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How to achieve Economic Recovery and Full Employment --Balance the Budget and Balance Trade
Raymond Richman, 4/24/2011

Princeton Professor Alan S. Blinder in an opinion piece in the Wall St. Journal on April 10, 2011 excoriates Rep. Paul Ryan’s plan for reducing the federal budget deficit as just about the worst conceivable, far inferior to the Bowles-Simpson and the earlier Domenici-Rivlin budget cuts proposal. Republican Sen. Paul Ryan’s  plan would reduce the deficit by $4.4 trillion over ten years by repealing Obamacare, substituting private health plans and making block grants to the states for Medicaid. It also imposes hard spending caps on domestic spending.  What is Prof. Blinder’s principle complaint?  It is regressive, it is “reverse Robin Hood redistribution.”  He ignores the fact that the bulk of government expenditures disproportionately “benefits” lower-income families, from public schools, parks and libraries to entitlements like medicare. Too bad he did not analyze similarly Pres. Obama’s economic stimulus plan.  He would find that Pres. Obama had sold out the American worker in the name of climate change.

If Prof. Blinder were to do that, he would discover real regressivity. About a third of the nearly $800 billion stimulus plan simply kept teachers and other state and municipal employees in their jobs. These are by no means an underpaid group. Teachers get superior annual salaries for working less than ten months a year. That apparently is what Prof. Blinder meant when he said the Recovery Act prevented a depression.  It obviously did not increase employment in the private sector.

And talk about regressive, about a third of the Recovery Act’s billions went to uneconomic wind and solar plants that in addition to the direct subsidies for their construction are subsidized by the higher prices guaranteed them for the electricity they produce  – double or triple the cost of electricity produced by natural gas, coal, or nuclear energy. Worse, these plants hire very few permanent workers. As we reported previously, a $220 million wind or solar plant creates only about 40 permanent jobs. WOW! Each sustainable job created required $55 million of expenditure per job. Not only a really regressive expenditure but one quite likely to usher in another depression when manufacturers flee abroad as a result of rising energy prices.

Another stimulus program is the subsidies to manufacturers and buyers of hybrid electric and gasoline powered autos.  Buyers were given a $3400 tax credit, equivalent to an exemption of at least $10,000 of income from income tax. Did any low income families buy these cars? And billions were spent in grants and guaranteed loans to manufacturers of hybrid autos, electric cars and batteries.  Regressive? You bet.

 All of the debt cutting plans ignore all the failed programs in the non-entitlement part of the budget, particularly expenditures of the Department of Education, $107 billions; the Department of Housing and Urban Development, $62 billion; and on the War on Drugs which not only costs $30-40 billion per year but results in thousands of Americans and foreigners losing their lives in the war against the drug cartels.  Our attempt, at UN urging, to terminate the growth of poppies in Afghanistan turned a quick and easy victory in 2001 when we were welcomed as liberators into a new war with the Taliban who promised the farmers they could grow as many poppies as they wished. Our actions turned victory into a likely defeat. The Taliban’s recovery as a fighting forces  was financed by drug dealers. Legalizing narcotics and taxing them like alcohol and tobacco would help a lot in reducing the deficit and would be progressive. The Hollywood types who consume them –like Charlies Sheen – aren’t poor.

 Since the federal government began to spend money on education, the schools have deteriorated and become more costly. Even higher education is a scandal. A recent study showed no educational achievement on the average during the first two years of college.  Interspersed among the other departments of government are the hundreds of billions wasted on mythical man-made global warming projects. According to the American Assn for the Advancement of Science, the government is spending in fiscal 2011nearly $2.5 billion in seven agencies, NOAA, NSF, NASA, DOE, DOI, EPA, and USDA, for research in climate change. What are we getting? Additional expensive ways of producing energy. For all practical purposes, there is no American research on the causes of climate change. Man-made global warming has become a religion. Dozens of physicists disagree but they cannot get federal funding to do research.  An experiment has just been concluded at CERN, the European Union’s nuclear research facility. The findings have not yet been published but they are expected to show that the sun’s emissions and their effects on cloud cover are responsible for nearly all climate change. This kind of research cannot be done in the U.S.

 But this research expenditure is a trifle compared to the “regressive” effect of the enormous expenditures on “unsustainable” alternative energy.  Spain and the European Union are near collapse.  What is happening to Greece, Spain, and Portugal will soon happen to us. The only thing that is saving us from their fate is the fact that we can print dollars which are still accepted as the world’s standard currency. And if the flow of dollars abroad as a result of the trade deficits, including the trade deficit in crude oil, is not reversed, and if we fail to bring our federal budget into balance, we face the calamity of hyperinflation and depression a la Germany post WWI.

The essence of the Bowles-Simpson proposal, which appears politically easiest to implement, is an increase in the Social Security retirement age to 69, elimination of the mortgage interest deduction under the income tax, cutting the top income tax rate, increasing the gas tax by 15 cents to pay for road projects, a three-year freeze on federal pay, and a 10 percent cut in the federal workforce. Regressive? You bet.  The Domenici- Rivlin recommendations call for a mix of increased taxes and reduced spending over the next several years, including a Social Security payroll tax. Regressive, Prof. Blinder? You bet. These would reduce the budget deficit by $5.9 trillion over the next nine years. The plan would stabilize the national debt within three years at about 70 percent of annual GDP. They proposed a new 6.5 percent national sales tax, a revamping of Medicare in 2018, and sizable benefits cuts and tax increases for Social Security.  Regressive? You bet.

We believe that none of the foregoing proposals will cause the economy to recover nor reduce unemployment.  They all ignore the chronic trade deficits that are de-industrializing the U.S.  None of them will stimulate private investment. Why would any corporation want to invest in the U.S. when costs are lower abroad and they can market their products in the U.S. with no tariffs at all. We are in effect paying them to create jobs abroad. Our leading corporations are hiring , but abroad not here!

 Pres. Obama’s and the Democrats’ environmental crusade that bars the exploration and development of our plentiful oil and natural gas resources on public lands;  offshore in the Atlantic, Pacific, and Gulf of Mexico; and the EPA’s harassment of oil and gas producers are guaranteed to keep weakening the dollar and cause hyperinflation and depression. (The City of Pittsburgh’s city council, all Democrats, by unanimous vote has even gone so far as to ban the deep drilling for gas in shale deposits within the city limits. (The city is only a billion dollars in debt and making no progress in reducing it. It is currently under state “receivership”.)

There is no way that the U.S. economy will recover without private investment growth. About the only growth that is occurring is in the economically disastrous alternative energy production, disastrous because it will raise the cost of energy and make manufacturing less profitable and encourage increased imports causing more unemployment.  

We have proposed a “single counry scaled tariff” to balance our trade with countries like China, Japan, and Germany. It would raise the prices of imported goods and the tariff rates would diminish as trade between those countries and us gets more in balance. In the meantime, the revenues from the tariff would immediately reduce the budget deficits. The tariffs in our view are legal under current international trade rules. Why haven’t we done it? Because of another foolish religion economists other than ourselves have forced on us – free trade.  There is nothing in economics that makes free trade a sound policy unless all countries observe our constitutional provision that U.S. states may not impose barriers to the free movement of people, goods, and capital. Until that is the world’s policy, there is no case that economists can make for “free trade”. The object of trade is for each party to exchange a bundle of goods it can produce for a preferred bundle of goods of equal market value made by the other. Continuation of our chronic trade deficits is a guarantee of the collapse of the dollar and depression.

With balanced trade combined with the Paul Ryan budget plan, or the Bowles-Simpson plan, or the Domenici-Rivlin plan, the U.S. economy can recover and achieve full employment.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]