Obama Did Create 3 Million Jobs -- in China

President Obama should be saying, "My economic stimulus plan has preserved or created three million jobs -- in China." He keeps leaving out the words "in China." His plan is stimulating American demand for imports, not demand for American products.

The latest unemployment report (9.6% in August) shows that the U.S. economy is stagnating, not recovering. Unemployment has stayed in the 9.5% to 10.2% range for the past thirteen months, as shown in the graph below:

Among the unemployed are many of the two million manufacturing workers who have lost their jobs since January 2008. U.S. manufacturing employment is stagnating at a low level and appears to be turning downward again, as shown in the graph below:

The latest GDP report, released September 4, reveals the cause of the stagnation. Our growing imports turned what would have been 4.7% GDP growth in demand for American products during the second quarter into anemic 1.6% growth. The Bureau of Economic Analysis (BEA), source of the GDP numbers, makes no bones about the cause of the slowed growth. It leads its discussion of the latest numbers with these words: "The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports ... "

GDP, the demand for products produced in America, is calculated using the following formula:

GDP = C + I + G + (X-M)

which sums demand for goods and services by consumers (C), business investment (I), and the government (G). But it has to be adjusted by subtracting that demand which goes to buy foreign products (i.e., iMports) and adding in demand by foreigners for American products (i.e., eXports), because if Americans are buying goods produced abroad, they are not demanding American products..

If boosting economic growth and diminishing unemployment were the top priority for the Obama administration and the Federal Reserve, they would be focusing their attention on bringing trade into balance. Instead, they ignore the trade deficits. For example, talking to reporters after the latest GDP data was released, Federal Reserve Chairman Ben Bernanke admitted the economic recovery had weakened more than expected and said that the Fed stands ready to act if needed to spur slowing growth. But he did not even mention the trade deficits.

Bernanke downplayed concerns that the economy might slip back into recession, predicting a modest expansion in the second half of this year, with the pace picking up in 2011. That is possible if private business investment were to escalate. The Obama administration is pinning its hopes on tax subsidies to businesses who engage in research and development. They hope to pay for those subsidies by closing income tax loopholes for American corporations that make income abroad.

But investment subsidies work only when there are investment opportunities. And with demand for American products growing at an anemic 1.6% pace, and with the mercantilist governments, including China's, actively keeping out U.S. products, there are few investment opportunities.

Furthermore, the corporate tax loopholes that Obama wants to close to raise revenue exist for a very good reason. The U.S. corporate income tax is the second-highest in the world. If corporations were forced to pay our high corporate income tax on money earned abroad, many would move their headquarters to lower tax countries. We would hemorrhage good-paying management jobs on top of our good-paying manufacturing jobs.

So why is the Obama administration so reluctant to take on the mercantilists, the countries that purposely manipulate currency values and trade in order to run trade surpluses with the United States? The September 20 issue of The Nation has an interesting article by Robert Dreyfus ("China in the Driver's Seat") which illuminates thinking within the American "progressive" community.

On the one side are those who favor dealing forcefully with China (the United Steel Workers, the AFL-CIO, and the Economic Policy Institute). Their analysis of the current situation coincides with our own. Dreyfus writes,

In this narrative, China exploits the willingness of multinationals to set up unregulated factories along its industrial southern coast, meanwhile blackmailing those firms to share trade secrets and technology with China as the price of admittance.

However, Dreyfus also discusses the many trade-deficit doves within the progressive community. One of the best known is Andy Stern, former President of the Service Employees International Union (SEIU), the union that funded and shared office space with ACORN.

According to Wikipedia, Stern makes frequent visits to the Obama White House. According to Dreyfus, he also makes frequent trips to China to visit with China's Communist-controlled All-China Federation of Trade Unions (ACFTU). Stern justifies his trips to China with the claim that he is helping push the ACFTU in a positive direction. Dreyfus writes,

"I get in trouble on Glenn Beck saying, 'Workers of the world unite!' It's not just a slogan," Stern says. It's critical, he adds, for US and Chinese workers to see each other as allies, and he argues that efforts such as his can help shift the ACFTU in a direction that will make it much more representative of its hundreds of millions of members.

Moreover, many progressives are pleased that China has been able to pull so many poor people out of poverty, even though some of that economic growth occurs by manipulating currency values and trade in order to steal our manufacturing industries and technology. Doug Henwood accuses those who don't want to deal with China of racism. Dreyfus writes,

"There is this longstanding Yellow Peril discourse in the United States, and a lot of this stuff fits into it comfortably," says Doug Henwood, editor and publisher of the Left Business Observer.

Such thinking may explain President Obama's acquiescence to mercantilism, even though doing so condemns the United States to economic stagnation and forces U.S. manufacturing workers out of good-paying jobs and into unemployment or low-paying jobs.

The Scaled Tariff that we have proposed would end mercantilism, jumpstart our economy, and preserve our blue-collar middle class. To be most effective, it should be combined with deregulation of the American economy and with the replacement of our corporate income tax with a consumption tax.

Many progressives would condemn such action. Andy Stern would likely argue that doing so would make it harder for the workers of the world to unite. Doug Henwood would likely argue that doing so would be racist. Although such action would reduce unemployment, increase American incomes, and jump-start American manufacturing investment, it might not be the "progressive" thing to do.

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.
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