Killer Politics (13 page)

While middle-class Americans were taking it on the chin, gross domestic product was on the rise. Big business was making a killing at the expense of the labor force. As the
Wall Street Journal
put it in 2006, “Since the end of the recession of 2001, a lot of the growth in GDP per person—that is, productivity—has gone to profits, not wages.” And for
many workers, there soon were not many wages at all.

From the start of the recession in 2007 to October 2009, the economy shed 7.2 million jobs, according to the Associated Press. While 3.4 million of those jobs were lost under Obama's administration, it would be unfair to hang that on him. He walked into Bush's economic buzz saw.

“This Great Recession is an inflection point for the economy in many respects. I think the unemployment rate will be permanently higher, or at least higher for the foreseeable future,” said Mark Zandi, chief economist and cofounder of Moody's Economy.com, on October 19, 2009, according to AP. “Many factors are pushing against a quick recovery,” added Heidi Shierholz, an economist at the labor-oriented Economic Policy Institute, in that same report. “Things will come back. But it's going to take a long time. I think we will likely see elevated unemployment at least until 2014.”

If things continue to progress as they have, the New Normal may well mean that our children will enjoy a lower standard of living than their parents. In places like China and India, meanwhile, the quality of life will improve steadily.

MEXICO—A FAILED STATE?

Despite a few encouraging economic signs, Mexico's future is far from certain. A brutal drug war raging along our border could undermine everything both governments are working on.

Remarkably, the U.S. Joint Forces Command said in 2009 that the two countries most at risk of becoming failed states were Pakistan and
Mexico.
Why didn't that astonishing statement make national headlines? Bill Clinton's drug czar, General Barry McCaffrey, said, “The dangerous and worsening problems in Mexico…fundamentally threaten U.S. national security.” Should Mexico come apart at the seams, America could become one giant refugee camp.

Almost thirteen thousand people have been killed in Mexico's drug
war since 2006. Murder, kidnapping, and other violent crimes have leaked into American cities along the Mexican border. If the American media has not paid much attention to this threat, our government has. By mid-2009, less than three years after Bush authorized it, the United States had built almost all of the planned seven hundred miles of fence in hot-spot areas along the shared two-thousand-mile U.S.–Mexico border. Meanwhile, the Obama administration has doubled border enforcement security teams and beefed up the border presence of Drug Enforcement (DEA) and Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) agents.

And that border patrol faces a formidable enemy. The Associated Press says there are six main drug cartels and twenty-four drug lords causing most of the carnage. These are brutal, brutal people. According to a March 2009 report from the
Economist,
“just before Christmas the severed heads of eight Mexican soldiers were found dumped in plastic bags near a shopping centre in Chilpancingo…. Another three were found in an icebox near the border city of Ciudad Juárez. Farther along the border near Tijuana police detained Santiago Meza, nicknamed El Pozolero (‘the soupmaker'), who confessed to having dissolved the bodies of more than 300 people in acid over the past nine years on the orders of a local drug baron.”

Mexican president Felipe Calderón, who was elected in 2006, immediately assigned forty-five thousand army troops to fight the cartels, who are armed with rocket launchers, grenades, machine guns, and armor-piercing ammunition. In August 2009, the Mexican government implemented another dramatic change.
All
customs agents, many of them believed to be linked to contraband operations, were replaced by the Mexican Army. Calderón believes the increasingly pitched fighting since then is proof that the cartels are feeling the pressure. Other analysts don't believe the battle is even competitive.

If I were counseling President Obama on national security, I would tell him to pay careful attention to Mexico. Efforts to secure our border
with barbwire and border agents can only go so far. We need to have a strategy of support for the Mexican government in its internal struggle against drug cartels.

And I think we need to look inward, because, after all, the American appetite for drugs is what perpetuates this cycle of corruption and violence. Some argue that we ought to end this prohibition against drugs. Legalize them, tax them, and deal with the addiction. I understand the argument, but I struggle with that. Either way, the American market for illegal drugs is an enormous topic, big enough for another, different book. I'll say this much now, though: It's time for a coherent national discussion about drugs.

The Rise of an Economic Superpower and What That Means for Us

REMEMBER WHEN YOU WERE A KID PLAYING KING OF THE HILL, HOW
much easier it was to become the king than it was to stay there? Everywhere you looked, someone was coming to knock you off. After World War II, the United States found itself at the top of the hill, with the world's mightiest economic and military machine, in large part because all the other economic machines in Europe had been devastated.

While by all measures today the United States has the mightiest military, many experts believe we will soon be knocked off as economic King of the Hill by China. And since you can only field the army you can afford, it's not a leap to think that our status as the world's greatest military power is threatened, too.

A 2005 survey by Reuters in nine countries showed that most respondents considered
economic power
the key to national power, but in China and in the United States, most respondents believed
military
power was more crucial.

China increased defense spending by 14.9 percent in 2009—to more than $70 billion. While that was the lowest increase in three years, as the
country grappled with the economic crisis and domestic issues, the buildup has the Pentagon wary.

“They are developing capabilities that are…maritime and air focused, and in many ways, very much focused on us,” Admiral Michael Mullen said in a separate story from Reuters. “They seem very focused on the United States Navy and our bases that are in that part of the world.”

China's estimated military spending equals 1.4 percent of its GDP, which is $3.5 trillion. Officially, the United States spends about 4 percent of its $13.8 trillion GDP on defense, which, in 2009, translated to about $515 billion. In the Clinton years, defense was cut from 5 percent to 3 percent of GDP, which helped reduce deficit spending.

The 2005 Reuters survey mentioned above showed that seven out of every ten Chinese citizens believes their country will be a world power by 2020. Forty-four percent believe they have already achieved that status. It's hard to argue. The Chinese, all 1.3 billion of them, are at the table and their stack of chips is growing. Goldman Sachs predicts that China's GDP could equal ours by 2027.

In his book
Hegemon: China's Plan to Dominate Asia and the World,
Steven W. Mosher talks about the mind-set of the emerging generation in China: “Their political education has veered away from ideology in favor of nationalism: they have been made familiar with the glories of China's imperial past, and with the history of her humiliation at the hands of the Western powers. They have been taught, and have come to believe, that America is denying China her rightful place in the world.”

The Chinese super-power strategy is two-pronged: First, maneuver us into a massive trade imbalance, and, second, use part of their profits to build up militarily. Obtusely, American corporations that have profited by and encouraged cheap Chinese imports—hello, Walmart—have not only been selling out the American worker, but America itself, by funding the very Chinese military that we may have to face in years to
come. It's no different than the way we fund Islamic extremism through oil profits because we lack the discipline to wean ourselves off imported oil.

Which of the twin prongs—economic strength or military might—will China exercise to become King of the Hill? Probably both. When China's economy is less dependent upon ours, we can expect them to test their muscle.

The obvious first test is Taiwan—the island nation that the People's Republic of China considers part of mainland China. While, at one point, President Bush indicated that the United States would defend Taiwan against a Chinese invasion, that position has seemingly softened, and wisely so. There is a big difference between rattling sabers at Tehran and rattling them at Beijing. China has eight hundred missiles aimed at Taiwan now. And they are building up their fleet to neutralize the U.S. Navy.

As groundbreaking as it was for Nixon to go to China in 1972, the most important diplomatic missions are yet to come. While there are distractions domestically as well as around the globe, diplomatic relations with the Chinese will be of utmost importance for America.

THE CHINESE CENTURY

You have to credit the Chinese for their ability to transform their economy. They may not have beaten us at their game—communism—but they sure might beat us at ours.

Many signs point to this being the Chinese Century. One of the most obvious indicators is that China holds more U.S. government debt than any other country—about $1 trillion and counting, by late 2009. The proposed U.S. budget for 2010 calls for about $3.55 trillion in spending and a $1.17 trillion deficit. So how do we cover the shortfall? Through the sale of U.S. government–backed securities that pay the holder interest.

So, China is doing us a favor by investing in us, by financing our deficit. But it's not so good for us in the long term. Essentially, as a nation, we are running up our credit card and leaving the bill to the grandkids.

As long as that credit card interest outpaces inflation, all is well and good for investors.

But increasingly factors like the potentially inflationary stimulus package have China, Japan, and the UK—the top three holders of U.S. debt—skittish. A weakening dollar stands to kill the profit on a lower interest investment like U.S. securities.

Weak currency does have its theoretical advantages, in that it makes exports cheaper (from the country with the weaker currency) and can serve to lower the trade imbalance between countries. A lower dollar means it is cheaper for other countries to purchase things that are “Made in the U.S.A.” That keeps factories humming and workers working. One of my mantras in life is that in every economy there is opportunity, so even in a recession, a smart businessperson can find niche areas of growth.

Not surprisingly, the weak dollar had Republicans, including Sarah Palin, criticizing the Obama administration. She failed to note (and probably didn't know) that the dollar was even weaker under Bush in his last months in office than it was under Obama in the third quarter of 2009.
New York Times
economist Paul Krugman says, “The truth is that the falling dollar is good news. For one thing, it's mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it's falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.”

The dirty little difference between China and our other international bankers is that China “pegs” the value of its currency—the yuan—to the dollar. The tactic has been controversial in the United States because if
the yuan is pegged artificially low, it exacerbates the huge trade deficit America has in relation to China—that U.S. deficit was $270 billion in 2008, according to U.S. government data.

In 2005, China had seemingly decoupled the yuan from the dollar, but when the economic crisis hit in late 2008, the yuan and the dollar were coupled again—to defend the status quo—which, again, has been large trade deficits for America. Had the yuan appreciated in value, American products would theoretically have become more attractive in China.

Federal Reserve chairman Ben Bernanke believes the trade deficit was a major cause of the global financial crisis. He warned, “Asian countries needed to rely less on exports and more on their consumption at home for their economic growth.” Bernanke also advised the Chinese to create social safety nets to address the volatility of capitalism.

Hold the phone! Rewind that! Did the Fed chief just call for safety net programs in China? Isn't that like socialism or communism or some other
ism
? Holy smokes, let's hope Republicans don't read that. They'll demand to see his birth certificate or NRA card or something. Republicans have always stood against such safety nets, viewing poverty and even unemployment as some self-inflicted disease.

Late in 2009, when the Democrats sought to expand unemployment benefits by twenty weeks, Republicans stalled the legislation—anything to obstruct the Obama agenda. Senator Dick Durbin (D-IL) scolded them: “They want to drag it out. They have no sensitivity to these people who lost their job or are struggling to keep their families together under the most difficult circumstances.”

I don't get it. Republican policies helped break Humpty Dumpty, but now they don't want to help put him back together again. The Republicans seem to view the unemployed as collateral damage in their effort to politically damage the president.

CHINA'S BOLD REACTION TO THE ECONOMIC CRISIS

Now that China has adopted Western-style capitalism and all of its trappings, its people have much different expectations than their parents and grandparents had. This generation of Chinese is growing accustomed to a higher standard of living. Any sudden negative shock to the Chinese economy has the potential to cause a great deal of social unrest. The Chinese authoritarian government can ill afford unrest, so in reaction to the global recession, they aggressively pumped $1 trillion in stimulus money into their economy.

It worked. The
Economic Times
reported in October 2009, “The Chinese economy expanded at a rapid rate of 8.9 per cent in the third quarter of 2009 as compared to the year-ago period, mainly boosted by increased infrastructure investment and stimulus measures. The world's fastest growing economy, which has been less affected by the global financial meltdown, grew 7.9 per cent in the June quarter.” According to the Chinese government, China's GDP was up 6.1 percent for the first quarter, 7.9 percent for the second, and 8.9 percent for the third quarter of 2009.

Why was China able to bounce back so quickly? Because of the fiscal discipline the Chinese showed when things were good. The Chinese inherited a budget surplus just like the one Bush inherited from Bill Clinton, but the Chinese used their budget surpluses to invest in infrastructure and job creation. What did Bush do? He spilled so much red ink it looked like a horror movie—
Night of the Living Dumbasses
. By failing to address the trade deficit and by squandering so much money, the Bush administration, for all its tough talk and saber rattling, weakened the country.

In September 2008, in the early stages of the global financial meltdown, Japan sold off $13 billion of U.S. debt while China boldly took on $44 billion in new debt. The net effect is that purchase of U.S. securities
tends to strengthen the dollar, which, of course, allows the favorable trade situation for China to continue.

In a very telling remark confirming this strategy, Lueo Ping of the China Regulatory Commission, speaking at the Global Association of Risk Professionals' Risk Management Convention in February 2009, said: “Except for U.S. Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion…we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

CODEPENDENT COUNTRIES

It's an interesting dynamic. Ironically, if China is to become the number one economic power, they need our marketplace to get there. For now, that gives us some leverage in this odd economic partnership. And for the time being we have to dance together.

Strategically, from China's point of view, to take the next step to global preeminence, they need to be able to extricate themselves somewhat from this economic entanglement with the United States and find or develop equally rewarding investments and trading partners elsewhere.

And that is already happening. According to the
Globalist,
an online magazine focused on the global economy, “few people outside China and India are aware that by the end of 2007, China had become India's number one trading partner. From China's side, India is now one of its top ten trading partners.” China is also promoting a European Union–style trade bloc among Asian nations, as part of the plan to lessen its dependence on the American consumer. A free trade pact between China and the ten-member Association of Southeast Asian Nations has already been signed.

Also, as its population becomes more affluent and begins to consume more domestic goods, China will not need to rely as much on the U.S. market.

As our rival—and make no mistake, that's how they see us—the Chinese want to knock us off the hill, but at the moment we are so codependent we would drag them down with us. Like us, they need a level of independence and self-sufficiency. And for that, we just have to go back to my Four Pillars. Like any great nation, China needs to feed, defend, and educate its people as well as have a sound fiscal policy. Feeding the country is no problem. Their Achilles' heel, like ours, is a ravenous thirst for oil.

With a rapidly expanding manufacturing base and the growing affluence of its society, China's hunger for energy continues to grow. Most of the oil guzzled in America goes into automobiles. Now, the Chinese, too, have fallen in love with the car. China's total motor vehicle number will increase from 80 million to 220 million by 2020; this can only exacerbate supply and price concerns.

Our country went to war with Iraq to secure the petroleum necessary for our defense. If we did it, do you think Communist China would have any compunction about doing the same? The
Los Angeles Times
reports that China continues to aggressively secure oil leases around the world, including in the Gulf of Mexico, the source of one fourth of America's domestic production. The story notes, “The sour U.S. economy and the need for Washington and Beijing to cooperate on potentially larger issues could mute any outcry. The U.S. could also find it difficult to rebuff China when it has long welcomed other foreign investment in the gulf…. The U.S. risks undercutting its foreign policy goals as well. Concern is growing over China's aggressive investment in oil-rich nations with anti-U.S. regimes, including Iran and Sudan. Denying China a shot at drilling in U.S. waters would only encourage Beijing to make deals in volatile regions given that new oil reserves in stable, democratic nations are getting harder to find.”