Obama chooses a free trade ideologue for Treasury
By Howard Richman and Raymond Richman
web posted December 1, 2008
The hopes that President-elect Obama might actually get the U.S. out of the worldwide depression were dashed when he chose Timothy L. Geithner as his Treasury Secretary. Geithner is an ideological free trader who sees nothing wrong in the statistic that in 2007 our imports from China amounted to $3 30 billion while our exports to China amounted to $ 79 billion. Our total trade deficit amounted to $ 708 billion which would require 7 million American manufacturing workers to produce. Without a major reduction in the trade imbalance, no economic stimulus package will produce a recovery from the depression.
Timothy L. Geithner's January 2007 speech to the Council of Foreign Relations is breathtaking in its delusions. Here are some quotes from it, followed by our comments:
Financial innovation and greater integration of national financial systems has contributed to the strength of real economic activity by improving the allocation of resources within and among economies. Improvements to risk management and to capital cushions are likely to have made the financial system more stable and more resilient.
Obviously he didn't at all understand that the current financial crisis was coming.
In emerging markets, better monetary policy has been accompanied by more disciplined and conservative fiscal policy and a range of other policies that have reduced, though not eliminated, vulnerability to changes in confidence, capital flows and exchange rate movements.
Geithner thought that the emerging market countries were following sound monetary policies. But China, the main emerging market, was following an excessively tight money policy to keep their people from borrowing, because they wanted to keep their country's savings high while sending them to the United States. Geithner saw this as a good thing.
To a significant extent, these financial developments reflect a high degree of confidence in future macroeconomic and financial stability, reinforced by the improvements in inflation performance, growth outcomes and financial resilience of the past several years.
Geithner heralds the confidence that people around the world had in future economic and financial stability. Turns out, however, that they were wrong to have that confidence.
There are other factors at work as well, however, that have less favorable implications. Part of this recent dynamic in financial markets is a consequence of the present state of the international monetary system, in which a substantial part of the world economy runs exchange rate regimes tied in some way to the dollar. This has entailed a sustained period of very substantial official accumulation of dollar reserves, putting downward pressure on U.S. interest rates and upward pressure on U.S. asset prices.
According to Geithner the "sustained period of substantial official accumulation of dollar reserves" was a natural result of "exchange rate regimes tied in some way to the dollar" and those exchange rate regimes were natural in order to preserve stability. No understanding, whatsoever, that these countries were accumulating dollar reserves as part of their mercantilist strategy of maximizing exports and minimizing imports in order to steal our industries.
These forces are surely transitory...
In other words, Geithner thinks that mercantilism will end all by itself if we do nothing. It will end by itself, all right, but not until the mercantilist governments finish stealing what remains to be stolen of our industry. Then they will start withdrawing their money and send us into a currency crash that will leave us in poverty.
Restoring confidence in U.S. fiscal management would be important and necessary independent of the broader context of the global economy today, but it is more important given the size of our external imbalance, now running at the unprecedented level of 7 percent of GDP a year.... Confidence that the U.S. political system will act to generate a sustainable fiscal trajectory is important to raising the probability that this process of adjustment unfolds with less risk.
He thinks that trade will balance itself, and that balancing U.S. government budget deficits would make the process more stable. Certainly balancing the budget would be important as trade is brought into balance, but trade is not going to balance itself.
A successful conclusion of the Doha round of trade negotiations would provide some insurance against the risk that the process of economic integration will be interrupted or reversed.
Geithner thinks that the Doha Round should have been passed. But it would not have reduced the huge trade imbalances which are causing the worldwide depression. The WTO is broken! Doha was not the solution!
The political challenge of sustaining support for the process of integration may be the most important economic challenge of our time. To paraphrase Lawrence Summers, it is not enough to explain that globalization is inevitable and that policies that look politically attractive as a response to economic anxiety will only hurt the economy as a whole. Nor is it a politically effective strategy to state simply that economic integration is a necessary and powerful force in raising average incomes, or that technological change may be more important than trade or immigration as an explanation for slower growth in real wages for many Americans.
According to Geithner and his mentor Lawrence Summers, the main challenge is to sell the American people on the benefits of letting foreign governments steal our industries. Summers, by the way, is being chosen by Obama to head his National Economic Council. Obama won Indiana, Michigan, Ohio, and Pennsylvania, largely because he advertised that he would do something about unfair trade. That was before the election.
Dr. Howard Richman is executive director of a nonprofit (Pennsylvania Homeschoolers Accreditation Agency) and an Internet economics teacher. Dr. Raymond Richman is professor emeritus of public and international affairs at the University of Pittsburgh with a Ph.D. in economics from the University of Chicago. They are co-authors with Jesse Richman of the 2008 bookTrading Away Our Future published by Ideal Taxes Association.