While being interviewed by George Stephanopolous yesterday on ABC’s “This Week,” Obama admitted that, at some point in his administration, in order to restore some fiscal sanity while pursuing his agenda, he will have to reach a “Grand Bargain” with Congress and the American people – sweeping legislation to put the brakes on spending and raise taxes to eliminate the deficits and begin paying down the debt. “Everyone will have to share the pain,” he said. “Everybody has to have some skin in the game.”
I don’t know if he’s thought this through yet but, contrary to what some “economists” may be telling him, cutting spending and raising taxes by themselves will seriously erode the purchasing power of consumers. As consumption declines, so too will employment. It’s a recipe for making the recession (or depression?) even worse, unless one more step is taken – eliminating the trade deficit. When he speaks of everyone “sharing the pain” and having “skin in the game,” is he including the exporting nations who have gotten a free ride in the American economy? Cutting the purchasing power of Americans doesn’t mean that they’ll simply stop buying imports. Go to WalMart and take a look around. See any luxury items? Of course not. Everything you see is necessities. And, aside from most of the grocery items, do you see anything that’s manufactured in the U.S.? Again, no. Sure, there’ll be fewer imported cars purchased, but sales of domestic models will decline just as fast. It’s services where the pain will really be felt – services provided by American workers.
In recent decades, as free trade policies eroded our manufacturing base, the big lie that we could somehow still have a vibrant economy was swept under a rug of debt. Americans could be made to feel just as prosperous by swapping savings for debt. We sold everything we could think of to foreign investors to raise the cash for easy credit. When we finally resorted to selling them subprime mortgages, the whole scheme came crashing down and the rising tide of unemployment that we had held at bay for so long is now topping the levee and inundating us.
Mr. Obama is a very smart man. In his efforts to restore some sanity to our fiscal mess, how long can a line item written in huge, bold red caps escape his attention? Unless Mr. Obama wants his “Grand Bargain” to accelerate our economy’s downward spiral, he’ll have no choice but to finally turn his attention to our massive trade deficit, now totaling $9.2 trillion since our last trade surplus in 1975. And, being a smart man, will he look at our decades-long strategy of complaining about currency valuations and cajoling our trade partners to abide by the spirit of agreements, and say to himself, “gee, this is working really well?” “Let’s keep doing it!” Or will he finally conclude that, just perhaps, it may be time to take some positive action – like tariffs, for example – to restore some balance? The last “skin in the game” may be the global trade welfare state.