not so flat after all - by bret swanson - 09.29.08
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8/14/2019 Not So Flat After All - by Bret Swanson - 09.29.08
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"A second Great Depression seems unlikely, but thethought is no longer a complete absurdity. The worldis dangerously curved." So ends David Smick's new book, The World is Curved , a well-timed and lucid
tour of the global economy.With continuing chaos on Wall Street – and in
Washington – Smick's insights appear supremely prescient. Dozens of recent books, of course, predicted doom, gloom and even "financialArmageddon." But dozens of books always predictthese things. Smick's warnings warrant moreattention because he mostly eschews the perenniallywrongheaded tsk-tsk triad of the trade, budget andsavings deficits. In its place he substitutes a morenuanced view of the promises and perils of globalization.
Published on Sept. 4, just as the credit crisisleapt to new levels of panic, Smick's book warned of further financial folly and even bank runs, whichhave now come to pass.
Playing off Thomas Friedman's The World is Flat (which probably now approaches the Bible's publication record), Smick outlines the globaleconomy's biggest challenges – its curves. There is,of course, the China juggernaut and the corrupt andunpredictable "Tony Sopranos" who Smick says runits economy. And watch out for the Japanesehousewives who, from their home computers, aresecretly some of the world's most prolific and
sophisticated currency traders.More to our immediate crisis, Smick vividly
describes the "dangerous oceans" of money, whichconcealed the complex and interfering derivativewaves, opaque global hedge pools and off-balance-sheet debt submarines, that led to a "crisis of trust inthe financial architecture."
But Smick is most convincing when he describesthe largest potential undulation in Friedman's flatworld: the rising threats of protectionism and anti-e n t re p re ne u r i a l popu l i s m. U n l ike ma nyApocalypticians, Smick is less concerned with out-year budget blowups or resource depletion than he is
with innovation. The chief source of economicgrowth, Smick insists, is entrepreneurship. "The
secret is creativity, allowing new firms with newideas to rise up, while existing firms work every dayto reinvent themselves." The worst thing we could dois clamp down on entrepreneurs with high tax rates or
close America's borders to outside capital, trade andtalent.
Smick worries that in a much-needed attempt toupdate our regulatory framework to stamp out someof this era's worst excesses, we could easily end upwith "Sarbanes-Oxley II." If so, the "U.S. financialservices industry would go the way of the U.S. autoindustry."
Smick saves sharp criticism for Warren Buffett,who he says fuels this "class-warfare" populism."Buffett conveniently calls for massive tax hikes on
capital after he has accumulated his own fortune,"Smick writes. But if everyone else deserves higher tax rates to supposedly balance the budget, what'swith his $30 billion tax-free gift to the Bill &Melinda Gates Foundation? "[W]hy wouldn't he have pledged his estate instead to the U.S. Department of Health and Human Services?" The answer, of course:"because [the Gates Foundation] is likely to be 10 to20 times more productive than a government bureaucracy."
Every few chapters, Smick succumbs totraditional but disproved economic notions like thePhillips Curve or those dreaded but always vague
"global imbalances." But what do you expect fromsomeone who wines and dines with the Davos elite
and achieves book-blurb nirvana from the likes of George Shultz, Jagdish Bhagwati, Alan Greenspan,Jean-Claude Trichet, Lawrence Summers and threedozen other intergalactic panjandrums? Smick has
plenty of globe-trotting stories, from late nightinebriation and crab-shack capers with staid Japaneseministers to outrageous Italian dinner toasts that serveas a metaphor for the fat, happy and bloatedAmerican economy.
Smick may too often tip his hat to the economicsestablishment and go out of his way to praiseDemocrats and Republicans alike. Bill Clinton's freetrade achievements and capital gains tax cut getspecial (and deserved) praise. But Charles Schumer,of Schumer-Graham China tariff fame, as a greatfree-trading capitalist? I don't think so.
This is a rare popular book that pinpoints thecrucial import of exchange rates, monetary policyand the need for a Bretton Woods-like globalmonetary system. But in the book's biggestdisappointment, Smick lays little responsibility at thefeet of the inflationary weak-dollar policy of theFederal Reserve.
He calls the Fed's 1% funds rate of 2003 to 2004and subsequent easy money – which inflated thehousing, oil, foreign reserve and credit bubbles – a"sideshow." Irresponsible bankers, mortgage brokers,home buyers and derivative packagers, of course, bear much responsibility for today's credit mess, and
Smick better than most predicted the disastrousconsequences. But these players couldn't have causedtoday's global panic of mis-priced assets without theFed's massive mis-pricing of money itself. The Fedand its accomplices at the weak-dollar Treasuryweren't a "sideshow" but the main event.
Smick ably identifies most of the crucial protectionist policy curves that threaten global prosperity, but unless we flatten the value of moneyitself, the world will continue to be dangerouslycurved.
Bret Swanson is senior fellow and director of the
Center for Global Innovation at The Progress & Freedom Foundation ( www.pff.org/cgi
).
Not So Flat After All by Bret Swanson 09.29.08