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What Went Wrong

The task for the president and Congress is to make it profitable to produce in the United States -- not only make it profitable, but develop a policy to protect investments from subsidized off-shore production.
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After eight years of Bush borrowing and spending to the tune of $6 trillion dollars, tax cuts and stimulus, wars and off-shoring a third of the nation's manufacture, the voters wanted no more. But Obama gave them even more borrowing and spending to the tune of $3 trillion, tax cuts and stimulus, wars, and off-shoring our industrial backbone -- thus, the shellacking.

Faced with a fiscal crisis, Democrats always responded responsibly, instituting the budget process in 1973, saving Social Security in 1983, supporting Gramm-Rudman-Hollings to stop deficit spending, and in 1993 President Clinton cut billions in spending, raised billions in taxes, taxed Social Security, giving President George W. Bush a balanced budget in 2001 with surpluses as far as the eye could see. But after the Bush spending binge, President Obama made no effort to draw down deficits. He submitted a budget calling for deficits in excess of a trillion dollars each year for ten years. By the time Obama was sworn into office, the economy had been stimulated $6 trillion by President Bush; household debt had stimulated another $7 trillion during the same period; and with $13 trillion stimulation, we were still losing 799,000 jobs a month (January 2009). Obama stimulated with 40% tax cuts for people that had stopped spending and were saving. Stimulation was substantially spent. Stimulation saved Wall Street, the financial houses, the big banks, and the AIG insurance company, all of which promptly eliminated jobs and gave billions in bonuses.

President Obama just bragged on TV about creating 1.1 million jobs in the last ten months. But the Princeton economist, Alan Blinder, estimated long before the recession (February 2007) that the economy would lose thirty to forty million jobs in the next ten years to off-shoring. That means the best estimate of jobs lost is three to four million jobs a year. Christmas always brings a gain of jobs. Assuming a gain of 400,000 jobs in the remaining two months of this year, a gain of 1.5 million jobs a year amounts to still losing l.5 million jobs to off-shoring each year. The President and Congress know this. But jobs are sacrificed to keep the contributions flowing from Wall Street and corporate America, who want to keep the profits flowing from China and India. The mystery is that the free press doesn't report this.

The loss of jobs to off-shoring is not surprising. Today in globalization it doesn't pay to produce in the United States. The United States has the highest cost of labor, environment, and safety, plus anti-trust laws, and someone can go or be in China and import the same article of quality cheaper and put you out of business. That is why the banks are not making loans for domestic production. Thus the task for the President and Congress is to make it profitable to produce in the United States -- not only make it profitable, but develop a policy to protect investments from subsidized off-shore production. Guess what? The United States already has such an industrial policy on the books with its trade laws.

Sixty years ago, Congress enacted the War Production Act of 1950 to make sure the country had the production and supply of equipment and materiel necessary for the nation's security. In 1961 President John F. Kennedy held Cabinet hearings to determine that textiles, next to steel, were most important to our national security. He then promulgated his 7-point program to save the textile industry. Today in globalization, we want domestic industries to maintain their competitiveness. But if subsidized imports make this impossible, then only that part of the textile industry necessary to our security, such as camouflage, parachute cloth and body armor materiel, can be protected. We have suffered trade deficits amounting to $6 trillion in the last ten years. President Obama should move with a 10% surcharge on imports as President Nixon did in 1971 when the trade deficit was a fraction of what it is today. Rather than wait for General Motors to go bankrupt, needing a bailout, President Bush, and now President Obama, under Section 201 of the Trade Act, should have imposed tariffs or import quotas when General Motors was endangered. This was exactly what President Reagan did to save Harley-Davidson motorcycles, which President Obama is bragging about in India. Dumping laws and "Buy American" provisions should be enforced. President Bush refused to compete in globalization and President Obama, following his pledge to change, should enforce our protectionist trade policy, creating millions of jobs.

What to do? President Obama can kick-start the economy and create jobs by getting in step with the value added tax systems of 135 countries in globalization. VAT countries can rebate at export their value added tax, whereas the corporate income tax of the United States is not rebated. Senator McCain's anti-VAT tax resolution was a VAT increase on the present income tax. But Congress can actually cut taxes and receive more revenues by replacing the corporate income tax with a 5% VAT. The 2010 estimate for corporate income tax is $156.7 billion, whereas a 5% value added tax raises $600 billion. Food, health, heating and cooling, and rent can be exempted for the lower income which still leaves over $300 billion to pay down the debt. Corporate income tax begins today at 35% with an average payment of 27%. Reducing the tax burden on production of 27% to 5% lessens the cost of articles for domestic consumption and, with no tax on exports, makes it profitable to produce in the United States. It will take a year for the IRS and business to computerize and implement a value added tax. But we ought to move in the lame-duck session. This approach doesn't increase taxes on personal income. But as the debt is paid down, then the personal income tax can be reduced. With the corporate income tax cancelled, the one trillion dollars in corporate off-shore profits can be repatriated on condition that the profits are used to create jobs rather than bonuses. If not, repatriated profits will still be subject to the corporate income tax.

After the election, Rand Paul put the nation on notice that "government doesn't create jobs." Joe Scarborough on Morning Joe said there were two words for President Obama to say: "I understand." Then Scarborough admonished: "Government doesn't create jobs." Rand Paul and Joe Scarborough are wrong. In globalization it's not company vs. company, it's country vs. country, and government is the main creator of jobs. As the United States languishes, China's government is setting the pace of competition. The United States government must compete. Globalization is nothing more than a trade war with production looking for a country cheaper to produce. Japan started this trade war after World War II by closing its market, subsidizing its manufacture, selling its export at cost, making up the profit in its closed market. This assault for market share put General Motors into bankruptcy with Toyota #1. Then China came with its government-controlled capitalism, giving incentives to produce, transfer technology and research, controlled financing, labor, production, trade, and market. Now more than ever, Henry Clay's statement on free trade in 1832 rings true: "It never existed; it never will exist...." No chance with communist control of the economy in globalization. At President Obama's press conference after the election, the President showed his naiveté by stating: "...making sure that we're making the investments in technology that will allow us to keep our competitive edge in the global economy." It is the development of technology that creates jobs. And Silicon Valley and Intel have long since left for development in China. The United States has a competitive edge in democratic government with first amendment rights of speech, religion, press and assembly. But in the global economy, China's government has the competitive edge in every phase of the economy with its communist-controlled capitalism. Today China has nuclear, missilery, satellites, the internet, and has quadrupled Silicon Valley's innovation at Xi'an.

China knows how to use its economic power in diplomacy. Twenty years ago China used its economic power to forego any hearing on human rights in China. After the Tiananmen slaughter in 1989, the U.N. General Assembly adopted a resolution to investigate human rights in China. But China went to its economic friends in Africa and the Pacific Rim, and there has never been a hearing on the resolution. More recently, when Japan held a Chinese ship captain, China cut off Japan's supply of rare earth materials necessary for the development of sophisticated technology in Japan. Japan promptly returned the ship captain to China. In world affairs it's no longer the Sixth Fleet and nuclear that has influence: "It's the economy, stupid." But the leadership of America arrogantly thinks that the United States is in charge. In globalization, China is in charge. We keep waiting for China to crumble in chaos. China's leaders are not only good politicians but students of government. They will use traumatic measures to maintain the Middle Kingdom as they develop economically and compete in globalization. America's trouble is that the most competitive nation in the world is not competing; that the most productive nation in the world is not producing.

Now on his trip to India the President explains his loss in the election: "Leadership isn't just legislation. You must persuade people, giving them confidence." That's like the President saying he lost the middle class vote because he didn't say "middle class" enough. Slow down, Mr. President. Stop campaigning the country just talking jobs, furiously bailing the economy boat with stimulation but refusing to plug the off-shore hole in the bottom. The nation is headed in the wrong direction on protecting the economy and paying for government. The president and the nation can't get by two more years with this nonsense.