With the first 100 days of the Obama administration in the rear-view mirror, the effects of his approach to the economy – especially his approach to the trade deficit – are beginning to come into focus. And it’s not the picture they hoped for. Yesterday, the Obama administration increased its project for this year’s federal budget deficit by $89 billion, an admission that the economy is not recovering at the rate they had planned.
And just minutes ago this morning, it was announced that the March trade deficit rose from $26.0 billion in February to $27.6 billion in March, ending a dramatic, several-month decline. The rise wasn’t unexpected, but the reason was. In spite of the fact that oil prices rose as expected, that rise was offset by falling imports. But what was an unpleasant surprise was that exports also fell a sharp 2.4%. Exports held up surprisingly well in February, perhaps the result of the rest of the world trying to hold up their end of the bargain struck at the G20 summit in London, when they promised to boost their own economies and start buying more American products, in exchange for Obama’s promise to disavow any moves toward protectionism. I predicted that approach was doomed to failure, and so it is. It lasted about a month.
Some of the stimulus measures taken by the Obama administration are having some minimal effect in slowing our economic decline. How could they not? Pour trillions of dollars into the economy, through economic stimulus and through various measures to lower interest rates and boost spending, and it has to have an effect. But the results are disappointing. While job losses have moderated slightly, they’re still at a level that would elicit bugged eyes and dropped jaws from economists during any other period. And home purchases have ticked upward ever-so-slightly, like the twitch of a limb of some poor animal that has come to a violent end.
Obama has said repeatedly that a recovery in the manufacturing sector is crucial to revival of our economy, especially as the finance sector fades into oblivion. But falling exports bode ill for any such recovery. This is exactly the scenario I predicted in my 2009 Predictions. Obama has relied upon the same approach to our trade problems that decades of experience has proven to be a failure – trying to talk our way out of the deficit instead of taking meaningful measures. Perhaps he thought that he could make it succeed by simply trying harder, bringing his charisma to bear and shaming other world leaders into pulling their weight. This will go on for some time as the administration clings to hope that their approach will begin to take hold.
But it won’t. It can’t. It ignores the economic realities associated with trading freely with overpopulated nations and ignores our own growing problem of overpopulation, and the consequences of these for unemployment. The question becomes what “plan B” might be. He will have only two choices: stick with “plan A,” relying on even more stimulus or begin moving away from the extreme free trade end of the spectrum of trade policy, which means beginning to adopt some forms of protectionism, whether it’s import quotas or tariffs. Sticking with Plan A for too long will leave too little time for Plan B to work and will assure a place in history as a one-term president and a failure.