EYE ON
AMERICA The trials of Henry
Paulson By Peter Morici
Failing to convince voters and financial
markets that the US economy is sound, Treasury
Secretary John Snow is being replaced by Wall
Street investment banker Henry M Paulson, Jr.
President George W Bush hopes he will bring the
kind of clout with financial markets and the
general public that Robert Rubin enjoyed during
the Bill Clinton years.
Don't hold your
breath. The Bush administration labors under the
false assumption that better media spin will fix
its flagging
fortunes, even as systemic
ills truly bedevil the American economy.
Under Bush's stewardship, the federal
budget has swung from a US$236 billion surplus to
a $423 billion deficit. This is thanks to runaway
federal health spending abetted by a faulty
prescription drug program, ill-fated
nation-building efforts in Iraq and Afghanistan,
tax cuts inconsistent with these initiatives, and
general fiscal indifference and dysfunctional
partisanship from both political parties in
Congress.
The trade deficit has zoomed
from $300 billion to more than $800 billion. This
is thanks to federal budget deficits, Chinese
currency manipulation and a weak-kneed American
response and a trade policy centered on
strengthening intellectual property rights and
opening foreign markets for service providers, as
opposed to forcefully challenging mercantilism in
China, India, South Korea, and other Asian
bastions of protectionism.
To grasp the
folly of US trade policy, consider that royalties
earned abroad totaled a whopping $58 billion in
2005, and those just about equaled the entire US
surplus on trade in services. Does anyone believe
tougher patent and copyright enforcement and
better market access for Citibank is going to fix
the US trade deficit?
Americans owe
foreigners about $5 trillion in Treasury bonds and
other debt instruments. Each year, after some hard
assets are sold, that figure jumps another $700
billion to finance the trade gap. At that rate,
debts will exceed the US gross domestic product
(GDP) in about another dozen years.
To be
sure, GDP growth has been strong but powered by
the steroids of spendthrift consumption and
borrowing, whose effects virtually every economic
forecaster expects to wind down in the months
ahead. The stock market is falling, international
investors weary of dollars are turning to gold,
and American multinational corporations are moving
offshore.
Icons like General Electric, IBM
and General Motors have made clear to stockholders
they are betting on China and India instead of
California and Indiana. Meanwhile, their smaller
suppliers are being forced to relocate to Asia or
close down shop altogether.
New York
investment bankers are happy tour guides on this
journey. Now Bush has recruited from among them a
champion to sell the whole thing to American
voters. If Henry Paulson truly wants to make
things better, his greatest contribution would be
to compel the president, his horsemen and fellow
citizens to face the facts.
For example,
if Americans want foreign adventures, such as
Iraq, they will have to pay for them.
Americans pay 50% more for health care
than do the Germans and the French, who also enjoy
universal health coverage. Either Americans will
have to regulate prices and ration health care as
the Europeans do, or accept higher taxes to pay
for the system they have.
Either Americans
place fiscal discipline, exchange rates and Asian
mercantilism at the center of economic and trade
policies, or Americans must reckon with economic
decline.
The day will come when China and
the rest of the world will tire of lending
Americans what they need to live well. Then
Americans will have to pay what they owe, live
poorly as repentance and suffer the status of a
debtor people in a world led by the thrifty,
prudent and prosperous.
To lure Paulson to
Washington, Bush assured him that at Treasury he
would enjoy the same status as the departments of
Defense and State. The very fact that this was
required for the office once occupied by Alexander
Hamilton indicates how little weight Bush places
on core economic issues.
In the mantra of
the Clinton campaign: It's the economy, Mr Bush!
Peter Morici is a professor at the
University of Maryland School of Business and
former chief economist at the US International
Trade Commission. He serves on the Bloomberg and
Reuters macroeconomic forecasting panels.
(Copyright 2006 Peter Morici. Used
with permission.)
