Focus On Trade Instead

Is Stimulus Spending The Answer?

Obama's Stimulus Plan Won't Accomplish What We Need To Do Most: Promote Exports

July 21, 2009|By Peter Morici

The $789 billion stimulus doesn't fix what ails the economy and is doomed to fail.

Since 2007, the private sector has shed 6.6 million jobs - half in manufacturing and construction. A couple hundred thousands government employees have been added, but that hasn't affected the overall trend.

During the last economic boom, a huge structural trade deficit emerged in the United States. Imports exceeded exports by about $700 billion annually from 2005 to 2008. By the end of the boom, nearly all of it was manufactured goods from China and oil.

The failure to compensate for imported consumer goods and gasoline with exports creates a huge shortage of demand for U.S.-made products. Money spent on imports that does not return as payment for exports can't be spent on U.S.-made products. Inventories pile up and layoffs result.

Americans solved that problem, temporarily, by borrowing against homes, cars and credit cards to spend more than they earned. Banks got the cash from China and Middle East oil exporters, who were stuck with dollars from selling to Americans but not buying U.S. exports.

Bubbles resulted in home construction, housing prices and stocks - and inevitably, they burst. Voila - the Great Recession.

To lift the economy, President Barack Obama must resurrect manufacturing, which requires exporting more and importing less, and shift idle construction workers from housing - which is in oversupply - to rebuilding schools, roads, hospitals and factories.

Of the $789 billion stimulus, only about $100 billion is for infrastructure. About $280 billion is tax cuts for individuals and businesses who are too scared to spend. The remaining $400 billion mostly rewards Democratic Party constituencies - for example, huge increases in the Department of Education budget - and grants to state and local governments (which are not laying off teachers and policemen, as President Obama often asserts).

Cap and trade will only make matters worse, economically and environmentally. It will raise the cost of manufacturing in the United States and send more jobs to China, where CO2 emissions are unregulated and higher.

Proposed changes in health care would increase the cost of insurance to businesses by increasing demand without adequately constraining costs - instead of lowering prices for drugs, doctor's visits and malpractice insurance, as true reform would accomplish. That may reward yet other Democratic Party constituencies, but it will further disadvantage Americans competing in global markets.

Real alternatives to failed Bush-era policies are available, however.

We should recalibrate trade policy to promote exports, balance trade with China and develop domestic oil and gas. Cap and trade should be abandoned until China and India sign on to the same disciplines. And let's require drug companies and doctors to charge no more than they are paid in Canada - and find honest work for malpractice lawyers.

Of course, these things would require Mr. Obama to think outside the box and abandon the conventional wisdom of the left.

Just as President George W. Bush's blind adherence to conservative ideology threw America into crisis, Mr. Obama must unshackle his policies from liberal groupthink to resurrect our economy and make his presidency succeed.

Peter Morici is a professor at the University of Maryland's Smith School of Business and the former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.