Tom Ferguson: Obama’s plan is a “recipe for disaster, if the US reflates, the rest of the world doesn’t”
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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network and our series of interviews with Tom Ferguson. We’re talking about the economic crisis and the plans of President Obama. Thanks, Tom. So Barack Obama talked about fixing the fundamental structural problem of a bubble-and-bust economy. Certainly one of the underlying structural issues in that is the lack of real purchasing power. And these certain bubbles are created in different ways. The last bubble was created through all this debt-infusion into the housing market. But the reason there is people susceptible to this debt infusion is ’cause they don’t have real purchasing power, and so much of the economy has been fueled by debt, by credit cards. The question of wages and real purchasing power, if that isn’t addressed, is there a structural solution there?
TOM FERGUSON, UNIVERSITY OF MASSACHUSETTS, BOSTON: Well, you know, one has to say that the short-term problems are so immense it’s maybe not surprising he hasn’t done much about it. But there are some fairly scary things going on. When you actually look at what the administration was doing, you will see that the same person who does the thinking—I’m now speaking of Larry Summers, and to some extent Geithner, who does the thinking on the financial crisis—is also in charge of the auto talks. And they did something pretty interesting a week or so ago that seems to me to foretell a problem. The auto parts industry has been asking for credit, ’cause, I mean, you got a problem. What essentially you got, the firms that they do business with are going down the tubes—they’ve got a problem getting paid for stuff, and they wanted credit. They asked the government for, I think, around $19 billion or so, $18 billion or $19 billion, and you might assume they really didn’t expect to get that, so maybe they thought they might get $8 billion, $10 billion. Well, they got $5 billion. And the point a lot of analysts noted was this means that a lot of these guys are going to go out of business.
JAY: Just to be clear, these are auto parts manufacturers.
FERGUSON: Auto parts manufacturers, yeah. And what that tells you is that Summers and Geithner are still thinking that the comparative advantage of the United States lies in what you might call the traditional Cambridge thought on this—us, Cambridge, Mass., thought on this—which is finance the media, high-technology. And you know you’ve got to have a wider view than that. And, you know, if they have it, I haven’t seen signs of it. I mean, it’s fine to do green jobs. I have no doubt that you can build a substantial employment basis there, though, you know, that’s not going to happen until you put a floor on energy prices. And you’re going to have to tell folks for sure that, you know, you can plan on, say, $40 a barrel as a domestic oil price or something, at least not less than that, so that you can actually make the commitments. And it’s not going to happen until you do that. I mean, and otherwise you can just pour a small amount—you can pour, actually, large amounts of cash into that, but it won’t get built when the cash runs out. … The standard line—I know of many people (I’ve coauthored papers with some of them)—the standard line of folks often, in the sort of high economics, has been you don’t have to worry about exchange rates; it’s really just a problem of an investment in savings. And I never thought that was true. And my sense is that they have not really addressed the problem. What are they going to do about exchange-rate misalignment, which ultimately pushed a lot of American manufacturing right out the door?
JAY: Break that down. What does that mean?
FERGUSON: Well, it means that—. I mean, look, it’s no secret the Chinese were all encouraged to peg their currency to the dollar and peg it at a—make it very attractive for Americans to buy there and not produce here. My sense is they should have moved on that exchange rate adjustment long ago. I mean, it was very attractive. When you study closely what Rubin and company were doing under Clinton, and then Paulson under Bush, what you’ll discover is their main interest in China was: how can they get US financial firms into China to deal financial assets? They weren’t interested in an exchange-rate misalignment and such problems. In fact, they typically denied it existed and tried very hard to pretend it didn’t exist. Even now, the administration’s approach on the famous “buy American” controversy, I think that was something of a—the thinking on that was, frankly, just not very clear. I mean, allow me to be blunt: there’s no question that you’re much better off with free trade and a world economy at full employment. I mean, and the notion that you should just do beggar-your-neighbor policies of effectively just exporting your unemployment with a tariff or something like that is indeed—that’s sub-optimal. They’re right on that. On the other hand, to pursue the policies they’ve embarked on, which is effectively reflation in one country, it’s—big economic stimulus in one country is not going to work. I mean, effectively what you’ll do is suck in imports at a very high rate in the US, and you may develop some balance-of-payments problems, unless that’s counterbalanced by sort of the capital inflow from, say, a rise in the stock market or something like that. And, you know, my take on this whole “buy American” thing was there was no reason to buy American in general, but I would have made it conditional for other countries—they had to join in the stimulus. I mean, otherwise, you just preach to the Germans, who will tell you “buy American” is internationally wrong and don’t stimulate, so that they in effect export in the United States and don’t do any reciprocal buying. That’s crazy. I mean, somebody—and they should have been put on notice that that’s unviable. I mean, this is effectively—. This point’s really crucial, because the administration, along with most American multinationals, does not want to go there, because that disrupts the transnational production schemes, potentially, of the multinationals. That’s the real issue here. On the other hand, you look at how—I mean, you got to this point in 1933, as Roosevelt came into office, and it was clear that the multinational solution would not work, and the London Conference fell apart. That’s the equivalent of the G20 summit that we’re just about to have. And so Roosevelt essentially just devalued the dollar and did his own reflation program with tariffs, with the whole—I mean, the tariffs were built into the National Recovery Act. All that stuff. And then, later, he turned around and turned into the world’s most famous and leading internationalist. I mean, they did the whole tripartite money agreement, the big move toward free trade. That was after they’d done domestic stabilization. My sense here is that there’s a deep internal contradiction in what the administration is trying to do, which is, quite correctly, reflate in the United States. If the US reflates, the rest of the world doesn’t. That’s a formula for disaster. And, you know, it means a year and a half or so from now, they’re going to be faced with some pretty big problems, including a lot of the cash you’re spending here just goes out the door and doesn’t come back. And, you know, my sense is they should deal with that right up front, early on, now, and push toward a multilateral solution. I’m not advocating that they exclude foreign goods or any of that stuff.
JAY: So this, you think, is going to the issue at the G20.
FERGUSON: It should have been. It wasn’t. Instead, I mean, what their basic—. They’re relying on moral exhortation. They’re telling these guys, “You should stimulate.” You know. And Angela Merkel and now even Nicolas Sarkozy are having none of it. They’re just saying no. [inaudible] I read German and I look at the German papers all the time.
JAY: And what are they saying now?
FERGUSON: Well, they claim they’ve done enough stimulus. That seems to me to be nonsense. In the German case, I think the story’s very clear. The Germans realize that as long as the whole EU doesn’t break down, in the current conditions, German companies will end up buying everything in Europe because they’re much stronger competitors than the rest of those firms.
JAY: So this deflation’s in their interest.
FERGUSON: Deflation is in their interest, and there has been a long-standing—. It is true that a big bloc of folks who pushed the European Union have always thought, “Well, we could turn Europe into a financial center like the US.” And so they’re happy to deflate their own—. European Central Bank has been the main sort of thing sitting on the world recovery in Europe for a very long time, and it actually predates Mr. Trichet’s introduction there.
JAY: Okay. Next segment of our interview, I want to focus on wages and how important is it that wages go up. Please join us on in the next segment of our interview with Tom Ferguson.