President Zero Sum Goes to Asia

Larry Kudlow
Thursday, November 19, 2009

President Obama took his declining dollar to the Asia-Pacific economic conference, and he added to it a declinist opinion of America's economy. His big message? Don't count on American consumers to lead the world from recession to recovery and beyond. His second big message? In the U.S., we must save more and spend less. . Huh? This is the same limits-to-growth, central-planning wisdom we hear so often these days at home. It's also tone deaf, to say the least. Despite a sinking greenback that is wreaking havoc among the Asian economies, and in the face of repeated currency warnings by Asian officials, Obama brought no King Dollar stabilization message to the conference.

Before getting into the currency question, let me say this: I think more saving (and investment) by U.S. citizens is a great idea. But this need not come at the expense of consumption. In a prosperous free economy, people should be able to save, invest, work and spend as much as they like. More is better than less in each case. Grow the pie larger.

Of course, if the president and his team want more saving and investment, they should end the multiple taxation of saving and investment. Unfortunately, our system taxes saving as income, capital gains, dividends and inheritance.

Team Obama also intends to tax wealth more by raising the top personal tax rate from 35 percent to 40 percent. And they apparently don't object to Nancy Pelosi's plan to slap another 5.4 percent tax on the incomes and capital gains of successful earners in order to finance a government takeover of health care.

Wealth is a crucial form of saving. And the investment that comes from extra saving is used to finance the entrepreneurial start-ups that create the jobs and incomes that allow families to spend. However, by creating a zero-sum game between saving and spending, the Obama planners are falling into an austerity trap -- one that would hand the American economy a second-place finish in the global race for capital and growth.

At the same time, Obama has no plan to stabilize King Dollar, and the Asian economies don't like it. China's top banking regulator said the Federal Reserve's money-creating binge was the main cause of "massive speculation." Similar sentiments came from top officials in Hong Kong, Singapore and Japan.

And while Ben Bernanke tried to calm dollar worries during his recent speech at the New York Economics Club, it was clear that the greenback's value ranks low on his priority list. Nothing but dollar lip service from the Fed head.

Because of the slumping dollar, U.S. import prices have jumped 10 percent at an annual rate over the past three months, and nearly 6 percent excluding energy. This is a tax hike on consumers and businesses, and it could depress holiday sales. It's reminiscent of the gigantic energy shock of 2008 that was caused by the dollar's collapse.

And what's the current U.S solution to the dollar problem? Blame China, and call for a revaluation of the yuan. But beggar-thy-neighbor protectionism never works, and it causes bad blood between the countries involved.

The powerful Asian economies actually have a better idea. They want to move toward a free-trade currency-cooperation zone -- much like the euro zone, fathered by Nobel economist Robert Mundell. This makes more sense in terms of world price stability and free capital flows. But the U.S. refuses to play.

So Japan, Singapore, South Korea, Taiwan and others are forced to desperately buy sinking dollars in order to protect their export industries. But this only creates inflationary money expansion. The beleaguered U.S. dollar is in effect exporting U.S. inflation overseas.

President Obama did talk about entering free-trade discussions. But his commerce secretary, Gary Locke, threw cold water on the idea in a Singapore speech. He said trade agreements have to wait because of a crowded U.S. legislative agenda. (Hat tip: James Pethokoukis.) He may have a point: The South Korean free-trade bill has been languishing for several years in the Democratic Congress.

Then there's the massive U.S. health care takeover plan, which is now estimated at $3 trillion. This additional dollar depressant will tax the patience of China, Japan and other would-be buyers of our massive debt creation.

We cannot spend, tax or devalue our way into prosperity. Nor can we command the respect of other nations by telling them our economy cannot grow as rapidly in the future as it has in the past.

Ironically, these same Asian countries -- with their accelerated growth rates -- have borrowed a page from American free-market capitalism. Yet Obama makes no defense of our free-market system and provides no leadership on the leading economic questions.

In terms of global leadership, Ronald Reagan would say: "If not us, who? If not now, when?" It's a pity that President Obama doesn't share the Gipper's commitment to American leadership.



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