Obama Fiddles While Economy Falters

The Economic Times of India called the latest U.S. trade data, released August 11, a "grim set of trade figures." In June, the U.S. trade deficit rose by $7.9 billion, or 19 percent, to $49.9 billion. Meanwhile, growth of the U.S. economy was faltering from 3.7% during the first quarter to 2.4% during the second. The two are related. The rising trade deficits have been causing demand to leak abroad out of the American economy, causing growth to slow. The graph below shows the monthly trade deficit since President Obama took office:

Instead of tackling the main problem of the economy and the high unemployment rate of more than 9%, the Obama administration wasted its first year in office pursuing a chimera called National Health Care. They followed that up by wasting six months of additional time and money creating a new giant bureaucracy to regulate the banking industry -- this to prevent a possible collapse of the banking system when we have not even emerged from the current collapse yet.

If, instead, President Obama had balanced trade, the U.S. would have gained enough jobs to produce an additional $49.9 billion worth of goods per month. With each U.S. manufacturing worker producing approximately $10,000 worth of product each month, this production would have employed about 5 million more manufacturing workers, not to mention additional jobs from workers constructing the new factories, and not to mention the jobs providing services to the newly employed manufacturing workers.

Obama's Pathetic Trade Policy

Meanwhile, all of President Obama's trade initiatives have turned out to be nothing more than talk. At the Pittsburgh meeting of the G-20 countries in September 2009, his negotiators got high-sounding words into the final communiqué. The largest economies of the world agreed to urge "adequate and balanced global demand," meaning that the trade surplus countries would stimulate their demand for the trade deficit counties' products. But that never happened. Germany, China, and Japan agreed to the communiqué but then proceeded to ignore it.

Then, in March 2010, President Obama announced the National Export Initiative with the goal of doubling export production over the next five years. He even announced an Export Promotion Cabinet to oversee the program. But the rate of growth in U.S. exports since then ($149.8 billion in March to $150.5 billion in June) would double exports in 44 years, not five.

Obama is so committed to one-sided free trade that he lets our trading partners ignore the International Monetary Fund Agreement (Article IV), which requires that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members." Obama lets our trading partners maintain high tariffs on our goods in accordance with WTO rules while ignoring the WTO rule which lets trade deficit countries, such as the United States, place tariffs to correct the trade imbalances.

In the meantime, at President Obama's urging, the Democratic Congress has been passing one new stimulus plan after another -- unpaid-for unemployment compensation, unpaid-for aid to the states, etc., etc. -- all in the vain hope that pumping up the economic tire without patching the trade deficit leak will eventually start to work. During the second quarter of 2010, according to preliminary data, American demand for foreign products rose at a 2.7% clip, but demand for American products rose at only a 1.4% clip. We are stimulating global demand more effectively than we are domestic demand.

Academia Stuck in the Ivory Tower

And there is little help available from the economics departments at our major universities. Our economics profession has been pursuing pretend free trade and must be held accountable for the millions of jobs lost as a result of our chronic trade deficits. Although balanced trade is beneficial to all participants, imbalanced trade is not. How long must the U.S. endure such foolishness from its elected leaders and their academic sycophants?

Economists are right, of course, that if all countries employed a policy of free trade, had balanced fiscal budgets, and allowed the free movement of labor and capital, balanced trade that benefits all parties would often result. But those conditions do not exist -- not in Europe, not in the oil-producing countries, not in China and Japan...for all practical purposes, not anywhere. The effect of the U.S. pursuing a preponderantly barrier-free economy has been chronic deficits with China, Japan, Germany, and a number of other countries.

All of the professors of the chief author of this commentary at the University of Chicago were free traders. They answered all those who raised objections to free trade with the answer, "If countries want to sell us goods for our dirty paper, why should we object?" Like most evasive answers to serious questions, this answer ignores the real costs to the U.S. of its trade deficits -- namely wage stagnation as workers lose productive manufacturing jobs and take less productive jobs in other sectors, the loss of U.S. industries and income, the loss of U.S. R&D which follows our industries abroad, the growing debt when we borrow to buy imports, and the decline of U.S. economic and political power.

Congress Swallows Progressive Propaganda

And there is little help on the horizon from Congress. Most have swallowed the progressive line that the Smoot-Hawley tariff deepened the Great Depression in the United States, even though economic historians know this to be untrue. They have a knee-jerk reaction against tariffs, even though tariffs were our federal government's primary source of revenue from our country's founding until progressives, under Woodrow Wilson, instituted the progressive income tax in 1913.

Instead of increasing our tariffs in response to our declining manufacturing sector, Congress's response has been to reduce them. On August 11, President Obama signed the United.States Manufacturing Enhancement Act of 2010, which reduces duties paid by U.S. manufacturers on inputs into final products that are sold in the United States. Not exported final products! Just domestically sold final products! Tariffs on inputs to exports are already rebatable under current law.

In the House, Democrats voted 245 to 1 in favor while Republicans voted 129 to 42 in favor. To their credit, the Republican leadership opposed the bill because eliminating tariff revenue will expand the already-sky-high U.S. government budget deficits. The bill should have been opposed also because it encourages importing goods instead of producing them at home or finding domestic substitutes.

House Democrats plan other measures to enhance U.S. manufacturing. If this bill is any indication, the other measures will also bust the budget while creating very few jobs. But the scaled tariff that we propose would create millions of manufacturing jobs while reducing the federal budget deficit, expanding our exports, and reducing our imports.

We are not the only ones who have recommended that Congress adopt balanced trade as American policy. Many businessmen have made the same recommendation, including Warren BuffettRalph Gomory, Lee Iacocca, Tallahassee businessman Devoe L. Moore, Milwaukee businessman John Torinus, Buffalo businessman Jack Davis, and Texas businessman Dick Alexander.

We can't afford to keep stimulating the economy without fixing the trade deficit. We keep borrowing from our children's future, with little effect upon unemployment. If we were to pass the scaled tariff, we could begin paying off our national debt while at the same time putting our jobless to work.

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.