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With No Program for Economic Recovery, the Republlicans Will Lose in 2012
Raymond Richman, 11/16/2010

Now is the time for all good Republicans, including Tea Partyers, to come to the aid of their party and their country!  With 9.6 percent unemployment – really more than twice that if you count those who dropped out of the labor force and those unwillingly reduced to part-time jobs --  Pres. Obama and the Democratic Congress spent -- no, wasted! -- his first two years in power occupied by domestic issues whose resolution should have been postponed until the economy had recovered. The issue that wasted the most time was health care. Republicans may want to repeal or amend the health care bill but if they do, they will waste another year and a half (and predictably won’t change it much) with no reduction in unemployment. Unemployment can be expected to increase, not decrease. And Republicans will suffer the same fate as the Dems did in the recent elections.

What did the Democrats do wrong that caused their tremendous loss of public support in just two years?

The Democrats passed Pres. Obama’s Recovery Act of 2009,  his $800 billion dollar plus economic stimulus plan but which, for all practical purposes, did not create any  new jobs although it may have preserved the jobs of supporters like the teachers that belong to the NEA and other unionized government employees. It financed the “klunkers” program which provided a temporary increase in auto sales. It had no lasting benefit. The Recovery Act  financed investments in so-called “renewable” energy sources like windmills and solar but which are so expensive that, even with the subsidies they raise the cost of electricity. We learned nothing from the earlier Spanish experiment with alternative energy which proved how uneconomic and unsustainable alternative energy sources really are. They will require continuous subsidies over their whole lives and will hit consumers in two ways, higher energy prices and higher taxes.  

The President acting like Venezuelan dictator Hugo Chavez, arbitrarily took over General Motors, causing the loss of thousands of jobs of workers producing Saturns and Pontiacs. In bankruptcy, those cars would still be being produced but with new owners. As a result, GM became known as Government Motors with the automobile union as co-owner

The Senate and Congress spent hundreds of man-years creating regulations that they hoped would prevent bank failures in the next recession. In the meantime, the regulations make banking less efficient and less profitable.

The law that helped create the housing boom and bust, the Community Reinvestment Act, made Acorn and other leftist neighborhood groups powerful and rich beyond their dreams. It  is still on the books. The Democrats tried to reduce foreclosures and keep housing prices from falling but failed utterly.

America’s international status has not been lower for at least a century. Our trade deficits have made our enemies stronger and decimated our industries. In the midst of an agonizingly slow recovery, we lost 9,000 manufacturing jobs last month. The failure of the Democrats to reduce unemployment led to their humiliating defeat in the mid-term elections.

The Republican party cannot afford to spend the next two years on trivial issues. There seems to be agreement with the Democratic leadership that earmarks should be abolished but doing so will not create a single job. Republicans must learn from the Democrats’ mistakes.  The same humiliating defeat  can happen to the Republicans in the 2012 elections. What should the Republicans do to avoid that kind of denouement?

The most serious drag on the economy is the huge trade deficits we have been experiencing with China, Japan, Germany, and the oil-exporting countries. Prof. Paul Krugman has recommended a 25% tariff on China in his NY Times column and in his new book Trickle Up Poverty Michael Savage has recommended a 20% tariff. Such recommendations would help tremendously.

But not as much as our invention called the “scaled tariff” which would apply only to countries with which we have been experiencing large and chronic trade deficits. A scaled tariff is one whose rate goes up as our trade deficit with a mercantilist country goes up, down when the trade deficit goes down, and disappears when our trade deficit disappears. Countries are permitted under WTO rules to impose barriers to imports from their trading partners with which they are experiencing chronic trade deficits. The scaled tariff would reduce American demand for imports from the trade surplus country which that country could avoid by removing its barriers to our exports.

It works like a devaluation by raising the costs of imported goods from the trade surplus countries, meanwhile helping to balance the budget by earning huge government revenues meanwhile. It would be a grand stimulus to American companies who have outsourced their production to become American producers once again. They would build their factories in the U.S., secure in the  knowledge we will not permit foreign countries to undercut them again. They will be guaranteed that trade will never again be a one-way street.

But we have to take other actions at the same time. We have to end our subsidies to alternative sources of energy. Those subsidies are just a waste of resources and create high energy price which put our industries at a disadvantage. Most of the Recovery Act’s spending,  supposed to stimulate the recovery of the private sector was spent foolishly, largely going to producers of alternative sources of energy, subsidizing not only their investments but forcing power companies to buy their electricity at high rates and passing those high rates on to consumers and businesses.

We have to remove the barriers to drilling for oil on public land. We have tied our hands behind our backs and have become increasingly dependent on imported crude. As Boone Pickens has suggested,  trucks and buses, should be converted to natural gas. Recent discoveries of huge deposits of natural gas in shale ensure unlimited amounts of natural gas for at least a century or two. With unlimited natural gas and unlimited drilling for oil on public lands and offshore,  we no longer need to rely on imported crude.

We should abolish the corporate income tax. Our preferred solution is to integrate the corporate income tax with the personal income tax. Another solution is to replace it with the value-added tax or the Fair Tax. Under WTO rules, value-added taxes and the Fair Tax can be rebated to exporters, thus subsidizing exports, whereas corporate income taxes cannot be rebated. Under existing rules, our manufacturers are at a disadvantage in international competition.  

There are many other actions that we can take to stimulate manufacturing. Spending the next two years trying to get the foregoing enacted should ensure Republican victories in 2012. Failure to try to enact these economic stimuli will mean that the Democrats or a third party  will be the victor  in 2012.

What are the chances that Republicans will unite and propose the necessary legislation? Unfortunately, not very good. They will unite on trivia like eliminating earmarks and reforms of health care which will do nothing to promote economic recovery. But it is difficult to envision them uniting on imposing scaled tariffs on our trading partners, or  uniting against environmentalist proposals favoring alternative energy souces, or facilitating the drilling and development of oil and gas wells. If they do not, there will be no economic recovery and no Republican victory in 2012.

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Comment by M, 11/18/2010:

The Republicans took over the house in 1994. 

Without a Ross Perot substitute to spoil the Republican's chances, President Obama will become the first African American One term President.

Your invention of the "Scaled Tariff" should solve the problem of the trade deficit.  But you can't do just one thing.  With access to low cost foreign credit cut off, would the "Scaled Tariff" also produce high inflation by creating an instant demand for labor and capital?  How would the increased demand for labor affect immigration, which is already a big problem?

Would your prescription require the Federal Reserve create new credit in order to match the new demand for capital projects?  How else will we replace foreign imports with domestically produced products?  Will the Federal Reserve need to create new money in order to fund the short term demands of both labor and capital?

Isn't that sort of incrementalism the type of thing that got Federal Reserve Chairman Arthur Burns fired?  Didn't he print money... And then turn around and raise the (FFR) Federal Funds Rate.  Thus making the problem of inflation that much worse.

Response to this comment by Raymond L. Richman, 11/20/2010:
I agree that the Republican Party would have to remain united behind a single candidate to win the election in 2012. The scaled tariff would result in higher prices but higher prices caused by sales or value-added taxes is not inflation properly defined.  The purpose of the scaled tariff is to induce countries like China to eliminate their artificial barriers to the importation of our goods. An appropriate definition of inflation would exclude price increases caused by offsetting higher revenues. Higher domestic sales taxes work the same way. With massive unemployed resources -- labor and capital -- there should be little inflationary forces other than the tax ffects described. Corporations are loaded with cash but are not investing here". In our view, the money supply should be increased at the real growth rate of the economy expected every year. Increases in the money suupply equal to increased output is not inflationary.   

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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]

    Journal of Economic Literature:

  • [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....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]