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April 3, 2009
Exclusive: The $700 Billion Gorilla Obama Wants to Ignore
During his Internet Town Hall March 26th, President Barack Obama was asked a vital question to which he had no viable answer. Harriet in Georgia asked, “When can we expect that jobs that have been outsourced to other countries to come back and be made available to the unemployed workers here in the United States? Thank you so much for all your hard work.” Unfortunately, it quickly became apparent that the president had not done any hard work on this topic.
He started his answer by falling back on talking points about the current recession and his budget plan. He then realized that Harriet’s question was not about the financial crisis, but about the longer term structural changes in manufacturing that cost the American economy 3 million good jobs even during the recovery phase following the 2000 recession. After some hemming and hawing about green jobs and how “there's always a country out there that pays lower wages than the U.S.” he concluded by surrendering on the issue. “So I guess the answer to the question is, not all of these jobs are going to come back. And it probably wouldn't be good for our economy for a bunch of these jobs to come back because, frankly, there's no way that people could be getting paid a living wage on some of these jobs – at least in order to be competitive in an international setting,” said President Obama.
When N. Gregory Mankiw, chairman of the Council of Economic Advisors serving President George W. Bush, made similar remarks, he was blasted by Democrats as an insensitive country club academic. And when Sen. John McCain said the same thing last year about auto industry jobs, he was soundly beaten in the Michigan primary.
Obama believes, “what we've got to do is create new jobs that can't be outsourced” such as building a new electrical grid. But is Obama so naïve (or uninformed) as to think that just because the electrical grid in located within the United States, the manufacture of the equipment used to create it cannot be outsourced? Rules published by the General Services Administration March 31stallow products sold to the U.S. government to contain components made overseas. This interpretation undermines the effect of the “Buy America’ legislation Congress put in the stimulus bill for infrastructure projects.
Obama also fell back on the very old notion that improving education (by tossing more money at it) would make American workers more competitive. President Bill Clinton talked of this same remedy in the economic summit he held just before taking office during the 1992 recession. Certainly workers need to improve their skills to keep up with new technology in our dynamic age, but to think this is the root of America’s trade problem does not bear examination. A Royal Commission convened in 1886 to study the inroads foreign rivals were making in British markets made the same mistake. It placed greater emphasis on technical and foreign language education than on direct support for commerce and industry. The failure to take direct action to give British industry an edge in its home condemned Great Britain to long term decline.
American factories have the best equipment available and productivity has been rising as a result of innovation. And industrial jobs are not low paying. I worked in Illinois factories to pay my way through graduate school. My fellow workers were able to buy homes and send their kids to college. American industry elevated the working class into the middle class with great positive benefits for the nation’s living standard and political stability. President Obama seems to feel that these gains must be given up because other countries using low-wage labor kept in check by authoritarian governments are more “competitive.”
There is a $700 billion gorilla in the room that Obama is ignoring when talking about economic recovery, job creation and future growth. The U.S. trade deficit, which averaged $706 billion annually 2005-2008, measures the net loss to the economy in jobs and production capacity as a result of America’s “free trade” delusion. It is a delusion because it is not an ideology followed by any of America’s major trade rivals who depend on running trade surpluses to add overseas support to their domestic economies.
The G-20 issued another denunciation of ‘protectionism” at their April 2nd London summit, as they did at the earlier finance ministers meeting. But as the World Bank has reported, 16 of the foreign members of the G-20 have already enacted new protectionist measures. What foreign governments want is to prevent the United States from putting its own house in order. Nothing is better for them than for American taxpayers and consumers to go further into debt to send stimulus funding overseas.
Some conservatives have hailed Germany for resisting calls for a larger stimulus package paid for by their taxpayers, but then Berlin gained a $45.7 billion stimulus from the trade surplus it ran with the United States last year, paid for by Americans. And this was small change compared to the $268 billion that China gained last year. The U.S.-China trade deficit has been the largest bilateral transfer of wealth in history, amounting to an aggregate $1.5 trillion over this decade.
The American auto industry cannot be saved without action taken to limit foreign competition, which is the real source of Detroit’s problem. The contracts the Big 3 signed with the UAW union were predicated on America’s continued dominance of its own transportation market. When foreign rivals took a third of that market away, the wages and benefits promised to workers were no longer sustainable. But the Japanese, Korean and European automakers (soon to be joined by the Chinese) designed their assault on the U.S. market with the full support of their governments who have used a variety of subsidies to carve out a share of the American economy to add to their own.
Even with retiree health care benefits moved off the books and a two tier wage structure set up to reduce the income of new and younger workers, the cost disadvantage will remain around $1000 per U.S. produced vehicle compared to foreign production. The industry must be put on a competitive basis by forcing foreign automakers to play by the same rules as the Big 3, which means requiring them to produce in the U.S. if they are going to sell in the U.S. This is the real world rule imposed elsewhere. One does not see imported cars in Japan, China or South Korea except for some luxury models.
When the Japanese car invasion started, President Ronald Reagan negotiated, with the help of threatened Congressional protectionist legislation, what were called voluntary export restraints (VER). These kept imports down and prompted Japanese firms to set up assembly plants in the United States. VER allowed only 1.68 million Japanese cars into the U.S. each year. The cap was raised to 1.85 million cars in 1984, and to 2.30 million in 1985. The program was terminated by President Clinton in 1994.
American consumers are price-sensitive, so the automakers were only able to raise prices by about one percent under VER. Car buyers did not get hit very hard in the pocketbook. But with fewer Japanese imports, sales of American cars increased at a time when U.S. assembly lines had substantial excess capacity (as they do today). During the years 1986-90, profits of U.S. automakers jumped about $2 billion per year as a result of the VER, allowing the firms to prosper and workers to gain in pay and benefits. The program was so successful that it was outlawed under the World Trade Organization at the insistence of foreign governments President Clinton was unwilling to resist.
VER was a form of protectionism, meant to defend American-based industry and American living standards. The United States became the world’s largest manufacturing economy with a society everyone wanted to join by adopting protectionist measures throughout its history. These are not a bar to all foreign competition. Tariffs, quotas and other limits on imports force foreign firms to invest inside America if they are to reach our affluent consumers. This is called “insourcing” which is far better for the economy than outsourcing.
At the moment, the foreign auto plants in the U.S. are allowed to use substantial amounts of parts and major sub-assemblies produced overseas and imported only for final assembly here. The Big 3 U. S. automakers have been pushed into using foreign-made parts (including parts from China) to compete. Limits on both the import of vehicles and of major, high-value parts would boost the insourcing of jobs and production capacity to the U. S. economy. This is the only way to assure a true level playing field within the American market and the preservation of a domestic auto industry. The auto industry is vital to a strong national industrial base upon which American power depends in a world of contending states.
President Obama seems to understand the importance of the auto industry, but not how to safeguard its future. The government cannot run the industry and it is dangerous for it to try. The government does have a duty to the industry, indeed to all American industry, to set the parameters within which private enterprise can operate and prosper. As long as Obama fails to set the proper parameters governing international trade, he will be forced to take more extreme and less legitimate actions to compensate. Unless he plugs the leak in the dam, he will exhaust himself with one bail out effort after another.
FamilySecurityMatters.org William Hawkins is a consultant specializing in international economic and national security issues.
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