If there is one clear message in Tuesday’s primary elections, it’s that voters are in a “throw the bums out” mood, regardless of whether you’re a Democratic or Republican incumbent. While conservatives have their “Tea Party” movement, progressives are no happier. The common denominator is unemployment and, to a lesser extent, concern about deficit spending. Nothing makes people angrier, conservatives and progressives, than being without a job or the fear of losing your job. And deficit spending has never come under such scrutiny as it has since the near-default of Greece and the collapse of the Euro triggered by the bail-out of that country.
While “throwing the bums out” might be a good first step, is it a step in a new direction or just another step down the path of aimless wandering that we’ve been following for decades? What exactly will our new representatives do differently from their predecessors?
A good case in point is Rand Paul, easy winner in Kentucky over the candidate hand-picked by long-time senator Mitch McConnell, and son of libertarian congressman and former presidential candidate Ron Paul. While being interviewed on Good Morning America this morning, Rand Paul emphasized the need to rein in deficit spending and advocated a balanced budget amendment. But exactly how he would balance the budget wasn’t clear. The only way to do it would be through cutting social security and medicare, while simulateneously raising taxes dramatically. Good luck with that. Your legislative career will be far shorter than your predecessor’s. There’s a third way to balance the budget, but more on that later.
While a balanced budget amendment sounds appealing to a lot of people, they don’t understand the connection between the budget deficit and the trade deficit. All of our trade dollars have to come back to the U.S. in the form of some kind of investment. In the ’90s it was the stock market, fueling a bubble that burst in March of 2000, wiping out trillions of Americans’ wealth. After that, trade dollars went into the purchase of mortgage-backed securities, fueling an enormous real estate bubble. That bubble burst in the fall of 2008, nearly collapsing the entire global economy.
Now, only one financial sponge is left to soak up all those trade dollars – U.S. treasuries. Foreign lenders like China, Japan and Germany buy U.S. debt, which is issued to fund programs like the stimulus plan in an attempt to off-set the negative consequences of the trade deficit – like unemployment. Take away deficit spending and there is nothing left – no place for trade dollars to come home to roost. The only alternative would be to re-start the inflation of one of the earlier bubbles – the stock market or real estate. It’d probably feel good for a while but will eventually come crashing down again, sooner rather than later, and with even more devastating consequences.
You might think that, without an outlet for their trade dollars, nations like China, Japan and Germany will simply be forced to export less and our trade deficit will melt away. You’d be wrong. As fiscal austerity is forced upon more and more countries by the credit markets, exporting nations will become even more dependent on exports. They’ll find a bubble to inflate in America, regardless of the consequences. Unemployment will grow worse and our economy will be further destabilized.
The Obama administration understands the role of global trade imbalances in the financial crisis of the past two years but so far has proven unwilling to do anything about it, other than to plead with exporting nations to voluntarily reduce exports and boost imports. The results have been predictable.
The third method of restoring fiscal balance that I spoke of earlier begins with restoring a balance of trade through a measured application of tariffs on imports. Suppose that an average tariff of 30% were imposed on imports, currently running at about $2 trillion per year. And imagine that imports fell to $1.5 trillion as a result. The revenue collected would still be $450 billion per year. And though consumers would see higher prices for those imports, they’d also see an explosion in hiring in manufacturing, driving wages higher and off-setting the higher prices for imports. So add to the $450 billion of tariff revenue the additional revenue collected from income taxes on more and higher incomes and the reduction in spending on programs like unemployment insurance, and now you’re making a huge dent in the federal budget deficit before you’ve even cut one dollar of spending and before you’ve raised anyone’s income tax rates.
But without an understanding of the role of population density disparities in driving global trade imbalances, I’m afraid that this new generation of lawmakers will simply veer our economy aimlessly once again, driven by a faith in economic principles that are based on flawed assumptions. Cutting spending and raising taxes in this environment will prove just as toxic to new legislators as it did for the old ones, and American workers will be hung out to dry with no safety net to catch them.
It’s time to face the fact that something is very fundamentally wrong with our economy. It’s not just a matter of spending too much, regulating Wall Street too little (or too much), or collecting too much (or too little) taxes. We can’t have an economy based on health care, with all of us getting sick and paying each other to nurse each other back to health. We can’t have an economy based on selling hamburgers and pizzas, or based on various get-rich-quick Ponzi schemes. It’s time to get back to the basics of making the stuff we consume and trading our excess for those things we can’t get here. It’s going to take some real back-bone and leadership to walk away from global organizations like the World Trade Organization, the International Monetary Fund and the World Bank, organizations that have been designed to perpetuate global economic imbalances. Will our new legislators be up to the task? I doubt it, but the old ones have proven themselves unwilling and or incapable. It’s time to give someone new a try.