Wanted: A new economy

President Obama must promote an economy that produces more of the goods Americans consume.
President Obama must promote an economy that produces more of the goods Americans consume. (OLIVIER DOULIERY / Abaca Press-MCT)
Posted: September 05, 2011

By Judith Stein

In his speech on jobs Thursday, President Obama will offer tax credits for new hiring, extension of the payroll tax cut, and other small items, his aides hinted. These measure may be helpful at the margins, but the only way they, and much needed larger ones, will get people's attention is if they are attached to a narrative that makes jobs the centerpiece of a new economy that produces more of the goods that Americans consume.

In 2009, the president seemed to agree when he told CNN, "We can't go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them."

Nobel prize-winning economist Michael Spence calculated the employment numbers that such an economy produced. Spence found that between 1990 and 2008, the economy added 27.3 million jobs to the base of 121.9 million. But 26.7 million of those jobs were in the nontradable sector - government, health care, real estate, and retail - where goods and services are both produced and consumed in one country, immune from international competition. In the tradable sector, manufacturing employment fell, as many jobs were off-shored. (This decline was offset by some additions in high-end management and consulting services.)

Most of the new nontradable jobs paid less than those lost, so inequality rose. Americans kept up their consumption by increasing their household debt - sustained by low interest rates, which nations like China and Japan kept down by using dollars accumulated from their trade surpluses to purchase U.S. debt. Because the United States was making fewer products than they used, the trade deficit rose to 6 percent of GDP in 2006.

Then came the Great Recession. In previous downturns, government spending and/or tax cuts and low interest rates brought people back to work. But past economic growth based on housing, debt-financed consumption, and finance cannot be restored.

Despite Obama's words, the tax cuts and spending in his $787 billion stimulus did not encourage the investment and growth we needed. Most of it was saved or used for consumption. The unemployed obviously needed income support. But some of the increased buying went for imports, providing jobs for foreign, not American workers. The low interest rates and quantitative easing of the Federal Reserve Bank aided the global as much as the American economy. Banks and multinationals used cheap money to invest in emerging markets, not in the United States. The wealth effect of the rising stock market encouraged upper-class consumption, not investment. The telltale trade deficit has been rising again, meaning that the United States is consuming more than it is producing again.

Any job plan must create incentives to obtain more tradable production in the United States. Here are three ideas that marry job creation and the kind of economic recovery we need:

Improving the U.S. trade balance could begin with creating a market for American-produced products. Government procurement requirements are commonly employed by most countries. It is outrageous that the steel used in the reconstruction of the California Bay Bridge was made in China, and defective to boot. The Treasury could label currency manipulation as an unfair trade practice. Fred Bergsten, of the Peterson Institute, estimates China's currency manipulation costs the United States 1.4 percentage points in GDP annually or a half a million jobs a year. In short, reducing the U.S. trade deficit would create more jobs than all the tax reductions and government spending that both parties advocate. It would probably reduce the budget deficit.

Oil imports are an important part of the trade deficit. Obama has made clean energy an important goal. But because the policy mainly subsidizes research and usage, it serves environmental more than job purposes. Three solar panel manufacturing plants have closed in August, and other U.S. based manufacturers cannot compete in the face of the large subsidies that the Chinese government provides its producers. The United States should either match the aid or turn to other energy sources. It makes no sense to substitute imported wind turbines or solar panels for imported oil. In the short run, investing in domestic natural gas reserves is a better choice. It is cheaper, will create jobs here, and could become a source of exports.

An infrastructure bank could leverage private investment by tapping the private capital markets for public infrastructure investment. Such investment would employ people, including the many unemployed construction workers, and make the economy more efficient and productive over time.


Judith Stein is a professor of history and the author of Pivotal Decade: How the United States Traded Factories for Finance in the Seventies (Yale University Press, 2010).

 

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