Why We Can’t Rely on Foreign Consumers to Rescue America

Fred Hochberg, president of the Export-Import Bank of the U.S., thinks I’m wrong to worry about a trade war, and that the President’s goal for doubling U.S. exports over the next five years is on track. Writing in the Huffington Post, Hochberg says:

Reich’s argument contradicts the message I’ve heard from leaders of the world’s emerging economies who know that American innovation will help sustain their rapid infrastructure growth.

According to data released yesterday by the Department of Commerce, U.S. exports of goods and services increased by 17.7 percent during the first five months of 2010, compared to the same period last year. If this trend continues, the President will meet his goal of doubling exports in five years. The key: targeting export markets strategically.

At the Export-Import Bank, we’re focused on countries that have weathered the global recession and want to grow in areas where U.S. companies have a comparative advantage…. Commerce’s May data illustrate the potential of an export strategy tailored to countries and sectors that suit our strengths.

With due respect, Mr. Hochberg is being misleading. The same Commerce Department report shows that America’s trade deficit with the rest of the world has continued to widen. American businesses sold $152.3 billion of goods and services overseas in May (an increase of just over 2 percent from April) but the U.S. imported $194.5 billion (a jump of 2.9 percent).

In fact, according to the Commerce Department, America’s trade deficit expanded in May to its highest level in 18 months — rising 4.8 percent to $42.3 billion. Our monthly trade deficit with China alone jumped $3 billion, to $22 billion.

When the President promised to double exports over five years in order to create more jobs in the US, most people assumed he was talking about net exports – that is, exports minus imports. A doubling of net exports would help fill the demand gap caused by American consumers who can’t spend what they used to spend because they can no longer borrow to the gills.

But regardless of how much we export, if imports continue to exceed that amount, we’re heading in the opposite direction. Trade can’t possibly be a source of new American jobs. To the contrary, it reduces overall demand in the United States. The widening trade deficit remains a drag on the nation’s economic growth.

As a practical matter, the widening trade imbalance means no more trade agreements because Americans, worried about their jobs, don’t want to risk losing more of them to foreign workers.

Today (Wednesday), leaders of big business are meeting with the President to urge that he push stalled trade-opening agreements with South Korea, Panama, and Columbia. They’re calling it a “Jobs for America Summit” and holding it at the offices of the U.S. Chamber of Commerce in Washington.

The irony is that many of America’s surging imports are coming from these same American-based companies. They’re either employing foreign workers to make things for sale in the U.S., contracting with foreign companies to do so, or contracting for parts and supplies. Jobs for America Summit? These executives don’t care about American jobs. They care about their own bottom lines. That’s what they’re paid to care about.

But their bottom lines have little or nothing to do with good jobs for Americans. They have to do with good returns for American investors.

Not all corporate executives are marching to the same drummer. Recently, Andy Grove, chairman of Intel, wrote that America should levy an extra tax on the product of offshored labor and give the money to American companies that will use it to grow their U.S. operations and create more jobs in the United States. The only small problem with this idea is it violates international trade law and would almost certainly lead to retaliatory tariffs against American exports. Grove doesn’t seem too bothered. “If the result is a trade war,” he writes, “treat it like other wars—fight to win.”

But trade wars damage everyone, as we should have learned in the 1930s from Smoot-Hawley. What Grove doesn’t say is that over 70 percent of Intel’s revenues now come from its sales abroad. A trade war is the last thing Intel (whose share prices are rocketing) needs.

Yes, America must keep the pressure on our trade partners to open their markets and not manipulate their currencies. By the same token, America also has to reduce its dependence on oil (which accounts for a large portion of our trade imbalance).

But the essential point is we can’t expect foreign consumers to fill the shortfall in demand left by American consumers who can no longer maintain their pre-recession standard of living. The only answer is to lift the standard of living of Americans. How?

That question has direct bearing on the other part of the business agenda at today’s faux “Jobs For America Summit” at the U.S. Chamber of Commerce. Business executives (all of whom are now raking in just about the same seven- and eight-figure salaries and bonuses they did before the recession) are also telling the President to hold off increasing taxes on the rich (that is, ending the Bush tax cuts that had been scheduled to end this year) and to cut the budget deficit.

But the only way the President could do meet both these objectives – other than by cutting Medicare, Social Security, and defense spending, which he won’t – would be to cut back even further on services going to the lower middle class and poor, including those that rely on federal support to state and local governments. Without these, including extended unemployment benefits, tens of millions of Americans are being forced trim their family budgets even more than they did last year. And that means fewer customers to purchase what these companies are selling in the United States.

Someone should remind business executives that their plan for America is eroding their customer base in America.

The way to get jobs back is to increase federal spending in the short term in order to make up for the gap left by consumers and businesses (the fastest way to get this money into circulation is by extending unemployment benefits and aiding stranded state and local governments).

Over the longer term, we can lift the wages of the vast majority of Americans by expanding and extending the Earned Income Tax Credit — an income supplement — up through the middle class, and pay for it by a higher marginal income tax rate on the top. And while we’re at it, exempt the first $20,000 of income from payroll taxes, and pay for that by lifting the cap on Social Security taxes on all incomes in excess of $250,000.

Beyond that, and over the still longer term, America’s vast middle class and the poor more need to be more productive and innovative, so they can add more value to an increasingly integrated global economy. That means better education. Instead of firing school teachers, closing libraries, and increasing tuitions at public universities, we have to do exactly the opposite.

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About Robert Reich 547 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

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