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The Wall Street Journal reported last weekend that Caterpillar is the latest American producer to shift production from abroad back to the United States. Cat’s new US plant -- at a location still to be decided --.will manufacture excavators formally produced in Japan and an older plant in Aurora, Illinois. The result could be a tripling of domestic production, while the Japan plant would have extra capacity to ship to Asian markets.

Cat is not alone. The Journal reminded us that General Electric had announced last year it was moving production of water heaters from China to Louisville, Kentucky and that U.S. Block Windows had decided to move all its China production to Pensacola, Florida.

From our own experience, we know of other cases of precision parts work coming back home for quality reasons. Even some woolen apparel production is being “on-shored.” Surely there are scores of other examples that have received less attention.

The Journal drew the following conclusion: “After a decade of rapid globalization, economists say companies are seeing disadvantages of offshore production, including shipping costs, complicated logistics, and quality issues. Political unrest and theft of intellectual property pose additional risks.”

These encouraging signs for American manufacturing are driven essentially by market forces and the shortcomings of regulatory systems abroad. Certainly, they are far too limited to constitute a reversal of the disastrous exodus of manufacturing output that has helped to drive the trade deficit and the accompanying foreign debt. Moreover, there’s no reason to believe that these trends will continue long enough to achieve that result without a disastrous fall in the dollar against floating currencies with the attendant inflation and destruction of wealth.

Imagine what could be done if the United States of America could get its collective act together and define a national economic policy that favored domestic production and a radical increase in net exports. The key elements would include: decisive action to counteract the protracted undervaluation of foreign currencies against the dollar; a tax system that rewarded investors for building new plant and equipment in the US; an ambitious program to build a national infrastructure – roads, bridges, waterways, broadband, and power distribution – worthy of a global leader; and the vigorous enforcement of our rights under international agreements and domestic statutes to achieve “free and fair trade with free and fair traders” as Ronald Reagan once defined his trade policy of reciprocity.

The growing list of on-shoring operations underscores the basic truth that American industry is fundamentally competitive. We have few obsolete or high-cost producers; they have long since been driven out by competition both international and domestic. What ails us is our public policy. That can and should be fixed without further delay.

Charles Blum

Warren Buffett predicts that we’ll all be driving electric vehicles (EVs) in 20 years. The Oracle of Omaha knows a thing or two about sound investments and he’s placing his bets on EVs. It makes economic, environmental and energetic sense. What doesn’t make sense is the dismal record of Buffett’s native land to capitalize on this insight.

Electric vehicles exceed the energy efficiency, environmental, and economic virtues of their conventional counterparts. Internal combustion engines have less than half the 95% efficiency rate of EV motors. The latter are also less carbon intensive: even if the electric grid that charged EVs were entirely coal-powered, EVs would still emit less carbon emissions than petroleum-burning cars. EVs are consumer friendly, requiring less maintenance and sporting a significantly lower cost of ownership for budget conscious Americans. Beyond the cost benefits of electricity over gasoline, EVs, like solid-state computer drives, have fewer moving parts and hence less need for service and repair. At a more macro level, EVs do not require the same massive infrastructural support as liquid fuels. More public EV plugs will be needed, but a home garage plug will suffice for the charging needs of most commuters. Moreover, when combined with a smart grid EVs might serve as energy reservoirs that could be tapped during peak electricity demand. Finally, EVs can empower America to make significant headway in weaning itself off its oil addiction. Indeed, transportation accounts for over two thirds of total U.S. oil consumption.

In 2008, Berkshire Hathaway made its foray into the EV market by investing $232 million in 2008 for a 10% share of BYD, China’s number one battery and electric car company. That share is now worth almost $2 billion. Berkshire’s record gains from this investment flow from BYD’s innovations in the EV industry, including a breakthrough in lithium ion ferrous phosphate technology and a plan to produce the world’s first mass-produced plug-in hybrid.

BYD’s (and Buffet’s) good fortunes are also a sign that China is doing something right: it is thinking big about bold investments in EVs. The Chinese government has made “independent innovation” in the EV industry a national goal. By 2011, Beijing plans to invest $1.5 billion dollars in EV R&D, to convert entire government and taxi fleets into EVs, and to incentivize local government and individual EV purchases through rebates and tax credits of more than $7,000 per passenger vehicle and up to $86,000 for trucks and buses. The Chinese government wants its domestic manufacturers to produce half a million EVs by the end of next year to secure China’s place as a leading EV producer and exporter.

The U.S. goal is strikingly less ambitious. President Obama has committed $2.4 billion in stimulus funding for EV and battery R&D to help pave the way for domestic production of 1 million EVs by 2015 (0.5% of our vehicle fleet). In the 1990s, when Chevy produced its S-10EV, GM its EV1, and Ford its Ranger EV, the U.S. seemed poised to dominate the EV market for years to come. Fifteen years and an $80 billion bailout later, the Chinese have picked up where America left off and are happily eating GM’s lunch.

There is hope for American producers and the Obama administration though. It’s not too late to develop and implement a comprehensive energy strategy that places 21st Century technologies like smart energy grids and EVs where they rightfully belong. Washington has to recognize that the electric stakes are high. Fortunately, there are rays of hope coming from the Department of Energy, which has granted Tesla almost half a billion dollars in loans to develop a mass-market version of its pricey high-tech all-electric Roadster sports car. Let’s hope this is a first step for the U.S. auto industry towards regaining a competitive edge in the EV market. After all, the U.S. shouldn’t trade its dependence on foreign oil for one on foreign green technology.

Carolyn Avery

Labels: Energy

Late one foggy, drizzly evening, an alpha male motorist became hopelessly lost in the crisscross maze of streets in the nation’s capital. Perilously low on gas, he pulled into a filling station. Bemoaning the inflated cost of fuel, he filled the tank with the cheapest grade. He decided to buy a new set of windshield wipers to help him see a few feet in front of the car, added a little air to one tire that seemed low, and ran the vehicle through the car wash to remove some unsightly splatter. Then, on impulse, he added some snack food and a diet soft drink to his credit card tab before driving off. He neglected to buy a road map or even ask directions.

The result of this pitiful pit stop is predictable. After many more hours of aimless driving, the same motorist will return to this or another gas station to refill the tank and his empty stomach. He is wasting time and money, going nowhere.

Like that hapless motorist, official Washington seems lost, spending precious time and money to go nowhere fast. The nation looks a little better and may even feel a little better, but no one has a clear sense of direction or purpose. This is the predictable result of an administration, a Congress and an opposition that seem united on just one thing: There shall be no agreed way out of the mess we’ve made of our economy and, increasingly, of our society.

The President has an agenda, a list of things to do, rather than a strategy. As Fareed Zakaria wrote recently, “Prime Minister” Obama seems content to manage the government when he should be leading the country. The House and Senate are working at odds with one another, helping to account for their shared de minimis approval rating. The Republican opposition seems content to just say no.

What we all lack is a clear sense of strategy: a few big steps that will set us off in a new direction. It could be as simple as: let’s change public policy in every way necessary to ensure that Americans can invest more, produce more, import less, and export more. That would pay big dividends: reduced debt; lower interest rates; and more jobs. Over time, the even larger pay-off would be renewed confidence that the American Dream will survive for future generations, restoration of the value of the dollar, and renewed credibility and influence for the United States in the world.

Focus on fundamentals. Aim high. Stay focused. That’s the kind of leadership we need, and we need it now.

Labels: national economic strategy

Imagine a circus act in which the high-wire artist tried to maintain balance by keeping his body stiff and his knees locked. The rigidity of the effort would be laughable, at least until he lost his balance and fell.

Yet, in all seriousness, the Chinese leadership repeats that its rigid currency policy, which has frozen the yuan (also called the renminbi or RMB) against the dollar for 18 months, is a contribution to stability in the international economy. Listen to Premier Wen Jiabao in a rare sit-down interview with the media on Sunday: “Keeping the yuan’s value basically steady is our contribution to the international community at a time when the world’s major currencies have been devalued.”

De-valued? Against the RMB, virtually every other major currency has risen in value even as they fluctuate against one another in response to market changes. The exception about which Wen is complaining, of course, is the dollar. China has effectively pegged the RMB at 6.8 to the dollar since July 2008. As a result, China’s contribution to a dynamic global exchange rate equilibrium is nil.

The truth is that:

• China, like any IMF member, is obligated to change the value of its pegged currency as needed to reverse imbalances in trade flows and payments. That’s the meaning of IMF Article 4. Exchange rate stability is no virtue; it’s a violation of a country’s international obligations when imbalances need to be corrected.
• The “protectionism” that Wen also complained about in the interview is a direct result of China’s aggressive overreliance on export-led growth. The premier seems to argue that China cannot afford to give up the weak renminbi (the yuan by another name) because its trading partners are exercising their legal rights to commercial self-defense. But what accounts for China’s flood of low-priced exports that prompts trading partners’ antidumping and countervailing duty cases? The massive export subsidy delivered by means of an undervalued RMB. Exchange rate stability is a source of, and not a solution to, trade tensions.
• Wen allowed as how China is concerned that inflation might someday become a problem there. He’s already right. The excessive inflow of dollars and other hard currencies has to be “sterilized” by the Chinese government’s exchanging them for local currency, thereby flooding the market with renminbi. The excessive growth in money supply – China’s money growth is about double its real economic growth – creates constant inflationary pressure. Looked at another way, China is forcing its own people to pay extra renminbi, the only money most of them are allowed to possess, in order to buy anything from abroad. That includes energy and components as well as food and other consumer goods. Here again, stability adds to and does not diminish the problem.

Chinese officials can assert that up is down, black is white, and foul is fair. That won’t change reality. In fact, China’s currency policy is a burden to its own consumers, an affront to its trading partners, and a threat to the international economy. It ought to stop – now – before we all fall off the high wire.

Labels: China, Currency

My Saturday breakfast was brightened a bit by a news item in the Wall Street Journal (“House Helps to Pick College Football No. 1”). It seems a subcommittee of the House Energy and Commerce Committee found the time and the will this week to vote to force a national college football play-off. A full committee vote might take place as soon as next week. Finally!

The Congressional aim is to end the often bewildering, controversial and seemingly unfair system run by the Bowl Championship Series (BCS) by prohibiting it from advertising the January show-down as a “national championship” contest. In the past, President Obama has spoken out against this system which clearly favors the major athletic conferences. So has Sen. Orrin Hatch, whose home-state Utah Utes got passed over recently.

You have to hand it to the Congress. When they see an injustice, our elected representatives can put aside petty differences to act with impressive determination, alacrity, and bipartisanship. Currency manipulators, subsidized foreign producers, product adulturators, Ponzi schemers, and anyone else who dares to take advantage of innocent consumers and fair competitors had better watch out. Once the Congress gets this BCS mess straightened out, they too might themselves in the bull’s eye. It’s just a matter of time – and priorities.

Labels: Congress

Last week’s finger-pointing session before the Joint Economic Committee of the Congress actually gives me some hope. Not because the criticism of Treasury Secretary Geithner and the administration as a whole was all that fair or balanced. Not because Geithner’s defense was all that convincing. And certainly not because anyone on either side had much to say about how we might exit from the economic crisis that won’t go away.

Geithner and the Obama administration have made their share of mistakes, to be sure. So has the Congress. The problems we face are not the work of one branch of government and certainly not of a single administration, past or present.

Our economic problems are structural, inherent in the fundamentally flawed growth model we have pursued – with short-term success – for a number of years. To end the current crisis, we need a new approach to economic growth here and abroad, which Geithner in particular has recognized. Americans need to avoid new debt and to pay down the huge excess of foreign debt, which Obama has now recognized. That will require a new approach to international trade, massive new investment both public and private, and the development and adoption of innovative technologies in this country. No one on either end of Pennsylvania Avenue has yet offered a credible strategy for achieving that.

We also need to refashion our system of government so that it is up to this historic task. We need effective regulation by the executive and effective oversight of the regulators by the legislative branch. We need to find a way to keep our promises and to live within our means. We need smart spending on public investment and an end to pork fests like the 2009 “stimulus” package. Most fundamentally, we need to define a national economic strategy and to implement it intelligently and urgently.

These challenges are the joint work of the Congress and the executive branch. Finger-pointing doesn’t do more than waste precious time. My clear sense of the American public is that they are sick of the bickering, impatient with the inaction on big things, and profoundly skeptical of any political promise. Now is the time for action -- bold, swift and purposeful. My advice to all office holders, regardless of party affiliation or position, is: “Get on with the work of economic and governmental restructuring as a matter of the utmost urgency. The job you save may be your own.”

Labels: US economy; recovery; national economic strategy

Older baseball fans will remember Hank Sauer, a slugging outfielder in the 1950s. In 1952 he bashed 37 home runs, batted in 121 runs and hit .270 for the fifth-place Chicago Cubs. For his efforts, he was recognized as the most valuable player in the 8-team National League.


Two years later, Sauer slugged 41 home runs, drove in 103 runs, and hit .288, arguably a better year. The Cubs finished seventh. During the offseason, Cubs management mailed Sauer a contract calling for a $1,500 reduction, a pretty hefty haircut given the modest salaries in those days. Sauer returned the contract unsigned, suggesting that he had had a “pretty good year.” The general manager replied that yes, indeed, he had had a “pretty good year” but that the Cubs “could have finished seventh without him.” He eventually settled for another year at his old salary.


Thanks to New York Attorney General Andrew Cuomo, I had occasion to ruminate on this bit of baseball lore. Cuomo released a report yesterday to the effect that nine of the banks favored with TARP funds had deemed it wise to shower a total of $32.6 billion in bonuses on its employees. A fortunate few – almost 5,000 in all – got bonuses of one million dollars or more.


The geniuses running the large banks could take a lesson from the lowly Cubs management of the 1950s. Let’s dub this the Sauer Rule:

o If we could have lost all that money, collapsed the world economy and bilked American taxpayers to the extent we did without you, then you should be paid no bonus.

o If we could have avoided some of that without you, you’re fired!

Labels: banking, Recovery

Treasury Secretary Tim Geithner’s speech at Peking University last week seems to have been better received there than in Washington. Some currency hawks are lamenting that he saw the need to go to apologize (again) for stating the obvious fact that China has been manipulating its currency for a long time now.

In fact, the speech does not include any apology (though private conversations with official Chinese might have). Nor did it represent what some in the media portrayed as a backtracking from the Obama campaign’s tough line on China. On the contrary, it is a thoughtful, reasoned explanation for the need for China and the US to work closely together to “lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established.” The speech should be studied carefully, in my view. The text can be found at http://blogs.wsj.com/chinajournal/2009/06/01/full-text-of-geithners-speech-at-peking-university/.

In fact, I found a lot to admire and agree with in this speech. For example:

§ It rests quite clearly on the expectation that Beijing will start to assume responsibility for the health of the global economy.
§ Geithner made clear that sustainable growth in China “will require a substantial shift from external to domestic demand, from investment and export driven growth, to growth led by consumption.”
§ At the same time, the US will have to increase its savings (i.e. reduce the rate of consumption growth) and should be expected to reduce its current account deficit (the broad measure of borrowing from abroad) as the recovery proceeds.
§ Its global perspective: “China and the United States individually, and together, are so important in the global economy that what we do has a direct impact on the stability and strength of the international economic system. Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.”

With respect to the value of the renminbi – a major nexus between Chinese and American growth strategies – Geithner called for a “more flexible exchange rate regime.” There’s not much new in this. Since the days of John Snow, Treasury has used that phrase as code for a stronger RMB. Indeed, only that meaning makes Geithner’s key sentence other than nonsense. He said: “Greater exchange flexibility will help reinforce the shift in the composition of [Chinese] growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future.” That had to refer to a stronger RMB, not one subject to greater fluctuations.

So, unlike some others. I see in Geithner’s speech most of the elements of a sensible approach to the vexatious currency problem. He has lowered his voice, especially compared to Henry Paulson’s histrionics. He has placed the central issues – sustainable growth strategies for China and the US – on the table for the Strategic and Economic Dialog. He did not back down on the need for a substantial revaluation of the RMB as crucial to a sustainable global recovery.

He’s speaking wisely and more softly. To make the Rooseveltian strategy complete, all he needs is a big stick, some means of compelling Beijing to make politically hard decisions. John Snow at one point told a business delegation in his office that they “should hold our feet to the fire so we can hold the Chinese feet to the fire.” That, I believe, is the most important function of the Currency Reform for Fair Trade Act of 2009 (H.R 2378 and S. 1027). Let’s hope the Secretary will prove willing and able to use it.

Labels: Currency; recovery; China

In the view of the latest issue of The Economist, “inflation is bad, but deflation is worse.“ (See The greater of two evils,” May 9-15, 2009.) An editorial reasoned that “inflation is distant and containable, while inflation is at hand and pernicious.”

It concludes darkly that we might be in for a “malign” form of deflation similar to the 1930s “... because demand is weak and households and firms are burdened by debt. In deflation the nominal value of debts remains fixed even as nominal wages, prices and profits fall. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. That undermines the financial system and deepens the recession.”

“Deflation robs a central bank of its ability to stimulate spending using negative interest rates,” the editorial went on. Moreover, using interest rates to combat deflation can slow the reaction of central banks when inflation once again becomes the issue.

By deflation, The Economist correctly means “persistent price declines” rather than passing ones that reflect temporary imbalances in the market. It focuses on the growing gap between the potential for global economic production and actual output as the source of the problem.

That production gap surely stems from other causes that The Economist overlooks. It’s not just debt-burdened households in the US and Western Europe that are not consuming; it’s also cash-rich households in Asia. Deflation surely stems in part from chronic underconsumption and over-reliance on export-led growth elsewhere. At the heart of this syndrome lies mercantilist price-fixing in the form of undervalued currencies.

So, why not go to the source – one of them anyway? Work out a new Plaza Accord with China, Japan and the others with misaligned currencies. This will help them bring their currencies into line with market forces, reduce their overdependence on exports to unwilling or unable consumers abroad, and stimulate demand at home to sop up some of that unused production capacity. That at least would be a step away from a repetition of the 1930s deflation and toward effective international cooperation to put the world economy on a sustainable growth path.

Labels: deflation; recovery; Plaza Accord