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Simple, realistic solution to fixing the U.S. economy

Feb. 19, 2012 - 20:56 By Korea Herald
Few would deny that the U.S. economy is badly damaged or that the party with the more plausible plan for fixing it is likely to win the coming election. Yet neither has proposed a plan that realists can believe in. While Republicans advocate yet more tax cuts and deregulation, Democrats propose further stimulus and deficit spending. Both are futile.

Tax cuts will fail because they reduce government revenue, thereby necessitating additional layoffs at the state and local levels among police, firefighters, teachers and others. Outside the beltway, budgets have to balance, and deficit spending is not an option. In any case, firing people is a poor way to create jobs. The victims swell the ranks of the unemployed, even as their insolvency erodes demand for their services.

History suggests that deregulation isn’t the answer either. As it affected the airlines in the late 1970s, deregulation served mainly to create shareholder value by decreasing the compensation of pilots, flight attendants, and airline mechanics. As it affected the trucking industry a few years later, it led to mass terminations coupled with (vastly) increased workloads for the few drivers fortunate enough to keep their jobs.

Stimulus and deficit spending are even less promising. Though widely believed to have halted the economic free fall of late 2008 and early 2009, the combination has yet to generate a recovery worthy of the name. Economist Nouriel Roubini, together with colleagues Daniel Alpert and Robert Hockett, has recently released a proposal for further economic stimulus leading, it is hoped ― after five to seven additional years of massive deficit spending ― to genuine recovery. But a substantial portion of their report is devoted to policies the Chinese government must be persuaded to adopt (including universal health care, education, retirement benefits, and substantial disposable income), lest the benefits of American deficit spending accrue primarily to that nation. How realistic is that?

Will the Chinese agree to abandon strategies that appear, from their perspective, to be working famously, in favor of policies that have stopped working for the United States? Is the Chinese government about to provide its citizens with a standard of living comparable to that enjoyed by the already developed nations? Will China even agree to stop devaluing its currency, as American diplomats have begged it for years to do? And if by some miracle China should agree to all that, is it likely that it will prove willing and able to honor the agreement?

The changes Roubini proposes would have many of the same effects as a simple protective tariff on imported goods, increasing federal revenue and rendering U.S. manufacturers more competitive in domestic markets. Yet such is the power of the free-trade lobby forged in the campaign to pass NAFTA and the WTO that every remaining presidential candidate has explicitly disowned “protectionism.” Should they?

Protectionism is the antithesis of the “free international trade” that American leaders have been preaching at least since Woodrow Wilson made it one of his “14 points.” As long as it received only lip service, the doctrine had little effect on the U.S. economy. But that changed soon after it became official policy.

The turning point, according to trade expert Ravi Batra, came in 1968, with the conclusion of the so-called Kennedy Round of the General Agreement on Tariffs and Trade negotiations. Before then, he argues, the U.S. economy had been relatively self-sufficient, with combined imports and exports rarely exceeding 12 percent of GDP. Only after 1973, when the OPEC oil embargo fell like a wet blanket on the growth prospects of energy-poor industrializing nations such as Japan and South Korea, did foreign firms and products begin to enter U.S. markets in force.

Low-tech products such as textiles and footwear came first, soon to be followed by radios, televisions, automobiles, motorcycles, refrigerators, air conditioners, generators, turbines, cameras, and others long supplied by U.S. firms. Often, the invaders used tactics that would have violated U.S. antitrust law had they been deployed by domestic firms. Little of this “export-led growth” would have been possible, according to Batra, without the draconian U.S. tariff reductions of the Kennedy and Tokyo Rounds.

The enactment of a protective tariff of, say, 30 percent on most imported goods and services could increase government revenue as much as half a trillion dollars annually. The resulting scramble to reopen or replace mothballed U.S. factories could hardly fail to create a welcome flood of new (albeit temporary) jobs. No other feasible reform would have as large an impact on either the nation’s finances or its employment prospects.

Yet no serious candidate dares to mouth those words, for fear of being ridiculed by the media and denied access to corporate campaign funds. As a result, voters seem doomed to 10 more months of econobabble about tax cuts, deregulation, and (Keynesian) stimuli.

By By James Case

James Case is the author of “Why Can’t Obama Fix the Economy?” ― Ed.

(The Philadelphia Inquirer)
(MCT Information Services)