PrintMay 29, 2009
Obama's Plan A is Not Working
On January 10, two of President Obama's economic advisors (Christine Romer and Jared Bernstein) put together a report in which they projected the effects of President Obama's economic recovery plan. The blue line in the chart below shows the unemployment rate that they predicted would result. Unemployment was supposed to peak in the middle of 2009 at about 7.9% and then decline thereafter. But in April 2009, it hit 8.9%.
The actual unemployment line, shown in red, demonstrates that, despite Obama's recovery plan, unemployment has continued to rise steadily. His plan is failing to meet its projections, even though it has already cost our government hundreds of billions of dollars in debt that taxpayers will eventually have to pay back with interest.
Obama's advisors hoped that their increased government loans to banks and automakers, tax rebates to consumers, and increased government spending would stimulate business investment which would put American workers to work and eventually make them more productive. But net investment in American manufacturing has been near zero ever since President Clinton let China into the World Trade Organization (WTO), gave her favored-nation treatment, and allowed her barriers to imports to remain intact.
Obama's Plan A is failing because it does not recognize the causes of the Great Recession and does not propose appropriate remedies. Under the Clinton and Bush administrations, the United States and the WTO permitted the creation of massive imbalances in the global economy. A range of developing countries, not just China, lent tremendous amounts of money in exchange for IOUs from Americans. Instead of exchanging goods for goods in world markets, Americans exchanged debt for goods. When American consumers could no longer take on more debt, the global economy began collapsing. Obama's plan amounts to doubling down on U.S. indebtedness by dramatically expanding borrowing by the government.
Detroit is going bankrupt because American made products have been excluded from growing world markets. In 2008, China and India broke off the Doha Round of renegotiation of the WTO rules so that they could maintain their 25% tariffs on American vehicles on top of their hidden duties imposed by value-added taxes and currency manipulations. American companies have learned that investments in American production do not pay off.
There is a way to change this psychology. We recommend that the United States adopt Warren Buffett's Import Certificates Plan to balance trade. He wrote:
We would achieve this [trade] balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties - either exporters abroad or importers here - wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
Some people think that any plan to reduce the trade deficits would repeat the Smoot-Hawley tariff of 1930, which resulted in counter-tariffs that reduced American exports. But an Import Certificates plan would have exactly the opposite effect. By tying our imports to our exports, it would force our trading partners to take down their trade barriers. Although the Smoot-Hawley plan reduced American exports, Buffett's plan would increase them.
In our book, Trading Away Our Future, we proposed a variant of Buffett's plan which would achieve balanced trade more gradually without violating WTO rules. But the Great Recession proves that the WTO is not worth saving. If the U.S. were to adopt Buffett's plan, other trade-deficit countries would soon follow suit. The result would be a new worldwide system of balanced trade with little need for the WTO or any other international regulation. Trade surplus countries that limit their imports, including China, would realize - finally - that they needed to increase their imports in order to increase their exports.
Buffett's plan would be the perfect Plan B for President Obama. Whenever American producers would export American products abroad, they would earn Import Certificates that they could sell to prospective importers. Meanwhile, competing imports of foreign products would face the additional cost of the Import Certificates. American producers' profits would increase and would be plowed back into investments in American production.
But the economists who produced Obama's Plan A would probably object. Like many other American economists, they believe in "free trade," even when it is unilateral. But in order for free trade to be a valid policy, all trading partners need to operate by the rules that make free trade the appropriate policy within the American states. The U.S. Constitution prohibits the states from interfering with the free movement of goods and citizens between the states.
The trade deficits have cost the U.S. millions of jobs, caused wages to stagnate, and worsened the distribution of income. Estimates vary of how many jobs have been lost as a result of the trade deficits. Suffice it to note that it would take approximately 6.7 million workers to produce the $670 billion worth of goods and services needed to balance trade in 2008. Seeking balanced trade is no vice and allowing America to become de-industrialized, no virtue!
The authors maintain a blog at tradeandtaxes.blogspot.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
