Smith Faculty Opinion Article

Peter Morici By Dr. Peter Morici, Professor of International Business
 E-MAIL WEB SITE

November 18, 2009 

America's Leadership Deficit

Bigger than the budget deficit, America has a leadership gap.

The economic recovery is not creating jobs, unemployment is rising, and the President and Congress offer little more than nostrums and platitudes.

Republicans push tax cuts that experience teaches have doubtful prospects for success.

Democrats alibi "employment is a lagging indicator" after a $759 billion stimulus has failed. It may be too early in the recovery for businesses to be hiring but big layoffs should have stopped by now and have not.

The huge trade deficit and reckless banking practices caused the Great Recession and still weight down the economy.

Oil imports and cheap consumer goods from China account for nearly the entire trade gap.

Americans drive big cars with thirsty engines. They sit on vast, untapped natural gas reserves but burn too much heating oil in winter. Congressional conservatives are unwilling to submit to genuine energy conservation, and liberals believe developing domestic fossil fuel is immoral.

China undervalues its currency to boost its U.S. sales, domestic employment and growth. Its economic miracle is engineered by Beijing buying hundreds of billions of U.S. dollars, with freshly printed yuan, to keep its currency undervalued and Chinese products inexpensive in U.S stores. Then China uses those dollars to buy U.S. Treasury securities.

President Obama, afraid China won't buy U.S. debt, won't challenge China on currency and trade. That demonstrates how little Obama and Treasury Secretary Geithner understand about money and trade.

If China doesn't buy our bonds, all those dollars Beijing purchases to keep its yuan cheap will get stashed in the vaults of the Peoples Bank of China and go out of circulation.

The Federal Reserve simply could print new dollars to purchase the bonds China now buys and U.S. money supply would be restored. The net effect: the Fed gets the interest on the bonds instead of Beijing. That works for me.

The TARP was intended to create an undated version of the Savings and Loan Crisis Resolution Trust, which purchased bad loans and mortgages from banks and ultimately made a profit on properties it acquired as the economy recovered. Wall Street Bankers objected-they wanted to offload their problem loans but keep the profits on properties down the road.

Presidents Bush and Obama gave in to Wall Street, and abused the TARP to bail out General Motors and Chrysler. The Federal Reserve bailed out Wall Street banks with trillions in cheap credit they used to make trades, not new loans, to earn big profits to cover losses on their failed mortgages.

Main Street banks were left to fester, and now more than 120 regional banks have failed.

Small businesses lack customers and won't hire, because subsidized Chinese products still stuff the shelves at Wal-Mart, and community banks lack funds to lend to worthy enterprises.

Americans spend too much on health care-19 percent of GDP in contrast to 12 percent in Western Europe. High administrative costs, drug prices and malpractice insurance are the principle villains.

Republicans offer little more than torts reform.

Legislation offered by Senate and House Democrats skirt malpractice and drug costs, and would spend another $200 billion annually, funded by higher taxes and health insurance premiums. Spending more is not the hallmark of a program that lowers costs.

Now the Democrats, fearful that unemployment, stagnant wages and their fiscal follies will result in big electoral losses in 2010 are cooking up another stimulus package. They will call it by another name, perhaps a "jobs initiative." After both the Bush and Obama stimulus packages failed, it has few prospects of creating lasting new jobs.

All this is remindful of bread and circuses in a declining Roman Empire. Those kept the crowds happy while the state was failing.

Like Rome, just before the barbarians, America needs smarter and braver leaders.

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