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President Obama's donut economics

By Peter Morici
web posted July 20, 2009

The stock market is rallying. The economy will recover by yearend, and strong profits among big players like Goldman Sachs, IBM and Google will spread to other big corporations. However, many small businesses and working Americans won't be cheering.

Since December 2007, the private sector has shed 6.6 million jobs -- half in manufacturing and construction. Lousy banking practices and a surge in imports, mostly from China, are the main culprits but are not getting fixed.

President Obama's bank reforms will fix many abusive lending practices. However his reforms hardly touch Wall Street's increasing aversion to the ordinary business of making sound loans, and its obsession with abusive derivatives trading and the big bonuses that creates.

The Federal Reserve and FDIC have poured $2 trillion in cheap credit into the banks and financial houses, mostly benefiting the biggest players. Hence, Goldman Sachs and J.P. Morgan post record profits and Citigroup and Bank of America survive when they should simply be dismembered in bankruptcy court. Meanwhile, regional banks that rely on Wall Street for credit simply can't get enough money to make loans or they end up like CIT Financial and others -- broke and bankrupt.

Small and medium sized manufacturers, builders and retailers rely on those disenfranchised regional banks and can't borrow enough money to sustain operations as the economy recovers. New opportunities in the President Obama's new green economy will go to big players like GM and to businesses in China, where the government understands global commerce is played by rules of prison football.

China has more than 100 million rural underemployed workers, who if moved into factories could replace every manufacturing job in the United States, Western Europe and Japan. China lacks the technology to capture all those jobs but Beijing recognizes its huge, growing market provides leverage to impose teach-to-sell conditions on the likes of GM and GE.

Beijing maintains high barriers to imports, requires Western companies to transfer technology to sell in China and subsidizes exports to the tune of at least $500 billion a year.

Beijing requires 70 percent of all green energy hardware sold in China to be manufactured there. Buick is a top-selling brand, but GM can't export from Michigan but must produce and source parts in China.

Any suggestion to get tough with Chinese mercantilism is naively labelled protectionism by President Obama and his aides.

Hence, the $789 billion stimulus will create some jobs but those will be mostly low-paying government jobs.

The economy will stage a moderate recovery but few jobs will be created that adequately replace lost high paying manufacturing and construction jobs.

Nevertheless, large companies like GE, GM and IBM are well poised to profit, having downsized domestic operations to service a smaller U.S. market and aggressively expanded in China.

President Obama is serving donuts. The big guys will get the cake and working Americans the hole inside. ESR

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

 

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