http://www.atimes.com/atimes/Global_Economy/HF02Dj01.html
EYE ON AMERICA
The trials of Henry Paulson
By Peter Morici

Failing to convince voters and financial markets that the US economy is sound, Treasury Secretary John Snow is being replaced by Wall Street investment banker Henry M Paulson, Jr. President George W Bush hopes he will bring the kind of clout with financial markets and the general public that Robert Rubin enjoyed during the Bill Clinton years.

Don't hold your breath. The Bush administration labors under the false assumption that better media spin will fix its flagging fortunes, even as systemic ills truly bedevil the American economy.

Under Bush's stewardship, the federal budget has swung from a US$236 billion surplus to a $423 billion deficit. This is thanks to runaway federal health spending abetted by a faulty prescription drug program, ill-fated nation-building efforts in Iraq and Afghanistan, tax cuts inconsistent with these initiatives, and general fiscal indifference and dysfunctional partisanship from both political parties in Congress.

The trade deficit has zoomed from $300 billion to more than $800 billion. This is thanks to federal budget deficits, Chinese currency manipulation and a weak-kneed American response and a trade policy centered on strengthening intellectual property rights and opening foreign markets for service providers, as opposed to forcefully challenging mercantilism in China, India, South Korea, and other Asian bastions of protectionism.

To grasp the folly of US trade policy, consider that royalties earned abroad totaled a whopping $58 billion in 2005, and those just about equaled the entire US surplus on trade in services. Does anyone believe tougher patent and copyright enforcement and better market access for Citibank is going to fix the US trade deficit?

Americans owe foreigners about $5 trillion in Treasury bonds and other debt instruments. Each year, after some hard assets are sold, that figure jumps another $700 billion to finance the trade gap. At that rate, debts will exceed the US gross domestic product (GDP) in about another dozen years.

To be sure, GDP growth has been strong but powered by the steroids of spendthrift consumption and borrowing, whose effects virtually every economic forecaster expects to wind down in the months ahead. The stock market is falling, international investors weary of dollars are turning to gold, and American multinational corporations are moving offshore.

Icons like General Electric, IBM and General Motors have made clear to stockholders they are betting on China and India instead of California and Indiana. Meanwhile, their smaller suppliers are being forced to relocate to Asia or close down shop altogether.

New York investment bankers are happy tour guides on this journey. Now Bush has recruited from among them a champion to sell the whole thing to American voters. If Henry Paulson truly wants to make things better, his greatest contribution would be to compel the president, his horsemen and fellow citizens to face the facts.

For example, if Americans want foreign adventures, such as Iraq, they will have to pay for them.

Americans pay 50% more for health care than do the Germans and the French, who also enjoy universal health coverage. Either Americans will have to regulate prices and ration health care as the Europeans do, or accept higher taxes to pay for the system they have.

Either Americans place fiscal discipline, exchange rates and Asian mercantilism at the center of economic and trade policies, or Americans must reckon with economic decline.

The day will come when China and the rest of the world will tire of lending Americans what they need to live well. Then Americans will have to pay what they owe, live poorly as repentance and suffer the status of a debtor people in a world led by the thrifty, prudent and prosperous.

To lure Paulson to Washington, Bush assured him that at Treasury he would enjoy the same status as the departments of Defense and State. The very fact that this was required for the office once occupied by Alexander Hamilton indicates how little weight Bush places on core economic issues.

In the mantra of the Clinton campaign: It's the economy, Mr Bush!
Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission. He serves on the Bloomberg and Reuters macroeconomic forecasting panels.

(Copyright 2006 Peter Morici. Used with permission.)