Those Stubborn Facts: A High Cost of Easy Money?

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bailouts, capitalism, corporate finance, debt, interest rates, monetary policy, Ruchir Sharma, stimulus, The Wall Street Journal, Those Stiubborn Facts, zombie companies

Share of publicly traded companies in the U.S. that were zombie companies*, 1980s: 2 percent

Share of publicly traded companies in the U.S. that were zombie companies, “by the eve of the pandemic”: 19 percent

*”[C]ompanies that, over the previous three years, had not earned enough profit to make even the interest payments on their debt.”

(Source: “The Rescues Ruining Capitalism,” by Ruchir Sharma, The Wall Street Journal, July 24, 2020, https://www.wsj.com/articles/the-rescues-ruining-capitalism-11595603720 )

 

Our So-Called Foreign Policy: Putting the “Dip” in U.S. Diplomacy

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bailouts, Brazil, China, China meltdown, China stock markets, CNN, Congress, coupling, decoupling, Denise Labott, emerging markets, Exim, Export-Import Bank, export-led growth, free trade agreements, global leadership, Hillary Clinton, IMF, International Monetary Fund, international organizations, Iran, Iran deal, Jackie Calmes, Obama, Our So-Called Foreign Policy, Russia, The New York Times, TPP, Trans-Pacific Partnership, Wendy Sherman

It was unintentional to be sure, but the establishment media should get some credit for providing the following two reminders of how positively dippy American foreign policy, and the analysis of this diplomacy, has become.

The latest came just yesterday, in New York Times correspondent Jackie Calmes’ article titled “I.M.F. Breakthrough Is Seen to Bolster U.S. on World Stage.” And in the likely case that Calmes isn’t responsible for the headline, the thrust of the piece is clear from the lead paragraph:

“A string of agreements between the White House and Congress, capped by last month’s surprise accord that ended a five-year impasse over the International Monetary Fund [IMF] has eased, though not dispelled, concern that America is retreating from global economic leadership.”

I’ve already explained here and here (among other places) why Calmes decision to include on this list Mr. Obama’s Trans-Pacific Partnership trade deal and Congress’ decision to restore to life the Export-Import Bank makes no sense. So I’ll concentrate on the development she focuses on: Congress’ agreement to approve reform of the International Monetary Fund that grants more voting power to so-called “emerging market” (EM) countries like Russia, India, and especially China.

The IMF decision itself is idiotic enough. The rationale – supported by virtually every other member of the Fund – has been that these countries represent the rising powers in the global economic system, and therefore deserve more clout in one of the international organizations charged with overseeing this system. The trouble is, these countries’ wherewithal was greatly exaggerated even when they were growing strongly. The main reason is that their growth depended heavily on exporting to wealthier countries like the United States.

They’re still largely export-dependent, but rather than global growth leaders, they’ve become global growth laggards. Brazil, for example, is facing the prospect of its worst recession in more than a century. On top of its geopolitical trouble-making, Russia’s an economic mess. And China looks not only to be slowing dramatically, but completely incompetent in regulating its financial markets (not to mention its own aggressive regional moves). Even acknowledging that the United States, the European Union countries, and Japan haven’t been economic standouts either for many years, what’s the merit case now for augmenting these countries’ international influence?

But Calmes’ thesis is inane on many more fundamental levels, too. Chiefly, it parrots a series of commonplaces that, though endlessly repeated by mainstream foreign policy analysts and the politicians that bewilderingly still listen to them, keep undermining the effectiveness of American diplomacy. They start with the idea that the IMF, or any other international organization, has counted for much in world affairs. These institutions are logistically useful in providing fora (i.e., “buildings”) in which leading powers that communicate, negotiate, and otherwise deal with each other. But they have no autonomous ability to affect the course of events.

The Fund is often seen as an exception even by avowedly realist thinkers who normally take a dim view of international organizations, but contrary to Calmes’ claim, it per se has never served as “an international lender of last resort to foster global stability.” After all, it has no capacity to create wealth or other resources. In the last analysis, its lending function has always been carried out by the United States and the other major powers, who have used the Fund as a conduit. For two decades starting in the 1970s, the Fund addressed a series of financial crises in developing countries with a series of bailouts (again, financed ultimately by its members) that were conditioned on economic reform programs. But even the Fund’s staff now acknowledges that much of the advice it dispensed was lousy.

And since institutions like the Fund don’t serve as significant force multipliers for strong, wealthy countries like the United States, they’re anything but indispensable for American world leadership, economic or otherwise. As with the case of all countries aspiring to this goal, that flows from America’s own capabilities. Indeed, given America’s still crucial role as the world’s market and consumer of last resort, we’ll know that its economic leadership is at risk when its trade partners figure out another way to grow adequately.

Finally, there’s the question of whether the United States needs world leadership in the first place. I’ve explained in detail why a country this strong, wealthy, and geographically secure can remain more-than-adequately safe and prosperous even in a deeply troubled world. Indeed, America’s matchless capacity for self-sufficiency nowadays argues for less of what foreign policy types call world leadership by Washington – and therefore less exposure to the world’s woes – not more. I’m not saying that these views are beyond criticism. I am saying that they were worth debating even during the Cold War, they’re worth debating more now, and it’s dismaying that no one relying on Calmes or her Mainstream Media counterparts for their news in 2016 would have a clue that it’s not still 1956 strategically.

The second example of foreign policy dippiness came during the summer, from CNN’s Denise Labott’s August profile of Wendy Sherman, the chief staff-level U.S. negotiator of the nuclear weapons deal signed with Iran. Although I’m not enthusiastic about the agreement, I still view it as the best possible option available to America to keep Iran bomb-free short of military strikes. My confidence, however, has definitely been shaken having read Labott’s cheery revelation that “Her first career as a social worker and community organizer may seem like odd training for nuclear negotiations. But Sherman said she actually drew upon those experiences with her Iranian counterparts.”

Continued Labott : “Her ‘caseload’ may be more global, but she said the work is similar — involving the complex relationship and budding detente between Washington and Tehran, as well as managing a series of clients both inside and outside the meeting room.

“‘That skill set came in handy,’ she said. ‘You have to see all the parts in front of you. You really learn how to understand people.'”

Meaning no disrespect for the profession, but I can’t think of a background less suitable than social work for dealing with regimes like Iran’s (or North Korea’s – which was a Sherman responsibility under former President Clinton). Unless you think that the ruthless mullahs in Tehran or the arguably sociopathic leadership in Pyongyang have anything in common with a troubled American individual or family? And that the assignment is providing relief?

From another standpoint, social work and comparable activity are defined by enhancing a client’s well-being. Self-interest doesn’t even enter the picture. Is that how Sherman viewed her priorities? At least judging from this article, that’s how it seems. And Labott apparently considered this nothing less than delightful.

An optimist could finish Labott’s profile relieved that Sherman is now esconced in the academic world. A pessimist, though, could note that she’s a close confidante of her former Foggy Bottom superior, Hillary Clinton, and that she’s being talked about as a possible Secretary of State herself should the Democratic front-runner win the White House.

Im-Politic: Why CNBC’s Bias isn’t Simply Partisan

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bailouts, Ben Carson, Bernie Sanders, Black Lives Matter, boardroom liberalism, capitalism, Clinton Democrats, CNBC, crony capitalism, Democrats, Donald Trump, free markets, globalization, Im-Politic, Immigration, Larry Kudlow, media, media bias, Noam Scheiber, Obama, Occupy Wall Street, Tea Party, Trade, Wall Street

Many of those nice enough to comment on my post yesterday on CNBC’s awful presidential debate performance have attributed the often abusive questions posed by the moderators as evidence of liberal/Democratic media bias. And that’s what some of the Republican candidates charged as well. My response? I wish the fundamental problem was that obvious – and therefore that correctable, at least in theory.

Instead, what the network’s evident mindset represents is the much more insidious development of a national political class homogeneous enough to share fundamental values, assumptions, and positions (with all too superficial variations) and powerful enough to ignore and, when necessary, keep out of the governing system against-the-grain views.

Part of this analysis reflects my own experience as a frequent CNBC viewer – and not only as background noise during the workday. I think the network’s coverage of finance, business, and economic headline developments is acceptable, and it at least mentions major breaking news in other spheres. Yes, I could watch Bloomberg, or Fox Business. But as my father used to say, we’re all creatures of habit, and my sampling of the newer competition has not yet persuaded me to change the channel permanently. Nor have I yet found any other continuous sources of reasonably serious hard news.

And when I hear or see the letters, “CNBC,” my first reaction isn’t “Democrats.” Quite the opposite. Even with the blatantly partisan Larry Kudlow gone from daily programming, the network clearly is tailoring its material towards the investment community and the steadily shrinking pool of American retail investors – groups not known for progressive leanings. In fact, with the latter ever more skewed toward the upper income strata, it hasn’t been surprising to see CNBC broadcast more and more segments that openly celebrate the “lifestyles of the rich and famous.” That’s of course on top of the broader tendency of the business press to create and glorify the “Superstar CEO” – a practice that (amazingly? or not?) has survived the financial crisis and ensuing recession.

When it comes to policy – overwhelmingly economic policy, of course – CNBC is firmly in the free market camp. Minimal taxation and regulation are constantly touted, as are free trade agreements, un- or barely fettered immigration policies, and the supposedly iron, unchangeable, undeniable realities that make them necessities – the historically inevitable and beneficent globalization of business; the equally inexorable triumph of capitalism worldwide; and the resulting supreme imperative of participating in and growing foreign market opportunities. And when the focus is domestic, CNBC therefore places on a pedestal “business-friendly” states, which unlike their more neanderthal (usually Democratic governed) counterparts are supposedly wise enough to spare companies of nearly all the costs of public goods and services – and to discourage unions.

It’s true that much else that’s central to CNBC’s worldview isn’t very consistent with free markets. But institutions like activist central banking are accepted not so much as regulatory exceptions to a more liberal rule, but as fixtures without which the economic landscape would be unrecognizable, and therefore literally inconceivable. Similarly, although the bailouts of non-financial companies were positively scorned, the bailout of Wall Street was (a little sheepishly) accepted because, well, it beat global destruction.

These exceptions to free market norms have convinced many that CNBC is extolling not genuine market capitalism, but crony capitalism, in which the biggest, most politically connected businesses manipulate government to serve their own selfish purposes and especially to marginalize newer, less influential competitors or even prevent them from forming. I agree that the network isn’t inclined to assail this form of corruption. (Of course the pugnacious Rick Santelli is a prominent exception.) But another implicit assumption needs to be added here to flesh out the full CNBC worldview, and it concerns the ostensible virtues of what I’ve referred to as “boardroom liberalism.”

This is a school of thought identified by New York Times reporter Noam Scheiber, and he put it better than I ever could:

“It’s a worldview that’s steeped in social progressivism, in the values of tolerance and diversity. It takes as a given that government has a role to play in building infrastructure, regulating business, training workers, smoothing out the boom-bust cycles of the economy, providing for the poor and disadvantaged. But it is a view from on high—one that presumes a dominant role for large institutions like corporations and a wisdom on the part of elites. It believes that the world works best when these elites use their power magnanimously, not when they’re forced to share it. The picture of the boardroom liberal is a corporate CEO handing a refrigerator-sized check to the head of a charity at a celebrity golf tournament. All the better if they’re surrounded by minority children and struggling moms.”

Scheiber used the term to describe the outlook of President Obama, and obviously it holds for Clinton-style Democrats, too. Just as important, because the most powerful ideologies and worldviews can accommodate a fair amount of diversity, it’s easy to imagine a conservative version of “boardroom liberalism,” and in fact, between the two of them, they dominate the perspectives of the establishment politicians, senior bureaucrats, media figures, and so-called policy intellectuals that in turn dominate American politics and discussion thereof.

In my view, this is the perspective that reigns at CNBC, and throughout the establishment media. And although it’s surely closer to the Democratic Party mainstream than to the Republican rank and file, and reserves special contempt for the Tea Party faction (as well as religious conservatives), it doesn’t hold much affection for Bernie Sanders and the Occupy Wall Street crowd, either.  (History-induced guilt typically inspires more indulgence for Black Lives Matter.)

I’m sure it’s clear why an ideologically uniform press corps is as big a threat to a democracy worthy of the name as an ideologically uniform party system. But an even greater danger is posed when the same precepts unite those media and political worlds – along with their colleagues in think tank ranks and academia. Conventional wisdoms become completely ossified and the decision-making apparatus becomes almost impervious to fundamentally new ideas – even in times of crisis.

When powerful challengers from utterly alien universes do loom on the horizon (e.g., a Donald Trump or a Ben Carson, Tea Party-ers uninterested in politically convenient compromises), all the major occupational groups and ideological sects comprising this polyglot establishment rush to join forces against the invaders. And they employ all the (predominantly verbal) weapons they can muster, ranging from slanderous invective to loudly professed indifference to chortling condescension to outright ridicule. This counterattack, moreover, is conducted with unusual vehemence when the outsiders make perfectly clear that they have no use, much less respect, for the conventional wisdom-mongers.

On the one hand, it’s comforting that a lively alternative media-verse has emerged in recent years – precisely in response to the power, intolerance, and resulting arrogance of the establishment. On the other hand, the establishment still seems firmly ensconced – in journalism and in both parties. Since it’s still early in the 2016 presidential cycle, this year finally being different can hardly be ruled out. But as Yogi Berra once said, “It gets late early out here.”

Following Up: For Greece and Creditors, Minimalism = Realism

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Angela Merkel, austerity, bailouts, debt, EU Stability and Growth Pact, euro, European Central Bank, European Union, Eurozone, Following Up, France, Francois Hollande, Germany, Greece, International Monetary Fund, Russia, Syriza

Every new fact emerging from Greece and its plight seems weirder and weirder. Today, the day of the country’s referendum on its creditors’ proposals to handle its financial crisis, the Greek government started issuing “official projections” of the final results. Not that Greece covers multiple time-zones like the United States, but I’m sure glad Washington isn’t in that possibly elections-altering business.

As of this writing, the only (apparent) certainty about the Greece mess is that its population has rejected the latest bailout-for-austerity deal offered by the European Union, the European Central Bank, and the International Monetary Fund. Even Europe’s most important national leader, Germany’s Angela Merkel, doesn’t seem to know what comes next; before the polls closed, she announced that she’ll meet tomorrow with French President Francois Hollande for a “joint assessment of the situation.”

Europe’s immediate challenge is deciding what a “No” vote by Greece means for the future of the European Union and of the eurozone – since Greece appears to have decided to break the rules of these rules-based institutions. (Here it’s important to note that Greece has by no means been the first rule-breaker, and that two of the biggest outlaws – when it comes to the EU’s Stability and Growth Pact – have been Germany and France.) How the continent handles the Greek challenge will surely influence how other economically hurting, debt-strapped – and larger – members of its defining organizations will react.  Specifically, will Portugal and Spain and ultimately even Italy more actively wonder whether they are better off remaining within such arrangements or leaving?

In turn, these decisions have huge national security and geopolitical implications. However flawed they have or haven’t been, pan-European institutions have been major pillars of the free world’s strategy for turning the continent into a zone of peace following centuries of calamitous wars.  In a nuclear age, for the entire world’s sake, these conflicts simply could not be allowed to continue. It’s eminently arguable that these institutions were insufficiently democratic or badly structured from an economic standpoint, or simply that they sought too much too soon (or too little too late, depending on your viewpoint). But if they fall apart, recreating them will be excruciatingly difficult, and Europe will surely become a more, not less, combustible place.

Worse, this new instability would emerge just at a time of rising tensions between America and its European allies on the one hand, and Vladimir Putin’s Russia on the other. Indeed, it’s entirely possible that Greece’s Syriza party leaders are betting on precisely these dangers to produce greater flexibility by their creditors.

But as important as these threats are, it’s tough to imagine any of them being solved or even headed off for very long if Greece’s fundamental economic problems aren’t solved, and what’s painfully clear to me is that no one in charge anywhere has a realistic plan.

As I suggested last week, Greece lacks a viable national economy. And no bail-out programs or austerity policies, much less further can-kicking, do anything to change its fundamental predicament. It doesn’t produce enough goods and services at affordable prices to meet its own current (first world-level) desires. It doesn’t produce enough of anything that the rest of the world is willing to purchase from it that’s needed to fill the gap. And I haven’t seen any evidence that any Greek leaders or European leaders are even thinking in detail about these issues – which matter crucially these days because the world economy is growing so sluggishly.

The closest I’ve seen to any micro-economic and structural thinking about Greece’s future is the idea that the country could ride a tourism boom back to respectable growth if either (a) the Germans and other wealthier Europeans would simply spend more of their incomes on Greek vacations; or (b) a currency devaluation following an exit from the euro made Greek vacations an irresistible bargain for the entire world.

Leaving aside the lunacy of believing that tourism and the overwhelmingly lousy jobs it creates can sustain Europe-style living standards, how many Europeans and others are likely to flock to Greece for the foreseeable future? By all accounts, many of its neighbors’ populations are thoroughly fed up with Greece’s perceived insolence, and its likely near-term future of economic turbulence doesn’t look like a formula for filling hotel rooms.

So I see no reason to change my view that most of Greece is headed for at least years of third world living standards no matter how the next few weeks and months turn out. It’s true that no one “owes Greece a living,” especially given the spendthrift choices made by its leaders and accepted with varying degrees of enthusiasm by so many of its people. Similarly, it’s true that no one forced the Greeks to borrow all the money that private sector European lenders foolishly provided. But it’s also true that both European financiers and the pensioners and other clients whose funds they invested in Greece, have gotten off pretty easy for their reckless choices, with the continent’s taxpayers and the governments they underwrite absorbing many of these losses.

As a result, maybe at least some of the intertwined political and emotional obstacles to genuinely constructive Greece policies could be cleared away with two measures. First, European authorities in particular should offer Greece some honesty. Second, that country’s financial enablers should be required to help fund purely humanitarian programs aimed at helping those Greeks who are suffering through no fault of their own.

(What’s Left of) Our Economy: Why the Auto Boom Has Been So Hollow

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auto boom, auto parts, automotive, bailouts, Buy American, Cash for Clunkers, Detroit automakers, George W. Bush, imports, manufacturing, manufacturing renaissance, next-generation vehicles, Obama, trade policy, transplants, wages, World Trade Organization, WTO, {What's Left of) Our Economy

I’m happy to recommend two cheers for the Wall Street Journal reporters who have just told us that the ballyhooed boom enjoyed by the American automobile industry since the U.S. economic recovery technically began in mid-2009 has been marked by vehicles increasingly stuffed with foreign parts (which has held down potential production increases) and largely, as a result, by falling wages.

These reporters would deserve three cheers, however, if they’d written on the inevitability of these woefully subpar results when it counted, and especially about what needlessly sabotaged the domestic industry’s prospects from the get-go. The best timing, of course, would have been at the height of the financial crisis, when the Bush and Obama administrations both blew the opportunity to re-invent the nation’s crippled domestically owned auto sector as an industry capable of contributing to a real renaissance in manufacturing and a much healthier, production-based recovery.  And the industry’s emerging underperformance is rooted in offbase U.S. trade policies.

As I wrote back then, and later told Congress, neither president promoted auto rescue strategies dedicated to maximizing automotive output and employment. Rather, they deferred to World Trade Organization rules that prohibit member governments from discriminating in favor of domestically owned companies and factories in their economic policy making (but that are overwhelmingly honored in the breach outside the United States).

The result:  Both Presidents Bush and Obama refused to condition their bailout of the Big Three Detroit automakers on requirements that vehicle production at home be prioritized, and that the use of U.S.-made parts be greatly increased. Just as perverse was the impact on initiatives aimed at spurring the production of “next generation vehicles” that would curb oil use. They were structured in ways that made import-heavy foreign auto transplant operations eligible for subsidies. The Obama administration, therefore, had few options other than focusing on improving Detroit’s “competitiveness” by cutting its wage and pension costs.

The counterproductive results were visible by late 2009. As I documented, for fear of WTO-authorized retaliation, the “Cash for Clunkers” law intended to aid the industry by stimulating auto buying provided taxpayer subsidies for the purchase of imported as well as domestic vehicles. As a result, more foreign auto production (of parts as well as vehicles) was fostered than American production.

Today’s Journal piece does usefully update the foregone gains and damage done by Washington’s timid and shortsighted trade policies. U.S. auto parts imports hit a new record last year. The share of domestic content in American-made vehicles has never been lower. (This statistic, moreover, bizarrely includes Canadian parts.) U.S. automotive employment remains nearly 32 percent below its recorded (1999) peak – slightly more than total manufacturing employment during this period. Real wages during the current economic recovery are way off throughout the sector, and entry-level pay at at least some parts companies down to Wal-Mart levels.

Imagine, however, the effect had Journal journalists – as well as so many others – been paying attention when these trends were unfolding, and focused on the (at least debatable) government decisions behind them, rather than drinking so much of the Kool-Aid of manufacturing and automotive renaissances.

(What’s Left of) Our Economy: Two Steps Forward, One Back, on Understanding China

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Asian financial crisis, bailouts, China, currency, devaluation, export-led growth, exports, growth, IMF, imports, investment, offshoring, processing trade, re-exports, trade surpluses, yuan, {What's Left of) Our Economy

Because Rome wasn’t built in a day, a month in which the economic policy establishment dispels two major myths about China’s economy and perpetuates only one is a month to celebrate. Here are the details.

Dispelled myth number one has to do with the distinctive nature of China’s trade, which makes a mockery of conventional notions of exports and imports, but which is routinely ignored in order to convey the impression that the PRC’s markets have been substantially open to American exports and remain so. This claim is central to the offshoring lobby’s insistence that anyone supporting curbs on U.S.-China trade must have rocks in their heads because such a move would cut the U.S. economy – including U.S. workers – from a customer base that is one of its biggest, fastest growing, and potentially most important.

But here’s the rub: As with America’s trade with many of its competitors, especially in the third world, its exports to China do not consist mainly of sales of finished products that are consumed in China. Instead, they’re either (a) parts, components, and other inputs (like materials) of finished goods that are sent to China for assembly and then re-exported (often right back to the United States); or (b) capital equipment used in Chinese export factories or in the construction of China’s export infrastructure (e.g., ports and airports and the roads and bridges leading to them).

Worse, many of these Chinese factories supplying the U.S. market used to be U.S. factories supplying the U.S. market that employed U.S. workers. They’re now located in China either because the offshoring-heavy business models of U.S. multinational companies put them there, or because facilities originally located in America were driven out of business by predatory Chinese trade practices and replaced by their Chinese competition.

In other words, many of America’s exports to China don’t satisfy foreign demand for U.S.-origin products that adds to American growth and hiring on net because it exists on top of existing domestic demand. Instead, they satisfy existing U.S. demand that was once supplied by American facilities and workers. As a result, ultimately these exports don’t fuel the U.S. economy’s growth and job creation. They fuel its trade deficits and overall indebtedness.

The importance of this processing trade to China’s economy is no secret to academics and other China specialists. (I devoted an entire chapter of my book on globalization, The Race to the Bottom, to this “new kind of trade.”) But it rarely makes its way into news coverage of U.S.-China economic relations and controversies, and almost never into Congress’ deliberations or speeches by U.S. presidents and their aides.

That’s why it was especially gratifying to see a Bloomberg article yesterday on the new monthly trade figures reported by China mention pointedly note that the surge in China’s imports recorded in September stemmed largely from purchases of processing trade goods destined for export markets, not the Chinese market. As an analyst quoted in the piece specified, “Import growth in September is heavily driven by external demand and the processing trade industry, instead of domestic demand.” Exactly. And he rightly suggested that the September import increase was anything but exceptional: “China’s economy at the current stage is still kind of externally demand-driven.”

The second myth debunked in October is closely related to the first. As I explained in one of yesterday’s posts, because China’s economic growth has long been driven powerfully by amassing trade surpluses, this growth has subtracted from growth in the rest of the world on net, rather than adding to it. China’s apologists – along with the Chinese government – continue working hard to obscure this reality. But they – along with the Chinese government – keep implicitly admitting “guilt” by emphasizing how thoroughly Beijing understands that it must “rebalance” its growth to ensure that more is led by domestic demand.

Since the financial crisis struck, one of the main developments cited to show that this shift is taking place – however inadequately, it’s frequently noted – has been the huge increase in investment recorded in China’s economic output (gross domestic product) figures. There’s no doubt that much of this investment has indeed been domestically focused, principally in the housing sector, which is looking monstrously overgrown. (Sound familiar?)

But I’ve long insisted that much of this investment remains export-oriented – mainly because as long as Chinese incomes on the whole remain very low, selling abroad must remain a major source of Chinese growth. For all the domestic wealth that’s been created during China’s reform decades, it’s still sorely inadequate to create big enough markets to maintain employment and boost living standards.

I’m not aware that the statistics on China’s infrastructure spending break down such investment into infrastructure-related and other categories, so to my knowledge, it’s not possible to state authoritatively that a large percentage is devoted to transportation systems that lead to ports and airports that depend heavily on the export business, and to these ports and airports themselves.

But I’m relieved to report that one of the world’s top international economists now agrees. According to Harvard University’s Kenneth Rogoff, “much” of the country’s infrastructure spending is “directed toward supporting export growth….” Not that a single economist’s views are ever dispositive. But I take some comfort in the fact that Rogoff used to be chief economist at the International Monetary Fund.

Unfortunately, one important China-related myth is apparently intact, and it’s especially harmful since it suggests that, in at least one important instance, Beijing did indeed bear out the longstanding hopes of American presidents and other strong supporters of the U.S.-China trade status quo and acted like it understood the need to sacrifice some short-term national interests for the entire world’s good.

This alleged selflessness came during the Asian financial crisis in the late-1990s. Because too many Asian countries whose growth was export-led wound up trying to sell to too few foreign markets, international investors suddenly turned very bearish on their growth prospects and starting sending their capital elsewhere. Long story short: These Asian exporters, mainly Thailand, Korea, and Indonesia, were bailed out by the International Monetary Fund – whose loan conditions mandating domestic austerity only increased their outsized reliance on exports for growth. As a result, the battering their currencies took from the flight of foreign “hot money” turned into a short-term advantage.

But one huge question hung over their heads. China of course was even more reliant on export-led growth then than it is now. Would Beijing simply stand by and watch as other Asian countries’ newly juiced exporting power ate into its own overseas sales? Or would it devalue the yuan and set off a round of (at least regional) currency wars?

The Chinese held the line – and won considerable international applause. But as a former colleague demonstrated, Beijing had in fact, pulled a fast one on the rest of the world. Although it kept the yuan steady, it greatly increased export subsidies that reduced the prices of its goods in foreign markets just as effectively. Because these subsidy increases weren’t announced with much fanfare, they were widely ignored outside China, enabling Beijing to have its cake and eat it, too.

So it was somewhat discouraging the normally perceptive Financial Times reporter James Kynge quote without comment in a recent piece the claim that China resisted the temptation to devalue some two decades ago. This point at least should have been presented with a “Yes, but…”

Nonetheless, so far October has been that rare month in which the economics establishment has added to understanding of key China-related issues on net, not subtracted from it. Granted, the sample size is not overwhelming. But when the stakes are so large, even small-scale victories should be savored.

(What’s Left of) Our Economy: The AIG Bailout’s China Angle

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AIG, bailouts, China, Hank Paulson, Maurice Greenberg, TARP, Too Big to Fail, Wall Street, {What's Left of) Our Economy

The former AIG CEO’s lawsuit against the U.S. government for forcing it to accept an overly harsh and allegedly needless bailout provides an important and fascinating window into the financial crisis and the (at best) controversial government response.

The American legal system is hardly a great place for staging policy debates, so the court proceedings aren’t likely to resolve still heated disagreements over whether the Wall Street bailouts were necessary, and if they were, whether they were structured competently or in ways that genuinely promoted the public interest. But trials do serve the invaluable purpose of requiring the key policy players to testify about their roles under oath, and thus fill in crucial details accurately while useful lessons can still be learned, not long years afterward, once all the official records are finally unsealed.

So far, two important revelations from the trial stand out, as I see it. First, it’s now clear that, despite their claims that they were healthy enough to weather the storm without Washington’s help, big money center banks like Goldman Sachs desperately needed taxpayer help. That’s because the AIG bailout let them off the hook for collectively choosing AIG to insure such enormous amounts of mortgage deals that went sour.

AIG’s inability to make good on the almost unimaginably huge and reckless level of risk it took on relative to its own resources threatened to deny its Wall Street customers literally tens of billions of dollars’ worth of payouts. Had the mega-insurer collapsed, the world’s biggest banks would have accept immense losses at the worst possible time, with vast near-term implications for the entire financial system’s survival. The terms of the AIG bailout, however, made all of these foolish investments whole. Not a penny of haircuts was required of these Wall Street giants by Washington. Even institutions like Goldman, which hedged impressively against the possibility of an AIG failure, could not have escaped the consequences had scores of weaker players buckled and gone under.

The second important revelation concerns the possibility of the Chinese government stepping in to rescue AIG. More of this story needs to come out, and hopefully will, but what we know so far is that the China Investment Corporation – the Chinese government-run fund for acquiring or taking stakes in non-financial assets (like businesses and real estate) all over the world – had expressed interest in making “a big investment in AIG.”

Then U.S. Treasury Secretary Hank Paulson has testified that he would not have encouraged Beijing’s involvement because he was unwilling to back it up with a U.S. government guarantee. It seems clear so far that the initial inquiry was made by the Chinese. But it also seems clear that Treasury officials thought the idea was worth discussing.

Even though no Beijing buy-in took place, the account is disturbing because it shows that, at least briefly, some in the U.S. government believed that welcoming a large, crucial infusion of capital from the Chinese government was an acceptable option. Did any of these officials worry about expanding the U.S. economic footprint of the world’s most corrupt major economic system? Did any express concern that an American financial system already shot through with domestic cronyism would have become more subject to the influence of state-of-the-art foreign crony capitalists?

Other important questions raised so far by the AIG testimony: Paulson has said that he never personally spoke with the Chinese about an AIG investment – even though his ties with Chinese leaders were broad and deep. But did he personally authorize any discussions, however tentative or exploratory? In addition, Paulson also insists that he knew the Chinese would want a federal guarantee, and that at the same time, they never explicitly sought one. How did he know any of this?

And let’s not forget the role of former AIG Chairman Maurice R. “Hank” Greenberg. His lawyer appears to have at least suggested that Paulson and the rest of the Bush administration should have let the Chinese in. Greenberg has successfully courted China’s most powerful leaders for decades, and has retained his influence through numerous leadership transitions in Beijing, both peaceful and otherwise. Did he encourage China to help rescue AIG? In other words, did he urge a foreign government that even then was often challenging or undermining U.S. national security interests to become a major power in the American financial system just to enrich himself personally?

These questions take on added importance given Greenberg’s major role in funding China and China-related programs in many of America’s most influential think tanks, including the Council on Foreign Relations.

It’s possible that the rest of the trial won’t shed significant news light on these questions – after all, that’s not the responsibility, much less focus, of either side’s lawyers. But further incidental revelations are entirely possible, and make the trial well worth following. The Paulson-Treasury-Greenberg-AIG-China nexus would be a great subject for a detailed Congressional probe. And is it too much to hope that Mainstream Media might want to dig into what could have been an eye-opening episode of corporate lobbying in Washington and foreign capitals?