- The Washington Times - Tuesday, April 26, 2011


Unimaginable as it seems, the bedrock economic strategies of the Obama administration and the Tea Party Nation share a major blind spot. Both aim to accelerate America’s sluggish recovery while virtually ignoring the towering obstacles erected to real prosperity by U.S. trade and other globalization policies.

My colleague, Kevin L. Kearns, and I explained in the New York Times last year how these policies, and the import bloat they’ve fostered, were inevitably sandbagging the president’s stimulus program and would have undercut even less-wasteful versions. As of last spring, fully 85 percent of the spending power created by the stimulus was offset by U.S. trade deficits run up since its enactment.

Lacking provisions to keep new spending at home, the stimulus bill also squandered a vital opportunity to keep at home most of the new production and hiring needed to supply this new demand. Worse, the benefits that leaked overseas mainly came from domestic manufacturing, whose prowess at creating real wealth is vital for weaning the economy from its dangerous addiction to debt.

One year later, 137 percent of disbursed Obama stimulus funds had been offset by trade deficits, and Washington’s other, multitrillion-dollar economic props are underperforming for similar reasons. No wonder growth has been so feeble. And since trade deficits must be financed by more borrowing, they keep boosting the national debt independent of Washington’s budget mess.

Ironically, the basic tea party, and broader Republican, recipe for growth - slash taxes and regulations and stand back - is already foundering for similar reasons. As widely noted, skyrocketing prices for (massively imported) oil have soaked up much of the wealth liberated by the extended George W. Bush tax cuts, reducing other consumer purchases and general economic activity.

But Tea Party Nation still needs to learn from the stimulus bill’s trade-related failures: As long as Americans’ imports greatly cut into their purchases of U.S.-made goods and services, precious domestic growth and job creation opportunities will be lost. Without severe austerity, therefore, the debt will keep mounting.

Recent history also exposes tax-cutting in particular as an inadequate growth panacea absent trade-policy overhaul. After all, the Bush-era tax cuts were in place for most of the Bush era. Look at their apparent effects on productive investment.

During the 1990s expansion, before the cuts, productive investment grew by nearly 118 percent in pre-inflation dollars, or an average of 2.95 percent annually. Granted, too much capital was thrown at any project with a .com suffix. But at least the idea was to strengthen America’s technology base and growth potential. During the shorter, post-tax-cut expansion, such productive investment expanded by just more than 38 percent, an annual average of only 1.52 percent before inflation.

Glaring domestic policy failures, of course, caused too much of the tax windfall to flow into personal consumption and housing speculation. But productive investment didn’t just slow. As documented (albeit incompletely) by sadly neglected government data, much moved abroad, with jobs naturally following. And such shifts flowed logically from 1990s-era trade policies that were unmistakably designed to empower business to replace U.S.-based facilities and workers with overseas counterparts.

Some offshoring obviously has responded to genuine domestic shortcomings that can and must be remedied and to market-grounded foreign-growth opportunities. But much has been lured by pervasive market-rigging by foreign governments through import barriers, export subsidies and currency manipulation.

Indifferent or ineffective U.S. responses have helped supercharge the profits of multinational corporations, which are well positioned to exploit such irresistible regulatory and policy arbitrage opportunities and have lobbied hard to create and preserve them. But the rest of the economy was left too dependent on dangerous Ponzi schemes.

Are tax and spending changes pointless? Of course not. But in the increasingly “open borders” economy created by U.S. globalization policies, they’re not nearly enough to restore national economic health. As a result, keeping recovery monies at home whatever their source also looks like a key to political victory in 2012.

c Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website www.AmericanEconomicAlert.org.

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