PrintNovember 27, 2010
Program for Economic Recovery and 2012 Victory
Now is the time for all good Republicans, including Tea Partiers, to come to the aid of their party and their country! With 9.6 percent unemployment -- really more than twice that if you count those who dropped out of the labor force and those unwillingly reduced to part-time jobs -- Pres. Obama spent -- no, wasted! -- his first two years in power occupied by domestic issues whose resolution should have been postponed until the economy had recovered.
What did the Democrats do wrong that caused their tremendous loss of public support in just two years?
The Democrats passed Pres. Obama's Recovery Act of 2009, his $800-billion-plus economic stimulus plan which failed to "create" enough jobs to replace those that were lost after it was enacted. It financed the "cash for clunkers" program, which provided a temporary increase in auto sales. The Recovery Act financed investments in so-called "renewable" energy sources like windmills and solar, but these alternatives are so expensive that even with the subsidies, they raise the cost of electricity.
The Senate and Congress spent hundreds of man-years creating regulations that they hoped would prevent bank failures in the next recession. In the meantime, the regulations make banking less efficient and less profitable.
The law that helped create the housing boom and bust, the Community Reinvestment Act, made ACORN and other leftist neighborhood groups powerful and rich beyond their wildest dreams. It is still on the books. The Democrats tried to reduce foreclosures and keep housing prices from falling but failed utterly.
America's international status has not been lower in more than a century. Our trade deficits have made our enemies stronger and decimated our industries. In the midst of an agonizingly slow recovery, we lost 9,000 manufacturing jobs last month. The failure of the Democrats to reduce unemployment was an important factor to their humiliating defeat in the midterm elections.
The Republican Party cannot afford to spend the next two years without addressing the serious economic problems facing America. There seems to be agreement with the Democratic leadership that earmarks should be abolished, but doing that will not create a single job. Republicans must learn from the Democrats' mistakes. The same humiliating defeat can happen to the Republicans in the 2012 elections. What should the Republicans do to avoid that kind of denouement?
1. Tariffs to Balance Trade
Republicans have a huge mandate from the American people to move the federal government's reckless budget deficits toward balance. But doing so won't grow the economy unless trade is moved toward balance at the same time. Balanced budgets and balanced trade go hand-in-hand, countering President Obama's failed strategy of huge budget deficits financed by China.
Some Republicans would like to simply return to President G.W. Bush's attempt to grow the economy through huge tax cuts. But Bush's tax cuts grew our national debt without growing our economy because he let the Asian governments manipulate trade to steal our industries. If he had required balanced trade, American businesses would have invested their profits in American factories. American workers who lost their jobs to imports would have taken even better-paying jobs producing exports. Instead, Bush presided over growing debt and decline in median income.
The obvious solution is to place tariffs upon the countries that manipulate our trade balance. Liberal economist Prof. Paul Krugman has recommended a 25% tariff on China in his NY Times column, and conservative talk show host Michael Savage has recommended a 20% tariff on China in his new book Trickle Up Poverty.
Such across-the-board tariffs would work, but not as well as our invention called the "scaled tariff," whose rate goes up as our trade deficit with a trade-manipulating country goes up, down when the trade deficit goes down, and disappears when our trade deficit disappears. Countries with an overall trade deficit are permitted under WTO rules to impose barriers to imports from their trading partners with whom they are experiencing chronic trade deficits. The scaled tariff would reduce American demand for imports from the trade surplus country which that country could avoid by removing its barriers to our exports.
The scaled tariff raises the costs of imported goods from the trade surplus countries, meanwhile helping to balance the budget by earning huge government revenues. It would stimulate those American companies which have outsourced their production to become American producers once again. They would build their factories in the U.S., secure in the knowledge that we will not permit foreign countries to undercut them again without increasing imports from us. They would be guaranteed that trade will never again become a one-way street.
Unfortunately, most Republican legislators believe Al Gore's propaganda from his tariff debate with Ross Perot, which gets endlessly repeated by progressives in the media and in government. Gore claimed that the Smoot-Hawley Tariff of 1930 was the principal cause of the Depression, even though economic historians know that it had little effect one way or the other. If the Smoot-Hawley tariff caused the depression of the 1930s, then the almost-as-high Fordney-McCumber Tariff of 1922 caused the economic prosperity of the 1920s! The fact is that tariffs make little difference when trade is already balanced, but they can be greatly beneficial when a country is running a huge trade deficit, as the United States is today.
2. End Subsidies to Alternate Energy
But tariffs on imports from China are not enough. We also have to end our subsidies for alternative sources of energy. Those subsidies are just a waste of resources, and they create high energy prices which put our industries at a disadvantage. Most of the Recovery Act's spending, supposed to stimulate the recovery of the private sector, largely went to producers of alternative sources of energy -- not only foolishly subsidizing their investments, but also forcing power companies to buy their electricity at high rates and pass those high rates on to consumers and businesses.
We have to remove the barriers to drilling for oil on public land. We have tied our hands behind our backs and have become increasingly dependent on imported crude. As T. Boone Pickens has suggested, trucks and buses should be converted to natural gas. Recent discoveries of huge deposits of natural gas in shale ensure unlimited amounts of natural gas for at least a century or two. With unlimited natural gas and unlimited drilling for oil on public lands and offshore, we would no longer need to rely on imported crude.
3. Abolish the Corporate Income Tax
We should abolish the corporate income tax. This tax penalizes American workers in international markets, results in double-taxation of shareholders, discourages corporations from making new investments, and causes corporations to move their headquarters abroad.
One way to deal with this problem is to integrate the corporate and personal income taxes, treating corporations like partnerships as we currently permit small corporations to do.
Another solution would be to replace the corporate income tax with a value-added tax or sales tax. Under WTO rules, value-added taxes and sales taxes can be rebated to exporters, thus subsidizing exports, whereas corporate income taxes cannot be rebated. Under existing rules, our manufacturers are at a disadvantage in international competition.
In 2010, voters rejected the Democratic Party's borrowing from China to finance growing budget deficits. In 2006 and 2008, they rejected the Republican establishment's unilateral free trade, which shipped good-paying jobs abroad. They will continue to hold incumbents responsible for the disastrous economy that results from tolerating trade deficits.
But a Republican Party that advocates balanced budgets and trade, replaces oil with natural gas, and abolishes the corporate income tax would fix the economy and be unbeatable at the ballot box.
The authors maintain a blog at www.idealtaxes.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.
