Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Real Policies for a Sustained Economic Recovery
Raymond Richman, 7/17/2010

For reasons that we have mentioned many times in this space, we believe the Obama administration’s policies to recover from this depression (technically, a recession) have been practically worthless, notwithstanding their enormous cost. The administration’s economists, who should know better, have endorsed the economic stimulus plan notwithstanding the fact that it throws money at a variety of programs that provide no sustainable stimulus to the private sector. Oh, the rebates, the klunkers’ program, subsidies for energy spending give temporary stimuli but nothing sustainable. To achieve sustainable economic growth, investment in manufacturing and industry is required. Stimuli to alternative sources of energy, principally wind, solar, and biochemical will not produce sustainable growth until we begin to run out of petroleum and natural gas which is likely to be delayed three to six decades.

All the while, there were cost-free and revenue-producing measures that could have been taken to stimulate private investment. In a posting on this site on June 28, 2010 entitled “ Bush and Obama's Economic Stimulus Attempts”, we criticized the administration’s policies as well as  Republican proposals and promised to put forth our own proposals for a speedy recovery. Our first proposal is to end our foreign trade deficits which have caused the closing of thousands of American factories and the loss of millions of good-paying industrial jobs.  We need to stop the outsourcing of the production of goods that Americans consume and produce the products of American ingenuity here.

 Bringing trade into balance will not cost a trillion dollars like Obama’s failed economic stimulus program but will in fact increase government revenues by many billions of dollars. We need to begin immediately the process of getting our millions of unemployed quickly back to work in good jobs and we can do so by imposing a tariff on imports from those countries that have been abusing our open markets by artificially imposing barriers to imports from the U.S. They are easily identified by the fact that the U.S. has been experiencing chronic trade deficits year after year with them. China, Japan, and Germany are among them.

We are not proposing tariffs on selected products as the Smoot-Hawley Tariff that took effect in 1932 did. The tariff we recommend is a single rate applicable to all imports from the targeted country. The tariff rate would depend on the size of our trade deficit with that country.  Moreover, all a country would have to do to get the tariff reduced or eliminated is to increase their imports from us, something they could easily do simply by removing their artificial barriers on imports from us.

Those barriers and the ensuing U.S. trade deficits were responsible over the past two decades for the loss of millions of good U.S. manufacturing and industrial jobs, the wage stagnation in the U.S., and the worsening distribution of income observed in the U.S. during the past two decades.

The tariffs would tend to raise the prices of goods coming from those countries and reduce our imports from them. Americans would shift their buying to countries with which the U.S. does not have trade deficits and to goods manufactured in the U.S. We argued that by bringing trade into balance, we would give incentives to manufacturers, American and foreign, to invest in new factories in the U.S.

Under the rules of the World Trade Organization, countries experiencing chronic trade deficits with any of its trading partners are legally entitled to impose tariffs on the imports from those countries until trade was brought into reasonable balance. By imposing substantial tariffs on imports from countries like China, Japan, Germany, and OPEC, we would induce those countries to remove their many barriers to our exports to them. We would first warn them that our trade goal is balanced trade. If they continued to deny access of American goods to their markets, the tariffs would be increased until trade was brought into reasonable balance.  It would be in their interest as well as ours if they responded by removing barriers to our imports. In a separate posting to be published shortly, we calculated the rates of the tariffs that we recommend levying on the imports from a number of countries.

In 2008 our imports of goods from China amounted to $338.8 billion, from Japan $142.2 billion, and from Germany $98.6 billion and totaled 579.6 billion. Our trade deficits were $267.8 billion, $75.4 billion, and $43.5 billion respectively. As a result of the recession, exports and imports declined but the deficits continue to exist. If we follow the free trade policy of this administration, there is no reason to believe that exports and imports will not return to the 2008 levels. A 10% initial tax would have yielded $58 billion in tariff revenue if the foregoing levels of imports remain unchanged. There will of course be reduced imports from those countries as a result of the tariffs. Whatever the level of our imports after we impose the tariffs, we would collect substantial revenues.

We do not know how our trading partners affected by our policy would react. First, they could retaliate by imposing tariffs on our exports to them.  All that that would do would reduce trade even more and give U.S. manufacturers an even greater incentive to open new factories and expand existing ones. Our importers would be encouraged to switch their buying of those goods to countries like Brazil with which we have a trade surplus. Second, they could threaten to sell their huge stocks of U.S. financial assets. The prices of treasury bonds and corporate shares and bonds would tend to fall causing interest rates to rise. The Federal Reserve System has all the power it needs to deal with that eventuality unlike countries that have fixed exchange rates, e.g., those in the euro zone. And what would they do with their dollars?  Increase their imports from other countries?  The G20 countries in its meeting in Pittsburgh adopted a resolution for its members to strive for a better trade balance. Needless to say, nothing was done to accomplish that desired goal.

How many jobs would balancing trade create? Each $100,000 of additional exports would create on job in industry and manufacturing. Our trade deficit on goods in 2008, a more or less normal year, was over $800 billion, representing the loss of 8 million manufacturing jobs. Were our trade balance to be reduced by $400 billion, it would mean the creation of 4 million jobs!

In forthcoming postings on this site, we shall propose other measures that would stimulate employment in sustainable jobs.  They include: