February 3, 2011
Obama Picks a Progressive Lawyer for Top Economist
On January 11, President Obama chose Gene Sperling to replace Lawrence Summers as his director of the National Economic Council. Sperling's educational background is in law with a degree from Yale. He owes his reputation as an economic policy expert to the fact that he served on President Clinton's National Economic Council and chaired the Council during Clinton's second term. We decided to read his 2005 book, The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity (NY: Simon & Schuster, 2005), to learn more about him. The book is very revealing of Sperling's thought processes, qualities, and defects.
As the title of his book indicates, Sperling would like to be known as a pro-growth progressive. He believes that the left should favor economic growth rather than simply concentrate on achieving additional benefits for the lower economic classes and disadvantaged. He apparently does not follow through on whether, in fact, the lower economic classes and disadvantaged have benefited from the earlier policies that he advocated. Take his trade policies, for example.
During Clinton's second term, Sperling, Robert Cassidy, and others negotiated China's accession to the World Trade Organization. Cassidy later regretted the result, but Sperling did not. In the June 2008 issue of Foreign Policy in Focus ("The Failed Expectations of U.S. Trade Policy"), Cassidy wrote:
As the principal negotiator for the landmark market access agreement that led to China's accession to the World Trade Organization (WTO), I have reflected on whether the agreements we negotiated really lived up to our expectations. A sober reflection has led me to conclude that those trade agreements did not. ...[I]t is doubtful that the U.S. economy or its workers are better off. U.S. manufacturing jobs declined by more than 2.5 million since China joined the WTO in 2001. While services jobs increased during this period, with the exception of telecommunications, non-tradable jobs accounted for the most significant portion of that increase. Wages have been stagnant and real disposable income for three-quarters of U.S. households has been stable or declining. Only the top quartile of families has seen significant increases in real disposable income.
In his 2005 book, Sperling tried to justify imbalanced free trade agreements by arguing that there were only two choices: free trade and protectionism. But there is a third alternative: balanced trade, as incorporated into Warren Buffett's 2003 tradable Import Certificates Plan and our 2011 WTO-authorized Scaled Tariff plan. While protectionist proposals result in reduced exports, balanced trade proposals result in increased exports by making exports a requirement for imports. Balanced trade gives us more income, industry, business investment, and economic growth, while imbalanced trade sends our industries, our income, and our economic growth abroad.
Sperling's solution to the job losses caused by our chronic trade deficits is to retrain workers for nonexistent jobs. But if trade were balanced, there would be no job losses. Those jobs lost to imports would be replaced by even better jobs producing exports. The balanced trade solution is obvious. But to Sperling, doing anything that makes imports more expensive for poor people is not "progressive."
Sperling's Fingerprints on the U.S.-China Summit
We see Sperling's fingerprints in President Obama's actions at the Jan. 18-21 U.S.-China summit. In his post-summit commentary, U. of Maryland economist Peter Morici pointed out that President Obama facilitated a meeting between US exporters and firms operating in China with President Hu, while those US firms competing with imports from China got stiffed.
After that meeting, President Obama said:
The positive, constructive, cooperative U.S.-China relationship is good for the United States. We just had a very good meeting with the business leaders from both our countries. They pointed out that China is one of the top markets for American exports. We're now exporting more than $100 billion a year in goods and services to China, which supports more than half a million American jobs. In fact, our exports to China are growing nearly twice as fast as our exports to the rest of the world, making it a key part of my goal of doubling American exports and keeping America competitive in the 21st century.
What nonsense! As shown in the graph below, our merchandise trade deficit with China (imports minus exports) has worsened continuously ever since Obama assumed the presidency:
Sperling and Obama are eliminating imports from the basic equation of economics. Although exports to China did increase both American GDP and American income, imports from China subtracted even more from both GDP and income. The basic economic equation reads:
GDP = Consumption + Investment + Government Purchases + Exports - Imports
Moreover, if we limited imports through a balancing trade measure, we would also increase exports and business investments in American production. A tariff whose regularly updated duty rate is scaled to the size of our trade deficit with China would force China to take down its many tariff and non-tariff barriers to American products so that it could lower our tariff rate on its own products.
WTO rules specifically let trade deficit countries apply a scaled tariff to balance trade. But Sperling and Obama won't insist on balanced trade, perhaps because doing so would not be "progressive."
We may be giving the reader the impression that Sperling's book is about globalization. In fact, most of the book is devoted to domestic policies.
- "Those who create great wealth do so on the backs and shoulders of previous generations of taxpayers[.]"
- "The notion that 'you earned it' is more correctly, 'you earned it with the indispensable help of the government.'"
The first sentence is a "progressive" myth. As for the "indispensable help of the government," government has no role except providing necessary infrastructure and providing a trustworthy system of law and patents. Its interference in the operation of the free market has often had disastrous results. The current "Great Recession" was caused by government housing policies and unsolicited foreign government loans. Sperling has accepted without question what is simply socialist propaganda.
He writes, "Of course, there are goals -- banning child labor in our factories; preventing racial, religious, and gender discrimination in the workforce -- that require direct intervention in the market regardless of their efficiency or economic impact." Really, "regardless"? What happened to benefit-cost analysis? What happened to consideration of lower-cost alternative solutions? Sperling makes no acknowledgment of the abuses of affirmative action.
He proposes a new role for colleges. "We will need to increase the pool of highly skilled workers or face a growing labor shortage." Even in 2005, when the book was published, we faced no growing labor shortage. As a result of the government-caused recession, we have a excess of unemployed skilled workers.
Sperling is concerned about the shortage of Latino students qualified for college. Dealing with the problem led him to make his first policy proposal in 1987 -- the creation of "an Urban Excellence Corps." Colleges would adopt poor students in sixth grade and then mentor them with the assurance that the students would receive college aid if they made it all the way through high school. When Sperling became NEC director, he got it included as a $295-million initiative serving 1.3 million children. That created a great bureaucracy at great expense, but if it had any significant benefits at all, it has been a well-kept secret.
Another proposal was to provide universal preschool for all disadvantaged kids. Sperling writes, "The progressive case for investing in education in the first five years has always been compelling, but the pro-growth imperative of this investment gets stronger every day." But just the opposite is true. Almost every study has shown that preschools produce no lasting gains in either IQ or achievement.
Sperling writes, "We cannot afford to give up on young Hispanic and African Americans." A question not raised is this: why is this a federal responsibility? Why are those communities not more responsible for their own progeny?
We believe that nearly all of Sperling's social amelioration proposals would fail benefit-cost analysis. Just as he misses the economics of unbalanced trade, nearly everything he proposes is bad economics.
Sperling is a great believer in tax breaks for people who pay no taxes. For example, he proposes a "flat tax incentive" to encourage savings so that "when a CEO and the person who cleans her office each put away an additional dollar, they both get the same tax incentive." The difference, of course, is that the CEO simply gets to postpone his or her own tax payments, while the "flat tax incentive" would give the cleaning person a gift from the government.
During his last days at the U.S. Treasury Department before becoming national economic director, Sperling helped negotiate a progressive tax provision as part of the Bush tax cut extension. That provision reduces worker contributions to Social Security from 6.2% of wages to 4.2%, even though Social Security is heading toward insolvency.
We are a nation blessed by God with almost unlimited resources and a Constitution that encourages and protects the right to innovate. If we pay for Social Security out of the general budget because it is "progressive," if we let China manipulate our trade, because cheap imports from China are "progressive," then we condemn ourselves to a future of unstoppable budget and trade deficits. On the other hand, if we balance budgets and trade, our economic future is unstoppable.
When the book about President Obama's presidency is written, it will be noted that he did not have the discernment to distinguish competent from incompetent advisors. The director of the National Economic Council does not have to be an economist, but he or she should not have such glaring gaps in economic understanding.
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.