A Better Economic Stimulus Plan

The airwaves are filled with talk of the President-Elect’s economic stimulus plan – its magnitude, its cost and whether or not it will really work. The Congressional Budget Office announced that, not even counting such a plan, the budget deficit this year is expected to soar to $1.2 trillion. Include Mr. Obama’s plan and the annual deficit could approach $2 trillion. And Mr. Obama readily admits that trillion dollar deficits could be with us for years to come. For a nation already drowning in debt, that’s a bitter pill to swallow. In the long run, it could do more harm than good, perhaps leading to hyperinflation, the very last thing that income-challenged Americans need.

There’s a much better way to do this. Restoring a balance of trade with a return to the tariff policies successfully employed by this nation for the first 171 years of our history, prior to the signing of the Global Agreement on Tariffs and Trade in 1947, would grow our GDP (Gross Domestic Product) by $700 billion, not just for one year or two but every year from now on. And the program wouldn’t cost a dime. In fact, instead of adding trillions in debt, between the tariffs collected on imports and the tax revenue collected on the higher GDP, federal tax revenues would easily swell by $500 billion per year. Second and third shifts would be added at auto and parts plants across the country. Idled plants would be restarted. At the same time, the profit potential needed to justify domestic production of other products would be restored. Instead of creating a mere three million jobs under Mr. Obama’s plan, many of which would be temporary, six million permanent, high-paying manufacturing jobs would come home and millions of additional construction jobs would be created to rebuild America’s manufacturing infrastructure.

Sure, it’d be a tough sell with the global community. But if we are on the brink of “an economic catastrophe from which we may not be able to recover” as Mr. Obama claims, then this is no time for timidity. Over the past three decades, our trade deficit has poured $9 trillion into the global economy. We’ve done our part and we’re tapped out. It’s time for the rest of the world to stand on their own two feet. Mr. Obama has said that only the government can pull us out of this rapidly deepening recession, and he’s right. But fixing our broken trade policy is a far more effective way to do it than with any deficit spending programs. It’s time to stop pretending that we can have a vibrant economy with an emaciated manufacturing base. We need long-term solutions that fix our economy and our balance sheet permanently, not short-term gimmicks that make us feel better now at the expense of future generations.

 

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5 Responses to A Better Economic Stimulus Plan

  1. Pete,

    While we agree on bringing jobs back to the U.S. the magnitude of doing so cannot be diminished and cannot be consider in such a linear fashion.

    That we would immediately gain $700 Billion and it wouldn’t cost a dime? That foreign nations would pay additional tariffs and swelling U.S. taxes would swell by $500 Billion? You are suggesting that we could continue to consume at the same rate as present for years to come?

    If all taxes in the U.S. were doubled today, it wouldn’t make a dent in the deficit.

    • Pete Murphy says:

      No, the trade deficit couldn’t be eliminated immediately, but we could get a huge chunk of it back very quickly because our auto manufacturing capacity still exists and could be ramped up rapidly. The rest would take a few years, allowing time for manufacturing plants to be built. Within four years for sure the trade deficit could be wiped out.

      Foreign nations would have no choice but to pay the tariffs. It wouldn’t be optional. Either that or their exports stop. We currently have approximately $3 trillion worth of imports. I estimate that we could very easily collect $400 billion in tariffs. (Before the signing of GATT, average tariff rates were about 40%, so I’m only figuring on a little over 10% – pretty conservative.) Also, since the federal government currently collects revenue at a rate of about 15% of the GDP – a historically low figure, by the way. So adding $700 billion to the GDP would also add about $100 billion in revenue, all without raising tax rates one bit.

      I think that you must be confusing the “deficit” with the national debt in your last sentence. Annual federal revenue is currently about $2 trillion per year, while federal spending is running at about $3 trillion a year, thus yielding a $1 trillion federal budget deficit. If taxes were doubled (doubling federal revenue), then we would swing from a $1 trillion deficit to a $1 trillion surplus, which would make a significant dent in our $10 trillion national debt. (However, doubling taxes would likely lead to a dramatic economic slowdown, blunting some of the impact of the tax increase.)

      Could we continue to consume at the same rate? We could if resource shortages didn’t put a halt to it, as they likely would before too long.

      I think you’re underestimating the damage done to our economy by the trade deficit. Imagine what things would be like if we had back the $9 trillion we loaded onto boats and shipped overseas the last 33 years.

  2. Gil says:

    I am part way through your article “A Better Economic Stimulus Plan”, and though I agree in general with the basic prescription, I have to confess that I am a bit annoyed at articles like yours that misrepresent the true purpose and by extension the true value of trade tariffs.

    Tariffs of course can be used towards any number of purposes. The only truly economically beneficial way to view and treat tariffs is as a market premium that fully or partially monetize a set of values in a given market-place. For example, the attractiveness of the American market-place is in large part due to its level of developed consumerist tendencies that are themselves an offshoot of the level of freedom accorded us by a constitution rooted deeply in personal choice. We cannot therefore undermine the value of all of this by allowing other countries who have chosen other approaches to organize their society that have produced less attractive domestic markets to ship their goods into ours with no consideration at all for the fact that we do have one of if not the most attractive consumer markets in the world.

    We must therefore use tariffs to capture this value and companies who understand the value of our domestic market will decide in an economic manner if it is still beneficial to them to export their goods to us and reap the benefits, notwithstanding the market premium (tariffs) involved.

    Approaching the issue of tariffs in this manner removes the “protectionist” and “fair trade” arguments.
    Tariffs could be set using some market mechanism instead of using statutory fiat thus making them more market-sensitive.

    To continue to represent tariffs as only a protectionist tool is to pretend that all markets are the same and possess the same characteristics. This is just not so and the whole drive to globalization which is predicated on this notion is not only out of touch with reality, but is destined to produce the economic and subsequent social results we are now sadly beginning to experience.

    Gil
    Coral Springs,
    FL

    • Pete Murphy says:

      Gil, first of all, thanks for stopping by. A couple of comments:

      1. I think there’s a danger in trying to disguise a tariff as anything other than what it is. I doubt that few will be fooled into not recognizing a tariff when they see it, and the attempt at obfuscation may imply that we are actually ashamed of what we’re doing – that we’re trying to pull a fast one.

      2. Your recognition of imbalances in the markets of the U.S. vs. many other nations and the role of “consumerist tendencies” is right on. But I don’t agree that the way in which these markets have developed has been just a matter of choice by the governments of those nations. In the vast majority of cases, the imbalance is due to the huge disparity in population density between the U.S. and nations like Japan, Korea, Germany and China. Their per capita consumption is low because of serious over-crowding. They are wholly incapable of consuming at the same level as the U.S. (This is the whole premise of my book.) So to combine our labor force with theirs through free trade is nothing less than economic suicide. I see tariffs as a means of compensating the U.S. for the exporter’s inability to provide us access to an equivalent market.

      3. How did the word “protection” ever acquire a negative connotation? No one would deride you as a “protectionist” for defending yourself against the attack of mugger. The trade arena is no different. We’re being “mugged” in the global marketplace by overpopulated parasitic nations who have found it necessary to prey on the market of the U.S. in order to support their bloated labor forces. Frankly, I don’t care who calls me a “protectionist.” I’ll wear the label proudly. It’s absolutely critical that we restore a balance of trade, and that requires protecting our market from the parasitic predation of those nations who have nothing to offer in return.

      It’s time to stop pussyfooting around the issue of trade and do what must be done to restore a balance.

  3. Clyde Bollinger says:

    Gil,
    Task number 1 is a thourough reading of Five Short Blasts. If you don’t gain a more meaningful understanding of the discrepancies between consuming nations, I’ll be totally surprised.I look forward to your comments after reading Pete’s book.

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