It should be the trade deficit, stupid

With American unemployment seemingly stuck at around 9 percent (or 15 percent if you count those working part time and those who have given up looking for a job), it is astounding that no significant politician of either party is talking about the trade deficit.

President Obama certainly is not, as he and the Democrats appear to have fixed on attacking Republican Congressman Paul Ryan’s plan for turning Medicare into a voucher system as their main campaign strategy. And the Republicans, including Ryan, just can’t seem to think of anything except cutting taxes.

I guess it’s possible that the American people care more about saving Medicare and cutting taxes than they do about holding finding and holding onto their jobs. But I doubt it. Sometime between now and the 2012 election, I think Americans are going to demand to know what happened to the good jobs and whether they will ever again have any.

That’s when the election will become interesting because the usual tools for creating jobs either aren’t available or aren’t working anymore. Some, like New York Times columnist Paul Krugman argue that more of the standard stimulus spending and of the Fed’s quantitative easing are still possible and advisable despite current concerns about debt, deficits, and potential inflation. Krugman  may technically be right, but I don’t think that matters at this point for two reasons. Stimulus spending is very inefficient and tends to leak. For instance, the cash from the old Cash for Clunkers program mostly wound up creating jobs in Japan and Korea where most of the small, gas-sipper cars are produced. Quantitative easing is supposed to do a number of good things including stimulating investment. But investors are typically reluctant to invest when production operations are running at a low fraction of capacity. Beyond this, however, is the political reality that in today’s atmosphere of concern over rising debt and potential stagflation, the stimulus and quantitative easing options are simply not on the table.

The obvious option that is hiding in plain sight is reduction of the trade deficit. Every $1 billion of trade deficit costs America from 10-20,000 jobs — let’s say 15,000 for the sake of this argument. Thus, at $500 billion and rising, the trade deficit costs America about 7.5 million jobs. Okay, a lot of the trade deficit is the result of oil imports that don’t really reduce U.S. jobs. So let’s cut the number in half and say the trade induced job loss is 3.75 million jobs. That’s still a lot of jobs.

What could the United States do to get those jobs back or to replace them with other jobs? The answer is that the United States is a highly competitive location for production and provision of most tradable goods and services. In a truly free market global environment the U.S. trade deficit would tend to be far smaller than it presently is. But the global environment is not anywhere near being a free market/free trade environment, and if America is to do the obvious and create jobs by reducing its trade deficit, it must have an export led growth strategy similar to those of China, Germany, South Korea, and other highly competitive economies.

Such strategies entail raising taxes on consumption — so called Value Added Taxes (VATs) – while cutting them on saving and investment. They mean preventing dollar over-valuation — if need be by taking measures to counter the illegal interventions of some countries that use currency undervaluation as a subsidy for exports. They also mean aggressive use of financial investment incentives to attract investment in the production/provision of tradable goods and services to the United States and to offset the impact of such incentive offers from other countries. They also entail serious thinking about what industries can be competitive from an American base and a comprehensive approach to creating a regulatory environment that maximizes their competitiveness.

None of this is rocket science. Germany, Sweden, the Netherlands, South Korea, China, Singapore, and other countries are already doing it very successfully. How to find a way for America to do it as well and to create the good jobs of the future here must become the focus of both parties as we move toward the next presidential election year.