The Jobs Agenda: Step One Is China

America is in the post-health care reform political environment now. The top-of-mind concern for voters of all political stripes is still the economy. Underpinning this concern is a real sense of fear and uncertainty about our nation's future: where our children will find jobs, how we will pay off our public and private debt, and what external threats we will face in the years to come.

Our anxiety only increases when Washington still turns a blind eye to the most glaring problems. So, where should we start? No doubt Congress and the Administration will continue to roll out efforts to strengthen education, invest in infrastructure, and tinker with the tax code. But all of these efforts will get overwhelmed unless we break the grip that Wall Street still has over our international economic policies. These policies have led to a massive trade deficit, turbocharged outsourcing, and a dangerous codependency with China: we provide the rich consumers; China provides the cheap goods made possible by state control and massive subsidies, along with the financing.

Here's the cost:
  • 2.4 million jobs lost to China, not only from the Industrial Heartland, but also from the hi-tech corridors of California, New England, and Texas.
  • A reduction in industrial capacity: even during the Great Depression, the U.S. managed a slight increase in industrial production. Not this time.
  • A rich and sad irony: many American consumers--concerned about quality and pride--unable to find American products on the shelves of stores.
  • A quandary for America in the developing world noted by Harold Meyerson: instead of emulating the sometimes dysfunctional democracy of the U.S., more developing nations like what they see in China's mix of mercantilism and authoritarianism.

The tech bubble burst a decade ago. The housing bubble burst in 2008. Soon, the trade bubble will burst.

Last spring, President Obama spoke eloquently about the need to "rebalance" the American economy, to produce more and consume less. He's absolutely right, but what does this mean? In all honesty, an economic rebalancing will have a much larger impact on our nation than health care reform ever will. If the Administration is serious about this rebalancing--and I hope that it is--the job of explaining how it can be accomplished and who it will benefit must begin right away.

If the rebalancing is to start anywhere, it must start with being honest about our flawed economic relationship with China. The Administration has the unique and extraordinary opportunity to do this within the next 15 days.

Outside of domestic policy, the role China plays in our economy will be the biggest determining factor in how robust our job market is, and how large our middle class will be, for years to come. Why? First, China will become the world's largest economy someday, even if it is only fractionally as productive as the U.S., because of its sheer size. Second, China practices a potent blend of mercantilist economic policies and repressive political policies that are effective in the short term in promoting stability and economic growth, but detrimental to the rule of law, wages in the developing world, and the economies of industrial competitors like the U.S. Third, China has already displaced 2.4 million jobs in the U.S., most in manufacturing and technology. Those are jobs we do not want to lose because the jobs--if any--that replace them pay lower wages and simply do not offer the same value added for the economy.

April must be Obama's month to do something about China. As a candidate, the President said we should trade with China, but fairly. It was a perfectly reasonable position, and one I happen to agree with. He also said President Bush had not been tough enough with China, a statement with which I also agree. As President, he's made a few key decisions--such as imposing duties on Chinese tires that were flooding the American market--that put teeth into his promises. But he's yet to do the most meaningful and difficult thing that he promised to do back in 2008: insist that China revalue its currency.

This debate will play out in full spectacle over the next two weeks, because Obama's Treasury Department has an April 15th deadline to file a semi-annual report on foreign exchange rates. It's an opportunity to designate China as a "currency manipulator," which would trigger serious negotiations. Every honest economist who has looked at China's exchange rate agrees that China manipulates its currency. (Those economists who don't agree either work for Beijing, reside in a parallel universe, or believe that credit default swaps were a wonderful thing for our economy.)

Economists such as Paul Krugman, Fred Bergsten, and Robert Scott have capably dismissed the "sky will fall" myths about getting tough on China's currency. Taking on China will not start a trade war, dramatically increase consumer prices, or permanently spook the bond market. Instead, it will increase U.S. employment (by anywhere from 700,000 to 2 million jobs), boost U.S. exports, and rebalance the economy. And, I might add, at no cost to taxpayers. Let the rebalancing begin.