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Government Wimps Masquerading as Economists
Raymond Richman, 1/12/2011

Dr. Lawrence Summers in a swan song speech to the White House’s Economic Progress Institute entitled “Economic Progress and Economic Policy” is more noteworthy for what he did not say than what he did say. ”It is by what happens to the middle class that our economic policies have to be judged.” He means the independent voters. Surely the welfare of the working class is equally important but the Democratic Party takes them for granted. 14 million or more unemployed and Summers offers them little or no hope for years.

Summers writes, “..(S)cholars .. will continue to debate just how close the American financial system and economy came to all-out collapse in the six months between September of 2008 and April of 2009.”  In our opinion, there won’t be much debate. Pres. G. W. Bush’s $750 billion TARP program which lent billions to the banks, foreign and domestic, prevented the collapse.

As to what caused the recession and what we have done to prevent a recurrence? Not a word. Even the Community Development Act, which made ACORN rich and was a full employment act for communists and other leftists is still on the books. What we do know he says is: that during that time the stock market fell more sharply than in the six months after Black Tuesday in 1929, that global trade declined more rapidly than in the first year of the Great Depression. and that the economy was not self equilibrating and that a variety of vicious cycles were pulling it down even deeper, at a rate of 700,000 jobs a month at the worst of it. "Had it not been for President Obama’s willingness to support a sufficiently aggressive response – from the late stage of the presidential campaign to his first days and months in office – I have little doubt that we would be looking at a vastly different world today.” We suppose it is to be expected that Summers would laud Obama’s inadequate efforts. After all Summers himself must share the blame. The President wasted his first two years treating the economic crisis as second to reform of health care. The Recovery Act of 2009 was a failure because it consisted of huge transfers to the states and school districts which created no jobs and huge subsidies to wind and solar power which only increased the cost of energy. Although we were importing 60% of our crude oil, no steps were taken taken to increase our own output of crude oil. To the contrary, greater restrictions were applied on investment in oil drilling on public lands.

 No permanent job-creating expenditures were made at all.  The administration rescued the auto industry, or more accurately their unions, by bailing out GM and Chrysler. They bailed out AIG, which turned out not to need bailing out and did little or nothing to stimulate investment. It gave huge contracts to domestic and foreign firms for the foolish wind and solar power fantasy. Even the recent government guarantee of a $145 billion loan to Abengoa, a Spanish firm, calls for the project to import 30 percent of the materials required to be imported adding roughly $60 billion to our trade deficit. Given the doubt that the new plant will be economically viable, the negative effects of the trade deficit make this a project that should not have been backed by the full faith and credit of the U.S. government. It is an example of the global warming foolishness this administration embraces. To the expected future budget deficit, add the total costs of this project.     

“The slow process of recovery has caused some to conclude that perhaps we have entered a new and weakened normal state of affairs – a state in which we must lower our sights, lower our aspirations, and not be able to pass on to the next generation the kinds of dramatic improvement in American economic potential that were passed down to us. President Obama rejects this view, and so should the rest of us. With the right approach, we can and we will resurrect, rebuild and renew the American economy.” And what is his approach? “F)orward momentum (!) .. and a framework that that assures our growth productivity and living standards.” And what is expected to increase the momentum? And what is the framework? Don’t look for answers. 

“What is holding our economy back?” Answer, a "lack of demand". Yet our demand for imports has been insatiable. Summers makes no mention of the trade deficits. This is strange because the trade deficits reached a scandalous peak in 2007. This is what the GDP looked like in the year before Summers took office as chief economic adviser but they made no impression on him apparently. He was pleased the world trade was increasing. Let’s test your reaction.

Billions of Dollars 2007 2008
Gross Domestic Product 14,062 14,369
Personal Consumption Expenditures 9,806 10,104
Gross Private Investment 2,295 2,097
Government purchases of goods and services 2,674 2,878
Exports 1,662 1,843
Imports -2,376 -2,554
Exports minus imports (the trade balance) -714 -710

Given the fact that on average each worker in manufacturing creates about $100,000 of GDP, if trade were in balance, American manufacturers would have required 7 million more workers.  

All that Summers has to say is, “We need non traditional approaches. Take exports. It is always the case that when we export more successfully we are more prosperous.  But when the economy is demand-constrained as it is now, increases in exports have a more potent effect because with  capacity more exporting does not mean less of anything else.” True, but the purpose of international trade is to exchange a basket of goods each country values less for a basket of goods each values more. That means balanced trade. An imbalance means exporting unemployment as Keynes phrased it, beggaring your neighbor. And an imbalance means our trading partners in 2007 and 2008 exported the equivalent of 700,000 unemployed to us. Our solution, as those of you who have been reading our articles here or on American Thinker are aware, is the scaled tariff that increases as the trade imbalance increases and decreases as trade becomes better balanced. We believe it conforms to international trade rules.  And it only affects countries with large trade surpluses.

 Summers cites approvingly our recent agreement with Korea. He ignores the failure of our agreements with Mexico and Canada which have been very stimulating to their exports to us. Why does Summers believe they have been beneficial to the U.S. economy?  

To increase exports,  “the President has set a goal of doubling our exports over the next five years and pointing to ways we can do so: Enforcing our trade agreements, Relaxing export controls, Standing up diplomatically for American producers, And insisting in global fora on the rebalancing of the global economy.” These are economic policies that will get us on the road to recovery? We believe they are token. good but insufficient policies. Why haven’t we done them? Well we have remonstrated with the G-20 nearly all of whom have trade surpluses with the U.S. It had no effect, which was to be expected. Likewise,we have remonstrated with China on numerous occasions for many years. We have day-dreamers in the White House who want to continue to remonstrate with the G-20 and with China, the country we are most likely to fight the next war against.  This is foreign policy?

Summers notes that American households and businesses are saving more and consuming less. Economists used to believe that household savings were good because they provided the capital for investment. American households are saving more because they are afraid of the future. American businesses save because they find few profitable opportunities for investing in the U..S. They find it much more profitable to take advantage of investment opportunities abroad. All of our leading technology companies, with few exceptions, have invested huge sums abroad outsourcing the production of their products. Adding insult to injury, they export the major portion of what they produce abroad to the U.S. and account for a large proportion of the trade deficit. Summers says it is “necessary for government to counteract private sector deleveraging.” Why not make the U.S. more attractive as a place to invest to produce the goods we are now importing from China and OPEC? Now that would create jobs. And as we have proposed, get rid of the corporate income tax. Other taxes like the value-added tax can and are being rebated to exporters by our trading partners.  

And, as a concession to the global warming lobby, we prohibit drilling for oil and natural gas on public lands. An eminent oil producer says a million workers could be employed if our restrictions were relaxed.

What does Summers believe we should do?

  1. Spend more money on public education and increase accountability. Even as we strengthen elementary and secondary education, we must also expand higher education opportunities. [ Throwing money at  public education and admitting more students to the universities have not improved education one whit. Other forces have been at work, mostly social like forced busing, playing not studying, decreased motivation to learn, early sex behavior, etc. He makes no mention of any. Summers appears to be a man that does not know that he does not know.]
  2. We have to make it easier to patent a new idea or innovation; make it easier for entrepreneurs and small businesses to raise capital; make it easier for the most promising minds and the most promising entrepreneurs to come to this country from around the world.  But we must also take the steps that will not happen without satisfactory public action, to invest in energy efficiency, and the renewable energy technologies of the future.” [We are not aware that a shortage of capital has been a deterrent in the U.S. A shortage of good investment opportunities is the problem. There is no shortage of investment in China and other countries. As for investing in alternative energy sources, it is hard for us to believe that he believes in man-made global warming! We believe there is no science to the anthroprogenic global-warming thesis. Renewable energy technologies ought to develop without subsidies in response to the rising cost of carbon fuels. Right now it looks as though we have enough natural gas reserves to last for centuries.]
  3. The third and final thing we must do is renew the public compact between the present and the future. Budget deficits are a tax on our future, unless used to finance productive investments. That is why while recovery is our first priority, it is essential that we establish long-run parity between revenues and expenditures.. That is why President Obama committed to health care cost reduction in the context of the recently enacted health care legislation. President Obama has already taken several important steps in this direction: a multi-year freeze in spending outside national security, a serious effort to root out wasteful outdated spending in every area, particularly defense. A particularly welcome feature of the recent commission report is its bipartisan recognition of the idea that tax expenditures are just like expenditures, and need to be held to the same standard of efficiency, fairness, and tough tests on government intrusion into the economy. [We believe that results speak for themselves. Both G. W. Bush and B. Obama’s huge budget deficits speak for themselves! Summers must be joking.]

To put it mildly, these are not only not solutions but if they have effect, it would take decades. Summers is a long-run thinker and, as Keynes said, in the long-run we are all dead. We have problems that need solution now.

In his conclusion he says, “Predictions of America’s decline are as old as the republic.  But they perform a crucial function in driving the kind of renewal that is required of each generation of Americans..I submit to you that as long as we’re worried about the future, the future will be better…We have our challenges.  But we also have the most flexible, dynamic, entrepreneurial society the world has ever seen.  If we can make the right choices, our best days as competitors and prosperous citizens still lie ahead.” Unfortunately, Summers has not been helping to make the right choices. He has been an economic disaster.

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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]