Wrong song on the bus

It seems bus tours are the new in thing for politicians. Michelle Bachmann did a bus tour of Iowa as a prelude to winning the straw poll in Ames. Sarah Palin‘s bus shows up anywhere it appears that political news might be made, and now President Obama is doing his own bus tour of Minnesota and the mid-west.

The problem is that he appears to be singing the wrong tune. So far his theme some has been an ode to job creation through lower payroll taxes, an infrastructure bank, and the conclusion of free trade agreements with Colombia, Panama, and South Korea. Of course the payroll tax cut will exacerbate the debt level and the debt ceiling debate, but if it’s only temporary it may be more of a plus than a minus. An infrastructure bank is, in principle, a very good idea, but it will require capital funding that may well increase the federal debt level.

The real problem, however, is the free trade agreements. It is good that the president has finally noticed trade and its potential for helping him with job creation. But he has false understanding of how trade might be able to help him. In pushing these bilateral free trade agreements, he is actually more likely to increase the U.S. trade deficit and to suffer further job losses than to create jobs by reducing the U.S. trade deficit. The reason for this is that the Panamanian and Colombian economies are too small to have much impact one way or the other on the United States. At the same time, according to the International Trade Commission, the free trade deal with Korea is likely to increase the U.S. trade deficit and thus to result in net job loss for Americans.

The road to the job creation the president so badly needs is not through bilateral free trade deals, but through a variety of policies aimed at reducing America’s enormous and chronic trade deficit. Once considered radical, this notion is no longer taboo.  For instance, in the most recent edition of the quintessentially establishment journal Foreign Affairs, Nobel prize winning economist Michael Spence emphasizes that America will have to dramatically improve its performance in the traded sectors of the economy. In this he is only echoing the International Monetary Fund’s call for global "rebalancing". Not to be outdone, Peterson Institute Director and perennial free trader Fred Bergsten in a recent op-ed. for Bloomberg called China perhaps the world’s most protectionist nation and suggested U.S. counter actions such as Treasury buying of China’s yuan in retaliation for Chinese intervention in currency markets to buy dollars.

Bergsten’s scenario is difficult to imagine because the yuan is not a freely traded currency and it is not clear what the United States would do with a pile of yuan. But measures to countervail the mercantilist trade, currency, and investment policies of a number of major trading countries should be the focus of Obama’s economic strategy rather than the conclusion of free trade, technological assistance, and joint venture deals with these very same countries.

Obama’s economic advisers are all completely conventional  and orthodox neo-classical economists who have made a veritable religion out of free trade. But the President might do well to recall the experience of Great Britain during the late 1920s and early 1930s at the time of the Great Crash and Depression. Britain also had a large trade deficit and embraced the religion of free trade.  But with unemployment soaring in the early 1930s, it devalued the pound sterling and largely abandoned its unilateral free trade regime. As things turned out,  Britain weathered the Great Depression better than the United States.

Unable to introduce meaningful new stimulus and macro economic policies, the president will eventually have no choice but to seek to create jobs through use of trade , investment,  and industry oriented measures otherwise known as industrial policies.