In its Room for Debate feature on Sunday, the New York Times ran a discussion of whether Apple and other manufacturers could and should produce more in the United States. As one of the featured discussants, I argued the case for.
Specifically, I noted that things like iPhones that we think are made in China actually aren't. They may be assembled in China but the bulk of the value in the products is in their high tech components (digital signal processors, memory chips, displays,etc.) which are mostly made in Japan, South Korea, Taiwan, Singapore, and Germany. While the assembly of the products is labor intensive and thus particularly suited for a country like China with a lot of inexpensive labor, the production of the technologically advanced components is not. It is capital and technology intensive which is precisely the kind of production America is supposed to be good at. Think "Intel inside." The countries noted above are not low wage payers. Indeed, some of them are among the highest wage payers and Germany is a welfare state that some Americans describe as socialist. Moreover, production of the high-tech components stimulates R&D, acquisition of high-tech education and skills, and innovation -- all things that economists and business and political leaders say are the keys to America's future. Thus it seemed obvious to me that America can and should make every effort to get more of this kind of production done in the United States.
The debate gave rise to a number of counter arguments and questions some of which deserve a general response.
One argument made by M.I.T. professor Yasheng Huang was that what worked with Japan in the 1980s won't work with China. What Professor Huang meant was that the threats to limit access to the U.S. market or to impose penalties for "unfair" trading that led the Japanese auto and electronics makers to invest in U.S. factories won't work in the same way with China. While I largely agree with this because, unlike Japan in 1980, China today is not a client state of the United States, I suspect that the argument is not entirely correct. Because of national security concerns, companies like Huawei (big telecommunications producer) have been unable to establish a real beachhead in the U.S. market on the basis of China based production. It may be that their only real hope of getting into the market is by, in fact, doing most of the production in America.
George Mason University economics professor Donald Boudreaux says it's best to apply only broad policies like reductions of marginal tax rates and regulations while relying on free markets to determine which jobs are best done by Americans. He may be right in some ideal universe, but we don't live in such a place. Let me give you just one example. Intel makes about 85 percent of the semiconductor micro-processors used to power personal computers. It makes most of those chips in America. By all economic indications, America has a so called "comparative advantage" in the production of those micro-processors. Yet Intel has just opened a plant in China. The operating cost of production will not be less in China nor will the quality or productivity be better in China. There was no market reason for putting the production and the high-paying, high-tech jobs attached to it in China. Indeed, the market decision would have been to put the fabrication facility in America. But China did two policy things to get the plant. Its top officials constantly made it clear to Intel that it would be better for Intel if it put a real production facility in China, and it offered special tax abatements and other financial subsidies that amounted to more than $1 billion to sweeten the pot. That's how the real world in which we live works to determine where the good jobs go.
One commenter said America's strength is innovation and the quality improvement and low cost production should be left to China. But innovation is iterative rather than linear. Much innovation comes from interaction between R&D and the production floor, and, of course, companies don't typically invest in a lot of critical human-skill development necessary for innovation unless they are also doing the manufacturing.
Another commenter said that America must put renewed emphasis on education in scientific and critical thinking. Amen to that, but again, without doing the actual production of technological things, it is unlikely that this kind of education will be increased or improved.
Finally, one commenter asked specifically what I would propose to do while another noted that the United States no longer has the industrial infrastructure and skill base for a lot of the subject production. Let me take a crack at both these issues. I'd look at what other countries including our own have done and are doing. Professor Huang may be largely correct that we can't exert pressure on China as we did on Japan in persuading it and its companies to move auto and electronics production to America. But South Korea, Taiwan, Japan, and other Pacific and Asian nations remain our client states. We are now in the course of negotiating a so called Trans Pacific Partnership (TPP) free trade agreement for purposes of demonstrating our "commitment" to the security and prosperity of a number of these countries and we have just concluded a free trade agreement with Korea. The deal with Korea has already led to a substantial increase in the U.S. trade deficit with Korea and the TPP will surely do the same in the case of several other Asian countries.
It is true that the United States has suffered a decline of skills and industrial infrastructure. But let's look at China. U.S. infrastructure is overall better in high-tech than China's, and Intel just put a major plant there. Indeed, China wanted Intel because it knew that the coming of Intel would help build the infrastructure. South Korea's Samsung is a major semiconductor maker and is the leader in several important categories. America is still a major semiconductor manufacturer and Samsung could certainly produce competitively in the United States. By doing so it would help rebuild and enhance the U.S. industrial and high tech infra-structure. Samsung and Korea owe the United States big time and depend on America for a lot of things. The U.S. Ambassador to Korea and top U.S. officials from the President on down should be all over the Koreans, incessantly reminding them of how nice it would be to see some reciprocity. No South Korean official should ever leave the White House without being told how important it is for Koreans to invest and produce more in America. The same holds for other key economies like Germany, Japan, Taiwan, and France.
I'd look at what the Chinese, Singaporeans, Israelis, French, Irish, and others do to entice investment with tax holidays, free land, capital grants, and breaks on utility costs. The Singaporeans are the world champs at this. I'd copy their Economic Development Board and put together a modest fund for the U.S. clone to use in conjunction with the funding already available in the economic development agencies of each state to match the packages of the other players.
I wouldn't constantly talk about other countries being unfair and cheating with their currency manipulation. A substantial number of countries are engaging in this practice and it is very much distorting trade and investment flows. I'd call a meeting under the auspices of the International Monetary Fund (IMF) and World Trade Organization (WTO) to attempt to negotiate a new set of global currency valuations while at the same time making clear that if such a thing cannot be done, the United States will have no choice but to take counter measures such as intervening itself in global currency markets to offset manipulation or imposing certain kinds of capital controls and even tariffs under emergency provisions of the WTO.
Finally, let me explain that in the early 1980s, as counselor to the secretary of commerce, I was personally called on by top Apple executives to help the company with its problems in Japan. I helped. I was therefore disappointed to read the recent statement by a current top Apple executive in the New York Times saying that Apple doesn't "have an obligation to solve America’s problems." Apple and other U.S. companies need Uncle Sam in a lot of ways they may not always themselves recognize (such as to help protect intellectual property). If I were president or a top U.S. official I would never let them forget it. I would be calling them all the time, asking about their strategy and plans and what they might need to do it in America, and, of course, I'd remind them from time to time of what I was doing for them in a myriad of ways.
Finally, I'd be promoting public-private partnerships as we did in the case of SEMATECH during the Reagan administration. At that time, the U.S. semiconductor industry was taking a bad beating from the Japanese. SEMATECH was created as a 50/50 partnership between the U.S. government and the semiconductor industry to promote revitalization of the critical U.S. semiconductor equipment development and manufacturing capability. It worked. Yes, this was the conservative Republican Reagan administration.
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Most leading economists argue that the U.S. economy is suffering from weakness of demand. This has long been Paul Krugman's theme. Joe Stiglitz along with many other well known names seem to agree. I myself do certainly believe that if billionaires from outer space suddenly appeared and began to buy lots of American produced and provided goods, services, and real estate, the outlook for the U.S. economy would be much brighter than it is
But I have been trying to think about this problem in the context of the current European crisis. One of the stock economist prescriptions for resolution of that situation is for Germany to go on a stimulus binge. This, it is said, would create demand in Germany that could be, at least in part, satisfied by exports from the so called "peripheral" European economies like Greece, Spain, Italy, Portugal, Ireland, and even France. These economies would then see a rise in their own domestic demand as workers found new jobs and started spending from their new pay checks, and this in turn would create new demand and jobs in a virtuous circle.
Sounds beautiful and logical, but I keep running into a difficult question: What exactly is it that the peripheral economies are going to sell to the Germans? Cars? But everybody in Europe wants a German car. Electronics? But with a few exceptions, the Europeans get their electronics from Asia. The Spanish have over 25 percent unemployment because their main product was housing and that doesn't export too well. My point is that that while more German stimulus, demand, and even, to a certain degree, inflation might be more desirable than not, it isn't fully clear that such stimulus would actually solve or even greatly alleviate the unemployment in the peripheral countries. This is because they don't make or provide much of what the Germans buy. German stimulus might do a lot for the Chinese, Japanese, or South Korean economies, but not nearly as much for the Greek economy. In this instance, the problem is more than just one of insufficient demand. It is also inadequate and inappropriate economic structure. How a country produces wealth matters and the level of demand may have little to do with it.
Now let's look at this from the perspective of the United States. As I have said before, it's not entirely true that we suffer a paucity of demand. We have trade and current account deficits of more than 3 percent of GDP, a level generally considered by economists to be unsustainable in the long term. That means we are consuming (demanding) 3 percent more than we produce. We are borrowing from foreign lenders to fund the purchase of that 3 percent of GDP that we consume in excess of what we produce. Does that sound like lack of demand to you ?
What's happening is that our demand is leaking abroad. The best example is the cash for clunkers program we operated a few years ago. People replaced their clunkers largely with imports. So the demand for new cars was there, but it was filled by foreign producers rather than domestic ones.
America actually has a substantial growth opportunity without spending a dime on tax cuts or new stimulus programs or quantitative easing by the Federal Reserve system. If it could cut its trade deficit in half, the United States could create 2-3 million new jobs. To do that , however , it must substantially increase the variety of goods and services it produces domestically and exports while decreasing what it buys abroad. And to do that America must avoid the profile of Europe's peripheral nations and aim for one like that of Germany.
Although America has become a very competitive location for production of autos, it still imports more than a third of the autos it buys. Most of the high tech components of the Apple iPhone can be made quite competitively in America, but they are almost entirely made, not in China as many suppose, but in Korea, Japan, Taiwan, and Germany, countries with high wages and costs but with economies of scale and skills and experience that America has failed to match despite its capacity to do so.
So by all means, let's be sure we are generating enough demand to keep the machine running. But at least as important if not more so is the question of what the machine is producing and of how to get it producing what will be necessary to avoid the peripheral trap and to sustain growing prosperity for all Americans.
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A recent tour of Asia has given me a headache trying to remember the names and acronyms for all the bilateral, regional, and multilateral free trade agreements under discussion.
In Singapore there was much talk of the TPP (Trans Pacific Partnership) dreamed up by Singapore but now led by the United States with the ostensible aim of creating free trade between Chile ,Peru, New Zealand, Australia, Mexico, Canada, Brunei, Malaysia, and Vietnam in addition to Singapore and the United States. In Seoul, the focus is on proposals for a China-South Korea-Japan Free Trade Agreement (FTA) as well as on a possible EU-Korea FTA. In Tokyo there is discussion of the China-South Korea-Japan deal as well as the possibility of joining the TPP. At the Pan Beibu Gulf Economic Cooperation meeting in Nanning, China, we also discussed the ASEAN (Association of South East Asian Nations)-China FTA along with free trade for APEC (Asia Pacific Economic Cooperation forum), a Comprehensive East and South Asia FTA, ASEAN plus 3, ASEAN plus 6, and an East Asia FTA.
Looking at this you might think that free trade was breaking out all over. But if you did, you'd be wrong. For one thing, the words "free trade" in these proposals are euphemisms. They are not about free trade. Rather the term is used to mask the fact that what is being proposed is a series of preferential trade agreements. It is this kind of fractured set of special deals that governed global trade before the Great Depression and that greatly contributed to its prolongation if not its outbreak. It was precisely to avoid a repletion of that experience that the Post World War II leaders negotiated the General Agreement on Tariffs and Trade (GATT) and eventually the World Trade Organization (WTO) to govern trade globally on the non-preferential bases of National Treatment (a country treats foreign participants in its economy just as it treats its own indigenous participants) and Most Favored Nation (a country extends to all its trading partners the same benefits and concessions that it extends to its previously most favored trading partner). The new deals and those being proposed are, in fact, a repetition of the pre-war, pre Great Depression regime. As such they are undermining global free trade and the WTO rather than enhancing it.
More importantly, these deals are mostly not about trade. Rather, they are chiefly about foreign policy and geopolitical influence. Especially in Asia, the United States and China are locked in a contest over their sphere of influence. The U.S. proposed TPP presently excludes China. Similarly, the various deals China is pushing exclude the United States. Ask U.S. officials why they want a TPP when 85 percent of the trade that would be covered by the TPP is already covered under other FTAs, and the answer you will get is that America must demonstrate its commitment to being in Asia and its support for its allies there.
Why the 80,000 U.S. troops and the U.S. Seventh Fleet that have been stationed in Korea, Japan, and the western Pacific for more than fifty years is not sufficient visible evidence of U.S. commitment and support has always puzzled me. But U.S. officials of both Republican and Democratic administrations over many years have consistently preached the demonstrate commitment theme.
In any case, the fundamental dishonesty arises not so much from the use of FTAs to demonstrate solidarity with allies, but from the fact that they will be sold to the Congress and the public as agreements that will increase U.S. economic growth and create jobs. Actually, they could only do this by accident. None of the deals cover the main determinants of trade, economic growth, and job creation. For example, they don't deal with currency exchange rates, investment and tax incentives, value added taxes, international cartels, or "administrative guidance" (a euphemism for bureaucratic pressure and threats) from governments to companies.
To be sure, analyses of what any proposed deal might do in terms of job creation and growth will be bandied about in support of the deal. But in view of the fact that the analyses include nothing they deals with the above factors, they can be nothing other than fiction.
Finally, when the deals don't deliver as forecast, they actually undermine support both for free trade and for allies. Thus does fraud beget the very trouble it purports to be attempting to avoid.
Many of my friends and critics have reacted to my criticism of the territorial system of taxation for global corporations (taxes are paid only in the country where the profits are earned) by emphasizing that the United States is the only major country that taxes its corporations on a worldwide basis. Washington, they say, should conform to the majority international practice.
Well, I was in Seoul last week. U.S. Chamber of Commerce President Tom Donahue was also there to praise the recent ratification of the U.S.-Korea Free Trade agreement and especially its clauses on protection of intellectual property which has long been a problem in South Korea. Just before he and I arrived in South Korea, the Koreans failed to ratify an agreement on sharing of intelligence that had been negotiated between the South Korean and Japanese governments. While we were there. the new North Korean leader, Kim Jong Un, dismissed his top military adviser, thereby sending a shiver the length of the Korean peninsula and across the Sea of Japan to Tokyo.
To whom does Tom Donahue and his members at the Chamber turn when they need their patents and trademarks protected? They have found the South Korean courts to be uncertain at best. They don't go to Geneva to discuss the problem with the World Trade Organization (WTO). No, no. They run to Washington. To whom do they turn when they want a trade deal that will open SouthKorea to U.S. investment and exports? Again, they turn to Washington. Most importantly, what is it that keeps the South Koreans and Japanese from each others' throats and that provides the stability and security without which the South Korean economy would be one of the worlds' poorest as it was in 1953? It is, of course, the U.S. security blanket over East and Southeast Asia. Without that there would be no corporate earnings in the region for anyone to tax.
My point is that Washington is essential to the overseas earnings capability of U.S. global corporations and therefore has not only a right, but an obligation to tax those earnings and to tax them without phony deferrals. However, the tax should be at a competitive rate. My proposal is a U.S. corporate tax rate of 15 percent. Maybe 20 percent is politically more feasible. But the current rate of 35 percent makes the United States completely uncompetitive in the investment sweep stakes.
To make the United States really globally competitive a value added tax (VAT) should be adopted along with the reduced corporate tax rate. VATs are rebated on exports and, of course, added to imports. In addition, Washington should adopt the special investment programs of countries like China, Singapore, France, and Ireland that provide targeted tax benefits, infrastructure improvements, and reduced utility costs. With this kind of a package, America would be the world's greatest magnet for direct and other investment.
The President's Export Council as well as his Commission on Jobs and Competitiveness and the U.S. Chamber of Commerce are all calling for a major change of the U.S. corporate tax system. In place of the present system of a tax on the worldwide earnings of U.S. corporations, they want U.S. taxes to apply only to earnings in the United States with foreign profits taxed only in the territories where they were earned.
This is one of those ideas that at first sounds a lot better than it looks upon reflection. The president and Congress need to remember that those making these proposals are not making them in their role as American citizens, but in their role as CEOs of profit maximizing global corporations. They should recall the New York Times quote of a high ranking Apple executive to the effect that the company doesn't "have an obligation to solve America’s problems."
Of course, the argument of the business leaders is that a territorial tax system would improve U.S. competitiveness by making it easier for U.S. corporations to operate abroad and that it would create more jobs in America by making it easier for U.S. corporations to repatriate their foreign earnings for investment and job creation at home. The truth is that such a system would be good for the global corporations, but of doubtful value to the United States.
Although the U.S. corporate tax is nominally levied on a worldwide basis, in fact, it is a kind of a hybrid system. U.S taxes on the so called "active earnings" (from actually doing business as opposed to rents, royalities,etc. which are considered passive earnings) of U.S. corporations in foreign countries can be deferred until such time as they are repatriated in the form of dividends from the foreign affiliate to the parent U.S. corporation. This has resulted in a tendency for U.S. corporations to invest and hold earnings abroad in places like Ireland, Singapore, Bermuda, and the Cayman Islands that have zero or very low corporate tax rates. A Fortune estimate (Stephen Gandel, June 6, 2012) puts the amount of deferred U.S. corporate earnings being held in such tax havens abroad at over $2 trillion.
For a long time it was argued that without the necessity to pay U.S. taxes upon repatriation of foreign earnings, U.S. global corporations would rush to move capital back to the United States where they would invest and become a job creation machine. But in 2004, when Washington instituted a one year tax amnesty on repatriation of foreign earnings the results were disappointing. The total amount repatriated was about $360 billion, but the Congressional Research Service subsequently reported that the repatriated funds went primarily to shareholders in the form of dividends rather than to new investment and job creation. Indeed, the CRS calculated that the top ten repatriating U.S. corporations actually reduced employment by 447,000 after repatriating about $99 billion.
A territorial tax system would only be a boon for the already thriving tax avoidance industry. It would encourage further investment in tax havens and complex intra -company transfer pricing schemes to move as much income as possible out of normally taxed countries into the well known low or zero tax havens. At the moment, in order to get the deferral, corporations at least have to certify that they need the funds being held abroad for continuing investment needs. Even that small discipline would be removed under the territorial proposal.
One sign that the territorial system is not the answer is the fact that the European Union is considering proposals to move away from the system.(European Commission, Common Consolidated Corporate Tax Base).
The answer is two-fold. First, the U.S. corporate tax, by far the world's highest with a 35 percent marginal rate, needs to be reduced to a competitive level of say 15-20 percent but with a base broadened by elimination of a variety of deductions. Second, the U.S. tax deferral for un-repatriated foreign earnings should be abolished.
At the same time, the United States should become much more aggressive in responding to and in offering its own new direct investment incentives. As China, France, Singapore, and any others do, it should pro-actively work with the global corporate community to maximize direct investment in new facilities and ventures in the United States.
For the past week, I've been participating in conferences in Singapore, Nanning, and Hong Kong on the future of China and the Asian economies in which I have been subjected to endless repetition of a mantra. Speaker after speaker has risen to declare that China is her or her country's largest trading partner. Left unspoken but understood by all is the fact that just a few years ago the largest trading partner of all these countries was either the United States or the EU. So the clear understanding is that China has displaced America and Europe as the main customer and engine of growth.
The declaration is often made with a certain air of excitement, almost as if many of the speakers can't quite believe what they are saying. And the truth is that they shouldn't.
Even as we discussed these trade numbers at the Pan Beibu Gulf conference in Nanning, the Chinese government released its latest growth figures showing a dramatic slowdown to 7.6 percent of GDP which was somewhat below the already lowered target. This slowdown is occurring in large part because China's exports are performing poorly in the face of the Euro crisis and a relentlessly slowing U.S. economy. China's growth is also slowing because the enormous stimulus spending the country undertook to offset the impact of the recent Great Recession created its own inflationary and excess debt and capacity problems that Beijing has been trying to control by cutting back on the stimulus. This is the subject of a second mantra which is that China is rebalancing by shifting away from investment and export led growth to domestic consumption led growth. So the hope has been that structural reform will make China a major end consumer and that consumption led growth will take up the slack of relatively declining export led growth.
Well, none of it is happening. Or, at least, it's not happening fast enough. The truth is that China is only the largest trading partner of many Asian countries in the sense that they ship goods to China. But China is merely a stop on the supply chain that eventually ends in the United States or Europe or, sometimes, in Japan. It is not usually the end customer unless the goods being shipped are raw materials, oil, and agricultural commodities. Most of what is happening is the shipment of parts and components from an Asian country to China where they are assembled into final products and then shipped on to the final U.S. and European customers.
The weaknesses of the whole global system are now becoming excruciatingly apparent. China has been urged by the G-20 and has committed to rebalancing and focusing on domestic consumption led growth. But consumption accounts for only 35 percent of China's GDP and is not large enough to be an engine of growth in the short term. As growth has slowed dramatically, Chinese officials are talking more and more of another round of investment and infra-structure stimulus. Understandable as a short run measure, this only threatens to exacerbate the longer run problems. Moreover, another round is unlikely to be as effective as the first round was because of the unresolved distortions remaining from that effort. In any case, reform looks like it will not happen quickly if at all. Further, China has backed away from allowing the yuan to strengthen and has put renewed effort behind exports, but the crisis in Europe and the slowing of the U.S. economy are having a huge negative impact and belying all the happy talk of decoupling.
Meanwhile, Europe seems determined to commit suicide by austerity and the death of a thousand all night Brussels summits. The Euro-zone needs some kind of growth agreement to complement the new fiscal pact as well as a banking union and some degree of common debt sharing through Eurobonds. But all this is unlikely, and certainly unlikely in the required time frame in the face of German opposition.
The U.S. situation is objectively the least dire in that its enormous trade deficit gives it the potential to grow by importing relatively less and producing and exporting relatively more. But no serious effort is being made in this direction, and political gridlock and the looming debt cliff are likely to continue to erode confidence and U.S. growth prospects.
The consequences of all this are that there is not going to be a global growth engine in the foreseeable future. China is not likely to rebalance by making the shift from investment and export led growth to consumption led growth, and the collapse of the euro and break-up of the EU is becoming a reasonable bet.
Aside from that, everything's okay. Have a good day.
So President Obama is trying to paint Mitt Romney as a big outsourcer of jobs abroad. Well, he no doubt was during his time as CEO of Bain Capital, but those who live in glass houses shouldn't throw stones.
The Obama administration has certainly presided over the outsourcing of more jobs than Mitt Romney ever did, just by dint of the fact that Romney was only doing it in the cases of some specific companies while Obama has been doing it across the entire economy.
This is not to say that Obama did so as a conscious part of his strategy which is certainly what Romney did. Obama probably doesn't realize the extent to which he has off-shored jobs because his off-shoring has come about as a natural result of his embrace of long standing orthodox American trade and foreign policy assumptions, theory, and practices that have been undermining the American wealth producing base for at least the past forty years if not longer. But remember that Obama said he was going to bring change we could believe in. Well, he hasn't. It has been more of the same old stuff from pretty much the same old crowd. Let's look at some examples.
During his first trip to China in 2009, the president held a joint press conference with Chinese President Hu Jintao in which he announced that America would assist China in the development of its own indigenous commercial jetliner. Of course, jetliners are one of the few things America can sell competitively to China and in which it has a trade surplus. So what possible logic was there in committing to help China develop a capability in which America clearly had a lead and a comparative advantage? The answer I got from the State Department was that we needed China to help us deal with North Korea and Iran and other foreign-policy issues and anyhow, what the Chinese were developing was only a small jetliner that would be technologically inferior to Boeing's products. But that was the answer I used to get when the previous administrations neglected to take steps to counter the subsidies the EU was using to build up Airbus Industries, which has now surpassed Boeing as the world's biggest producer of commercial jetliners. It was just kneejerk, standard, trade/foreign-policy tradeoffs, and clearly not change I could believe in.
Just to put the icing on the cake, last year, in the spirit of the president's statement, GE CEO Jeff Immelt who also chairs the President's Commission Jobs and Competitiveness, announced that GE will be merging its avionics division into a joint venture with China's AVIC state owned aircraft developer. So that means a transfer of technology and jobs from GE's U.S. division to this new joint venture. There was no cry of anguish from the White House when the announcement was made and Immelt continues to chair the Commission even as GE ships jobs abroad.
Take the recently concluded U.S.-Korea Free Trade Agreement. The president made a strong effort and succeeded in obtaining congressional approval and in putting the arrangement into force. He did this despite the finding of his own International Trade Commission that the overall result of the agreement would be to increase the U.S. trade deficit. Now that the agreement has been in force for about three months, we are already seeing a dramatic climb in South Korean exports to the United States and in the U.S. trade deficit with Korea, a deficit that definitely costs America jobs.
Again, why did he do this? Two reasons, I believe. First, his national security and foreign-policy team told him this deal would demonstrate America's continuing firm commitment to South Korea and thereby reassure the Koreans that we would not abandon them to their enemies in North Korea. Why we have to continue making these demonstrations of commitment when we have had 30,000 American troops in Korea and the Seventh Fleet in the Pacific is beyond me, but we feel compelled. Second, the president's top economists kept repeating the orthodox mantra that free trade is always and everywhere a win-win proposition.
Unfortunately, that is only true under very restrictive assumptions. If you have full employment, no costs involved in shutting down factories and opening new ones, no cross border flows of technology, people, or capital, fairly valued and unmanipulated exchange rates, and perfectly competitive markets (meaning no industries dominated by a few companies) then trade can be win-win.
But we do not have full employment, we do have enormous shut-down and start-up costs, markets in things like autos, semiconductors, and consumer electronics are not perfectly competitive, and South Korea along with many other Asian countries manipulates its exchange rate to keep its won undervalued versus the dollar. As a result, trade with South Korea is not necessarily a win-win proposition. Yet the president told the congress it was and further argued that the free trade deal with Korea would create thousands of new American jobs.
It won't. And the president ought to know that by now and instead of throwing stones at Romney, tell us about a new trade policy that will, in fact, create net new American jobs.
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So the headlines said June jobs were up by about 80,000 and unemployment stayed at 8.2 percent. Not great, but not a disaster. At least things are not getting worse. Right?
Well, you could be forgiven if that was the meaning you drew from the headlines and the latest Labor Department releases on job creation. That was how it looked to me at first glance. But having been through this many times before, I took a second glance -- and quickly lost my appetite.
The headline unemployment numbers are the so called U-3 government numbers that count just current jobs held, gained, and lost. Because of seasonal factors it is easily subject to distortion that makes it more or less meaningless as was the case in June. A broader, more meaningful measure is U-6 which takes into consideration short term discouraged workers who have only recently stopped looking for work as well as those working part time who really want full time work. U-6 unemployment is 14.9 percent and up about two tenths of a percent in June. Then there are the numbers of the consulting firm Shadow Government Statistics (SGS) which hark back to 1994. Until that time, the U.S. government kept track of long term discouraged workers as well as short term discouraged workers. In 1994, the method of collecting and calculating the unemployment data was changed and the workers who said they would like to work but were so discouraged that they hadn't been looking for work for a long time were defined out of the calculation. But SGS still does the calculation, and it's a shocker -- 22.9 percent. Yes, that's the percent of Americans who say they would like to work but for one reason or another can't find work, are working only part time when they want to work full time, or have become so discouraged that they have given up looking for work. That number means that the U.S. full time work force ought to be a quarter larger than it currently is. Can you imagine what that would do to U.S. GDP growth, to local, state, and federal government tax collections and budget deficits, to savings and investment, and to long term retirement prospects?
The fact is that the U.S. economy is operating far below its potential productive capacity. Estimates of how far below vary, but a good guess is about 5-8 percent of GDP or close to $1 trillion. Remember when Senator Everett Dirksen used to say: "a billion here, a billion there, pretty soon you're talking about real money?" Well a trillion dollars is real money, and it's money America isn't making. Why is the big question.
A significant piece of the answer can be glimpsed in a recent report by U.S. Trade Representative Ron Kirk. In a recent press statement about the Global System of Preferences he said:
"GSP is a valuable tool for advancing the Administration's goals to boost trade and to advance international economic development. The GSP program helps developing countries to grow their economies while also helping U.S. businesses, workers, and consumers by lowering the costs of imported goods, including those used as inputs for U.S. manufacturing. The annual review allows the Administration to ensure that the program is working as intended."
Got that? The focus is on promoting cheap imports. Looking at the U.S. trade deficit, I'd say the program is working fully as intended. But if the U.S. government spent a fraction of the effort it spends on promoting cheap imports on promoting domestic American production, the U.S. unemployment numbers would look a lot better and the economy would be much closer to operating at its full potential capacity. For the United States to achieve growth without increasing debt, it must substantially cut its trade deficit.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.