The following is a paper by CPA member and supporter, Bill Parks, founder and president of NRS, Inc.
Increasing evidence suggests that the Great Recession may not be a temporary, cyclical event, but instead a chronic condition. The U.S. trade deficit has quietly been destroying American jobs and lowering the middle class standard of living for decades. Improving American competitiveness would boost manufacturing, create jobs and swiftly revive the economy. Warren Buffett has prescribed a compelling proposal for balancing trade with minimal government interference. Modified and administered correctly, the Buffett plan can be a solution to our malady.
Another View of the Economy and the Recession Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery…Now they have run out of rabbits. – Nouriel Roubini The United States’ current economic malaise is commonly characterized as an anomaly – a bump in the road, a storm to be weathered. Pundits and politicians have ascribed the blame to a variety of factors: unemployment, deficits, a weak housing market, high oil prices, the European debt crisis, Middle East turbulence, over-regulation, under-regulation, over-taxation, under-taxation. But another possible cause – indeed, the most probable – is rarely discussed (and even then in hushed tones). It’s the proverbial elephant in the room.
It’s time we discussed the elephant.
It is unlikely that we are simply experiencing a troublesome economic anomaly. The more plausible view is that the prosperity we have experienced in recent decades has largely been the result of anomalies, and that we are now seeing a regression to a “new normal.” Disturbingly, this new normal is characterized not just by lower wages and fewer benefits for the majority of Americans, but also by continued high unemployment. While the United States has prospered in the last 40 years, that is largely because the rich have done exceedingly well, because two government-sanctioned “bubbles” have artificially inflated our economy, and because household and government debt has soared. Take out the skyrocketing debt, along with the tech and housing bubbles, and the picture becomes very dark. Wages are stagnant. Job growth is weak. Household, business and public debts have reached historic levels. America’s present is America’s future – unless, of course, we take bold steps to improve that future. Unfortunately, many in the corridors of power have failed, or refused, to recognize the probability that our economic illness is even more serious than its immediate symptoms indicate. Until we come to grips with the grim reality of our tepid economy and compromised standard of living, we will be incapable of improving either. All the stimulus spending, tax cuts, deregulation, quantitative easing, interest-rate cutting and money printing in the world can’t fix the systemic, chronic condition infecting our nation: trade imbalance and a drastic decline in domestic manufacturing and an endangered working class.
In the early 1990s the economist Dr. Ravi Batra ascribed the problems of the working class to the United States’ increasing commitment to global free trade. At about the same time, Philadelphia Inquirer journalists Donald L. Bartlett and James B. Steele chronicled the dismantling of the American middle class in their investigative series and best-selling book “America: What went wrong?” Their work revealed a working class losing living-wage jobs with good benefits in exchange for low-wage jobs with poor or no benefits. It also demonstrated through data analysis that, for the first time in history, the American middle class was shrinking. Only one conclusion could be drawn from the work of Batra, Bartlett and Steele: that many Americans faced a diminished future standard of living unless policy makers worked to change that trajectory. But then the dot.com boom – or, rather, bubble – took effect, and the efforts of Batra, Barltett and Steele were too easily forgotten.
Free trade, Batra warned, led to increased productivity coupled with decreased income and real wages, a situation he likened to the age-old dilemma of the agricultural sector; free trade, in Batra’s view, was to blame for the socio-economic ills reported by Bartlett and Steel. However, the prosperity brought on by the tech bubble of the 90s and the housing bubble of the early 2000s, coupled with over-leveraging in every sector, dampened free trade’s negative impact. This allowed the unmitigated proliferation of the free trade paradigm and its near-universal acceptance as the best way forward.
Now it appears we’re moving backward, and not just temporarily. The Great Recession unemployment problem may not be just cyclical, or even structural, but permanent. Blaming the dip’s duration on its financial roots may be comforting, but statistics show that private employment growth, not counting health care, has been negative for the last ten years. Does a buoyant stock market, CEO bonuses, and large industry profits count as a recovery when millions are still unemployed or under employed? When do we admit that this might be a permanent problem for the former middle class, and therefore the nation?
As a remedy, Batra advocated imposing high tariffs on selected industries and breaking up giant corporations under antitrust laws – a strategy so politically problematic it would be impossible to enact. Proposals such as a value-added tax (VAT) and currency reform, though an improvement over the non-policy of laissez faire free trade, still aren’t a comprehensive solution. Obama’s remedy of selling more frozen chickens to Russia or pork products to China won’t solve our economic woes, either. Even if such measures solved the trade deficit, the United States would still have a manufacturing deficit, resulting in a shortage of well paying working class jobs. So, if not these remedies, then what? Are we left to settle for a new normal with high unemployment and low real wages for the foreseeable future? How can we change the trajectory?
For economic and political reasons, it is unlikely that the U.S. can follow the Keynesian prescription of substantially increasing government spending to recover from the present malaise. Fortunately, we can achieve a similar, or even greater, effect by introducing measures to balance trade and promote manufacturing. Deficit spending can produce a “multiplier effect,” wherein a publicly funded new hire spends those funds on goods and services, the providers of which then spend a portion of those funds, and so on. However, expanding manufacturing can produce an even more powerful “accelerator effect.”*
*Assume a simple economic model in which industry A factories are operating at capacity. The equipment used in industry A is replaced every 20 years and is manufactured by industry B. Industry B in turn uses equipment from other industries, such as C, D, E, etc. Assume further that industry A spends 5% of its revenue on equipment replacement during normal times. When industry A’s demand goes up by 10%, it will order three times the product from industry B in the first year to expand production capabilities. This increased demand will then reinvigorate industries C, D and E, setting off a chain reaction that jumpstarts the economy.
Examining the Great Depression, we find that manufacturing growth contributed at least as much to the recovery as deficit spending. Federal jobs programs and other Keynesian measures abounded in the New Deal era, but when Roosevelt scaled back deficit spending in 1937 and 1938, the economy slipped back into recession. The United States only truly recovered when it spent heavily to arm for WWII. Military spending brought not only jobs, but also massive investment in the manufacturing sector that in 1932 had dropped to 54 percent of its 1929 sales.
By WWII, much of American industry was obsolete, and wartime product demands were radically different from those needed in peacetime. These demands triggered not only the expected multiplier effect, but also the more powerful “accelerator effect,” causing dramatic industrial expansion. The accelerator swiftly returned the economy to more than full employment.
Today, U.S. manufacturing is but a shadow of what it once was, thanks largely to free trade. Opponents to trade regulations worry that improving our competitiveness will cause a trade war, when America has been losing a trade war for years. Countries like China have hoarded the most lucrative industries, while low-wage countries have gobbled up the rest. Meanwhile, China continues to manipulate its currency and strong arm American companies, forcing them to transfer technology to China.
Boosting American competitiveness and reviving industry would provide as much economic stimulus as occurred during WWII, when most of the factories were intact, though needing retooling. Unfortunately, there seems to be no consensus on the need to act. So, while we reach for jobs in green energy, more competitive countries will beat us to the low-hanging fruit. We’ll likely be left with the green tech jobs, such as maintaining wind turbines – hardly enough to drive an economic recovery. Even a wind turbine built in the United States is likely to be assembled from bolts, magnets and even motors from China. This is not a winning strategy. Restoring trade balance is the only remedy for our manufacturing deficit.
Fortunately, an effective treatment has already been prescribed – by none other than Warren Buffett. Administered correctly, it can be the cure our nation needs.
In a 2003 Fortune Magazine article,[iii] Buffett and co-author Carol Loomis proposed “issuing Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports,” and requiring importers to acquire ICs in amounts corresponding to the dollar value of their imports, ultimately resulting in balanced trade. Senators Russ Feingold and Byron Dorgan later proposed “The Balanced Trade Restoration Act of 2006” [iv] which would have implemented a version of Buffett’s plan. The Bill cites article XII of the General Agreement on Tariff and Trade (GATT 1994) that permits any member country to restrict the quantity or value of imports in order to safeguard its financial position and the balance of payments of the member country. Unfortunately, the bill was never brought to a vote.
We need to look again at ICs. I’m proposing a revised version of the Buffett plan that will balance trade, create American jobs and help put the shine back on the rust belt.
- Issue ICs to U.S. exporters in amounts equivalent to the dollar value of their exports.
- Require importers to acquire ICs in amounts equivalent to the dollar value of their imports.
- Allow exporters to sell their ICs to importers in an auction similar to that used to auction U.S. treasury securities.
- Designate the Treasury Department or another government agency to oversee IC issuance and to regulate certificate exchange values to optimize trade balance and market stability, with a goal to achieve balanced trade within a certain time period, such as ten years.
- Divert a portion of IC sales and use the revenues to help pay down the debt and deficit.
- Limit Import Certificates to manufactured goods and outsourced jobs,[v] and exempt agricultural products and raw materials. This would bolster manufacturing and improve the job market while avoiding the volatility associated with oil and other commodity prices.[vi]
A Revised Proposal and Call to Action
Today, the dire U.S. economic and trade situation cries out for the Buffett plan. WWII pulled the United States out of the Great Depression almost immediately; Import Certificates could more slowly accomplish that same revitalization for the Great Recession.
The incentive effect of ICs will cause a huge jump in demand for domestically manufactured products and a corresponding jump in employment. Manufacturers will need to build new factories and grow their production capability. This added employment will multiply economic effects as the employees distribute funds throughout the economy. Even more important, as manufacturers grow their production capability and build new factories, the accelerator will come into play. Demand for domestically produced machine tools, computers and all types of machinery will swell; bringing the economy even more good jobs. This one-time boost could rapidly pull the economy out of the doldrums, probably long before imports and exports reached parity.
Over time, ICs will serve as an economic tool that affects our economy just as surely as the no-longer-effective monetary or fiscal policy. Flexibility in cranking down the IC ratio will allow us to moderate domestic and international economic disruptions. We should no more use a fixed formula to implement certificates than we should use one to control monetary or fiscal policy. Dimitri Papadimitriou expresses concerns that IC prices could be extremely volatile and disruptive to commerce.[vii] But using a flexible ratio within certain guidelines will ensure a smooth, consistent acceleration of the economy.
Exporters have much to gain from ICs, and they should, but allowing the exporter to keep all of the revenue from IC sales would over-compensate them. Some of the revenues from ICs could be diverted to help pay down the federal debt.
To help ensure economic stability, congress could provide a timeline for balancing manufacturing trade, leaving the ratio of imports to exports to be determined one or more years in advance, depending on forecast economic conditions. [viii]
The United States Treasury Department might be the logical body to administer the proposed Import Certificate (IC) program. The Treasury has the experience and appropriate staff to administer it and, perhaps with input from the Department of Commerce, to resolve disputes over which products would be subject to the program and which should be excluded.
The Treasury, or another agency, would annually, or more often, determine the ratio or dollar amount of imports to be allowed for each import certificate awarded per dollar of covered exports to meet Congress’s intent. It could certify exports monthly and issue ICs valid for 12-months. It would then auction off the ICs in a process based loosely on the process used to auction U.S Treasury securities. Dealers might be the main purchasers, with provisions for direct purchasing by importers. By adjusting the IC ratio monthly, the managing agency could minimize price volatility. Congress might ensure that the Treasury has specific goals such as achieving balanced manufacturing trade in 2020.
 Bill Parks is Founder and President of NRS, Inc. Started with $2,000, NRS has grown to over $25,000,000 in sales and is the world’s largest paddlesports accessory provider.
[ii] “Marx was Right – Captialism is on a Self-Destructive Path,” Project Syndicate (projectsyndicate.org), August 2011.
[iii] America’s Growing Trade Deficit Is Selling the Nation Out From Under Us. Here’s a Way to Fix the Problem-And We Need to Do It Now. FORTUNE October 26, 2003 By Warren E. Buffett and Carol Loomis.
[iv]S. 3899: To achieve balance in the foreign trade of the United States through a market-based system of tradable certificates as well as other purposes.
[v] Outsourcing destroys American jobs just as surely as does moving American manufacturing jobs overseas. Therefore, outsourced jobs should also necessitate import certificates. More research will be necessary to establish the appropriate value for outsourced labor by multi-nationals that outsource to their own subsidiaries. Rules must be in place to assure fair transfer pricing within multinational firms.
[vi]International trade imbalances in commodities and raw materials cause extremely disruptive business conditions.. Combining commodities with manufactured goods would cause wildly fluctuating IC prices. Business must have predictable IC prices in order to operate efficiently. Commodity imbalances, including oil, need targeted approaches and should not be combined manufactured goods and outsourced jobs.
[vii] Dimitri B. Papadimitriou, Greg Hannsgen, and Gennaro Zezza, “The Buffett Plan for Reducing the Trade Deficit.” Working Paper No. 538. The Levy Economics Institute of Bard College, July, 2008.
[viii] Ian Fletcher (Free Trade Doesn’t Work, What Should Replace It and Why) proposes as an alternative The Natural Strategic Tariff. This raises revenue and doesn’t discriminate as would the usual protective tariff. By being levied at the same rate on all imports it avoids the harm of having tariffs levied according to political power. He believes also that it will work to foster “good” industries. He roughly defines them as high tech areas that are at an early point of production where the protective tariff will increase production and these increases will rapidly lead to scale economies. The disadvantage is that there is no guarantee that it will achieve a trade balance and US manufacturers that export are still at a disadvantage to manufacturers from countries that levy Value Added Taxes. Buffett’s ICs will also target Fletcher’s good industries, but with the added advantages of aiding exporters and guaranteeing a manufacturing trade balance.