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Instead of just handing out U.S. government cash borrowed from individuals in foreign industrial nations to the unemployed, maybe the U.S. government could build manufacturing plants to make various consumer products, in sequence, one product at a time, i.e. refrigerators, washing machines, clothing, TV’s, electronics, tires, auto parts, hand tools, power tools, machine tools, appliances, and etc., and impose import taxes to make those imported products as expensive as products made by US workers.

Maybe most all of the consumer goods that we import could eventually be made in the U.S.A. The U.S. government could impose extremely high import taxes that are high enough so that these U.S. made products are always less expensive to the consumer than the same imported product.

These plants should periodically and/or constantly be for sale based upon periodic open public competitive bidding, but at a minimum sale price at least equal to as much as the government investment, and with terms of cash only, without any creative financing. The business management should know about making the products, not creative accounting and/or creative financing.

Yes, the consumer will pay many times the price for the particular U.S. manufactured product than he would pay for an imported product made with foreign labor and foreign environmental manufacturing costs, but maybe this might avert a second bloody American revolution.

The U.S.A. must act now while we can still buy foreign made materials and foreign made equipment for the re-industrialization before title to the remaining privately-owned U.S. assets are exchanged for all of the U.S. dollars and U.S. treasury bonds owned by foreigners.

Gerald R. Spencer, P.E., President
Spencer Engineers, Inc.
Houston, Texas

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Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The country faces a serious crisis in the form of a manufactured crisis over the budget deficit. This is a crisis because concerns over the size of the budget deficit are preventing the government from taking the steps needed to reduce the unemployment rate. This creates the absurd situation where we have millions of people who are unemployed, not because of their own lack of skills or unwillingness to work, but because people like Alan Greenspan and Ben Bernanke mismanaged the economy.

The basic story is very simple and one that we have known since Keynes. We need to create demand in the economy. The problem is that, as a society, we are not spending enough to keep the economy running at capacity. Prior to the collapse of the housing bubble, the economy was driven by booms in both residential and nonresidential construction. It was also driven by a consumption boom that was in turn fueled by the trillions of dollars of ephemeral housing bubble wealth.

With the collapse of the bubbles, both residential and nonresidential construction have collapsed. There is a huge amount of excess supply in both markets, which will leave construction badly depressed for years into the future. Together, we have lost well over $500 billion in annual demand from the construction sector. In addition, the loss of the ephemeral wealth created by the bubble has sent consumption plummeting, leading to the loss of an additional $500 billion a year in annual demand.

The hole from the collapse of construction and the falloff in consumption is more than $1 trillion a year. The government is the only force that can make up this demand. However, this means running large deficits. To boost the economy, the government must spend much more than it taxes.

The stimulus approved by Congress last year was a step in the right direction this way, but it was much too small. After making adjustments for some technical tax fixes and pulling out spending for later years, the stimulus ended up being around $300 billion a year. Even this exaggerates the impact of the government sector, since close to half of the stimulus is being offset by cutbacks and tax increases at the state and local level.

The answer in this situation should be simple: more stimulus. But the deficit hawks have gone on the warpath insisting that we have to start worrying about bringing the deficit down. They have filled the airwaves, print media and cyberspace with solemn pronouncements about how the deficit threatens to impose an ungodly burden on our children.

This is of course complete nonsense. Larger deficits in the current economic environment will only increase output and employment. In other words, larger deficits will put many of our children’s parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing. But the deficit hawks would rather see our children suffer so that we can have smaller deficits.

In spite of the deficit hawks’ whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that, even ten years out on our current course, the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country’s history.

We can also look to Japan, which now has a debt to GDP ratio of more than 180 percent. Investors are not running from Japanese debt. They are willing to hold long-term debt at interest rates close to 1.5 percent. In our own case, the 3.7 percent interest rate on long-term Treasury bonds remains near a historic low.

The story is that we are forcing people to be out of work – unable to properly care for their children – because people like billionaire investment banker Peter Peterson and his followers are able to buy their way into and dominate the public debate. The reality is that we have an unemployment crisis today, not a deficit crisis. The only crisis related to the deficit is that people with vast sums of money (i.e. the people who wrecked the economy) have been able to use that money to make the deficit into a crisis.

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Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Truthout. Mr. Baker, a macroeconomist,  previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a member of Truthout’s Board of Advisers.

Robert Borosage

By Robert L. Borosage
Co-Director Campaign for America’s Future 

China has surpassed Germany as the world’s largest exporter. It is the largest holder of American Treasury bonds, nearly $800 billion. America runs its largest trade deficit by far with China. The low price flood of goods – the Wal-Mart trade – is pervasive. Now the US even runs a growing deficit in advanced technology products.

China flouts the rules and the spirit of the “free trade” global economic order that the US constructed and, under Bill Clinton, invited China to join, granting both permanent normal trading relations and membership in the WTO.

China is a mercantilist nation, largely copying the successful Asian model developed by the Japanese and the Asian tigers. Its communist dictators plan and guide an economy geared to develop through exports. The elements of its model are clear, evident to all who would see, and not often admitted. They include:

An artificially undervalued currency, pegged to the dollar; An industrial policy that targets “pillar industries,” using a broad range of subsidies and protections to capture of world markets; A complicated maze of trade barriers that allows Systematic pressure on foreign multinationals to invest for export in China and to transfer their most advanced production techniques to China; Systematic efforts to pirate technology, trade secrets and copyrighted materials; A system of forced savings that funds investment

In the global economy, China is a rogue nation – with success that breeds envy and imitation. Its system works very well for China, but not for the rest of the world, as respected commentators like Martin Wolf of the Financial Times have pointed out. Fixing Global Finance, 2008 As the IMF warned, the dramatic trade imbalances run by China as a mercantilist nation and the US as the consumer of last resort are destabilizing and unsustainable – and contributed directly to the financial bubble and bust that drove the world into the Great Recession.

This poses a central problem. What do you do when the most successful nation in a trade regime routinely and systematically violates that regime?

You can deny reality. This has been a favored response of the China lobby, arguing that China is really far more open and free market than Japan and other East Asian countries, or trumpeting preposterously that the “World is Flat,” and there are no alternatives to the Washington consensus.

You can argue that the situation is improving. Successive administrations have claimed that the Chinese will inevitably become more democratic and more free as the economy grows, that the Chinese government has agreed to crack down on piracy, to curb its internal systems of bribes and controls, to let its currency adjust, to increase domestic demand and decrease forced savings. But after twenty years, the routine gets a bit tired. .

You can argue that the situation doesn’t matter. This is the favorite trope of the US foreign policy elite.(See most recently, Fareed Zakaria) China and the US have a symbiotic relationship, we’re told. They have to keep the dollar strong and cover our deficits. So we benefit by buying more than we produce and getting a flood of cheap products; they benefit by producing more than they buy.

But this too is hard to swallow after twenty years. The imbalances contributed directly to the financial casino that Wall Street opened — while US workers saw their jobs shipped abroad, their wages fall, and their prospects dim.

The Obama administration, not surprisingly, has tip-toed around this question. Obama led the drive to get the G-20, including China, to set up a process to monitor – and highlight — excessive trade imbalances. Unlike Bush, Obama accepted the decision of the US Trade Commission in cases concerning Chinese dumping or flooding of our markets. But as under Bush, the Obama Treasury Department ducked calling things by their real name, refusing to certify that China was doing what everyone understands it is doing – manipulating its currency to keep it undervalued.

Now, as the world starts to turn its attention to recovery – however prematurely – the question remains. How will the US handle a rogue nation with policies that are destabilizing for the globe, and ruinous for the American middle class?

At the end of the day, the US will have to have an aggressive trade policy to challenge Chinese mercantilism and a smart industrial policy to revive advanced US manufacturing. We know how to do it – to target a key industry with public supported R and D, smart procurement, planning to build supply chains, subsidies for investment here.

The president rightly says that capturing a lead in the new green industrial revolution is a matter of our nation’s basic economic security. Well, consider the way we deal with national security when it comes to the military. There’s no parading about free trade. No conservative blather about small government, or getting government out of the way. Here’s how the Pentagon’s recently published 2010 Quadrennial Defense Review described the Pentagon’s industrial policy:

America’s security and prosperity are increasing linked with the health of our technology and industrial bases. In order to maintain our strategic advantage well into the future, the Department requires a consistent, realistic, and long-term strategy for shaping the structure and capabilities of the defense technology and industrial bases–a strategy that better accounts for the rapid evolution of commercial technology, as well as the unique requirements of ongoing conflicts.

That strategy includes export controls, procurement policy, and “a strategic approach to climate and energy.”

China has made new energy a “pillar industry.” It has deployed the entire range of its mercantilist strategies to make itself the leading manufacturing of solar panels.

If capturing a leading edge of these industries is vital to our nation’s economic security, then shouldn’t we get serious about an industrial policy that goes far beyond the Pentagon?

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Robert Borosage and Campaign for America’s Future Co-Director Roger Hickey are co-editors of the book, The Next Agenda: Blueprint for a New Progressive Movement.

Dean Baker

 

By Dean Baker
Co-Director, Center for Economic and Policy Research

Okay, we all should be glad that Treasury Secretary Henry Paulson seems to have abandoned, or at least sidelined, his TARP program and instead decided to directly inject capital into the banking system. The problem is under-capitalized banks and that is best solved by giving the banks more capital.

But, there is a big issue about the terms under which they were given capital. Secretary Paulson decided that a 5 percent rate of return on preferred share was good enough for the taxpayers. Warren Buffet got a 10 percent return for his investment.

No one would confuse Henry Paulson for Warren Buffet, but come on — he could get a 4.0 percent return buying treasury bonds. I can’t believe that he had such bad business sense when he was CEO of Goldman Sachs.

The markets gave Paulson’s investment strategy a big thumbs down from the taxpayer perspective. Goldman Sachs shares jump 10.7 percent after the details were made public. Shares of Bank of America rose 16.4 percent and Citigroup’s stock rose 18.2 percent. Obviously the market thinks that Paulson gave the banks a really good deal.

It also seems unlikely that the executive compensation restrictions will have much effect. I doubt that we will hear about any top executives getting big pay cuts because of the bailout, but I will be very happy to be proven wrong.

In short, it seems that we have a whole new group of welfare dependents. Forget Reagan’s mythical “welfare queen” who drove a Cadillac. These folks have private jets and homes on the Hamptons. And, they wreck banks and economies for a living.