Another related piece

[David Farber <farber () central cis upenn edu>]

Date: Fri, 14 Jul 95 14:59:19 EDT
From: wfs () image mit edu (William Schreiber)


The Federal Deficit, the Trade Imbalance, and Employment
Some Thoughts for the Democratic Party


Summary


The last election was lost because many of the Reagan Democrats who had
deserted Bush in 1992 switched back to the Republicans in 1994.  They
switched because they were losing out in today's economy.  The election did
not represent a revolt agains big government, concern over the federal
deficit, or anything else in the infamous "Contract."  To reverse the
results in 1996, the Democrats must return to their traditional role as the
champions of ordinary people by taking highly visible steps to improve the
job situation.  This certainly does not mean balancing the budget in 10
years.  It does mean reversing the trade imbalance and slowing the move
towards free trade as embodied in NAFTA and GATT.  It also means persuading
the Fed that we need more jobs and growth, not less.




According to an exit poll for House members published by the New York Times,
the "revolt" of the electorate last November that produced such a cataclysm
in Congress (1) was not very large (4%, smaller than occurred in 1982), (2)
had very little to do with any of the points raised in the infamous
"Contract," and (3) was confined to a small segment of the electorate.
Women, Easterners, Westerners, Catholics, Jews, union members, those who
thought their standard of living was improving, blacks, those under 29, and
college graduates, all voted Democratic, much as they did in 1992.  The
total vote was not a landslide at all -- it was fifty-fifty.


Of course, there are always some voters who clamor for less government, but
the small-government types have never voted Democratic.  Virtually all of
the voters who switched parties were those who are losing out in today's
economy.  The switchers, however, did vote for Mr. Clinton in 1992 in the
hope that he would produce benefits that Bush did not.  A reasonable
conclusion is that they don't want less government; they want the government
to do more for them in the new economy.  In this desire, the are backed by
the Constitution, which states that one of the purposes of the Union is to
promote the general welfare.  The Democratic Party has been the party of the
people because it has traditionally taken this purpose to heart.  A small
tax cut for the middle class will not have much impact.  What is really
needed is a better job outlook for the switchers.


If, in fact, we are headed for a radically new economy in which American
workers must compete directly with those of China and the Pacific Rim, and
where automation is drastically reducing labor demands in both manufacturing
and the service industries, then there is no hope at all to improve the
situation of either the switchers or the Democrats.  Those of us who have
done well in these conditions may as well retreat into our private enclaves
for the wealthy and forget about those unfortunates outside.  On the other
hand, if we retain some feeling of responsibility for the general welfare,
we must open our minds to different approaches in the attempt to do
something effective.


Some say that the time has arrived when the US can no longer live so much
better than everyone else, and it is only fair that we make room at the
table for the rapidly developing nations of the East -- a sobering thought,
if true.  However, no politician has even been foolish enough to try to get
elected on that platform.  Instead, we keep hearing, from Democrats as well
as Republicans, that America's future is in exports.  The Administration
promised hundreds of thousands of high-paying jobs as a result of NAFTA.  In
hardly a year, that promise has disappeared and we are faced with enormous
losses instead.  I do believe that we are morally obliged to bail out the
peso since we bear much of the responsibility for this situation, but cannot
we learn something from this experience?


In the (very) long run, the improved productivity implied by lower labor
requirements can give everyone a better material life.  In order to do that,
we have to evolve to a system in which the reduced amount of work that is
available, and the pay that goes with it, are spread around more equitably
than now.  This implies enormous changes in our social arrangements that
cannot possibly be achieved in a short time.  (In the first Industrial
Revolution, it took some hundred years of unparallelled misery before the
benefits trickled down to workers.)  Slowing the transition to the new
economy is therefore one of the most important steps that might be taken.
We can only do that if we abandon the idea that "free" trade is invariably
the right course.  It does not equate with freedom, nor is it a moral
virtue.  It is simply one possible economic arrangement, and one that is not
being used in today's most successful economies.  We must confront the
reality that its first effect is downward pressure on jobs and incomes of
the very people who just voted against the Democrats.  If we want to avoid
that result, then we must abandon NAFTA and GATT, or, at the very least,
stretch out the transition to totally free trade over several generations.


It is instructive in this matter to review the results of the President's trip
to Asia to try to convince the Pacific Rim countries to adopt free trade.
All these countries are growing very rapidly under highly restrictive trade
policies and see no reason to change.  They agreed to go along in 25 years,
which is quite meaningless.


Another matter that needs serious attention is the trade imbalance.  This is
responsible for as many as 4 million direct and another 4 million indirect
jobs.  (Think of the effect of 8 million more tax-paying workers on the
federal deficit!)  It is recognized by most observers that this is a serious
problem, and we have taken significant steps to try to solve it.  We have
devalued the dollar against the yen by a factor of 2.7 and we have talked
endlessly with the Japanese -- the trade partner most responsible for the
imbalance -- with essentially no effect.  While there are some who blame
this situation on American mismanagement (insufficient savings and excessive
federal deficits), it may be noted that these alleged failings do not
prevent us from having nearly balanced trade with Europe, which has as much
genuine comparative advantage over us as Japan.  The imbalance, for the most
part, is caused by deliberate actions of the Japanese, and will be reversed
only by deliberate actions of our own.  Current efforts by the
Administration in this direction are to be applauded.


In trying to increase manufacturing employment, we would immediately run up
against the Fed, which thinks we have too much employment as it is.  A lot
of votes could be had by reversing the Fed's destructive policy.  With the
highest productivity in the world, we can repair our deficit in wealth
creation only by employing more workers.  The official statistics
underestimate unemployment by a considerable factor, and they totally ignore
widespread reduction in wages and job security.  It is absolutely
incomprehensible that an agency of our government should be trying to make
the situation worse rather than better.


There is much talk these days of balancing the budget, and even of making
balanced budgets compulsory except in time of war.  We might remember that
Herbert Hoover's proposal to end the Great Depression was to balance the
budget.  This remedy also disregards American history, since every
significant deficit-reduction period in the last 150 years has been followed
by a depression.


Balanced budgets are not only bad economics, they are a cover for reversing
all the social gains achieved since 1933.  Deficits are objected to by the
radical right at least as much on ideological grounds as on (faulty)
economic grounds.  The talk of making the government live within its income
"just the way American families do" is particularly reprehensible, since
families are more in debt than the government.  Buying houses and cars, the
two most important components of the consumer economy, would be impossible
for most families without credit.  Even so, we must look at the deficit
carefully.


All kinds of deficits simulate the economy.  However, the most effective kind
of government spending, from an economic point of view, is that which has a
large multiplier factor.  When the government spends money on
infrastructure, as was done massively during and after WWII via the Defense
Plant Corporation, the Reconstruction Finance Corporation, and the GI Bill,
the money comes back with interest when production is facilitated or when
educated graduates become productive workers.  When money is simply given
away, as with welfare and most military expenditures, the effectiveness is
lower, but jobs are nevertheless created when the recipients spend the
money.  Like most people, I am in favor of reduced military and health-care
spending.  However, if we do not deal effectively with the loss of jobs that
must inevitably accompany reductions in those areas, we shall make the
situation worse, not better.


The fact that jobs are harder to get, pay less, and are less secure than they
once were has many unpleasant consequences besides persuading those most
directly affected to vote against the party in power.  Domestic tranquillity
is upset. Morale goes down; it is highly likely that among the ranks of the
right-wing militias there will be found many of the victims of today's
jobless "recovery."


The current shortfall in good jobs persists in spite of the stimulus of large
federal deficits.  Cutting the deficit will surely make the situation worse.
 Democrats are finished at the national level unless some creative solutions
to the problem can be found. Here are some things that might be done:


1. Slow the transition to totally free trade.  Give up entirely the false idea
that free trade, on balance, creates jobs in the near future.


2. Bring back manufacturing to the US, no matter what action is required to do
so.  Except in special cases where there is a good reason not to do so, we
must strongly discourage large-scale imports of products used in our daily
lives.


3. Make full employment again a top priority of government.  Specific steps
that can be taken, in addition to ending the trade imbalance, include
reduction of the labor force by encouraging shorter hours, earlier
retirement, and single salaries high enough to support a family.  Entry into
the labor force should be delayed by increasing the average length of
education.


4. Increase the number of jobs available to unskilled workers.  While it is
true that there are more and better jobs available to more highly educated
persons, it is also true that education does not directly create jobs by
itself.  Furthermore, we have a disastrous unemployment problem in the
central cities that will not be solved by education alone in our lifetime,
if ever.  This national calamity calls for more entry-level jobs.  We must
make the "lean and mean" philosophy now so popular in large companies
absolutely unacceptable by any means necessary.  This implies that American
companies should not invariably be expected to compete with foreign companies
employing cheaper labor, particularly in our domestic market.


Making progress on jobs is not only good Democratic politics; it is good for
the country.  A job for everyone who wants one would do more to deflate the
right-wing blowhards and to restore the morale of the country than any other
action we might take.


William F. Schreiber, professor of electrical engineering, emeritus, MIT
617 253 2579, fax 253 7302, wfs () image mit edu, 15 March 1995, rev 17 June 1995
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