In advance of tonight’s state-of-the-union address by President Obama, there’s a lot of talk about the urgent need to rein in the budget deficit, along with speculation about what the president may propose. Already leaked is a plan to freeze discretionary spending for three years, saving $250 billion over a ten year period, during which the budget deficit is projected to be $6 trillion – nothing more than a token gesture.
Lost in all the proposals is the one measure that would do far more than anything else toward balancing the budget – a return to sensible trade policy that relies on tariffs to restore a balance of trade. Consider this: in 2008 we imported $2.1 trillion worth of goods. If these imports had been subjected to an average tariff of 38.5%, the prevailing rate established by the Fordney-McCumber Tariff Act of 1922, we would have collected an additional $809 billion in federal revenue. That would eliminate 58% of this year’s budget defiict of $1.4 trillion. Compare that to Obama’s plan to freeze discretionary spending, a move that would reduce the deficit by only 1.8%.
Of course, imports would certainly fall as a result of the tariffs, reducing the revenue take. But they’d be offset by a boost in domestic manufacturing, increasing federal revenue from the domestic economy. And growth in the manufacturing sector would have synergistic effects on the rest of the economy, boosting revenues even further.
This would entail extricating ourselves from the World Trade Organization or, at the very least, predicating our continued involvement in the WTO on its acceptance of the role of population density in driving global trade imbalances, allowing us to raise tariffs on overpopulated nations without the threat of retaliation.
That’d take a lot of guts on Obama’s part, a quality that, if it exists, has yet to be revealed. No doubt, China, Japan and Germany would threaten to dump their vast holdings of U.S. treasuries. But it’s a hollow threat. First of all, such a move toward a sensible trade policy would send the dollar soaring, making other nations eager to snap up those bonds and, secondly, with our budget deficit reduced so drastically, the volume of bond auctions would fall precipitously, tipping the supply/demand balance in favor of the U.S.
It’s no mere coincidence that virtually all of the rise in our national debt over the past three decades closely matches our cumulative trade deficit in that same period of time. The relationship between the two is more than coincidental, since deficit spending by the federal government has been relied upon heavily to offset the negative consequences of the decline in GDP wrought by our trade imbalance. You can’t fix the former without addressing the latter. The economic smoke and mirrors employed by both the left and right for the past three decades to obscure that fact has painted our economy into a corner.
Is Obama willing to walk over that paint and take us in a new direction? I doubt it. More likely, he’ll grab ahold of a sconce on the wall, support himself on one tippy-toe, and lay down some more paint.