Bold Action on Trade Needed to Complement Stimulus Plans

As the Obama administration and the Federal Reserve have announced trillion dollar stimulus or bail-out plans one after another, I haven’t had much to say specifically about each.  But this may be a good time to stop and consider these actions as a whole.

The stimulus plan itself – the one that included spending on infrastructure and renewable energy, was probably a good thing.   Jobs will be created, though the number remains a question, as does whether or not it will be enough to actually stem the slide in the economy.  Halting that slide is crucial, since it will be impossible to make any progress on reducing our national debt while in recession. 

That leaves two other announed plans, I think, although it’s getting hard to keep track – the Fed’s plan to buy Treasuries using printed money and the government’s plan to buy up “toxic assets,” supposedly in partnership with private investors.  But nearly all of the money will be ponied up by the government – in other words, the taxpayers.

The strategy is clear:  re-start the debt machine, piling more debt onto consumers, and do it with government programs that pile more national debt onto future taxpayers.  But this time, regulate it so that it’s good debt instead of the bad debt that collapsed the economy in the first place.  There’s only one way to do all of this, and that’s to stimulate a demand for labor that’s so vigorous that it sends incomes soaring again. 

Such a strategy has only one chance of success (albeit a slim one), and that requires that the trade deficit be completely eliminated, bringing six million manufacturing jobs home again.  Ideally, we might even return to a trade surplus, enabling us to start paying down our debts.  Otherwise, a continuing trade deficit demands that deficit spending be maintained to avoid lapsing into recession once again. 

The problem is that the administration has done absolutely nothing to address the trade deficit so far that has any chance at all of being effective.  It has talked of the need to reduce the trade deficit, talked of the need to renegotiate NAFTA (the North American Free Trade Agreement), talked of labeling China a currency manipulator and, I believe, has quietly put the rest of the world on notice that a trade deficit will not be tolerated much longer. 

But all of this talk is a complete waste of time, as proven by over three decades of trying to talk down the trade deficit.  The fact is that the nations with whom we have the largest trade deficits in manufactured goods – China, Japan, Germany, South Korea and a host of others – are all overpopulated and completely dependent on sustaining their trade surplus with the U.S. to avoid economic collapse.  Even if they are sincere in their promises to stimulate domestic consumption and eliminate their dependence on exports, they’ll find it impossible to do so.  In addition, regarding the trade deficit in oil, the administration’s moves to boost the production of renewable energy are quickly being overwhelmed by population growth.  With each passing day, we grow more dependent on imported oil, not less. 

The fact that the administration has taken this approach is not surprising and, in fact, is what I predicted.  But time is marching on and we’re now two months into Obama’s administration.  How long will they be patient when the monthly data shows the trade deficit resuming its upward trend, as it surely will?  If they don’t act quickly (no later than the end of this year) to begin imposing tariffs, the only measure that has any chance of restoring a balance of trade, then his economic plan will fail and he will be a one-termer, to be replaced by someone completely devoted to free trade, regardless of the consequences. 

This president who, if he can be believed, seems to understand the consequences of a trade deficit, may be our only chance to rescue the sickened, fallen corpse of the American economy from the global hordes of parasitic economies that are feeding on it.  But to be successful, time is needed to demonstrate the benefits of a judiciously-applied dose of protectionism and the restoration of a balance of trade.  Unless those benefits are realized by 2012, he’s a goner and, so too, will be any hope of salvaging America’s future.

5 Responses to Bold Action on Trade Needed to Complement Stimulus Plans

  1. Clyde Bollinger says:

    If I were to start campaigning for the office of President in 2012 or advising someone else, jobs, the trade deficit, the elimination of income taxes and the implementation of a consumption tax would be front and center planks in the platform.
    There can be no hope for improvement without the benefit of suficient jobs. Without the punative tax sructure, jobs will come home. When the jobs come home and the trade deficit is under control, health care, education reform, deficits, energy and all of the other items of contention would fall into place. I’m firmly convinced that the outrageous spending we’ve seen would be immediately curtailed were it not for the mistaken notion that the corporations will pay the bill. Too many people fail to realize that it is all passed on to the consumer in the end. The consumer tax would prove the point. We’d probably have a painful period of adjustment, but what else is new. It is painful now and we’re not even trying.
    I’m still waiting and hoping for that first glimmer of enlightenment from the President. He is about as aware as a deer caught in the headlights of an oncoming car. He is the most ‘in over his head’ person I’ve ever seen. He reiterated tonight that the US must do nothing to hamper free trade.

    • Pete Murphy says:

      I think it’ll take more than revisions to the tax structure to bring jobs home. It’ll take tariffs.

      I think you’re being a little harsh on Obama, since he’s only been in office for two months. I too am anxious to see him be much more aggressive on the trade deficit. Just to correct your last sentence, he didn’t say that we must do nothing to hamper free trade. He said that we should “avoid a return to protectionism.” Saying that we should avoid it isn’t the same as an outright rejection of the approach. We need to give it more time and see how this plays out.

      I am concerned about the whole issue of deficits as far as the eye can see. The only way to address it is through a combination of spending cuts, tax increases and balancing trade. But’s it’s difficult to see how tax increase will ever be approved. We’ll never be able to face up to reality if politicians get more traction with voters by always opposing tax increases and, worse yet, proposing more and more tax cuts. The only way to do it may be the kind of total revamp of tax policy that you’ve suggested, ditching the income tax for some kind of consumption tax, so that it would be impossible to determine whether the proposed change really represents a tax cut or tax increase.

      I do think that more people would be supportive of tariffs if they understood that the end result would be an off-setting tax decrease in the long run.

  2. Clyde Bollinger says:

    You are correct, it will require elimination of punative policies and taxes, imposition of tariffs and the US electorate coming to some UNDERSTANDING about just how extremely costly the trade deficit is for things to turn around. The “free traders” will have a veritable field day with any suggestion of tariffs coming out of Washington unless you gain some more grassroots support for your theory.
    Although almost never mentioned, spending cuts will have greater benefit than will tax increases over time. Tax increases generally have loop holes and exemptions for various secial interest groups. This is one of the better points of the consumption tax idea. I’ve not mentioned it previously, but the consumption tax has something of a population limiting factor since more mouths to feed and clothe will cost more. Sort of like your exemption penalty idea.
    By the way, the exact Obama quote in the Washington Post was
    “Let’s avoid steps that could result in protectionism, that would further contract global trade”. My paraphrasing was a bit off the mark.

    • Pete Murphy says:

      Clyde, you make a very, very interesting point about the population-limiting aspects of a consumption tax. I hadn’t thought about it that way before but I think you’re right. I’d have to give it more thought about how to incorporate that feature without making it too punitive for lower income folks, but I think it really has potential. Feel free to expand on that idea.

      I agree that spending cuts should be the first priority, as we want our government, just like our industries, to be as efficient as possible. But, just as Einstein once said that things “should be as simple as possible, but not simpler,” we also shouldn’t cut programs and services that are vital to maintaining an orderly, civil society. Even if we do that, I don’t believe that we’ll ever be able to reduce our national debt without more federal revenue, whether that revenue comes from tariffs or higher taxes. It’s interesting that the states, most of which have constitutional mandates to balance their budgets, are able to get the job done. Here in Michigan, the governor and legislature have waged huge battles over this issue but, in the end, have managed to come to some compromise that includes deep spending cuts and some tax increases. Maybe that’s what it’s going to take: a constitutional amendment that mandates a balanced budget. Boy, wouldn’t that be interesing?!?!

      I think you’ve accurately quoted Obama. Perhaps I’m being overly optimistic in seeing a loophole in his remarks that doesn’t completely rule out protectionist measures. Time will tell.

  3. Clyde Bollinger says:

    My version of the consumption tax would apply to sales of everything except basic foodstuff intended to be prepared at home, school supplies, work and school clothing, prescriptions and medical supplies. The collection process would follow the same prceedure as the present sales tax. Rates would be set to fund the budget. There are two areas of potential abuse that I don’t have an answer for yet. One is the bartering of goods and services outside of the retail channel and the other is corporate hoarding of cash, thus keeping it out of the cash flow subject to taxation. Stockholder greed will probably take care of the latter and the former may not be a big enough revenu loss to matter. One difference I’d make from the European VAT is that the tax amount would be prominently displayed on the register receipts, etc. Just as a reminder to folks to remain vigilant. This would go a long way toward solving the balanced budget need.
    Were we to combine this idea with a functional tariff revenue stream and highly publicize the attendant contributions, the impetus to return to funding a significant portion of the cost of government by tariffs would be obvious.
    Population limiting consumption taxes,tariffs that succeed in balancing trade combined with the elimination of the present tax structure will bring manufacturing and jobs home generating a capacity for possibly even “conspicuous consumption” in time.
    We just might be able to return to the less hectic conditions you describe in Five Short Blasts.

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