From THOM HARTMANN
By preferring the support of domestic to that of foreign industry, he [the entrepreneur] intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
—Adam Smith, Wealth of Nations, 1776
The White House called me.
About a year after President Barack Obama took office, on the first anniversary of his major economic recovery legislation, his administration was struggling to get the word out that the legislation was, in fact, quite a success story. I found myself invited to the White House as part of a small group of well-known authors and bloggers to meet with a top administration economist as part of this promotion effort.
It was an odd problem they were facing, given that this president was masterful during the 2008 election campaign in communicating his ideas and his vision to the American public. So what happened? Why didn’t America know that the $787 billion legislation represented one of the largest middle-class tax cuts in American history, that it had demonstrably created or preserved between 1.5 million and 3 million jobs, and that it had, in all probability, prevented the severe recession Obama inherited from George W. Bush from turning into a second Republican Great Depression, at least in the short term?
Part of the problem was that the Democrats hadn’t much mentioned or marketed the legislation leading up to the one year anniversary, nor had they given it a catchy name—a “New Deal” or “Contract with America” sort of thing—leaving it instead as a “stimulus bill” (officially called the American Recovery and Reinvestment Act of 2009).
A second problem was that a lot of the Republicans in Congress—the Disloyal Opposition—were blatantly lying to the American public about the bill’s impact, saying it had created absolutely no jobs. Adding insult to injury, they were simultaneously attending ribbon-cutting and check-giving ceremonies in their own districts, celebrating its successes—even though they all voted against it. Most of the corporate media didn’t bother to even mention the irony or hypocrisy of this.
The Democrats in Congress and the Obama administration had, in fact, crafted and passed legislation that moved money into the hands and the pockets of working people, who spent virtually all of it, which fueled the economy by direct stimulation and its multiplier effect, as intended. The bill reduced both tax and deduction rates for working people and poured billions of dollars into programs designed to get people to buy new products—programs like the $3 billion “Cash for Clunkers,” which offered incentives for people to trade in gas guzzlers for fuel-efficient vehicles.
What drove the legislation was precisely what drove Franklin D. Roosevelt’s New Deal, which got us out of the Great Depression: Keynesian economics. John Maynard Keynes, the British economist, believed in the private sector but also in a strong government role, especially during dire economic straits. Keynes understood that demand from consumers drives an economy; and when consumers don’t have a job, an economy will stagnate or worse. So during a cyclical depression, the best response of government is to use government money—even borrowed government money if need be—to put people to work so they’ll have money to buy things.
Those expenditures by working-class people—on computers, television sets, clothes, toys, furniture, power tools, and so on—would help restart the economy, which would grow gross domestic product (GDP) and tax revenues, so government would be able to pay back the borrowed money and wean people off of government jobs as private industry picked up the load. (Keynes even suggested that this was such an important principle that it would work if government simply hired one man to dig a hole and another man to fill it back up a week later.)
It worked in the 1930s with federal projects like Roosevelt’s Civilian Conservation Corps (CCC), which put 3 million Americans to work on various conservation and natural resources projects; his Works Progress Administration (WPA), which employed millions on public works projects; and an alphabet soup of other “pubic employment” agencies. That same principle—government stimulating the economy through job creation—was working in 2010, albeit anemically, in large part because the stimulus bill was one-third the size it should have been. It was a vindication of Keynesian economics, but nobody knew it outside of political insiders and policy wonks because the stimulus package hadn’t been large enough to actually create a net surplus of jobs. Instead it had only stopped the hemorrhaging that had started during the Bush administration with the loss of more than 7 million jobs in less than two years.
So there I was at the White House, listening to the top economist trying to figure out why this “stimulus bill” had not really stimulated much of anything, certainly not good PR for Obama. For example, four days later a front-page headline in the New York Times blared “Despite Signs of Recovery, Chronic Joblessness Rises.” Among other things, the article reported that more than 6.3 million Americans had been jobless for more than six months, the largest number since government started tracking joblessness in 1948, and more than 15 million Americans were jobless in January 2010.
What happened to Keynes? How could hundreds of billions of dollars pumped into the economy fail to create jobs making things that working people could buy? If it worked so well in the 1930s and the 1940s, why did it fail to go beyond just “stopping the bleeding” and move into the net creation of new manufacturing jobs in the United States in the 2010s?
In fact, it hadn’t failed. It did create millions of jobs—probably tens of millions of jobs. The problem is that they were mostly in China.
The simple fact is that we no longer make computers or TVs or clothes or power tools or toys or pretty much anything in the USA, except military hardware, processed food, and pharmaceuticals. So when we “stimulate” our economy by putting money into the pockets of working people, they go to Wal-Mart and buy things made in Asia—creating jobs in that part of the world.
So here is the first big way we can reboot the economy: lose our recent fascination—obsession, really—with “free trade,” get back to protectionism, and impose tariffs (import taxes) on imported consumer goods as we used to do. Let’s apply the lessons that our own rich history teaches us. In other words, let’s resume the manufacture of consumer goods in the United States, protect these industries from cheap foreign labor, and bring all those jobs back home.
The High Cost of “Free Trade”
During the 1930s none of the “Asian powerhouse economies” had adopted American industrialization strategies, so when Roosevelt put money into workers’ pockets and they bought toys or clothes or radios, all of those items were made in Alabama or Connecticut or Michigan. Now they’re made in China, which experienced a “labor shortage” in 2009, causing its average wage to increase from $0.80 per hour to $1.14 and its economy to grow by more than 8 percent.
China has been following the lead of Japan, Taiwan, and South Korea during the past half century and has become an industrial powerhouse as a result. And, ironically, each of those countries got its strategy from us: George Washington’s Treasury secretary, Alexander Hamilton, proposed it in 1791, and by 1793 most of the parts of his Report on the Subject of Manufactures had been instituted as a series of legislative and policy steps.
And it didn’t start with Hamilton; he was just building on King Henry VII’s “Tudor Plan” of 1485, which turned England from a backwater state with raw wool as its chief export into a major developed state that produced fine clothing and other textile products from wool. He accomplished this by severely restricting the export of wool from England with high export tariffs and restricting the import of finished woolen products with high import tariffs. King Henry learned this from the Dutch. They copied the Romans. And the Romans got it from the Greeks three thousand years ago.
Nonetheless, President Obama continues to follow his predecessors—Bush Jr., Clinton, Bush Sr., and Reagan—in the religious belief that “free trade” will save us all. It’s nonsense. “Free trade” is a guaranteed ticket to the poorhouse for any nation, and the evidence is overwhelming. Even the very phrase free trade was introduced by Henry VII as something that England should encourage other countries to do while it maintained protectionism.
The Korean Experience
A more contemporary example of the application of that wisdom can be seen in South Korea. In the 1960s Korea was an undeveloped nation whose major exports were human hair (for wigs) and fish and whose average annual income was around $400 per working family. Today it’s a major industrial power with an average annual per capita income of more than $32,000, and it beats the United States in its rate of college attendance, exports, and lifespan. Korea did it by closing its economy and promoting its export industries. A decade earlier Japan had done the same thing. Forty years earlier Germany had done it.
In July 2009, with no evident irony or understanding of how South Korea went about becoming a modern economic powerhouse, President Obama lectured the countries of Africa during his visit to Ghana. As the New York Times reported: “Mr. Obama said that when his father came to the United States, his home country of Kenya had an economy as large as that of South Korea per capita. Today, he noted, Kenya remains impoverished and politically unstable, while South Korea has become an economic powerhouse.”
In the next day’s newspaper, the lead editorial, titled “Tangled Trade Talks,” repeated the essence of the mantra of its confused op-ed writer, Thomas L. Friedman, that so-called free trade is the solution to a nation’s economic ills. “There are few things that could do more damage to the already battered global economy than an old-fashioned trade war,” the Times opined. “So we have been increasingly worried by the protectionist rhetoric and policies being espoused by politicians across the globe and in this country.” But South Korea did not ride the “free trade” train to success.
South Korean economist Ha-Joon Chang details South Korea’s economic ascent in his 2007 book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. In 1961 South Korea was as poor as Kenya, with an $82 per capita annual income and many obstacles to economic strength. The country’s main exports were primary commodities such as tungsten, fish, and human hair for wigs. That’s how the Korean technology giant, Samsung, started—by exporting fish, fruits, and vegetables. Today it’s the world’s largest conglomerate by revenue ($173 billion in 2008). By throwing out “free trade” and embracing “protectionism” during the 1960s, South Korea managed to do in 50 years what it took the United States 100 years and Britain 150 years to do.
After a military coup in 1961, General Park Chung-hee implemented short-term plans for South Korea’s economic development. He instituted the Heavy and Chemical Industrialization program, and South Korea’s first steel mill and modern shipyard went into production. South Korea also began producing its own cars and used import tariffs to discourage imports. Electronics, machinery, and chemical plants soon followed — all sponsored or subsidized and tariff-protected by the government. Between 1972 and 1979, the per capita income grew more than five times. In addition, new protectionist slogans were adopted by South Korean citizens. For example, it was viewed as civic duty to report anyone caught smoking foreign cigarettes.
All money made from exports went into developing industry. South Korea enacted import bans, high tariffs, and excise taxes on thousands of products.
In the 1980s South Korea’s economy was still far from that of the industrialized West, but the country had built a solid middle class. South Korea’s transformation was, to quote Chang, as if “Haiti had turned into Switzerland.” This transformation was accomplished through protecting fledgling industries with high tariffs and subsidies and by only gradually opening itself to global competition.
In addition, the government ran or heavily funded many of the larger industries, at least until they were globally competitive. The government ran or regulated the banks and therefore the credit. It controlled foreign exchange and used its currency reserves to import machinery and industrial products. At the same time, the government tightly controlled foreign investment in South Korea and largely ignored enforcement of foreign patent laws. Korea focused on importing basic goods, to fuel and protect its high-tech industries with tariffs and subsidies.
Had South Korea adopted the “free trade” policies espoused by Friedman and the New York Times, it would still be exporting human hair.
Another favorite Friedman free-trade example is the success of Toyota’s Lexus luxury car, immortalized in his book The Lexus and the Olive Tree. But again, the reality is quite different from what Friedman naïvely portrays in his book. In fact, Japan subsidized Toyota not only in its development but even after it failed terribly in the American markets in the late 1950s. In addition, early in Toyota’s development, Japan kicked out foreign competitors like General Motors. Thus, because the Japanese government financed Toyota at a loss for roughly 20 years, built high tariff and other barriers to competitive imports, and initially subsidized exports, auto manufacturing was able to get a strong foothold, and we now think of Japanese exports as being synonymous with automobiles.
Founding Father Knows Best
For about 200 years, we understood well the benefits of tariffs, subsidized exports, and protectionist policies in the United States. Had the Founders, like Abraham Lincoln, George Washington, Andrew Jackson, or Ulysses S. Grant, applied for loans from the International Monetary Fund (IMF), they would have been denied: all of them believed in high tariffs and a heavy control of foreign investment and considered “free trade” absurd.
But it was another Founding Father, Alexander Hamilton, who knew best how to spawn American industry to make the country independent and competitive. As the nation’s first Treasury secretary, Hamilton submitted his Report on the Subject of Manufactures in 1791 to the U.S. Congress, outlining the need for our government to foster new industries through “bounties” (subsidies) and subsequently protect them from foreign imports until they become globally competitive. Additionally, he proposed a road map for American industrial development. These steps included protective tariffs on imports, import bans, subsidies, export bans on selected materials, and the development of product standards. (See “Alexander Hamilton’s 11-point Plan for ‘American Manufactures’” in the introduction.)
It was this approach of putting America first that our government followed for most of our history, with average tariffs of 30 to 40 percent through the nineteenth and twentieth centuries. There is no denying that it helped turn America into an industrial and economic juggernaut in the midtwentieth century and beyond. The three periods when we radically dropped tariffs—for three years in 1857, for nine years in 1913, and by Reagan in 1987— all were followed by economic disasters, particularly for small American manufacturers.
The post-Reagan era has been particularly destructive to our economy because we not only mostly eliminated the tariffs but we also became “free trade” proponents on the international stage. After Reagan blew out our tariffs in the 1980s and Clinton kicked the door off the hinges with the General Agreement on Tariffs and Trade (GATT), North American Free Trade Agreement (NAFTA), and World Trade Organization (WTO), our average tariffs are now around 2 percent. The predictable result has been the hemorrhaging of American manufacturing capacity to those countries that do protect their industries through high import tariffs but allow exports on the cheap—particularly China and South Korea.
The irony is that we have abandoned Hamilton’s advice—and our own history—while China, South Korea, Japan, and other nations are following his prescriptions and turning into muscular and prosperous economic entities.
It’s high time we relearned Alexander Hamilton’s lessons for our nation.
The first third of Hamilton’s report deals with Jefferson’s objections to it (withdrawn later), which were primarily over the subsidies to industry, as Jefferson in 1791 favored America’s being an agricultural rather than an industrial power. After that, Hamilton gets to the rationale for, and the details of, his 11-point plan to turn America into an industrial power and build a strong manufacturing-based middle class.
First, Hamilton notes that real wealth doesn’t exist until somebody makes something. A “service economy” is an oxymoron: if I wash your car in exchange for your mowing my lawn, money is moving around, it’s an “economy” of some sort, but no real and lasting wealth is created. Only through manufacturing, when $5 worth of iron ore is converted into a $2,000 car door, or $1 worth of raw wool is converted into a $1,000 suit, is real wealth created. Hamilton also notes that people being paid for creating wealth (manufacturing) creates wages, which are the principal engine of demand that drives an economy. And both come from a generally protectionist foreign-trade policy.
In an early version of Keynesian economics, Hamilton noted that when people make things, they also earn money, which will be used to buy more things, thus creating a real economy with things of real value circulating in it. In addition, Hamilton saw a clear government role in fostering manufacturing, not just in subsidizing it until it could compete on its own but also in crafting a foreign policy that favored the protection of American enterprises. “It is for the United States to consider by what means they can render themselves least dependent,” on other nations’ manufactures, Hamilton wrote, “on the combinations, right or wrong, of foreign policy.”
But there were many voices—the loudest being the young Thomas Jefferson—who argued that instead of becoming an industrial power the United States should remain an agricultural nation. Hamilton believed that both were possible, and there would even be a desirable synergy between the two. He felt that if America wanted to be competitive, it couldn’t just leave it to the free market, at least not until homegrown industries were robust enough to compete on their own in the international marketplace.
Government ought to play a role in fostering a strong industrial base, he argued: “To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government.” In fact, Hamilton believed that success was not possible without government. “To be enabled, to contend with success, it is evident that the interference and aid of their own government are indispensable,” he wrote.
His reasons were pretty straightforward: it would take government’s power to set up a playing field for the game of business where investors who would otherwise be able to make more money overseas would keep their money in the United States. “There are weighty inducements to prefer the employment of capital at home, even at less profit, to an investment of it abroad, though with greater gain,” he wrote.
Having provided this overview, Hamilton got right to the meat of the matter—his 11-step plan (see the sidebar in the introduction). It called for government to take an active role in developing its own industry, in discouraging imports through tariffs and prohibitions, in building transportation routes at home for internal trade, and in subsidizing manufacturing until companies become strong enough to compete on their own.
Consider the historical impact of Hamilton’s plan, which was adopted in a series of piecemeal legislative steps mostly in 1793: tariffs became so important that they constituted pretty much the only source of revenue for the federal government until the Civil War, and they were the single largest source of federal revenue from then until World War I. And even when the U.S. government grew exponentially in the lead-up to World War II, fully one-third of all federal revenues came from tariffs.
It is only since the Reagan era and subsequently with Bush Sr., Clinton, and then Bush Jr., that we have forsaken tariffs and have been chanting the “free trade” mantra—to our own detriment and destruction. A protectionist approach, including tariffs, is what the USA needs so that it can get back in the game of manufacturing—before it’s too late.
Rebooting the Economy
So in my meeting in February 2010 at the White House, I pointed out to the administration economist that when Ronald Reagan came into office, as the result of 190 years of Hamilton’s plan, the United States was the world’s largest importer of raw materials; the world’s largest exporter of finished, manufactured goods; and the world’s largest creditor.
After 30 years of Reaganomics, we’ve completely flipped this upside down: we’ve become the world’s largest exporter of raw materials, the world’s largest importer of finished goods, and the world’s largest debtor. We now export raw materials to China, and buy from it manufactured goods. And we borrow from China to do it. I pointed out that China’s “stimulus package”—about the same size as ours at around $800 billion—could explicitly be spent only on Chinese-made products from Chinese-owned companies employing only Chinese workers. Ditto for the 2009 Japanese version of “Cash for Clunkers,” which mandated the purchase of only Japanese cars.
Although no fan of the Reagan revolution, the Obama administration’s economic policy team is no fan of protectionism either. Nevertheless, the senior economist at the table reiterated the administration’s goal of creating “new jobs” here in the United States.
Well, here’s how we can do it.
Create New Jobs Here at Home
First, charge an import tax—a tariff—on goods made overseas that compete with domestic manufacturers, while keeping import taxes low on raw materials that domestic industries need.
Somehow it has become unfashionable in the post-Reagan era to talk about tariffs. An easy way of explaining tariffs is to say, “If there’s a dollar’s worth of labor in a pair of shoes manufactured in the United States, and you can make the same pair of shoes with twenty cents worth of labor in China, we’re going to charge you an eighty-cent tariff when those shoes are imported into the United States. If you can make them with fifty cents of labor in Mexico, our import tariff from Mexico is fifty cents.” In short, import duties are used to equalize manufacturing costs and protect domestic industries.
And the tariffs’ equalizing effects shouldn’t be limited to labor. Products from countries where toxic chemicals can just be poured into rivers (eventually ending up in the oceans we all share) instead of being more expensively disposed of or recycled, should be assessed a tariff to reflect that environmental cost. The same should apply to the way they generate their electricity (for example, using old coal-fired power plants that belch toxins into our air) to manufacture parts for the products.
Second, pull us out of the WTO, NAFTA, CAFTA (Central American Free Trade Agreement), and the rest, and mandate that all purchases made with U.S. taxpayers’ dollars be spent on goods and services provided by American workers employed by U.S.- domiciled and -incorporated businesses on American soil. No exceptions. (No more hiring Dubai-based Halliburton, for example.)
Third, have the government support new and emerging industries through tax policy, direct grants, and funding things like the National Institutes of Health, which funds most university research that leads to profitable new drugs for our pharmaceutical companies. In Japan it’s the Ministry of Industry and Trade that helped develop the Lexus so beloved by Thomas Friedman. There is no shame in subsidizing our own companies—so long as they show their loyalty to the nation by employing American workers, investing in American enterprises, and not engaging in international business ventures that hurt America.
Then there are other tax incentives and domestic policies to pursue that will benefit the creation of jobs at home. Encourage Americans to save so that there’s a strong pool of investment capital for businesses to borrow against and grow. The best way to do this is to offer people an above-the-inflation-rate interest rate on savings. This could easily be accomplished by offering U.S. government savings bonds with a guaranteed rate of return (for example, inflation plus 3 points) and limiting their purchase to people who have a net worth of less than $5 million and selling no more than $1 million per person. This would establish a benchmark against which banks would have to compete, stimulating private banks and credit unions to offer higher returns on savings.
These are bold moves, no doubt, for any president or party to make, but they do have the advantage of pleasing the Tea Party conservative populists as well as the Coffee Party progressive populists. Of course, such protectionist policies would not sit well with some of the multinational conglomerates, whose loyalty is not to America but to their investors and shareholders. A lot of them manufacture products in China or Vietnam and sell them here at a huge profit without giving a damn about the consequences of these actions to American workers.
And these multinational corporations have newfound power, given the recent Citizens United v. Federal Election Commission decision of the U.S. Supreme Court (see chapter 10) asserting that even foreign corporations are persons with constitutional protections of things like free speech. Now they can freely carpet-bomb politicians they either love or hate with cash or attack ads during elections. This poses a serious threat to any politician who pushes policies or legislation that is not in the financial interest of the corporations—even if it is in the economic interest of the USA.
Whether it was coincidental or consequential, a week after that Supreme Court decision President Obama was backpedaling on many of his criticisms of bankers and other companies who could easily outspend him or any other politician or political party.
And no matter how well the authors and the bloggers I was with at the White House can help President Obama and the Democrats in Congress tell the story of their accomplishments, that ability of corporations to now promote or destroy a politician or political party is a problem that—like our persistent unemployment arising from our loss of manufacturing—is not going to go away on its own. The President and Congress need to do something drastic, like amending the Constitution to say that corporations are not “persons,” and reinstituting the trade policies that worked so well from the time of George Washington to, most recently, Harry S. Truman, Dwight D. Eisenhower, John F. Kennedy, Lyndon Baines Johnson, Richard M. Nixon, and Jimmy Carter.
Instead, Obama and the Democrats seem to have joined the Republicans in drinking the Tom Friedman Kool-Aid, and Middle America is looking more and more like Jonestown.
Article with footnotes here