My blog “It Does Not Add Up” addresses our country’s two major problems:
- Slow Economic Growth, only 2.1% annually for the past seven years and
- Massive Debt, now 74% of GDP, the highest it has been since the end of WWII.
These two problems are, of course, closely related. Faster growth would bring in more tax revenue and reduce our annual deficits. Shrinking the debt, as a percentage of GDP, will demonstrate that the world’s strongest economy will not falter when interest rates inevitably return to more normal (and higher) levels.
There is a strong correlation between trade and world-wide economic growth as shown in the above chart. A recent Gallop poll found that 58% of Americans consider foreign trade an opportunity for economic growth and only 34% view it as a threat. Not surprisingly, the opponents are lower-income, blue-collar workers who are the most vulnerable to economic change. Consider:
- It is technology, not trade, which is behind the loss of manufacturing jobs. Between 2000 and 2010, employment in manufacturing fell by 5.6 million. But productivity growth accounted for 85% of the job loss. Only 13% resulted from trade.
- Since trade is not the underlying cause of job loss, protectionism is not the solution. If, for example, the U.S. imposes 45% tariffs on imports from China, production would merely shift to other low-wage developing countries in Asia. Pretty soon we’d have a massive trade war.
- Trade Adjustment Assistance consists of extended unemployment compensation as well as retraining programs. This program misses the millions more who are unemployed due to technological change. Furthermore, extended unemployment compensation leads to deterioration of work skills. A better way to help displaced workers is to expand the Earned Income Tax Credit which supplements all low-income work.
- NAFTA is a huge economic and foreign policy success. Trade between the U.S. and Mexico has greatly increased sine 1994 and 40% of the value of imports from Mexico consists of content originally made in the U.S. Furthermore NAFTA has promoted the growth of a large middle class in Mexico.
- Starting in 2001 when China became a WTO member, U.S. companies became more interested in foreign investment in China and other countries and offshoring has proliferated since then. Substantially reducing the corporate tax rate would bring many of these foreign operations back to the U.S.
Trade is win-win for everyone except the production workers who lose their jobs to foreign competition. We can clearly do much more to help them maintain their standard of living.