William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

Robert Reich, who served as Secretary of Labor for President Bill Clinton, wrote an “interesting” op-ed in the New York Times February 13 – not only interesting for its analysis of today’s most pressing economic problems, but also interesting for exposing the unwillingness of our policy elite to support the strong actions needed to solve the problems identified.  

Reich was right on target when he wrote, “The underlying problem has been building for decades.  America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation.  The income of a man in his 30s is now 12 percent below that of a man his age three decades ago.”  He then went on to list the many ways that Americans had been trying to pursue the dream of a rising standard of living without a rising real income.  The list is one we at the USBIC have been using for years.

The first expedient was to send more family members into the workforce.  As Reich noted, “The percentage of American working mothers with school-age children has almost doubled since 1970 – to more than 70 percent.”  Polls have shown that most of these working mothers would have preferred to stay home and take care of their children, but felt they had to work to provide for the family’s material needs.  Unfortunately, the social costs have been high.  Reich does not elaborate on this aspect of the problem, but it is well known that the hours between when school ends and parents get home from work are the most dangerous for children, resulting in drug use, gang violence and unwanted pregnancies, among other problems.  

Reich only pays passing attention to the abuse of credit cards in his rush to get to the housing crisis.  Yet, it is not a trivial matter when total U.S. consumer debt (which includes installment debt, but not mortgage debt) reached $2.5 trillion in July 2007.  Only about 40 percent of credit card users pay off their balances each month, and one in six only pays the minimum due.  With housing prices rising through the 1990s, and even faster from 2002 to 2006 during the subprime and easy money boom, many people refinanced home mortgages or took out home-equity loans to pay off credit card debts– only to run up the debts again.  With the bursting of the housing bubble, that strategy is now exhausted along with the others.

Americans have used every expedient available to advance in an economy with limited job opportunities.  But what has been limiting these opportunities? A major factor has thirty odd years of trade deficits, with the resultant hollowing out of the nation’s manufacturing base.  On the day after Reich’s column appeared, the Commerce Department reported a $711 billion trade deficit for 2007, equal to 5.1 percent of GDP.  While the rising cost of imported oil is a significant part of the story, the deficit in non-petroleum goods was $496.8 billion.  Good paying jobs in industry and other sectors have been moved overseas, while the bulk of the jobs being created in America are in lower-paying fields not subject to foreign competition.  A trade surplus, or even balanced trade, is a support for income growth; but a deficit is always a drag on economy growth, and thus economic opportunity for Americans.  

Here is where Reich goes off track:  He writes, “The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans.  The answer is not to protect jobs through trade protection.  That would only drive up the prices of everything purchased from abroad.” Instead, he opts for a redistribution of income within our sluggish economy.  “A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required,” according to Reich.

His scheme would not create a single new or better job.  It would not raise wages –but only subsidize low wages with, in essence, welfare payments.  It would not boost productivity, which is the underlying foundation of higher incomes.  It would not improve the competitiveness of American industry, nor reduce the drag on the economy resulting from foreign rivals grabbing market share here and poaching the good jobs for relocation offshore.  It would be like using a mild painkiller to cure cancer, and would be no more successful in the long term than the other expedients already tried.  It is, in other words, a socialist, not a nationalist concept.  Reich has returned to academia (University of California at Berkeley) and left reality behind.

What is Reich’s objection to solving the trade problem directly?  Trade protection is what America and most other countries have done in the past when faced with this kind of problem – and, in fact, the course that most countries follow today. However, the tools they use are more subtle – currency manipulation, VAT systems of taxation, hidden subsidies, intellectual property theft, and the list goes on.

The United States became the world’s largest, most productive economy behind “protectionist” tariffs that focused on national economic development.  Americans have long been the world’s highest paid workforce.  Elevating the working class into the middle class is one of the great achievements of America.  It dampened the class warfare that has thrown so many foreign lands into turmoil.  However,

  Being told that this success story must be abandoned to conform to the sophistry of academic “free trade” theory is nonsense.  And, in fact, the economic theory underlying free trade is not in itself very convincing.  (I know, having taught it for over a decade at the university level.)  It is a cover behind which special interests lobby for their profit at the expense of society.  That is what in reality free trade means – trade “free” from government intervention to protect the common good.

The day before Reich’s column appeared, he was speaking before the Association for Corporate Growth in Utah.  He is not going to advocate policies that would restrict the dealings of corporations when he is hob-knobbing with them.  

Jeffrey Garten, who served as Under Secretary for International Trade during the Clinton administration, wrote of how President Clinton was turned around on trade with China by corporate lobbying.  In his book The Big Ten, Garten recalled, “Many of the Fortune 100 had placed big bets on China....I saw no issue which raised more concern or emotion in the business community than the tying of trade to human rights in China....They were passionate in arguing that the United States was heading down a dangerous path in confronting China....Not surprisingly, the Department of Commerce sided with the business community, as did the Treasury.”
Confronting Beijing’s predatory policies might be dangerous for transnational business firms who are in bed with the Chinese, but it is essential for the United States if it is to reverse an expanding trade deficit with China, which hit $256.3 billion last year.  

Reich is predicting a deep recession as a result of domestic economic problems.  He does not think the recently enacted stimulus package is strong enough.  Yet, the downward pressure on growth from the trade deficit is greater than the downward pressure from the housing bust, and it hits most Americans every year, suppressing their wages.  The stimulus package tax rebates are supposed to boost aggregate demand, a mainstay of Keynesian economics.   But John Maynard Keynes had another suggestion for fighting downturns, redirecting demand from imports to domestic production.  

In October 1930, Keynes won majority support for abandoning free trade within the Committee of Economists advising the British government.  He favored an across the board 10 percent tariff on manufactured imports.  Though he called it a revenue tariff (with the money going to fund public works), he wrote a few months later, “In so far as it leads to the substitution of home-produced goods for goods previously imported, it will increase employment in this country.”  He thought it would also help support the value of the pound sterling.  In his seminal General Theory of Employment, Interest and Money (1935) he argued for removing ideology from the discussion of trade restrictions in favor of “practical statecraft.” He advised, “The authorities should pay close attention to the state of the balance of trade.  For a favourable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavourable balance may soon produce a state of persistent depression.”

Keynes argued against the classical liberal economists who thought the way to put people back to work was to cut their wages – essentially what has been happening in the United States in recent years to keep unemployment low.  

The slight improvement in the trade deficit in 2007 was due mainly to the slowing of import growth as prices for foreign goods were pushed up by the declining value of the dollar.  Increasing import prices by tariffs or by currency devaluation are the time-tested methods of righting a damaging trade deficit.  Tariffs are a better solution because they can be targeted at the main problem areas and do not damage the nation’s finances as severely as does gutting the value of the dollar.

It is way past time for our national leaders to return to the common sense policies that built the American economy.  Pundits and academics can complain about problems and propose unrealistic solutions, but it takes statesmen to solve them.  And to date, statesmen are in short supply.

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