Exit Strategy from the Great Recession

In the 1930s, Democratic President Franklin Roosevelt had no exit strategy from the Great Depression, so he blamed it on his Republican predecessor. Roosevelt's policies prolonged the depression until, finally, the start of World War II in Europe caused the increased exports and business investment that pulled us out.

It is becoming increasingly clear that President Obama doesn't have an exit strategy either. Like Roosevelt, he blames his Republican predecessor. He also touts his "recovery" plan, as if it were helping. In a September 20 interview with CNN, he predicted that employment would start increasing this year and that unemployment would start decreasing next year.

But there is no indication of increasing employment. In fact our economy lost another 263,000 non-farm jobs in September when unemployment climbed from 9.7% to 9.8%. The economy is not recovering, and no amount of optimism by Obama can paper over that fact. It is becoming more and more clear that President Obama's recovery plan is failing.

One reason is that the Democrats are discouraging drilling for oil and natural gas in the United States, even though such drilling would create jobs and income, reduce business costs, and get our economy moving. We could:

  • 1. Permit drilling on public lands.
  • 2. Drill off-shore in the Atlantic and Pacific and in the Arctic (as Russia is doing).
  • 3. Encourage natural gas, which is abundant, as an automotive fuel.
  • 4. Implement the Alaska-Canadian natural gas pipeline.

Instead, Obama is promoting "green jobs," as if producing energy more expensively would help the economy. If Spain's experience with subsidies for wind and solar production is any indication, net jobs will be lost, not gained. A study by Gabriel Calzada, economics professor at Madrid's King Juan Carlos University, calculated that Spain lost 2.2 jobs in other industries for every government-subsidized green job that was created.

In his stump speech as a candidate last year, Obama claimed that green jobs can't be outsourced. But GE is already importing wind turbines into the United States from its factories in Germany, Spain and China. And California-based Applied Materials, the world's leader in producing the machinery for solar panel production, has built 5 factories in Germany, 4 factories in China, 1 in Spain, and none in the United States.

Why should any manufacturer choose to locate in the U.S.? After all, if they build in China they will have open access to the U.S. market and access to the Chinese market too, while if they build in the United States, they will not have access to the Chinese market... which brings us to Obama's mismanagement of our trade deficits with China.

Instead of requiring balanced trade, which could get us out of the recession, President Obama sent his Secretary of State to China where, on February 22, she called on Chinese authorities to continue buying U.S. Treasuries, saying it would help stimulate American imports of Chinese goods.

Indeed Obama followed through on his promise to stimulate the Chinese economy, which is growing at about a 7.3% clip this year according to the World Bank's June 2009 Quarterly Update. China is reciprocating by lending Obama the money he wanted for his "recovery" plan (not by buying our goods). The Chinese government's strategy is to stimulate domestic demand for Chinese-made products only, while stealing market share in foreign markets through export subsidies. 

Predictably, our monthly trade deficits with China have grown steadily since February, as shown in the graph below:

These increased trade deficits have contributed to our steadily decreasing manufacturing employment, causing decreasing employment in other economic sectors, including retailing. The continuing decline in manufacturing employment is preventing Obama's recovery.

Belatedly, President Obama realized that his February message to China was the wrong one. In September he sent a new message when he imposed temporary tariffs on Chinese tires and got the G-20 to issue a communiqué that called for "adequate and balanced global demand."  President Hu of China quickly responded, "No," as reported by Bloomburg:

China's President Hu told the G-20 yesterday that "the issue of global economic imbalances has drawn close attention from the international community." The "root cause is the yawning development gap between North and South," he said, according to an English translation of his text, referring to developed and poorer nations.

It is possible that Obama will be able to get the Chinese government to change its policy of keeping out American products. But with China growing rapidly, while the economies of its adversaries (Hu's "North") shrink, he is likely to encounter stubborn resistance.

President Obama is correct that President Bush deserves much of the blame for the Great Recession. Bush's decision to ignore our growing trade deficits with China, which were intentionally produced by the Chinese government, proved to be an unmitigated disaster. For awhile, the house price bubble hid the negative effects. But after the house price bubble popped in 2006, it became apparent that America was losing its industrial base and getting nothing but debt in return.

Then, in 2008 President Bush tried almost the same strategy that Obama is now using. His February 2008 stimulus package was a failure, as was his October 2008 TARP bill. Bush's stimulus plan caused a temporary blip upward of GDP during the second quarter of 2008. But, like Obama's "recovery" plan, it failed to reverse the overall downward trend.

Republicans need not let themselves be defined by the mistaken economic policies of the Bush administration. They can address the three excesses that both Presidents Bush and Obama ignored:

  • 1. Excess Foreign Debt. Balancing trade would eliminate the need for the U.S. to borrow money in order to pay for imports and would bring back our manufacturing sector. In our 2008 book, Trading Away Our Future, we recommend telling the Chinese government that the U.S. will balance trade through auctioned import certificates if China doesn't balance trade on its own. The Chinese government could easily end export subsidies, let the yuan rise, and take down its tariff and non-tariff barriers to imports from America.
  • 2. Excess Government Debt. Balancing government budgets is crucial. The Obama administration is risking a cut in the credit rating of our government, which would greatly increase the amount of interest we must pay on our government's debt. One obvious solution would be cutting government spending. President Obama is doing the opposite.
  • 3. Excess Business Taxes. Eliminating our corporate income tax, the second highest in the world, would jumpstart investment in our economy. We could easily replace it with a Value-Added Tax (VAT). Currently, American exporters not only pay our taxes, but pay foreign taxes at our borders because all of our trading partners have VATs, usually 15% or higher.

Democratic and media propagandists are fond of saying that Republicans are capable only of saying no and have no solution, except for the personal tax cuts that increased consumption, but not business investment, when tried by President Bush. But Republicans could advocate fiscal conservatism, an entirely different policy from the unilateral free trade and unbalanced tax cuts of President Bush and the environmental fanaticism of President Obama.

Our urgent need is for jobs, jobs, jobs. That requires stimulating business investment. That requires balancing trade, cutting spending, lowering business taxes, and ending government abuses of environmental regulation. Electing fiscal conservatives is America's exit strategy from the Great Recession.

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.