Farewell To Old Economic Nostrums
By Paul Craig Roberts
With his tax rebate policy, President Bush has put economic policy back on a Keynesian basis. Will it work?
During the two decades it was in effect, supply-side economics had restorative effects on the American economy. Its predecessor, Keynesian demand management, stimulated demand more than supply. Consequently, over time the trade-offs between employment and inflation worsened, and for a while it appeared that inflation and unemployment would rise together. The breakdown of the Keynesian policy opened the door for the Reagan administration's supply-side approach.
By following Nobel economist Robert Mundell's advice to "reverse the policy mix," the supply-side policy allowed the US economy to grow without paying for the growth with rising rates of inflation. However, the new macroeconomic policy was not a cure-all, and its success in banishing worsening "Philips curve" trade-offs between inflation and employment masked the appearance of new problems, such as the loss of jobs and GDP growth to offshoring, problems from deregulation, and the growing concentration of income in fewer hands.
The Bush administration is turning to tax rebates, because problems in the financial system and the amount of consumer debt hinder the Federal Reserve's ability to pump money to consumers through the banking system. Like an easy credit, low interest rate policy, the purpose of a tax rebate is to put money in consumers' hands in order to boost consumer demand.
Will consumers spend the rebate, or will they use it to pay down their debts? If they spend the rebate on consumer goods, will it provide much boost to the economy?
Many Americans are overloaded with debt and will have to use the rebate to pay down credit card debt. The gift of $800 per means-tested taxpayer is really just a partial bailout of heavily indebted consumers and credit card companies.
The percentage of the rebate that survives debt reduction will be further drained of effect by Americans' dependency on imports. According to reports, 70% of the goods on Wal-Mart shelves are made in China. During 2006, Americans spent $1,861,380,000,000 on imported goods, that is, 23% of total personal consumption expenditures were spent on imports (including offshored goods). This means that between one-fifth and one-fourth of new consumption expenditures will stimulate foreign economies.
Americans worry about their dependency on imported energy, but the $145,368,000,000 paid to OPEC in 2006 is a small part of the total import bill. Americans imported $602,539,000,000 in industrial supplies and materials; $418,271,000,000 in capital goods; $256,660,000,000 in automotive vehicles, parts and engines; $423,973,000,000 in manufactured consumer goods; and $74,937,000,000 in foods, feeds and beverages.
The Keynesian policy of driving the economy through consumer demand was applied to a different economy than the one we have today. In those days the goods Americans purchased, such as cars and appliances, were mainly made in America. Construction workers were not illegals sending their wages back to Mexico. The US had a robust manufacturing workforce. When consumer demand weakened, companies would reduce their output and lay off workers. Government policymakers would respond to the decline in employment and output with monetary and fiscal policies that boosted consumer demand. As consumer spending picked up, companies would call back the laid off workers in order to increase output to meet the rising demand.
Today Americans are losing jobs for reasons that have nothing to do with recession. They are losing their jobs to offshoring and to foreigners brought in on work visas. Today many American brands are produced offshore in whole or part with foreign labor and imported to the US for sale in the American market. In 2007, prior to the onset of the 2008 recession, 217,000 manufacturing jobs were lost. The US now has fewer manufacturing jobs than it had in 1950 when the population was half the current size.
US job growth in the 21st century has been confined to low-pay domestic services. During 2007, waitresses and bartenders, health care and social assistance, and wholesale and retail trade, transportation and utilities accounted for 91% of new private sector jobs.
When a population drowning in debt is hit with unemployment from recession on top of unemployment from offshoring, will the people spend their rebates in eating places and bars, thus boosting employment among waitresses and bartenders? Will they spend their rebates in shopping malls, thus boosting employment for retail clerks? If they become ill, the lack of medical insurance will direct their rebates to doctors' bills.
Economists and other shills for globalism told Americans not to worry about the loss of manufacturing jobs. Good riddance, they said, to these "old economy" jobs. The "new economy" would bring better and higher paying jobs in technical and professional services that would free Americans from the drudgery of factory work. So far, these jobs haven't shown up, and if they do, most will be susceptible to offshoring, just like the manufacturing jobs.
The Bush administration has in mind a total rebate of $150,000,000,000. As the government's budget is already in deficit, the money will have to be borrowed. As the US saving rate is about zero, the money will have to be borrowed abroad.
Foreigners are already concerned about the US government's indebtedness, and foreigners are bailing out some of our most important banks and Wall Street firms that foolishly invested in subprime derivatives.
Under pressure from budget and trade deficits, the US dollar has been losing value against other traded currencies. Having to borrow another $150 billion abroad will further erode the dollar's value.
Meanwhile, Congress passed a $700 billion "defense" bill so that the Bush administration can continue its wars in the Middle East.
Our leaders in Washington are out to lunch. They have no idea of the real challenges our country faces and America's dependence on foreign creditors.
The rebate will help Americans reduce their credit card debt. However, adding $150 billion to an existing federal budget deficit that will be worsened by recession could further alarm America's foreign creditors, traders in currency markets, and OPEC oil producers. If the rebate loses its punch to consumer debt reduction, imports, and pressure on the dollar, what will the government do next?
As long as offshoring continues, the US cannot close its trade deficit. Offshoring increases imports and reduces the supply of potential exports. With Washington's Middle East wars, with private companies ceasing to provide health coverage and pensions, with political spending promises in an election year, and with recession, the outlook for the federal budget deficit is dismal as well.
The US is moving into a situation in which the government could find it impossible to close the twin deficits without massive tariffs to curtail imports and offshoring and without pursuing peace instead of war. The outlook for the United States will continue to worsen as long as hegemonic superpower and free trade delusions prevail in Washington.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com