adjustment in China’s reserve purchases could be gradual. There is no need to go cold turkey.

The only thing missing from your post is a motive why the Chinese should change away from a policy which is working. They are about to purchase GE’s appliance business and grab its US market share. Detroit is on the ropes and they will soon move in to the US car market. Airbus is starting to move production to China so they should soon gradually be getting the commercial aircraft production business. They are building three new factories to compete with one of America’s remaining exports - heavy mining machinery.

I suspect that Japan changed policy in 2004 partly because they didn’t want to destroy America as a counterweight to China in Asia. China has no such motive.

I did not get ignored by others in the discussion that followed Brad's posting. For example, I had an active discussion with Ruiz Huizer about how to get mercantilist countries to reduce their currency accumulations. Here is a selection from what we wrote:

21. Rien Huizer Says: Great piece and interesting comments. Does anyone see a practical solution for how to get from 1.5 tr to .15 tr annual reserve growth?...

22. Howard Richman Says: Yes. We propose a new international system based upon balanced trade in our book, “Trading Away Our Future” (www.idealtaxes.com). The key is for the US to insist, unilaterally, on US trade with the reserve-accumulating countries moving toward balance over a period of 5 years. At the same time, the US has to take steps to enhance domestic saving. The immediate result of adopting such a policy would be a surge in investment in US exporting sectors.

23. Rien Huizer Says: Right, I guessed that you would suspend or abandon WTO. What about the FTA countries such as Australia and Singapore? And I guess that your program to boost domestic savings would involve reducing the gvt deficit by increasing taxes?...

28. Howard Richman Says: Rien,

You said: “Right, I guessed that you would suspend or abandon WTO.”

–> Although I would not object to the United States suspending or abandoning the WTO, that action should not be necessary. Article 12 of the Uruguay Round of GATT and the IMF agreement would both justify US action to balance trade.

You commented: “And I guess that your program to boost domestic savings would involve reducing the gvt deficit by increasing taxes?”

–>Reducing government budget deficits would certainly increase domestic savings, but that’s not what we recommend in our book. Our book reflects the lead author’s specialization in public finance. (He did his dissertation under Milton Friedman at the U. of Chicago.) In our book we recommend the following changes to the tax code to increase domestic savings:

1. Raising the capital gains tax to end the perverse incentive for corporations to buy back their own shares. We would accompany the tax hike with a provision that would allow taxpayers to reinvest their capital without paying tax, as homeowners now do when they sell one home and buy another. In other words, we would tax consumed capital, but not reinvested capital.

2. Reducing or eliminating the corporate income tax would help since corporations are doing all of the savings in America today. Doing so would not only enhance domestic savings, it would also reduce the opportunity cost of capital, thus enhancing fixed investment.

3. Moving away from income taxes and toward consumption taxes would help. We like the USA Tax, VAT, and FairTax. The USA Tax is the most progressive, but the VAT and FairTax have the advantage of being border adjustable, thus helping to level the playing field for American products.

The discussion continues from there. To read it all, go to: http://blogs.cfr.org/setser/2008/06/27/does-the-feds-mandate-now-extend-to-beijing-moscow-and-riyahd/#comments

Howard

We're in Wikpedia!

Our book Trading Away Our Future is now in Wikipedia as the definitive book about Balanced Trade. Here's the Wikipedia entry for Balanced Trade:

Balanced trade is an alternative economic model to free trade. Under balanced trade nations are required to provide a fairly even reciprocal trade pattern; they cannot run large trade deficits.

The concept of Balanced Trade arises from an essay by Michael McKeever Sr. of the McKeever Institute of Economic Policy Analysis. According to the essay, "BT is a simple concept which says that a country should import only as much as it exports so that trade and money flows are balanced. A country can balance its trade either on a trading partner basis in which total money flows between two countries are equalized or it can balance the overall trade and money flows so that a trade deficit with one country is balanced by a trade surplus with another country."

A more extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. "A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance."

Follow the following link to read the entry: http://en.wikipedia.org/wiki/Balanced_trade

Howard

A Quick Fix to Our Economic Malaise

A Quick Fix to our Economic Malaise
Raymond L. Richman

The current weakness of the U.S economy is attributable to the goods trade deficits that have grown from $189 billion in 1996 to $826 billion in 2007, the latter equal to the value-added of nearly 8 million industrial workers. In other words, it would take the export of the goods produced by 8 million American workers to bring trade into balance. No wonder that wages have been stagnating, that income distribution has been worsening, that the dollar has been falling, and that the economy has been slowing. During the first quarter of 2008, the trade deficit continued to grow although less rapidly: goods imported grew $52.6 billion compared with the first quarter of 2007 while goods exported grew $47.6. One quick sure way is to bring the trade deficits under control is by reducing imports. Unfortunately, too many powerful groups have a vested interest in perpetuating the trade deficits and everything that has been proposed has been labeled “protectionist” by a huge majority of economists. To paraphrase the late Senator Goldwater, protectionism in pursuit of a trade balance is no vice and allowing the trade deficits to devastate our economy is no virtue.

Free trade has sounded good since Adam Smith wrote his Wealth of Nations in 1776. Indeed, so good that few economists ever asked themselves what the consequences would be if one party practiced free trade and the other trading partner practiced mercantilism. Since the early 19th century, economists have denounced any action to restrict imports as protectionism. They sat and pontificated in their ivory towers on the benefits of free trade while the trade deficits grew and grew. Faith in the forces at work in free markets became the pied piper of America’s descent into economic stagnation. It has been obvious for sixty years that Japan was not reciprocating our free trade policy and that China, with her controlled capitalistic economy has not been doing so either. And the rise of oil prices, which accounted for 40 percent of the trade deficit in goods in 2007, met with no U.S. government response during its rise from $35/barrel in June, 2004 to $135 in June, 2008. While the supply of petroleum is highly inelastic, it is hard to believe that world demand has increased in four short years enough to send its price into the stratosphere. Unfortunately demand is highly inelastic, too. The solution to the game requires bargaining as in the case of monopsony versus monopoly.

It has been obvious since the 1973 oil embargo that we were becoming dependent for most of our oil on foreign sources, some of them hostile or potentially hostile. Thanks to Pres. Clinton’s veto of the Energy Bill in 1995 and repeated successful Democratic opposition to bills that would have authorized drilling in the ANWR and offshore, some of the world’s largest oil reserves located in the U.S. and off-shore could not be exploited.

Exports and Imports of Goods, incl. Petroleum
(Billions of Dollars)

Year	Exports of goods	Imports of goods	Trade deficit on goods	Less: Petroleum imports	Deficit excl. petroleum
1996	618.3	807.4	-189.1	72.7	-116.4
2000	784.3	1243.5	-459.2	120.2	-339
2004	818.3	1499.5	-681.2	180.5	-500.7
2006	1030.5	1880.4	-849.9	302.4	-547.5
2007	1152.9	1979.4	-826.5	330.7	-495.8

At the beginning of 2002 Americans could buy a Euro for ninety cents but as of June 2008, it requires $1.55, seventy-one percent more. The head of OPEC may be close to the truth when he recently declared that the U.S. is responsible for the high price of oil. The increase in cost is not nearly so great for Europe as it is to us given the fact that the price of oil is calculated in U.S. dollars.

The European Union allows the Euro to float in the foreign exchange market but China and Japan do not. China allowed the yuan to rise in value, from 8.3 to the dollar to 7.3 between 2000 and 2008, a rise of 12 percent, while Japan allowed the yen to rise from 102 to the dollar, to 135 in 2002 (32 percent) and down to 108 in 2008 (6 % over 2000). Indeed, the strength of the Euro is the result of the flow of dollars to the purchase of Euro-denominated assets, garnered from trade surpluses with the U.S. (and Americans fleeing the dollar, too). The fall in the dollar relative to the Euro makes American goods cheap relative to European goods and encourages U.S. exports by making European goods more costly discouraging U.S. imports from Europe. That’s the way free trade is supposed to work. The low values of the yen and yuan versus the dollar puts no pressure on our imports from Japan and China.

In fact, there is little evidence that the lower value of the dollar relative to the Euro has affected trade at all. Our trade deficit with Germany was about the same in 2004 and 2007. about $45 billion. Our trade deficit with China grew from $162 billion to $256 billion, an increase of 58 percent and with Japan from $75 billion to $83 billion, about ten percent. With all countries, the deficit increased twenty percent. No doubt, much of the increase consisted of petroleum imports. But no oil was imported from China, Japan, or Germany.

Our leaders, following the advice of their economic advisors, are acting as though our principal economic problem were a Keynesian insufficiency of domestic demand. Were that the problem, a “rebate” would indeed be helpful; it would increase domestic demand to the extent households spent the rebate on domestically-produced goods. But what can you buy that is produced in America? We need to produce the computers, the luxury autos, the TVs, the cell phones, oil, and other high-valued products we are now importing. Stimulating consumption now may have a modest temporary effect but what we face is a long-term slide into oblivion. We desperately need investment spending at home.

We have been over-consuming and under-investing for two decades. Last year, according to government statistics, Americans saved 4/10ths of one percent of their disposable income (income after taxes). In most Asian countries, households save a quarter to one-half their incomes. American business investment in 2006 barely exceeded depreciation allowances. We need net investment of 15 percent of GDP, just to have a three percent rate of real growth. Business investment is strong only in the health sector and technology sectors where the firms are protected from foreign competition by patents. Indeed, many corporations have so much in retained earnings and nothing to invest in that are buying back their own stock, a practice that benefits managers whose bonuses are based less on earnings that on the rising price of shares. (Paying that same money out as dividends would really benefit their shareholders with dividends currently taxed at the same rate as long-term capital gains. These include some well-known names, e.g., IBM.

For many years trade surplus countries like Japan, China and the oil-exporting countries invested their surplus dollars in American assets such as U.S. Treasury bonds. The flow of these funds to the U.S. prevented any downward pressure on the dollar but as the dollar began to show weakness, they reduced their purchases of U.S. assets and increased their purchases of Euro assets and assets in other countries. This strengthened the Euro and precipitated the decline in the exchange value of the dollar. The trade deficits are the real cause of the weak dollar.
The U.S. government in the person of Treasury Secretary Henry Paulson, has been trying to bring down the price of oil by treating its symptom, the low value of the dollar relative to the Euro, trying to get foreign central banks to support the dollar. That would do nothing to correct the cause of the dollar’s decline. The cause of the collapse of the dollar is the trade deficit.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself has said that market forces cannot be relied upon to get the trade deficits under control. We can easily reduce the trade deficits as we show in our recently published book, Trading Away Our Future. We have the legal right under WTO rules to impose barriers to imports from countries with which we are experiencing chronic trade deficits. We need to inform all of our trading partners with whom we have chronic trade deficits that they must purchase as much from us as we purchase from them and that effective next year, importers will be limited to 90 percent of their prior year’s imports. This will be in effect until our exports reach 90 percent of our imports. Likewise, we should reduce our imports of petroleum from OPEC members by ten percent of the previous year’s imports. This will make it necessary to ration gasoline and other petroleum products. Each household would receive marketable ration coupons which would provide a financial incentive to use less than its ration. Reducing imports of oil from Venezuela and Saudi Arabia, both members of the illegal cartel, OPEC, would also lower the world price of oil inasmuch as the supply of oil is highly inelastic. A small decrease in demand for oil would lower its price disproportionately.

Moreover, announcing that we will lift the prohibitions to drilling in the ANWR, off-shore, and on public lands would have an immediate effect of lowering the world price of oil.

The effect of these measures will be to strengthen the dollar, encourage investment, and stimulate employment in well-paid jobs in oil production, pipeline construction, and transportation and have beneficial secondary effects throughout our economy. End of recession!

- - - - - -

Dr. Raymond L. Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh. Together with Dr. Howard B. Richman and Dr. Jesse T. Richman, he recently published, Trading Away Our Future, (Ideal Taxes Association, 2008), a book which deals with many of the above issues.

Where's this headed?

Steven Pearlstein's column today in the Washington Post argues that we are at the beginning of our economic woes rather than near the end.

He writes

The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes.

The diagnosis seems right on track to me. All that is missing, as some of those writing comments on the Washington Post noted, is a solution. I continue to believe that the solution in Trading Away Our Future is an appropriate one.

Dropping dollar hurts stock market

The dollar has been overvalued for years, puffed up by subsidized financial flows that artificially inflate its value relative to trade fundamentals, as we discuss in Trading Away Our Future. Rebalancing is apt to be messy. And at present the dollar is alleged to be hurting the stock market. From a story on CNN Money:

The real problem is even though [the] Fed attempted to be more hawkish, it was not supportive enough of the dollar," Hogan said.

Crude-oil futures climbed to new heights, as weakness in the U.S. dollar, influenced by the Federal Reserve's decision to stand pat on interest rates, sent prices past $140 a barrel.

Crude for August delivery reached a high of $140.39 a barrel in electronic trading on Globex. The contract closed at a record $139.64 on the New York mercantile exchange, up $5.09, or 3.8%, for the session after trading as high as $140.

Until recently, the market applauded FED rate cuts. Now, it is alleged, the FED's failure to raise rates in causing the market to drop. An intriguing reversal.

Apparently investors are fleeing U.S. stocks for foreign currencies and oil partly because they believe that further devaluation of the dollar is ahead. This could easily become a self fulfilling prophesy for a while.

The Political Economics of Oil

Economics teaches us that as the price increase, supply increases, and as the price decreases, supply falls. This is true in the long term for the oil market, I suppose, but in the short term because so many oil companies are nationalized, things can get a bit skrewy.


Twenty years ago, John Londregan, then at Carnegie Mellon, noticed something odd about how Iran, Iraq and some other countries responded to declining oil prices in the mid 1980s. Instead of pumping less oil, they pumped more. This contradicted economic theory. His answer was that the domestic political situations and financial demands faced by these countries meant that a decline in oil income was not politically acceptable. To compensate for lower prices, leaders pumped more oil.


Reverse the situation. Over the last few years the price of oil has been going up. But... as noted by Howard a few weeks ago on Trade-Wars, the amount of oil many countries are pumping has been dropping. Perhaps this is because the countries cannot produce more, as 'peak oil' theorists surmise. On the other hand, with the price so high, state owned exporters probably feel much less pressure to pump. Better to keep the extra oil in the ground to smooth out the budget cycle.

What cannot go on...

Imballanced trade is, in the long run, unsustainable. It is also bad for the U.S., as we have argued extensively in Trading Away Our Future. It costs the U.S. jobs, future comparative advantage, and future debt payments.

Until very recently, China has had the best of all worlds from a mercantilist perspective. The Chinese government borrowed domestically at low interest rates, lent the money to the United States at higher interest rates, made money on the investment, sustained a non-market exchange rate, and subsidized its exporters.

A recent Reuters article suggests that the system of 'sterilizing' dollars earned from foreign trade is beginning to crumble on the edges. In particular, the decline of the dollar, combined with below-inflation interest rates in the U.S., and higher interest rates in China are conspiring to generate losses on the Chinese investment portfolio.

China's central bank used to make a tidy profit in managing foreign exchange inflows. When Chinese interest rates were lower than in the United States, the People's Bank of China made money every time it sold bills at home and invested its forex reserves in debt across the Pacific -- its own carry trade.

But that soured over the past year as Beijing raised rates and the U.S. Federal Reserve slashed them. The economics were further undermined by the yuan's faster appreciation against the dollar.

China's losses may be running to about $15 billion a month, or 5 percent of GDP on an annualised basis, Goldman Sachs economists Hong Liang and Eva Yi calculated.

The losses are not huge, compared to more than two trillion dollars worth of reserves. China's response has been to emphasize increased reserve requirements for Chinese banks, a strategy that is better financially.

Brad Setser's recent blog suggests that China now has less company at the task of supporting the dollar. Rising energy costs have led some East-Asian countries to begin drawing down reserves and selling dollars.

McCain proposes $300m prize for new auto battery

Senator McCain's proposed $300 million prize for an improved auto battery is an excellent idea. America has the largest university-based research infrastructure to the world. If it could only be harnessed toward solving U.S. and world economic problems, we could see some huge advances in technology. Goal-oriented research works. That's one reason why wars usually lead to huge advances in technology.

I just hope Senator McCain goes further than just one prize and endorses the principle behind it. That principle is that prizes work, peer-judgment does not.

He should replace the current peer-review pre-approval process for research grants with a goal-oriented process involving prizes for the best, second best, and third best contributions toward achieving specific goals. The prizes would not have to be large. All we really have to do is to take the money that universities are currently getting through peer-reviewed National Science Foundation grants and turn it into prizes for achieving goals.

The current peer-reviewed process for awarding grants is forcing conformity upon academia. Any academic who differs from the academically-correct consensus loses funding. That's one reason why retired professors tell the truth about global warming while active researchers tend to keep quiet. That's one reason why my father, a retired economics professor, tells the truth about trade, while active economic professors keep quiet. The peer-oriented review process stiffles dissent from whatever is the prevailing academic opinion.

Peer-pressure is not a positive force in schools of any sort, not elementary schools and not graduate research institutes. If we would move from peer-reviewed funding to prize-oriented funding, the standard of income of the entire world would increase and the quality of advice that the US government gets from academia would also improve.

Howard

Wall Street Journal tries to explain away their obviously delusional editorial

In a delusional June 5 editorial entitled The Buck Stops Here, the Wall Street Journal praised Federal Reserve Chairman Ben Bernanke for taking a strong-dollar position. As proof, they noted that Bernanke's stance had caused the price of oil and gold to fall for two days in a row. The very next day after this editorial appeared (June 6) the price of oil futures skyrocketed, rising by almost 11% in a single day!

In a June 20 editorial entitled Bernanke's Market Week the Wall Street Journal blamed the Federal Reserve. Specifically they wrote:

Earlier this month, Chairman Ben Bernanke signaled a turn in Fed policy to include a focus on maintaining a "stable" dollar. Sure enough, the dollar strengthened, the price of oil fell and stocks crept up. Then earlier this week, someone in the upper reaches of the Fed began leaking to the press in advance of next week's FOMC meeting that Mr. Bernanke saw no reason to raise interest rates this month, or indeed until the autumn.

Sure enough, oil shot up and gold rose back above $900 an ounce, with equities tanking in turn on stagflation fears. Throw in renewed worries over credit problems in the banking system, and the markets had a very ugly week.

What we can't figure out is what in the world Fed officials are thinking, assuming that's even the right word. The most precious commodity a Fed Chairman has is credibility. When he makes a widely advertised public commitment to maintain dollar stability, and then he or his minions leak that he has no plans to back that up with any action, he is squandering his own currency. Central banking isn't an academic seminar where ideas don't have consequences.

With inflation climbing around the globe, most of it inspired by dollar weakness, the Fed has a growing credibility problem....

The Wall Street Journal's attempt to get its foot out of its mouth relies upon its ability to rewrite history. They pretend that oil and gold prices started to shoot up last week after the Federal Reserve leaked to the press that they were not planning to raise interest rates this month. But oil shot up on June 6, way before the leak, while the Federal Reserve was still planning the higher interest rate policy to fight inflation that the Wall Street Journal was praising.

The Wall Street Journal also ignores the fact that the Federal Reserve's short-lived tight money policy plans were reversed partly because of a report that was released by the Bureau of Labor Statistics on June 6. That day, the Bureau of Labor Statistics announced that U.S. unemployment had shot up from 5.0% in April to 5.5% in May, which could explain why the Fed is not about to raise interest rates right away.

The editors of the Wall Street Journal are increasingly divorced from reality. It is amazing that the Republican leadership still tries to follow their economic advice. Fortunately for the United States, Federal Reserve Chairman Bernanke realizes that he shouldn't follow their advice.

Howard

Balanced Trade A Quick Fix

Balanced Trade, a Quick Fix to our Economic Malaise

Raymond L. Richman

History will wonder how it was possible for the country which won nearly all the Nobel prizes in economics 1) to allow its trade deficits to grow in three short decades from chronic trade surpluses to a trade deficit on goods of $790 billion in 2007, 2) to witness factory after factory close down and move to Asia at the cost of laying off millions of industrial workers, causing wages to stagnate and the distribution of income to worsen, 3) allow the dollar to fall from $0.90 per Euro to $1.55, 4) to observe without flinching the escalation in the price of petroleum, The explanation is simple, the economists advising the Bill Clinton administration and the economists advising the G.W. Bush administration were all blind-sided free-traders, ideologues who did not want free trade challenged.

Why have the Congress and the Clinton and Bush administrations done nothing about a problem that cost us factories and jobs and a host of other ills. Because, as Lee Iacocca writes, “We worship at the altar of free trade, and it’s killing us. At the very least, it’s time we started charging admission to the American market. And the price of a ticket has to be a little fairness and reciprocity.”

Few economists asked themselves what the consequences would be if free trade were one-sided and trade deficits became chronic. I exchanged e-mails with one of Pittsburgh’s free-market gurus this spring writing him about some of my concerns and this is what he said: “If China wants to send us goods for our paper, what do we have to lose?” He blithely ignored what had happened to the U.S. economy as the result of a world flooded in dollars by the trade deficits.

The millions of Americans who lost their jobs believed it was due to uncontrollable market forces. The millions of others whose wages stagnated had no reason to believe that it was the result of something so esoteric as trade deficits.. And there were some who benefited. These latter include Wall Streeters and bankers, albeit temporarily as it turned out, and people with guaranteed incomes such as government employees and university professors and those on fixed incomes.

Economists blamed the worsening distribution of income on a lack of a skilled workforce as though the sophisticated computers, electronic goods, and luxury automobiles we have been importing require only unskilled labor.

Faith in the forces at work in free markets became the pied piper of America’s decline. It has been obvious for sixty years that Japan was not reciprocating our free trade policy and that China, with her controlled capitalistic economy has not been doing so either.

It has been obvious since the 1973 oil embargo that we were becoming dependent for most of our oil on foreign sources, some of them hostile or potentially hostile. Thanks to Pres. Clinton’s veto of the Energy Bill in 1995 and repeated successful Democratic opposition to bills that would have authorized drilling in the ANWR and offshore, some of the world’s largest oil reserves could not be exploited.

Exports and Imports of Goods, incl. Petroleum

(Billions of Dollars)

	1996	2000	2004	2006	2007
Exports of goods\1\	618.3	784.3	818.3	1030.5	1152.9
Imports of goods\1\	807.4	1243.5	1499.5	1880.4	1979.4
Trade deficit on goods (-)	-189.1	-459.2	-681.2	-849.9	-826.5
Less: Petroleum imports	72.7	120.2	180.5	302.4	330.7
Trade deficit excl. petroleum imports (-)	-116.4	-339	-500.7	-547.5	-495.8

At the beginning of 2002 Americans could buy a Euro for ninety cents but as of June 2008, it requires $1.55, seventy-one percent more. The European Union allows the Euro to float in the foreign exchange market but China and Japan do not. China allowed the yuan to rise in value, from 8.3 to the dollar to 7.3 between 2000 and 2008, a rise of 12 percent, while Japan allowed the yen to rise from 102 to the dollar, to 135 in 2002 (32 percent) and down to 108 in 2008 (6 % over 2000). Indeed, the strength of the Euro is the result of the flow of dollars to the purchase of Euro-denominated assets, garnered from trade surpluses with the U.S. (and Americans fleeing the dollar, too). The fall in the dollar relative to the Euro makes American goods cheap relative to European goods and encourages U.S. exports by making European goods more costly discouraging U.S. imports from Europe. That’s the way free trade is supposed to work. The low values of the yen and yuan versus the dollar puts no pressure on the deficits with Japan and China.

In fact, there is little evidence that the lower value of the dollar relative to the Euro has affected trade with Europe at all. As can be seen in the following table, our trade deficit with Germany, was about the same in both years, about $45 billion. Our trade deficit with China grew from $162 billion to $256 billion, an increase of 58 percent and with Japan from $75 billion to $83 billion, about ten percent. With all countries, the deficit increased twenty percent. No doubt, much of the increase consisted of petroleum imports. But no oil was imported from China, Japan, or Europe.

Trade Deficits with Selected Countries, 2004 – 2007

(billions of dollars)

Country	X – M 2007	X – M 2006	X – M 2005	X – M 2004
Total, All Countries	-790.30	-818.10	-767.10	-652.00
Canada	-64.20	-72.80	-76.60	-65.70
China	-256.30	-232.60	-201.70	-162.00
Mexico	-74.30	-64.10	-50.20	-45.00
Japan	-82.80	-88.50	-82.70	-75.20
Germany	-44.70	-47.80	-50.70	-45.80
France	-14.20	-12.90	-12.80	-17.30
Netherlands		13.80	-19.50	-19.20
Brazil	-1.00	-7.20	-27.60	4.30
Italy	-20.90	-20.10	-9.10	11.70

Our leaders, who rely on economic advisers, are acting as though our principal economic problem were a Keynesian insufficiency of domestic demand. Were that the problem, increased expenditures like the so-called rebate would indeed be helpful; it would increase effective demand 1.1 percent if it were all spent on domestically produced goods. But what can you buy that is produced in America? We need to produce the computers, the luxury autos, TVs, and other high-valued products we are now importing. Stimulating consumption now may have a temporary modest effect but what we face is a long-term slide into oblivion. We desperately need investment at home. We have been over-consuming and under-investing for two decades. Last year, according to government statistics, Americans saved 4/10ths of one percent of their disposable income (income after taxes). In most Asian countries, households save 15 percent or more. American business investment in 2006 barely exceeded depreciation allowances. We need net investment of 15 percent of GDP, just to have a three percent rate of real growth. Business investment is strong only in the health sector and technology sectors where the firms are protected from foreign competition.

It was easy. It was all done because American economists made an ideology of free trade. Since the classical economist, Smith, Ricardo, Economists denounce any action to restrict imports as protectionism. They sat, and continue to sit and pontificate in their ivory towers on the benefits of free trade while the trade deficits accelerated America’s de-industrialization causing the loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation, as well as a depreciating dollar.

For many years trade surplus countries like Japan, China and the oil-exporting countries invested their surplus dollars in American assets such as U.S. Treasury bonds. The flow of these funds to the U.S. prevented any downward pressure on the dollar but as the dollar began to show weakness, they reduced their purchases of U.S. assets and increased their purchases of Euro assets and assets in other countries. This strengthened the Euro and precipitated the decline in the dollar. The trade deficits are the real cause of the weak dollar. The falling dollar is the result of the fact that the trade surplus countries did not use the dollars they earned to buy U.S. goods or services but used them to buy financial assets here and increasingly abroad.

The U.S. government in the person of Treasury Secretary Henry Paulson, has been trying to bring down the price of oil by treating its symptom, the low value of the dollar relative to the Euro, trying to get foreign central banks to support the dollar. That would do nothing to correct the cause of the dollar’s decline. The cause of the collapse of the dollar is the trade deficit.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself said in a speech while he was Chairman of the Council of Economic Advisors that market forces cannot be relied upon to get the trade deficits under control but has offered no alternative

We can easily reduce the trade deficits. As we show in our recently published book, Trading Away Our Future, we need to inform all of our trading partners with whom we have chronic trade deficits that they must purchase as much from us as we purchase from them or we will enforce a trade balance by reducing our imports from them. If necessary, we may have to ration some oil uses, particularly gasoline.

- - - - - -

Dr. Raymond L. Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh. Together with Dr. Howard B. Richman, a teacher of economics on the internet and Dr. Jesse T. Richman, Asst. Professor of political science at Old Dominion University, they recently published, Trading Away Our Future, (Ideal Taxes Association, 2008, a book which deals with many of the above issues.

McCain's energy policy sounds good to me

Here's a selection from an article about his speech yesterday at Missouri State University:

Republican presidential candidate John McCain is pushing for new nuclear power plants, carbon sequestration "clean coal" technology and off-shore oil drilling to meet the country's energy needs for the next generation.

"One obstacle to expanding our nuclear-powered electricity is the mind-sest of those who prefer to buy time and hope that our energy problems will somehow solve themselves," McCain said in his opening remarks at a town hall meeting at Missouri State University.

McCain pledged to "set this nation on a course to building 45 new (nuclear) reactors by the year 2030" if voters chose him over Democratic Sen. Barack Obama in November to be America's 44th president.

Increasing US energy production would not only lower the cost of energy, but would also strengthen the dollar, lowering the cost of everything that is imported. The nuclear power plants could, perhaps, fuel electric cars.

There has been a huge shift in popular opinion on two economic issues. The Democrats are just beginning to realize that popular opinion is now in favor of energy production, more than environmental protection. The Republicans are just beginning to realize that popular opinion is now in favor of strengthening US industry, more than keeping Chinese imports inexpensive. The November election is again up for grabs. The party that moves fastest to adjust to the new reality will likely win in November.

Howard

Subsidies at the Root of the China Price

In an article from the June issue of the Harvard Business Review entitled "Subsidies and the China Price" Usha C.V. Haley and George T. Haley (both professors at the University of New Haven in CT) summarize their larger report on the use of energy subsidies to boost the Chinese steel industry. The larger report is available from americanmanufacturing.org/.

They write that

Many assume that China's cost advantage in manufacturing comes from cheap labor. But in China's burgeoning steel industry, our research suggests, massive government energy subsidies, not other factors, keep prices down. These subsidies have broad implications for how companies compete and collaborate with Chinese businesses.

According to the report, the subsidies go to domestic energy producers (e.g. coal mines) and are then passed along as lower costs to energy consumers including the steel industry. China continues to engage in strategic trade policies designed to boost its position in key industries.

In 2005, Beijing designated steel as a pillar industry for the Chinese economy. China was the world's largest producer of steel, with 27% of global production, but until then it had imported 29 million tons of steel annually. That year, China suddenly transformed itself from a net steel importer to a net steel exporter. In 2006, the country became the world's largest steel exporter by volume, up from the fifth largest in 2005. Today it remains the world's largest consumer and producer of steel, with 40% of global production. How did China make these astonishing gains so quickly and manage to sell steel for about 19% less than steel from U.S. and European companies? Labor accounts for less than 10% of the costs of producing Chinese steel, and Chinese steel doesn't appear to rely on scale economies, supply-chain proximities, or technological efficiencies to lower its costs.

Instead, what happened is that China boosted its energy subsidies, which now total more than 27 billion dollars per year.

The authors note that one important implication of their work is that foreign companies doing business with Chinese suppliers should be aware of the risk that subsidies underlying the "China Price" might be removed at any time because of political calculations. Companies should maintain supplier relationships with other sources until they are sufficiently confident in the "medium term" reliability of Chinese suppliers.

Another implication, not discussed in the HBR article, is that consumers and economists in the U.S. should not assume that low prices from China are the result of natural comparative advantage or low cost labor. It isn't cheap labor that gives Chinese steel companies an advantage, but cheap (e.g. subsidized) coal.

Although in the short term Chinese decisions to subsidize exports make those exports cheaper for us to buy, the longer term risk is that these subsidies will help Chinese producers gain other kinds of comparative advantage while driving other world producers out of business. In the short term, subsized and distorted export prices hurt American workers and companies in export-competing industries. In the medium term they could hurt all Americans.

My new letter to the Washington Times was published today!

Two postings ago, I posted "A tale of three letters" and I noted that I had just e-mailed the Washington Times the third letter. The Washington Times ran it today. They gave it the title, "How to grow the economy." Here's the link: http://www.washtimes.com/news/2008/jun/17/how-to-grow-the-economy/

Howard

Ross Perot is Back

Ross Perot recently rolled out a new website that uses charts to describe the condition of the U.S. economy and the risks posed by current fiscal imbalances. The website is http://www.perotcharts.com/. His charts are crisp and often interesting. For instance, check out his chart examining U.S. savings rates in comparision with a number of other countries http://perotcharts.com/category/challenges/savings/.

Unfortunately, Perot has not yet included discussion of the trade deficit in his list of issues discussed, although the trade deficit is closely related to several issues Perot does examine including savings rates, taxation policies and the federal budget. The public remains woefully underinformed about the trade deficit, with substantially fewer even aware that there is one than in the 1980s when it was a smaller portion of GDP.

A tale of 3 letters to the editor

On June 6, a letter to the editor that I wrote was published in the Washington Times. This is what I wrote:

Balanced trade is the key

In his Tuesday Commentary column, "Economic Reality Check," Michael Barone cites many trees but misses the forest. He points out that the economy is not suffering from much unemployment (true), nor is there much inflation (true). Nor is the economy shrinking (true). He also points out that the growth rate is mighty slow, but he doesn't stop to analyze why. His conclusion: Barack Obama's "protectionism" would not help the United States economy.

What he misses is the reason U.S. growth is so slow despite the lack of unemployment. It is slow because businesses have not been investing in American production. They have not been investing because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade.

By the way, Mr. Barone is wrong when he calls Sen. Obama a protectionist. Mr. Obama would not likely do anything more to balance trade than Sen. John McCain. The main reason Sen. Hillary Rodham Clinton was solidly defeating Mr. Obama throughout the Midwest is because the manufacturing voters detected a phony.

As things stand, the Democrats will gain a huge victory in Congress of 1932 proportions as a result of delusional Republican economics as exemplified by Mr. Barone's column. The presidential race, however, is up in the air. Ohio, Michigan and the nation will go to the presidential candidate who persuades voters that he will do the most to balance trade.

HOWARD RICHMAN
Co-author: "Trading Away Our Future"
Kittanning, Pa.

On June 9, Don Boudreaux, Chairman of the economics department at George Mason University responded with his own letter to the editor. Here is what he wrote:

Trade Deficit Offset

Howard Richman argues "Balanced trade is the key" (Letters, Friday/Saturday) to America's prosperity. He's confused, as evidenced by his claim that America's recent economic slowdown is linked to its trade deficit. The United States has run a trade deficit for each of the past 31 years, some of which (like the present) were periods of slow growth, but many of which were periods of high growth. Indeed, the evidence suggests that higher trade deficits are associated with higher, rather than lower, rates of economic growth.

This last point highlights another of Mr. Richman's confusions. He thinks trade deficits mean less domestic investment. Not so. Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus - meaning net inflows of capital into the domestic economy. More capital generally means more growth.

DONALD J. BOUDREAUX
Chairman, Department of Economics
George Mason University
Fairfax

Last night, I e-mailed the Washington Times a response to Boudreaux's letter. Here is what I wrote:

How it Works in the Real World

In a June 9 letter to the editor, “Trade Deficit Offset,” Don Boudreaux, Chairman of the Department of Economics at George Mason University, disputed my contention in a June 6 letter to the editor, “Balanced Trade is the Key,” that U.S. investment would increase if we insisted on balanced trade with the mercantilist countries.

Specifically, Boudreaux argued that our trade deficits contribute to our economic growth: “Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus - meaning net inflows of capital into the domestic economy. More capital generally means more growth.”

Boudreaux's theory works on the chalkboard of his classroom, but in the real world, the exact opposite occurs. Instead of helping, inflows of financial capital slow the growth of the economy that receives them. In 2006 three International Monetary Fund economists (Prasad, Rajan & Subramanian) found that the more capital a developing country had received from abroad, the slower its economic development because of the harm to its exporting industries. Although the inflow of capital causes lower interest rates, it also causes a higher currency value which makes the products of that country less competitive in world markets.

Many Asian countries, especially China, have been intentionally manipulating their currency values to keep their exports high and their imports low. In order to conduct these currency manipulations they buy dollars and lend those dollars to the United States. Boudreaux thinks that this inflow of dollars from the Chinese government has been benefiting our country. But the inflow of capital into the United States drives down U.S. interest rates while at the same time putting U.S. producers at a competitive disadvantage when competing with Chinese producers.

As I pointed out in my June 6 letter, "businesses have not been investing in American production ... because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade."

Howard Richman
Co-author: Trading Away Our Future
Kittanning PA 16201

Howard

Economically Illiterate Populists?

In a response to our article on American Thinker, AL wrote:
>Three things to note for economically illiterate populists.
>First, US manufacturing output was increasing with steady pace over last two decades.


There are a variety of arguments contra "economic populists" concerning US manufacturing. There is a grain of truth to them, but also they must be taken with plenty of salt.

One argument is that US manufacturing output is growing. While manufacturing output shrank for quite a time in the early part of the current decade, the broader claim is also misleading.

Alan Tonelson takes on this argument in the link below.
http://www.americaneconomicalert.org/view_art.asp?Prod_ID=2648

Another argument, versus China in particular, has to do with the relative share of worldwide manufacturing production in the US and China. As this analysis from the Heritage Foundation discusses, China's manufacturing output once adjusted for Purchasing Power Parity (PPP) is larger than that of the U.S.
http://www.heritage.org/research/AsiaandthePacific/wm1762.cfm

Another argument is that the U.S. share of global manufacturing has held largely constant since the early 1980s. The share of output statistics are deeply misleading because changes are often driven by exchange rates rather than anything more real. Our borrowing to finance the trade deficit (driving up the value of the dollar) makes us look like the manufacturing powerhouse we aren't. And the way these numbers are used is also deeply misleading. The U.S. share was well above 20 (or 22) percent for almost all of the interval. It is now, and only now, back down in the range it was when Reagan beat Carter.

>Second, loss of manufacturing jobs is due to increasing productivity; China is loosing manufacturing jobs also.

Increasing productivity does diminish the number of manufacturing jobs, and this is a good thing because it allows each worker to produce more and it thereby raises living standards. However, as we discuss in chapter 1 of Trading Away Our Future, several million manufacturing jobs do not exist in the US because of the trade deficit. The exact number depends on how you do the calculation and how you assume the trade deficit would be resolved. At the low end it is about 3 million, and at the high end about 7.5 million.

>Third, fast-tracking of Chinese economy is producing 1.5 billion of new consumers of US manufacturing goods, like aircrafts and i-phones, to name a few.

The Chinese population of 1.3 billion is a huge potential market. I sincerely hope that the U.S. can expand exports to China at a pace that at least matches the increase in China's exports to the US. I believe that China is in no hurry to let this happen, let alone encourage it. Lets start with airplanes. China imports passenger aircraft. However, the days of big orders forBoeing are probably near an end. The recent Chinese deal with Airbus included expanded requirements for Chinese parts sourcing on top of Chinese assembly for Airbus planes. (http://www.nytimes.com/2007/11/27/business/worldbusiness/27trade.html)

The i-phone has a long supply chain, like most manufactured products in our globalized world. But nearly all of the parts are produced in Asia, and the phone is assembled in China.
http://www.allroadsleadtochina.com/index.php/2007/08/15/iphone-made-in-shenzhen/

"Straight Talk from Clinton's Trade Negotiator" - We're published in today's American Thinker

Here's how our commentary begins:

It is rare when a government official actually blames himself for his mistakes. That straight talk occurred in the June 4 issue of Foreign Policy in Focus when Robert Cassidy, President Clinton's Assistant U.S. Trade Representative for Asia and China, took himself to task for the trade agreement he negotiated with China. He began:

As the principal negotiator for the landmark market access agreement that led to China's accession to the World Trade Organization (WTO), I have reflected on whether the agreements we negotiated really lived up to our expectations. A sober reflection has led me to conclude that those trade agreements did not.

Cassidy notes that only two groups benefited from our trade agreement with China: "multinational companies that moved to China and the financial institutions that financed those investments, trade flows, and deficits." The American economy and the American worker were the big losers with up to 2.5 million manufacturing jobs lost.

Here is his passage in which he explains why his "free trade" recipe was flawed, even though he succeeded in reducing Chinese tariffs:

China has adopted an export-led development strategy [italics ours], the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%. Thus China's wages, in U.S. dollar terms, are 40% cheaper than they would have been if the currency were allowed to freely float. Similarly, foreign investors receive a 40% subsidy to develop operations in China. To add insult to injury, our exports are taxed at an additional effective 40% rate.

We would use the less-charitable term mercantilism to describe what Cassidy calls China's "export-led development strategy." The goal of a mercantilist strategy is not only to maximize exports, but also to minimize imports in order to steal industry from one's trading partners.

If you add the two manipulations mentioned by Cassidy together, the approximately 40% added by Chinese tariffs and value-added taxes and the approximately 40% added by Chinese currency manipulations, you find that American exports face the equivalent of an 80% tariff when being sold in China while Chinese exports to the United States face no tariff and get a 40% currency-manipulation subsidy from the Chinese government. With our trade deficit with China rising from $229 billion in 2006 to $252 billion in 2007, is it any wonder that American manufacturers are laying off workers?...

Follow the following link to read the entire commentary: http://www.americanthinker.com/2008/06/straight_talk_from_clintons_tr_1.html

Howard

America's Thrift Deficit

Why did Americans stop saving? Although the report doesn't get to the bottom of the sources of easy money, a new think tank report summarizes some of the more proximate problems ably, and proposes a number of useful solutions including a move to taxing consumption instead of income.

The report is summarized in The American Interest by Barbara Dafoe Whitehead. A quote:

Why are so many Americans struggling with high levels of debt? Some blame individual greed and recklessness, and certainly human frailty and irresponsible choices are part of the story. Others point to a culture of rampant, corporate-driven consumerism, buttressed by marketing techniques so sophisticated as to exceed the imagination of George Orwell himself. If you can find someone who honestly denies that this is part of the problem, sell him a bridge before it’s too late. But soaring levels of household debt are also tied to another, often overlooked, source: recent changes in America’s institutional and regulatory landscape.

Both statistical evidence and common sense make it clear that this is so. As to the former, many other countries in the world are similarly embedded in a corporate market economy, yet few other advanced countries confront a debt debacle comparable to that of the United States. The variable that can most readily explain the data is the different institutional/regulatory environments in different countries.

As to common sense, it is evident that in money matters, as in most things that matter, authoritative institutions play a role in guiding individual choices and in setting cultural norms. Few people understand the full range of forces affecting them, or have time to acquire the knowledge and self-discipline necessary to make informed decisions.

That’s where authoritative institutions come in. They establish the norms, conventions and values that vest individual decision-making with broader social wisdom and knowledge. But not all institutional set-ups are created equal. Some inculcate norms and values that foster unwise choices or contribute to unjust outcomes. Such is the case in today’s American debt culture. Newly powerful and aggressive anti-thrift institutions are promoting behaviors and attitudes that have undermined our nation’s traditional culture of thrift. (http://www.the-american-interest.com/ai2/article.cfm?Id=458&MId=20)

Barbara Dafoe Whitehead is co-director of the National Marriage Project at Rutgers University. This essay is excerpted and adapted from For a New Thrift: Confronting the Debt Culture, a report released in May by the Commission on Thrift, co-sponsored by the Institute for American Values, the Institute for Advanced Studies in Culture, the New America Foundation, Public Agenda, Demos, the Consumer Federation of America and the National Federation of Community Development Credit Unions. Sources for all data can be found in the full report.

Falling dollar, high oil prices, and trade deficits

The Falling Dollar, High Oil Prices, and Trade Deficits

Raymond L. Richman, Howard B. Richman, and Jesse T. Richman

Why have crude oil prices escalated during the past three years? Most economists attribute the rise to increased demand and the failure of supply to keep pace. And some believe the bubble has been caused by speculators, betting on the fact that the U.S. will continue to do nothing about it. According to other observers, the immediate cause of what appears to be a “bubble” in the price of oil during the past three years was the fall of the dollar relative to the Euro and other currencies during the past three years. Oil contracts are typically expressed in dollars. Measured in Euros which have appreciated about fifty percent against the dollar, the price of oil has increased hardly at all during the past half decade. While high oil prices have created a serious problem for the U.S., countries enjoying strong currencies have felt little pain at all.

We believe that the basic cause of the decline in the value of the dollar was our huge trade deficits which grew to a shocking $760 billion in 2006, falling in 2007 to $708 billion and rising again in 2008. The rising price of oil in dollars merely exacerbated the trade deficit and the dollar’s decline. The fall of the dollar against the Euro made American goods less expensive to foreigners and accounted for most of the reduced trade deficit observed in 2007.

For many years trade surplus countries like Japan, China and the oil-exporting countries invested their surplus dollars in American assets such as U.S. Treasury bonds. The flow of these funds to the U.S. prevented any downward pressure on the dollar but as the dollar began to show weakness, they reduced their purchases of U.S. assets and increased their purchases of Euro assets and assets in other countries. This strengthened the Euro and precipitated the decline in the dollar. The trade deficits are the real cause of the weak dollar. The falling dollar is the result of the fact that the trade surplus countries did not use the dollars they earned to buy U.S. goods or services but used them to buy financial assets here and increasingly abroad.

Later they diversified into corporate securities. The latest manifestation is the so-called Sovereign Wealth Funds. Wall Street says this shows the confidence foreigners have in the U.S. economy! Well, that confidence has been waning; they have been using their ever-larger supply of dollars to buy Euro assets which strengthens the Euro and explains the collapse of the dollar relative to the Euro.

The U.S. government in the person of Treasury Secretary Henry Paulson, has been trying to bring down the price of oil by treating its symptom, the low value of the dollar relative to the Euro, trying to get foreign central banks to support the dollar. That would do nothing to correct the cause of the dollar’s decline. The cause of the collapse of the dollar is the trade deficit.

The administration’s economists denounce any action to restrict imports as protectionism. They sat, and continue to sit and pontificate in their ivory towers on the benefits of free trade while the trade deficits accelerated America’s de-industrialization causing the loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation, as well as a depreciating dollar.

Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself said in a speech while he was Chairman of the Council of Economic Advisors that market forces cannot be relied upon to get the trade deficits under control because of the foreign governments’ manipulation of flow of foreign savings to the U.S. The collapse of the dollar stimulated U.S. exports in 2007 but by April, 2008, the deficit was as great as ever thanks to higher prices of crude oil imports.

We do not need to submit passively to the high price of imported oil or a falling dollar. For thirty-five years we have been on notice that our dependency on imported oil endangers our economy and our security. Nevertheless, our government has prohibited drilling for oil on public lands like the ANWR and exploiting our huge resources of shale oil just as Canada began expoiting its oil sands. Congress should announce that drilling will be permitted in the Arctic National Wildlife Refuge (ANWR) and other public lands and offshore. How much oil is there in the ANWR? A U.S. geology mission in 1998 estimated 4.25 billion to 11.8 billion barrels. Just announcing that we would authorize drilling in the ANWR would cause the price of oil to fall substantially as speculators run for cover.

Drilling in the ANWR would have few social costs, environmental or otherwise. There is no evidence that drilling has had any effect on wildlife anywhere. Environmental concerns are sometimes legitimate. But this one is not. Drilling in Alaska has proven to be environmentally neutral. What better place to drill that an area devoid of humans. In any case the benefits would be considerably greater than costs. The oil that is foregone by the current restrictions on drilling has a market value of many hundreds of billions of dollars and the exploration, drilling, and pipelines would provide many thousands of good jobs directly and indirectly. And longer-term, we should continue to seek alternative sources of energy for transportation uses. The hybrid cars and projected use of electricity as a substitute source of power is already having an impact.

More can be done in the short-run. We can easily reduce the trade deficits. As we show in our recently published book, Trading Away Our Future, we need to inform all of our trading partners with whom we have chronic trade deficits that they must purchase as much from us as we purchase from them or we will enforce a trade balance by reducing our imports from them. If necessary, we may have to ration some oil uses, particularly gasoline.

A reduction of our imports of oil by ten percent would require the reduction of imports from current levels of 9.3 million barrels to 8.4 million per day. Only our imports from OPEC countries would need to be affected. Our imports of crude oil from OPEC in 2007 were about 38 percent of our total imports and Saudi Arabia and Venezuela alone accounted for 28 percent. Canada and Mexico are the other principal suppliers and balancing trade with them is not a great problem because our NAFTA partners are not imposing barriers to trade.

Reducing our oil imports ten per cent would cause a dramatic fall in world oil prices as soon as it were announced. A similar response could be expected when the U.S. simply announces that we will authorize drilling on public lands. The world price could be expected to fall by 20 percent or more. Americans will have to adjust to the reduced quantity of fuel available by making greater use of public transportation, sharing rides, using hybrid vehicles, etc. etc. The U.S. Department of Commerce has a stand-by plan for gasoline rationing and it, or a simpler version, could be implemented quickly.

The high price of gasoline is equivalent to a regressive tax, weighing most heavily on low income households. It is almost as regressive as a poll or head tax. It has the effect of causing low income families to reduce their consumption of other goods and services while middle and upper income families could care less whether a fill-up costs $30 or $60. Rationing would have the effect of reducing the price of oil and gasoline and all households would benefit thereby. Households willing to forego their entire ration should be authorized to sell them. It would be simple to create a market for them. (Just this sort of rationing plan was suggested by Prof. Martin Feldstein in a 2001 paper. (See http://www.nber.org/feldstein/oil.html.)

The Democrats will probably control the next Congress and administration. To date they have been subservient to the environmental lobby. It was Pres. Bill Clinton who vetoed in 1995 the authority to drill in the ANWR. And Senators Obama, Clinton, and McCain are all on record as opposing drilling in the ANWR. It is laughable that they and the President have enacted a law requiring the substitution of mercury-filled fluorescent lamps for incandescent lamps. There is not now nor does there ever need to be a shortage of electricity in the U.S. Prospective shortages of electricity can be blamed on opposition to new coal-powered and new nuclear plants. The high price of motor fuel and the trade deficits are the problem. What we need is a lobby as powerful as the environmental lobby that will advance, not diminish, the welfare of the American people.

- - - - - -

Dr. Raymond L.Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh; Dr. Howard B. Richman teaches economics on the Internet, and Dr. Jesse T. Richman is Asst. Professor of political science at Old Dominion Uniersity. Their book Trading Away Our Future, published by the Ideal Taxes Association (www.idealtaxes.org) deals with many of the above issues.