Tuesday, July 27, 2004

Stick to your knitting 

The Elder alerted me to an article on how the war effort weakens the U.S. economy by someone at nearby St. John's University. I believe a few of the Fraters are Johnnies, but they seem better versed in economics than this.
The war on terror continues to maintain a hold on our national psyche as we seem to be caught in a holding pattern -- not sure how, when or whether we should feel safe enough to return to the business of developing new markets and sustaining our role as the world's most dynamic economy.
Not sure consumers are reading the same newspapers as Prof. Bosrock.
"Consumer confidence has now increased for four consecutive months, and is at its highest level since June 2002 when it registered 106.3," says Lynn Franco, Director of The Conference Board's Consumer Research Center. "The spring turnaround has been fueled by gains in employment, and unless the job market sours, consumer confidence should continue to post solid numbers."
Oh well. Maybe he means business rather than consumers? I don't think so. Prof. Bosrock continues.
Meanwhile, the rest of the world is going about establishing new markets and new economic alliances that will provide the competitive edge for the future.
Yes, so much so that workers in Europe are being compelled to give up longer vacations and short workweeks. That's because they were already competitive, sir? We are a bigger share of a larger amount of world trade; we compete famously.
Can the United States go on conducting these multiple wars at the expense of the most important part of our power base -- namely, our economy?
We produce over $10 trillion of goods and services in a year. Congress appropriated $87 billion for Afghanistan and Iraq last year; an additional $25 billion this coming year is requested. That's coming in at 0.5% of GDP per year on average. Exactly how little would you prefer we spend? And how would reallocating that 0.5% make our economy stronger?
As our deficit continues to grow and our preoccupation with the war on terror dissipates our time, talent and treasure, we risk seeing our competitive advantage slip away.

A recent article in the New York Times discussed how China is gaining power and influence in Asia while the United States rapidly is losing its influence after more than 60 years in a dominant leadership role. Japan now imports more from China than is does from the United States. At its current rate of growth, China's economy will be more than double that of Germany by 2010, and China's economy is expected to surpass Japan as the second-largest economy in the world by 2020.
Three points: First, we always have a comparative advantage in something. China may gain market share in manufacturing steel, but we simply move workers into other more productive areas. Compared to Europe or Japan, we have a relatively easy time doing that. Second, growth rates don't continue ad infinitum. We extrapolated the Asian Tiger economies in the early 90s and predicting great things ... and then came 1997. I won't get into a big debate on Chinese currency policies (yet) but I would be willing to defend the point that the current growth rate of China is unsustainable. Professor might wish to read Ethan Guttmann's Losing the New China, who we had on NARN a few months ago. It's not necessarily the "next big thing".
Add to this challenge the surging economy of India, which is working feverishly to close the gap between itself and the rest of the Asia.
But it is doing so by finally (!) doing away with its dirigiste policies, something that hopefully will be improved under its new prime minister Manmohan Singh. (Though the current government structure gives one pause.) And yet that growth will not be immediate. The results of removing regulatory barriers take almost a generation to fully appreciate.
Meanwhile, consider the growing European Union -- which constitutes the biggest consumer market in the world. Our traditional economic partners are quite willing to create new alliances with our challengers. Add it all up and you can start to appreciate the loss of influence and leadership our war efforts have cost us.
So it seems that Prof. Bosrock wants us to engage in building trading blocs rather than free trade, and that to do so means we have to make concessions in foreign policy. I won't sing Bush's praises as a free trader -- because he isn't, not by a whit! -- but neither would I support the idea of subsuming foreign policy to economic policy. Countries that embrace democracies and capitalism are the countries that will most likely trade with us -- and create fewer trade barriers. If the Indians and Chinese want to buy more expensive EU goods to spite us for our foreign policy, that is a sign that these economies are not free and are not likely to grow, undermining Prof. Bosrock's argument.
The United States cannot continue its economic expansion and at the same time spend on military ventures that threaten to suck up its financial resources.
Defending one's own property and people, to the contrary, is exactly the one thing for which government can and should legitimately tax and spend. Who chooses to invest in an economy that is threatened by terrorism or invasion?

The rest of his opinion is the usual laundry list of what we should and should not concentrate on, building ties. I ask, what kind of ties are built when you need to ask the permission of your neighbors to defend yourself?