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Losing currency

Money | Congress focuses on the wrong issue when it comes to the trade deficit

Issue: "Jerry Falwell," May 26, 2007

Sander M. Levin has met the enemy, and he is convinced that it is not us. The Michigan Democrat is a leading voice in a growing congressional chorus that blames the Chinese and Japanese governments for the large U.S. trade deficit.

Levin, chairman of the House Ways and Means Subcommittee on Trade, convened an unusual joint hearing May 9 with two other trade subcommittees to investigate China and Japan.

Those two countries, he argued, are "rigging" trade in their favor by keeping their currencies undervalued. The result: The United States ran a $88 billion trade deficit with Japan, a $232 billion deficit with China, and an $836 billion overall trade deficit in 2006. Levin wants the Bush administration to start pressuring China to revalue its currency or slap tariffs on Chinese products.

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The House is not alone in making belligerent trade noises. In the Senate, Democrats Charles Schumer (D-N.Y.) and Max Baucus (D-Mont.) are reportedly working with Republicans Lindsey Graham (R-S.C.) and Charles Grassley (R-Iowa) to introduce a bill next month addressing China's currency policy. "When it comes to currency," Levin says, "we have essentially been standing by the road instead of in there wrestling. We have been more bystanders than activists."

But as popular as it is to castigate foreigners, most economists say the cause of the U.S. trade deficit lies closer to home, that it results from behavior in places like Boston and Tulsa instead of Beijing and Tokyo. A trade deficit, they say, is a mathematical certainty in a country with low levels of saving and high levels of investment.

Morgan Stanley chief economist Stephen Roach made this point at the joint hearing: Because of its "chronic shortfall of domestic saving," he said, the United States "has no choice other than to import surplus saving from abroad if it wants to keep growing. That means running current account and trade deficits in order to attract the foreign capital."

If Congress wants to do something about the trade deficit (some economists don't consider it to be a problem), the only solution is to encourage Americans to stop consuming more than they produce. Harvard economist and former Bush advisor Greg Mankiw, for example, argues that Congress should expand 401(k) and IRA opportunities.

These ideas may not rouse passions the way verbal assaults on foreign governments do, but they have the virtue of not risking a trade war, or what Roach calls "a policy blunder of monumental proportions."

Balance Sheet

BUSINESS: In 1998, Daimler-Benz took over Chrysler in a much-heralded $36 billion deal that created DaimlerChrysler. Last week, the auto company sold Chrysler for $7.4 billion to Cerberus Capital Management, a private equity firm. While Chrysler workers feared that Cerberus would lay off workers in an attempt to revive the struggling automaker, industry analysts called the disastrous 1998 merger a warning to other auto companies contemplating cross-border deals. "The Germans never knew really quite what to do with Chrysler," analyst Stephen Cheetham told the Associated Press. "Managing across the pond and managing this very, very different business is very difficult."

HOUSING: RealtyTrac Inc. reported last week that mortgage foreclosures were up 62 percent in April over April of last year. Lenders foreclosed on 147,708 homes last month, compared to 91,168 in April 2006. The increase was mainly due to subprime borrowers being unable to make payments or sell their homes. The National Association of Realtors, meanwhile, announced that the median price for existing homes fell 1.8 percent in the first quarter, sliding to $212,300.

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

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