Hillary Bashing as Spectator Sport

For the record, I’m not a fan of the junior senator from New York. But she actually said some sensible things in a letter to Henry Paulson, which were mischaracterized by Harvard prof Greg Mankiw on his popular blog (and picked up by Angry Bear).

It is remarkable how Clinton can serve as a lightening rod for criticism (which doesn’t bode well for her presidential candidacy). But I detect a knee jerk quality to the comments on her letter. It’s as if anything a Democrat says to Paulson has to by definition be a) wrong, b) politically motivated and c) populist (oh, c is a subset of a and b, but gee, we need as many salvos as possible). And the fact that this is a woman/lawyer/wife of that man only raises the ante.

Here is what Mankiw extracted from her letter, and his comment:

we can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.

To me, this seems excessively alarmist and a bit xenophobic. I am skeptical that economic policy decisions made abroad could hold the U.S. economy hostage in any meaningful sense.

This is what the letter said:

It is with great concern that I witnessed the recent volatility in the global markets and the undeniable impact it had on U.S. markets. Indeed, I believe that the economic policies of the last six years have contributed to an erosion of U.S. economic sovereignty and have made us more dependent on the economic decisions of other nations. Moreover, I believe that action should be taken now to address some of the underlying issues that contributed to yesterday’s market disruption.

Markets to a certain degree will always be volatile, and to a great extent we are fortunate that our domestic markets are deep enough to absorb certain shocks. But what happened yesterday underscores the exposure of our economy to economic developments in countries like China. As we have been running trade and budget deficits, they have been buying our debt and in essence becoming our banker. While the President has touted recent improvements in the overall budget deficit picture, it is undeniable that the exponential growth of foreign debt in the last six years has undermined our economic standing. We have to curb these deficits and ensure foreign governments don’t own too much of our public debt and take steps to ensure that our economic well being is soundly in our own hands.

I have long argued that a great source of vulnerability is the fact that other countries, including China, own so much of our debt. Today, foreign nations according to the most recent Treasury statistics hold over $2.2 trillion or 44% of all publicly held United States (U.S.) debt with Japan and China alone holding nearly $1 trillion. In essence, 16% of our entire economy is being loaned to us by the Central Banks of other nations. Having so much debt owned by other countries can be economically unsound. Yesterday it was the sell off of foreign stocks that had reverberations in U.S. markets. But if China or Japan made a decision to decrease their massive holdings of U.S. dollars, there could be a currency crisis and the U.S. would have to raise interest rates and invite conditions for a recession. While it can and will be debated whether yesterday’s market disruption was just a blip or a larger indicator of our economy’s vulnerabilities, it is clear that interdependence between our economy and that of other nations can pose a risk if we do not pursue smart policies. Precipitous decisions by any country with our debt could create much graver economic problems than what we saw yesterday. The writing may not be on the wall, but yesterday, the writing was on the Big Board.

In years past, I have worked with other members of Congress who share many of the same concerns on this issue. For example, during the last session of Congress I supported legislation by Senator Dorgan and then Congressman Cardin that sounds an alarm bell when US foreign owned debt reaches 25 percent of GDP or the trade deficit reaches 5% of GDP. It would require the Administration to develop a plan of action to address these conditions, and report their findings to Congress. At the very least this proposal would compel our government to deal with these economic issues while they are problems and before they become crises. I believe that proposals like these need to be discussed in order to put our economic house in order as we can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.

You can argue the wisdom of the mechanism she discusses, but the concerns are neither nutty nor extreme (in fairness, her speech on the Senate floor was more dramatic. There she linked economic security to homeland security). And she is not calling for protectionism, but characterizes this as an internal problem.