US Treasury Secretary Says US Can’t Fix Trade Imbalance Alone

It does take two to tango, but each partner must decide to dance in the first place. So when Treasury Secretary John Snow spoke about the US trade imbalance and told the IMF on Saturday that the US “by itself, cannot and should not be expected to resolve the problem, but we, like other major participants in the global economy have an important role to play,” one wanted to ask him about the tap-dancing he’s doing around the issue. American action can and does cause reactions, and the question is which way does America want to go.

In the long run, America’s current account deficit is unsustainable at ever-rising levels. It is now 6% of GDP, and as it continues to rise, it will have adverse effects on the domestic economy. The working poor will grow in number, and the over all economy will be smaller than would be the case were American trade closer to an equilibrium level.

The latest G-7 statement covered remedial action around the world and “In the United States, further action is needed to boost national saving by continuing fiscal consolidation, addressing entitlement spending, and raising private saving.” Indeed, if Americans saved more, the trade imbalance would begin to shrink. The trouble is, Americans don’t save at all. Currently, the savings rate is negative. Looking abroad for a solution to this problem is ludicrous. The American government can make this change happen.

First and foremost, the American tax system has to be altered to punish consumption beyond basics instead of productive work. “Capital is dead labor” said Comrade Marx, and Ol’ Abe Lincoln (who musta’ been a commie) agreed, “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if Labor had not first existed. Labor is superior to capital, and deserves much the higher consideration.” Taxation of consumption at 25% excluding rent, clothing and food would take care of most of the revenue issues. Keep the estate tax, excise taxes, and capital gains taxes (see Abe Lincoln above).

Second, the massive spending on military goods, which have a much lower multiplier effect than private capital goods, needs to be radically reduced. Although America is at war with Fascislam, it is difficult to justify much of the current spending. Why, for example, does the nation need more nuclear-powered subs when the enemy hides in territory unsuited for submarines like caves in the desert and mountains? The US spends more than all other nations on earth combined on defense, and that contributes to the imbalances.

Third, free-trade is best achieved through negotiation and bit-by-bit give and take. One doesn’t declare a free-trade zone and unilaterally drop tariffs and other restrictions – which has been America’s approach for 25 years. Access to the US market must be conditioned on reciprocity.

It is true that the Chinese currency is undervalued, and it is true that the EU’s common agricultural policy is hard on US farmers. However, the real problems in America’s economic house are within America’s power to address. As long as Mr. Bush is reshuffling his administration, he should let Mr. Snow return to the private sector as he has wanted for the past year. He's doing no good at all at the Treasury.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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