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Challenges for the New President

Voters are focusing too much on personalities and not enough on issues. This is unfortunate. Americans need a president to address tough problems and implement solutions.

On Iraq and terrorism, it’s time to rehinge policies to reality. U.S. troops cannot simply be withdrawn. Standing down would take many months, and without antagonists more firmly pacified, a shrinking security perimeter would put thousands of troops at grave peril as their numbers were cut to even just half.

The war on terrorism should never have been cast in terms of regime change. Islamic terrorism, cultivated and supported by circumstances within oil exporting countries, ultimately is a religious movement and parastatal threat.
Ardent internationalists may pretend otherwise, but terrorism cannot be addressed simply through diplomacy, national building and democratization. Terrorism is rooted in great Middle East wealth, created by U.S. payments for oil and the ruthless poverty imposed by the decadent, privileged families that control this wealth.

Tactics that defanged the Mafia are better suited to combating terrorism than those offered by global governance and transparent military force. This is distasteful but we have to address the world as we find it.

Domestically, the economy is in a funk, because growth has been powered by the federal government and consumers borrowing too much. Imports exceed exports by $700 billion each year, thanks mostly to oil and lopsided commerce with China. To pay the difference, Americans sell bonds and assets to private investors abroad and foreigner sovereigns, notably China and Middle East royals.

Now, too few Americans can get mortgages, home equity loans and cheap credit card debt. Home prices and retail sales are tanking, and the economy swoons.

The stimulus package and Federal Reserve interest rate cuts won’t stave off recession, because Wall Street banks have proven dysfunctional, obsessed with generating bonuses in the millions for MBAs in their thirties. Consequently, these big banks can no longer raise cash in the bond market, and thereby recycle Chinese and Saudi money into the hands of consumers.

Democrats and Republicans are too hooked on campaign money raised on Wall Street to require banking reforms. And neither party seems to have the courage to fix energy and trade problems that finance terrorism, create huge trade deficits and make all this borrowing necessary.

We have the capacity, now, to build 50 mile-per-gallon automobiles, but the 2007 Energy Policy Act mandates too little in fuel efficiency and pretends we can feed cars corn instead. Ethanol will help but not enough. Oil imports will continue to grow.

We can do better.

The new president must read us the truth about automobiles and ethanol, shift gears and require somewhat more expensive vehicles that unyoke Americans from the House of Saud.

China subsidizes exports to the United States by printing and selling billions of yuan for dollars in foreign exchange markets, and recirculating those dollars into the hands of American consumers by purchasing U.S. bonds. This keeps China’s yuan undervalued, its products cheap at Wal-Mart, and the Americans borrowing to maintain their reckless prosperity.

The stimulus package and Federal Reserve interest rate cuts are all about boosting further the budget deficit and consumer borrowing to keep this folly going.

We could end this madness by imposing a tax on U.S. purchases of yuan in proportion to China’s subsidy on the sale of yuan, and use the proceeds to reduce the federal budget. If China stopped buying dollars, the tax could end.

Smart energy policies and dealing effectively with China would create much new demand for U.S. made products and new industries, and permit the economy to grow more with less borrowing from foreign sources.

Still Americans would be left with their biggest worry-health care.

Americans pay 50 percent more for health care than the Germans or French, and 46 million Americans have no insurance.

What the Europeans have that we don’t are price controls and rationing, because markets can’t adequately provide drugs and doctors visits. Without those compromises to free market principles, we simply cannot afford to assure health care for everyone, and increasingly Americans want that security.

One way or another we have to recognize the basic nature of our adversaries to accomplish a reasonable threshold of security from terrorism, and apply our free market principles pragmatically in a less than perfect word to enjoy a sustainable economic growth.

We need a president that tells Americans to recognize facts, not cling to fairy tales.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.