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Economists Don't Know How to Recover From the Recession
Raymond Richman, 8/24/2010

In an Op-ed in the Pittsburgh Tribune Review on 8-17-2010 entitled "Obama's Reverse Progress", Kevin Hassett, director of economic policy studies of the American Enterprise Institute and senior economic adviser to Sen. George McCain in the latter’s 2008 election campaign, brings into question whether a Republican majority in the Congress would do any better than Pres. Obama  in dealing with this recession. He demonstrates the bankruptcy of economists of both parties in dealing with the recession. He asserts that Pres. Obama’s “massive intervention” to rescue General Motors and Chrysler is anachronistic. Manufacturing is, in his view, “no more valuable than other types of output.” He writes: “Manufacturing has been on a decline as a share of national output for decades, part of the evolution of the U.S. economy.”  His notion that a decline of U.S. manufacturing as a share of GDP is “normal” and to be expected is almost universally held among economists. But the rapid rate of decline of manufacturing  during recent decades is not normal at all. It is a result of mercantilist practices of some of our trading partners and the failure of Democratic and Republican administrations to pursue policies that would bring our international trade in goods and services into balance.

As Hassett notes, “Manufacturing as a share of U.S. gross domestic product has fallen from about 28 percent in 1950 to about 11 percent in 2009.”  But as a share of U.S. household consumption, it has not fallen at all as the following table shows:

Table 2.3.3. Real Personal Consumption Expenditures by Major Type of Product, Quantity Indexes

 

[Index numbers, 2005=100]

           

Bureau of Economic Analysis

       

Change

 
           

1960-2008

 

 Line

 

1960

 

2008

     

1

    Personal consumption expenditures (PCE)

20.2

 

105.1

 

84.8

 

2

Goods

19.8

 

103.5

 

83.7

 

3

  Durable goods

8.2

 

102.8

 

94.6

 

4

    Motor vehicles and parts

15.3

 

85.0

 

69.7

 

5

    Furnishings and durable household equipment

12.7

 

102.8

 

90.1

 

6

    Recreational goods and vehicles

1.2

 

129.8

 

128.5

 

7

    Other durable goods

10.4

 

101.0

 

90.6

 

8

  Nondurable goods

30.4

 

103.7

 

73.3

 

9

    Food and beverages purchased for off-premises consumption

47.0

 

104.0

 

57.0

 

10

    Clothing and footwear

15.4

 

108.3

 

92.9

 

11

    Gasoline and other energy goods

45.7

 

92.5

 

46.8

 

12

    Other nondurable goods

20.5

 

107.1

 

86.6

 

13

Services

19.9

 

105.9

 

86.0

 
               

Gross output is net of unrelated sales, secondary sales, and sales to

     

 business,to government, and to the rest of the world; excludes own-account

   

 investment(construction and software).

           
 

Source: BEA, US Dept of Commerce

         

If we include imported goods consumed, American consumption of durable goods grew faster than nondurable goods and the consumption of services from 1960 to 2008. We appear to be consuming more manufactured goods than ever but more of are made abroad and often by American companies. If trade were in balance we would very likely be producing and exporting as much durable goods as we import. But trade has not been in balance for decades, converting us from the world’s leading creditor to the world’s leading debtor.

Chronic trade deficits are not normal.  Economists believe market forces work to return trade to balance. But they are mistaken as Fed Chairman Bernanke, then Chairman of Pres. Bush’s Council of Economic Advisers admitted in a 2006 speech. (cited in our book, Trading Away Our Future (Ideal Taxes Assn., 2008) p. 75.) Free market forces would work if all prices were determined in free markets, including the relative value of currencies. The trade deficits are not the result of evolution. They are the result of unfair foreign competition, mercantilist policies of Japan post WWII, which have been well documented; mercantilist policies of Germany post-war which have been less well documented, and mercantilist policies of China during the last three decades which have also been well-documented. And they are the result of abysmal U.S. government policies.

There is no question of the relative decline of manufacturing relative to other sectors of the economy.  But economies do not evolve, they change, sometimes for the better and sometimes for the worse.  The latter is always the result of foolish economic policies.   Hallett writes, “Any economist can tell you that this decline is not necessarily a cause for concern.” Well, here is one economist who is deeply concerned because of the size of the decline, the causes of the decline, the displacement of industrial workers, and the implications of the decline for our survival as a great nation. The decline of manufacturing as a share of national income has resulted in wage stagnation, a worsening of income distribution, the strengthening of our enemies and likely or potential enemies, and undesirable changes in American values, life styles, and social behavior. 

Hassett complains that lots of firms went bankrupt during the recession but the government intervened to save only the auto industry “because manufacturing output is somehow more valuable than other types of output.” We do not believe that was the reason at all. Rather, it was political, to help the auto unions who were among his principle supporters. Indeed, our belief is that he violated the U.S. Constitution by usurping control of General Motors and Chrysler.

Hassett overlooks completely the artificial barriers to trade erected by first, Japan, then Germany, and now China and many others that have cost us five to six million industrial jobs, roughly the number of jobs that would return us to full employment. 

Contrary to Hassett’s assertions, the automobile industry is not declining. The world’s  output of automobiles is actually increasing. Nor is the consumption of autos in the U.S. decreasing.  All one has to do is look at the millions of Toyotas, Hondas, Hyundais, being produced here and being imported, and the Mercedes, BMWs, VWs,  et al. that we import and many of which are assembled here  and very profitably, too.  It is the very unions that Pres. Obama rescued that caused the bankruptcy of GM and Chrysler.  

Haslett sheds crocodile tears over the fact that long-term economic changes can be painful to those harmed by the decline of manufacturing. His solution is re-educating the displaced workers for the new economy. What new economy? Taking in each other’s washing? He does go a small distance with us. Congress, he writes, should lower corporate tax rates. We want to eliminate the corporate income tax. We want to abolish it and replace it with the VAT or integrate it with a progressive consumption tax that will substitute for the personal income tax as well or replace the entire tax system with the FairTax.

Most important, we recommend the imposition of scaled tariffs on imports from the major countries with which we are experiencing chronic trade deficits. It would restore the competitiveness of the U.S. economy. Just balancing our trade with the rest of the world would create millions of jobs.

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Comment by Scott Greene, 8/26/2010:

Elimination of the Corporate Income Tax and elimination of the Regular Income Tax and replace them both with a Progressive Consumption Tax IS the solution.

In regards to today's Income Tax, Treasury Secretary Geithner (who is in charge of the Income Tax) did not know how to correctly fill out his Income Tax return.
And Congressman Rangel (who writes Income Tax policy) also did not know how to correctly fill out his Income Tax return.

So when those who write Income Tax law and those who are in charge of administering Income Tax policy don’t know how to correctly fill out their own Income Tax return, what hope is there for the rest of us?

 




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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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