Smith Faculty Opinion Article

February 24, 2008

By Dr. Peter Morici, Professor of International Business
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 Peter Morici

Primary Economics

The Texas and Ohio primaries could well determine the Democratic nominee for President. Its high time Barak Obama and Hillary Clinton quit musing about change and explain what they will do to fix the economy.

The trade deficit exceeds $700 billion. China and oil account for 80 percent and significantly contribute to stagflation—rising inflation and unemployment.

Each year, Beijing prints and sells about $460 billion worth of yuan for dollars, euros and other currencies at cut rate prices. Currency manipulation floods U.S. stores with Chinese apparel, electronics and appliances.

Unfortunately, Chinese manufacturing uses oil less efficiently than western competitors. Export-driven growth in China, driven by currency subsidies, has pushed oil to $100 a barrel, and U.S. energy prices are up 20 percent over the last year.

Congress passed the 2007 Energy Policy Act, which requires little more in automotive fuel efficiency than higher gasoline prices would compel and propagates the fiction we can feed cars corn to end our oil addiction. Subsidizing ethanol pushes up grain prices. Consequently, food prices are rising 5 percent a year.

Now energy and food inflation are spreading. Overall, consumer prices rose 6.8 percent for the three months ending in January.

China, Saudi Arabia and other major exporters use their extra dollars to buy U.S. securities and property. Until recently, banks recycled foreign money to American consumers by offering easy credit cards and mortgages, and combining those loans into securities for sale in bond markets.

Now, we learn the banks didn’t create legitimate bonds. Instead, they sliced loans into incomprehensibly complex derivatives, then sold, bought, resold, and insured those contraptions to generate fat fees and million dollar bonuses for bank executives.

Alchemy discovered, banks can no longer repackage loans into bonds and are pulling back lending. Home prices tank, consumers spend less, businesses fail, and jobs disappear.

Stimulus package tax rebates, interest rate cuts and Administration help for distressed homeowners are palliatives. A permanent solution requires fixing the trade deficit, oil consumption and the banks.

Asian currency shenanigans have destroyed two million manufacturing jobs. Bills in Congress would permit U.S. workers to get relief, much as they can from other unfairly subsidized imports. President Bush opposes those solutions, and Obama and Clinton support weaker legislation that would continue U.S. policy of begging China to change.

Obama and Clinton should embrace realistic policies toward China. Otherwise, voters can pick McCain in November. At least he is honest about doing nothing.

The candidates should speak candidly to Americans about accepting moderately more-expensive hybrid and plug-in vehicles to reduce gasoline consumption, and nuclear power to get more electricity.

Bankers cannot borrow at five percent and write mortgages at seven, and pay themselves like rock stars. To keep the fantasy, bankers are busy selling huge equity shares to the Asian and Middle Eastern governments.

Obama and Clinton should explain how they would stop sharp banking practices but are too busy raising campaign cash on Wall Street.

Americans can vote for McCain if they want that too.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.                                                          ►More Faculty Opinion Articles